Is Voice Search an Opportunity or a Threat to Google?

By Adam Levy Markets Fool.com

Image source: Google.

Continue Reading Below

Consumers are doing more and more web searches just by talking. And they're not just asking the digital assistants on their smartphones; they're also buying all-new devices, such as the Amazon.com (NASDAQ: AMZN) Echo and Google Home, to answer random queries.

For Google, the subsidiary of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the new trend in search is a double-edged sword. On one hand, it provides another point for users to interact with its product. On the other, Google doesn't have a stranglehold on the device market, and it isn't clear how companies can monetize voice search with ads.

Even as Google navigated the shift to mobile, it still fundamentally followed the same business model -- display ads within search results. That's not possible with voice searches.

But Google CEO Sundar Pichai isn't concerned. "I see more opportunity than challenge, when I think about voice search," he told analysts on the company's fourth-quarter earnings call. I wouldn't be so sure he doesn't have that backward.

Losing the hardware battle

Continue Reading Below

Google didn't provide any exact figures on the sales of its new Google Home device. Pichai did say that "Google Home was a very popular present that many people opened on Christmas morning," but that was as detailed as he got.

RBC analyst Mark Mahaney suggests that Google is getting outsold 10-to-1 by competitors such as Amazon Echo. That presents a real challenge for Google, because without control over the hardware, it has no control over the user interface. That means all those potential voice searches will go to someone else.

Pichai points out that it's the very early days for devices such as Google Home. And Google does have one big advantage over Amazon and other competitors -- it's much better at search. "When I look at what it would take to voice search well, our years of progress we have done in areas like natural language processing comes into play," Pichai said on the call.To his credit, Google Home has outperformed Alexa in many head-to-head search reviews.

But smart-speaker hardware is about more than search, and Amazon's Echo is capable of integrating with more devices and services than Google Home is. Google is certainly capable of overcoming that through more strategic partnerships, though. It just released a development kit for businesses to integrate with Google Home last month.

One area that will be harder to overcome is how well Amazon Echo works for Amazon Prime members. With tens of millions of Prime members around the world, it creates a pretty big moat for Google Home to cross.

But wait -- it gets tougher

Even if Google closes the gap in hardware sales, it still has to find a way to turn voice search into a business. Hardware sales won't move the needle for Alphabet, which generated over $90 billion in revenue last year.

What's more, Google has to sell the hardware near cost because its biggest competitor, Amazon, does the same. The margins on a Google Home device don't even come close to Google's 31% operating margin in the fourth quarter.

If Google is going to make some real money off of voice search, it needs to go beyond just getting its devices into people's homes. Google's best idea so far is to facilitate commerce through voice search. But if there's one company that has Google's number in e-commerce search, it's Amazon. Google will not win a battle against Amazon in developing a personal shopping assistant, no matter how good its search capabilities are.

Not just a challenge -- a threat

The growth of voice isn't just a challenge for Google. The shift to voice represents a threat, as it could result in a decline in the amount consumers use Google search, the company's cash cow.

Google is working to overcome the head start Amazon got in smart speakers, which accelerated the voice search trend. It plans to expand its hardware lineup and invest more in 2017. But as voice search continues growing and starts taking searches away from mobile and desktop, it will put pressure on Google to continue developing new higher-value display and search ads for its main desktop and mobile products.

10 stocks we like better than Alphabet (A shares)
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Alphabet (A shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon.com. The Motley Fool has a disclosure policy.