The real threat to Google

By BusinessWeek

Google's biggest threat may not be Microsoft (MSFT, news, msgs) or Yahoo (YHOO, news, msgs).

No, one of the most formidable challenges facing Google (GOOG, news, msgs) is likely sitting in your pocket or purse. It's your cell phone, and it will put added pressure on Google and other Internet companies to revamp the way they handle online marketing.

As more people use cell phones -- with their tiny glass screens -- to gain access to the Internet, Google and other online advertisers will have less space, or what's called ad inventory, in which to place marketing messages for customers. Google makes money selling ad inventory and a cell phone just doesn't provide much room for it.

Google can fit about 10 ads on a standard computer screen. (If you look at Google search results on a PC monitor, paid ads are the listings at the very top and along the right.) But on your cell phone, if you type in a search query at google.com you get only one or two paid ads in response.

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Imagine the horror that would befall your business if a large slice of what you sell suddenly disappeared. A similar fate could befall companies that depend on online advertising, as small screens become the gateway to the Internet.

No one's suggesting that consumers will abandon standard computer screens overnight. And early research shows that mobile advertising may be more effective than standard online advertising, suggesting that it will be more lucrative for the companies that rely on it. Still, the shift is coming fast enough that Google must start preparing now.

It was Apple (AAPL, news, msgs), a frequent Google collaborator, that tipped the trend. Consumer use of mobile Internet in the United States has longed trailed that of Asia and Europe, where standardized cell networks made it easier for handset makers to produce gadgets that tap the Web at blazingly fast speeds. But in the summer of 2007, Apple rocked America by launching the iPhone. The computer maker wasn't the first to put the Web on phones, but for many consumers, the iPhone made the experience more robust.

Almost two-thirds of Americans have had some experience with mobile Internet use, and the adoption trend is most pronounced among teens and young adults, according to Pew Research Center. About 60% of adults 18 to 29 use text messaging every day, compared with only 14% of their parents. Nearly one-third of young adults use mobile Internet. This is the future; people take their media habits with them as they age.

So, as Apple and demographic trends thrust the mobile Internet upon us, how will advertisers and we consumers of electronics respond?

Google will try to expand ad "shelf space," especially by redesigning cell-phone software. In November, Google announced it was launching an Open Handset Alliance to design a new operating system, code-named Android, which would provide a "truly open and comprehensive platform" for cell-phone users. A few scratched their heads as to why Google would get into the cell-phone interface business. But now it's clear: Web screens will soon be two inches wide, and Google wants a say in what fits on that tiny screen.

Our bet is that the new Android interface will encourage mobile device users to flick through multiple layers or pages, similar to the iPhone album-art menu. This would create more room for ads.

Expanding the visual ad inventory will be crucial for Google, as evidenced by the recent announcement that it will begin selling small display ads on cell-phone screens.

Continued: Paying for 'free' stuff

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