Google has what amounts to a licence to print money. By inserting itself between the shops and shoppers of the world, the search provider takes a small commission every time it connects the two. Dwarfing the competition, it has barely slowed under the weight of recession. First-quarter numbers from Google this week showed the first quarter-on-quarter drop in revenues for 11 years, but sales were still up 6 per cent on the same period last year – and that growth will naturally accelerate once more when economies start to recover.

Lex chart: Google
© Financial Times

So does it matter that the company is a one-trick pony? Although Google remains reluctant to disclose the details of its business, the vast bulk of revenues almost certainly still come via paid search. Most of what Google does beyond tweaking algorithms is to support that core business – offering free e-mail or mapping the world in ever greater detail. The trick throws out spectacular amounts of cash: adding $2bn to the group’s $16bn cash pile in the last quarter alone.

Indeed, it is not clear that Google should pursue another. To see why this is so, just look at YouTube, the video-sharing website Google bought for $1.8bn – paid mostly in stock – in 2006. The site supplies about 40 per cent of all videos watched online worldwide for free. That generosity comes at tremendous cost, as very few of its videos carry advertising. Credit Suisse estimates YouTube’s running costs will be between $500m and $1bn this year, while revenues will only be in the region of $240m. Even with the addition of more professionally created content, the economics appear unsustainable.

Investors might recall the history of tobacco companies. Making more cash than they could reasonably invest, they built sprawling conglomerates but then dismantled them when returns failed to match that of the core business. Discipline would have saved considerable amounts of cash. Time, perhaps, to ask Google for a dividend.

BACKGROUND NEWS

Google’s revenues in the first three months of this year fell below the preceding quarter for the first time in the company’s history as the global recession brought an end to its unprecedented 11-year growth spurt.

“No company is recession proof, Google is feeling the impact,” said Eric Schmidt, chief executive officer, although he added the latest figures showed that Google was still performing strongly at a difficult time.

Meanwhile, Google announced a redesign of YouTube that it said would add significantly to the video site’s appeal to professional studios. YouTube’s commercial growth has been held back by the lack of formal links with studios, since it only sells advertising against content covered by these types of arrangement. The new arrangements will see a new area added to its site displaying full-length TV shows and movies.

To e-mail the Lex team confidentially click here
OR
To post public comments click here

The Lex column is now on Twitter. To receive our daily line-up and links to Lex notes via Twitter, click here

_________________________________________

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe now

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments

Comments have not been enabled for this article.