Source: https://seekingalpha.com/article/3242926-google-neglects-organic-advertising-the-hole-in-the-business-model

Summary

• Google has had a pretty lousy year in terms of shareholder returns.
• The company is neglecting core markets that may not be able to afford paid advertising channels.
• Therefore start-ups in Silicon Valley are starting to fill that hole.
• Going forward, I anticipate further M&A activity in mobile organic advertising.
• Google needs to capitalize on these smaller trends, otherwise it risks becoming an unimaginative big tech company.

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has had a pretty lousy start to FY 2015, and I believe that the various downward forces on earnings and revenue will continue into the next year. Admittedly, there are people who disagree and believe that the stock is a great investment after Q1 earnings. Time will tell, but for now I will need to see Google's growth rate accelerate on the back of new products paired with utilization of the cash on large-scale acquisitions to change my stance on the stock.

Google could be neglecting opportunities in organic advertising

Many companies are in a transitional phase from web to mobile apps. However, in many cases, it costs a lot of money to drive meaningful volume via app-install ads from Facebook (NASDAQ:FB), Google and various other websites. Hence, approaches for determining attribution and analytics will be a necessary component to meaningful app installs going forward.

Currently, Google focuses the vast majority of its attention on how its ad model can quickly convert web-based users into installs. Unfortunately, it doesn't seem that neither Google nor Facebook ads are the primary reason for why users install mobile apps.

Source: Tech Crunch

I recently got an opportunity to talk to Dane Holowinski, the co-founder of a Venture backed startup called Yozio (they closed a seed round for $1.6 million). The conversation veered into many directions, but I was able to gather a lot of information on organic marketing. For starters, there's a huge opportunity to monetize organic advertising, assuming a reasonable business model can be created to capture some of the value.

So, I asked Dane Holowinski, "how do you go about monetizing organic conversions?" He mentioned that they offered tools and technology to track users that click on a link prior to them installing an app. This allows marketers to better understand user behavior prior to the app install. This in conjunction with non-paid channels like e-mail marketing and better search optimization and other free forms of marketing lowers the cost of conversions. Admittedly, Dane mentions that organic conversions would be used in conjunction with paid advertisement channels. Dane's platform, i.e. Yozio, charges users for various technology and service pertaining to organic marketing.

The reason why I found the conversation with Dane pretty valuable was partially driven by the venture-backed partners that are funding the infant company. Heavy weights like Jerry Yang (co-founder of Yahoo) and Maynard Webb (former COO of eBay) are investing capital into organic app installs. And, according to Dane, there aren't that many companies that are offering either the tools and analytics or necessary insights to drive user acquisition for small or large-scale app developers.

Source: Millennial Media

The vast majority of app developers belong to really small studios. So, the same app developer doesn't receive help from traffic acquisition experts that really know how to generate impressions via traditional or non-traditional channels. This implies that Google needs to devise solutions for smaller studios that are more intuitive. From what I saw, purchasing ads from Google is an extremely complicated process and developing organic traffic is extremely hard for mobile app developers. Helping smaller developers doesn't seem high on Google's priority list, as the company is heavily focused on monetizing and increasing the pricing of clicks for mobile app installs. Offering free tools to market a service runs counter to Google's current business model.

In other words, small developers are an underserved market, and it could materially impact Google assuming non-organic methods can be monetized just as effectively. Of course that's years away, which is why it's not going to surface on the radar of large tech companies.

Going forward, I anticipate future M&A activity in the tech space to shift away from ad-purchase platforms like AdRoll, DoubleClick, MoPub, Brightroll and Tremor Video. And instead will shift toward organic traffic acquisition, which implies that larger companies will eventually develop app-install models that appeal to smaller app studios that are pinching pennies just to keep the lights on.

I'd remain cautious when investing into Google. The company faces regulatory issues, the business could become stagnant in terms of earnings per share, and the valuation really isn't all that appealing. Therefore, I maintain my sell rating and $486 price target.