Google Forgoes Easy Money

The search giant chooses growth over quick YouTube cash.
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Investors looking for

Google

(GOOG) - Get Report

to quickly cash in on its YouTube acquisition shouldn't hold their breath.

Taking advantage of the enormous graphic- and video-advertising opportunities offered by the popular video site seems like the next logical step and the easiest money for the search giant to make.

But at the Morgan Stanley Technology Conference on Monday in San Francisco, CEO Eric Schmidt hinted that Google may be looking elsewhere for revenue first. He declined to give investors a sense of when Google could start gaining from the $1.7 billion

purchase of YouTube in October.

But the premium version of Google Apps, an online suite of software applications aimed at small businesses that

Google announced in February, is likely the company's next major driver of revenue outside of search, Schmidt said at the conference.

"The other nonsearch businesses are too early to forecast. When they hit, they are likely to move quickly -- in which case we will let you know," Schmidt said.

The CEO's comments come at a time when Google's stock has stagnated. Shares traded at $455 Thursday, levels they first hit in October, as investors wait to see where the company will turn for new revenue.

It's surprising that Google would point to this service, which it found a way to make money from only two weeks ago, as its next big moneymaker. Google Apps is meant to be cheap: Though its low price of $50 a year per account is intended to boost adoption rates, Google will have to work extremely hard to collect that revenue, making it anything but cheap.

Part of what users get for that skimpy price tag is full-time phone support, meaning that Google's usual, lucrative approach of automation will have to take a back seat to the much messier business of customer support.

Pass and Fail

While any new revenue stream would be welcome news to investors, Google seems to be passing on the burgeoning market for display and video advertising for now.

Those categories will see a combined $6.1 billion in spending in 2007, according to research firm eMarketer, which makes for a market that is a hefty three-quarters the size of paid search, upon which Google has been almost solely reliant.

Though Google's already-tight grip on paid search makes it difficult to keep its growth momentum going, stepping up its efforts in the graphical ad market would likely lead to much quicker gains.

The opportunity isn't lost on Google. At a Bear Stearns conference Tuesday, Schmidt said that video advertising has the potential to "build a business as large as the media businesses we grew up with."

Google, in fact, seemed to have the opportunity well within its sights just a couple of months ago during

the company's fourth-quarter conference call with investors.

"Advertisers are now using our targeting platform to place brand advertising across our content network, and they're going to have more branding options as the YouTube inventory comes online," Sergey Brin, Google's co-founder and president of technology, said then.

But the reception of Google's Adsense ad platform has been mixed. Advertisers would much rather buy a graphical ad on one site, rather than on the network of sites that Adsense offers, even if the network brought in as many views as the single site.

This makes YouTube the perfect way for Google to realize its ambitions in graphic advertising, a category it now all but concedes to rival

Yahoo!

(YHOO)

.

YouTube, however, has been mired with problems as of late, as old media companies have taken issue with the site's use of their copyrighted material. In February,

Viacom

(VIA) - Get Report

demanded that

YouTube take down more than 100,000 of its clips, after walking out on negotiations to find a way to split revenue from the content viewings.

Even

CBS

(CBS) - Get Report

, which had earlier claimed that YouTube grew the audience for its television shows, reportedly stopped talking to Google about further collaboration.

Though Viacom's actions

don't seem to have hurt YouTube's growth rates just yet, they may make a serious dent in Google's timetable to make money from YouTube. That's because down the road, YouTube may have to cut a deal with the traditional media companies that own content.

And when that happens, the amount of traffic it generates will be its main bargaining chip.

The Quick Cash

Putting up ads sooner rather than later would rake in cash for the time being but weaken Google's hand in the longer term by dampening traffic.

Additionally, a compelling reason to make deals with old media is the aggressive competition from other video-sharing upstarts. At the Bear Stearns conference, Schmidt iterated that Google feared getting hit unexpectedly from start-ups that are not on its radar, more so than from known competitors

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

.

That paranoia may be well justified when it comes to YouTube, for which Google has high and long-term hopes. In the core search business, however, Google's position is virtually unassailable by start-ups.

The company has a well-guarded technology that it keeps honing, it pours billions into infrastructure to keep performance going, and its brand name is synonymous with "Web search."

But there are few proprietary barriers protecting YouTube in the same way, and Google has already experienced the vagaries of the video market firsthand. After all, it was plugging away on its own Google video site before YouTube came out of left field to dominate the market.

By using Google's clout to negotiate deals with content owners, though, YouTube could give users a unique draw apart from rocketing momentum. Having enough agreements with media companies in place -- such as the one Google announced with the BBC last week -- would give YouTube an anchor in the mercurial market.

But gaining leverage in eventual media negotiations means forgoing ad dollars to continue growing traffic at full throttle. And though the plan may seem shrewd long term, it won't present the type of kick that investors looking for Google to diversify would be seeking short-term.

Meanwhile, Schmidt is left playing tech visionary -- waxing philosophical about the power of mobile ads, organizing the world's information and talking up seismic shifts taking place in computing.

And as he prophesizes, billions of dollars will be bypassing Google's coffers as the company ups the ante in the high-stakes media game it's playing.