That may limit the search giant's reach into markets that offer fewer advertising opportunities. For example, enterprises don't want their data mined for targeted ads, which means products such as Google Apps for Business must be underwritten by customer subscriptions. Yet the subscription fees Google earned in 2010 were just a tiny fraction of the $18.6 billion that Microsoft Business Division, which produces Office, earned over the same period.
Google stands little chance of making further inroads into that lucrative market as long as its product development is so completely subsidized by advertising. After all, it makes little sense to prioritize feature requests from customers that make up less than 3 percent of your business. It's only logical that customers of its ad-supported offerings, which drive the most revenue, get the most attention. And which upgrade will do more to bolster Google's bottom line -- improving Gmail's UI, or refining its email indexing algorithm to deliver more targeted ads?
Your privacy is your concern
Google's reliance on the ad market may further impair its ability to shore up new revenue streams, as the need to monetize its services through advertising may influence Google to innovate in ways customers might not like. In particular, Google has demonstrated a tin ear for individual privacy concerns. The watchdog group Privacy International has gone as far as to describe the company as "hostile to privacy."
In 2004, Sergey Brin told Playboy magazine he had been surprised by public outcry over the use of targeted ads in Gmail. The email service came under fire again in 2010, when Google began mining Gmail users' personal data for its Google Buzz social network without their consent. That same year, Google admitted that it had inadvertently intercepted emails, website addresses, and passwords as part of a Wi-Fi mapping project.
The Wi-Fi snooping earned Google at least seven class-action lawsuits. The Google Buzz blunder triggered an inquiry by the Federal Trade Commission, and the search giant now must submit to independent privacy audits for the next 20 years. Google has also drawn legal challenges in several countries over privacy issues related to Google Street View.
But none of this may be enough for Google to learn its lesson. The supply of ad dollars isn't infinite, and competition is heating up. The temptation for Google to increase the value of its ads by mining ever more personal data from its users must be great, as must the temptation to focus its efforts on products that increase its share of the overall ad market. Both could come back to bite Google, particularly if the legal climate around individual privacy grows more hostile to advertisers.
An elephant's graveyard of products
Diversification could help the search giant reach new markets, but as much as Google insists that it won't shy away from innovative, risky projects, its track record for turning them into successful products is spotty at best. If a particular product fails to capture the public's imagination, Google is often quicker to pull the plug than to invest in making it a more attractive offering.