Google Gets Friendly

What does Google search for? Over the past few months, the Web titan has been looking for new partners. It has teamed with Intuit to enable small-business owners to manage Google ad campaigns, partnered with eBay to offer "click-to-call" ads that connect online shoppers to sellers, joined with MySpace to supply the social network's search and advertising, and helped MTV distribute video clips with ads tacked on.

Google is seeking growth and security, betting that the coterie of new colleagues on its team will strengthen its ability to live up to its $123 billion stock-market valuation. "Partnerships had not been a core part of the way we were running the company," says Google CEO Eric Schmidt. "When you're a small company, you have to do everything yourself. As you get more established, you realize you'll never get everything done by yourself."

The partner push comes as competition is pushing back. Microsoft is waking to the ad-revenue world, legions of Web 2.0 start-ups are dreaming up useful new tools, and Ask.com and Yahoo! are closing the gap in search. "People have been brainwashed that search can't get any better than Google," says Ask.com CEO Jim Lanzone. Ask has dumped its gimmicky Jeeves icon and zoomed in on search, sensing an opening.

Google realized while negotiating a deal with Dell that it needed to stretch its existing user base. That May agreement will put Google's toolbar on millions of Dell machines, and it prompted Google execs to seek other such alliances. Those partners "have a way of reaching customers that we do not on our own," Schmidt says, "and each represents a different strategic thrust."

MySpace gets Google into the fastest-growing online communities, Intuit helps Google target a whole new market of business users, and MTV gets Google into video distribution. So what's in it for the partners? For one, they get to avoid competing with Google, a good outcome particularly for companies without an alternative means of coaxing revenue out of their content. "It's easy to collaborate with Google," says MTV president Michael Wolf. "They move fast. We'd like to do even more with them."

The alliances will also allow Google to get back to its primary business. Schmidt acknowledges that the company had to redirect resources to search after its famous 70-20-10 policy--70% of the time spent on core issues, 30% on side and new projects--went slightly off-kilter. Marissa Mayer, who manages search products, says the company has assigned more engineers to search than ever before and plans to release a new search tool that will enable users to design and build their own flavor of Google search, scanning just the sites they're interested in.

The company's lack of focus is showing on the balance sheet too. Tim Gaumer, director of fundamental research for StarMine, a financial-analysis firm, notes that Google's pretax return on assets declined to 7.6% in the quarter ending in June, down from 11.8% a year ago. "While significantly above the industry average, that's a rapid decline," Gaumer says. What has changed this year is that Google has ramped up its investment in areas with lower expected returns, such as infrastructure. Still, sales should reach $10 billion this year.

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