This is a guest post by Wall St. Cheat Sheet’s Damien Hoffman.
Earlier this month, Google announced a new broadband initiative. A few days earlier, they announced a rumored Twitter killer. Months ago, it was Google Wave. Is all this entrepreneurial zest a sign Google is a leader? Or, is the search/ad giant losing focus?
Google is smart to attempt to enhance email with Wave or mass text messaging with Buzz. They are smart to expand web services and software which compliment search and advertising. They are also smart to stake their claim in the white hot mobile world.
Broadband is a completely different story. As Warren Buffett notes, these types of businesses are extremely cyclical and have low returns on equity. The hardware game is a perpetual horse race requiring tons of capital to simply stay in the race against competitors. For example, Google currently sports a 20.3% return on equity and 27.57% profit margins, while top telecom company Verizon returns 8.77% on equity and has 3.39% profit margins.
I understand Google is tired of waiting for telecoms to deliver better web speed. The way telecom giants boasted in 1999, I thought we’d have ESP by 2010. But managing manual labor crews digging up streets, repair technicians riding around in trucks, and an endless staff of customer service reps dealing with pissed customers is an entirely different ballgame than keeping quantitative geniuses motivated at computer screens and letting software addicts help each other in help forums.
Wave and Buzz have flopped so far. Rather than spend time and money on entering the capital intensive and risky broadband sector, maybe Google should spend more time perfecting some of the high potential “Lab” products they have introduced. Maybe they should have considered buying Twitter rather than spending countless hours in strategy sessions about lobbying the FCC.
Unless the government is heavily subsidizing Google’s broadband “experiment,” I would be weary of investing in Google until seeing how all this shakes out at the financial bottom line. Awkward moves outside core competencies tend to haunt companies more than they end up helping. Either way, in a few years we can Google the answer.