Time for Google to Cut Up Its Credit Card?

Wednesday Apr 20th 2011 by Mike Elgan
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Google has money to burn, but as expenses grow and competition gets tougher, maybe burning money isn't such a great idea.

Google missed its numbers in the most recent earnings report. The company is still making truckloads of cash. But it's also spending money faster than ever.

The earnings report itself is no big deal. The company is still growing -- net income grew 27 percent to $8.58 billion for the first quarter (compared with the same quarter last year). That's strong growth, but slightly slower earnings-per-share than Wall Street predicted. Google's stock price fell 5.2 percent.

The real problem is the long-term prospects for Google's continued dominance.

Google faces a volatility imbalance between income and spending. Google is an advertising company. Some 99 percent of its revenues come from ads. The trouble is, ad revenue is fragile, and tends to rise and fall with the economy, and changes in the ad market. But costs tend to be more persistent, and tend to rise, rise and rise.

While 27 percent revenue growth sounds good, consider also that spending is growing much faster. In the past year, for example, Google's research costs have increased by 50 percent. Sales and marketing costs have risen 69 percent.

Google announced recently that it's hiring 6,000 new employees this year -- a 23 percent increase in staff. And Google is paying more for the people they've already got.

Google has a defection problem. An embarrassingly high number of employees last year moved from Google to Facebook, many of them top executives. Google gave all employees a surprise, $1,000 bonus and 10 percent raise in November. (Google even paid the taxes on the bonus. Nice!)

Eric Schmidt, who's been moved from CEO to executive chairman, got a salary-and-bonus package that could top out at $6 million per year -- up from $1 (he used to be happy with Google stock; now he wants cash, too).

Google also spends a lot on acquisitions, which keep accelerating in number. The company has acquired 90 companies in the history of the company, but one-third of those since the beginning of last year. I'm sure some of these acquisitions will pay for themselves, but most probably won't. And Google often pays top dollar. The company is buying ITA Software, a company that makes travel-related software, for a whopping $700 million, for example.

Acquisitions, by the way, often sound like a better idea than they actually are. To profitably put a new company's employees and intellectual property to use is painful, difficult, distracting and expensive. Data center integration, motivating "acquired employees," real-estate issues and, above all, the "distraction factor" make acquisitions more expensive than the purchase price might suggest.

Google has also wasted a lot of money launching, then closing, various services. Google's most recent closure is Google Videos, which the company launched in 2005 to compete with YouTube. Less than two years after the acquisition, Google bought YouTube itself.

Since then, the company has been carrying the bandwidth burden of both sites, only to announce the closure of Google Videos this month. The whole misadventure seems like a huge waste of money that could have been avoided.

Google launched, then closed, Google Wave, AudioAds, SearchWiki, Notebook, Catelogs, Print Ads, Page Creator, Answers, Lively and other services. The company acquired, then closed, Dodgeball, Jaiku and others.

Google has shut down so many projects that it risks entering Yahoo territory. That company is more famous for closing sites than launching or promoting them.

At least most of Google's failed experimental services can be justified by Google's mission, which is to "organize the world's information." Other projects, well, not so much.

One of the most head-scratching projects is Google's development of a self-driving car. You see this thing driving itself all over Silicon Valley (with humans in the front seats in case it freaks out and starts mowing down furry animals).

It's hard to understand why Google is investing in this technology. First, it duplicates dozens of similar such projects organized at universities and by the Pentagon. Second, it's hard to image how the technology could be used by Google.

I wonder if Google thinks it will one day unleash a fleet of unmanned Priuses to snap photos of people's houses, download their Wi-Fi passwords or whatever its StreetView cars do, but minus the drivers. I'm pretty sure that will never happen. It all seems like a big waste of money to me.

And why did Google get into the handset hardware business? What were they thinking? The company launched its Nexus One phone in January of last year, only to discontinue the handset in June. Google seemed genuinely surprised that people wanted tech support.

The collective effect of all these closures and random projects makes Google look like amateur hour. But mostly, they just waste a whole lot of money that Google may need someday.

Meanwhile, other costs are growing fast. As I detailed in this space earlier in the month, Google is facing a sudden and growing series of lawsuits and anti-trust investigations.

The company will have to spend a lot more on lawyers, and also on lobbyists, if it wants to keep governments at bay.

Google has recently embraced another strategy that involves spending money to save money. The company is getting into a bidding war with Research In Motion (RIM) over an acquisition of Nortel Networks. Both want that company's pile of 6,000 patents, which could help either company avoid costly patent-infringement lawsuits. Google has reportedly offered $900 million for the company.

If Google had invented a time machine rather than a self-driving car, they could send Sergey Brin back in time to tell Eric Schmidt not to allow all that reckless, pointless spending.

Yes, Google is still sitting on a big pile of cash. They have money to burn. But as expenses grow, competition gets tougher and ad revenue remains ever volatile, maybe burning money isn't such a great idea.

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