Google the one-trick pony

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.

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.

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