Today (Mar5/06) Google has a market cap of about $112 billion - that's down about 20% from its high in mid January, but it's still more than 75 times its earnings.
That's a big problem: because that price earnings ratio is driving management to look for every revenue penny they can scrape up, and the market just isn't big enough to meet their needs.
At the public markets level the risk Google owner/managers face is that one of the big funds does the arithmetic and calls a halt -precipitating a price slide down to the hundred dollar level or lower.
At the board decision making level the risk they face is that the pressure causes them to make a significant mistake - buying Disney or AOL, for example - that shores up their market image in the short term but leaves them no wiggle room in the longer term.
At the daily decision making level, however, the big risk Google faces is that its revenue needs drive it to behaviours that create opportunities for competitors, one of whom could duplicate its own rise to prominence and thereby turn them into another Altavista.
At its beginning Google had two big advantages over its competitors: results ranking and a dead simple query page as its front end. Today anybody can rank search results (and there are enough well understood methods to offset Google's patents and secrets) and the initial simplicity of use is giving way to revenue pressure. That dead simple front page combined with invisibly effective page ranking, for example, is gradually being crowded out by PC toolbars and other client-server paraphernalia that may seem individually attractive but are cumulatively destructive of Google's own value, while the formerly clean and effective result pages are being crowded (and the rankings subverted) by generally inapplicable sponsored links.
So what can Google do?
The best thing that could happen to them (although not to their shareholders!) would be a precipitous drop in the share price. If the company had a market cap in the $20-30 billion range it wouldn't face these pressures: revenue would match shareholder expectations and management could do what it's good at: contribute value to shareholders and users alike, protect the company from competitors, and manage for the long term.
Beyond that, management can try to bring earnings up by cost cutting: it's somewhat surprising, for example, that they haven't publically climbed on board with Sun's CMT technologies to cut their top two facilities costs: power and hardware.
More interestingly, they could try to raise revenues by offering pay per use searches. Many academic institutions, for example, would be likely subscribers to a custom search solution aimed at finding and documenting plagerism - something Google is uniquely well positioned to deliver by breaking input text into syntactic blocks, isolating word roots, and weighting search results by the length of string matches and syntactic similarities as a proxy for the probability that part or all of one input document is copied from one or more others.
And, finally, they could look at adding user features to the results, not the search, pages. It would be easy, for example, for them to use color codes to migrate some advanced or alternate search facilities onto the results page. Such markers, for example could differentiate recently updated links from older ones or largely positive text, (for example, in reviews) from largely negatives ones.
Unfortunately, however, there's only so much management "bandwidth" to go around, only so much innovation you can do in a fixed market, and only so much room to manoeuvre for a company that's so over valued in the stock market. So my bottom line is simple: I'll think we'll either see them make an outsized acquisition and ultimately choke on it, watch the bottom drop out of their market price, or see a competitor come in and sweep them away.