Consultant Value Added

“It is because of my wish to be helpful that I share my ideas and experiences; being helpful to even one person is valuable.” Dalai Lama

1. Carlos Valdecantos 10.20.10 / 10am

   Update 20/10 – Interesting article written by Tim Poulus. Enjoy it.

   Google gives a lesson in innovation and long-term thinking
   Monday 18 October 2010

   Google reported another record quarter in Q3. Revenues rose sharply, partly due to a slowdown in 2009, making for a flattering comparison. Growth was 23 percent on an annual basis and 7 percent versus Q2, to USD 7.3 billion. Net sales, after subtracting traffic acquisition costs, came in at USD 5.48 billion, while the market was expecting USD 5.27 billion. The earnings per share of USD 7.64 were also well above expectations of USD 6.69. The company’s shares rose 9 percent in after-market trading.

   Google’s results show that its core business (search, AdSense, AdWords) is running well, and new sources of income (mobile, display advertising) are starting to reach a significant scale. The sales category ‘other’, in which the latter are included, rose 35 percent to USD 254 million. Without giving exact quarterly figures, Google noted that mobile and display (non-text) are at annual run rates of respectively USD 1 billion and USD 2.5 billion.

   As a result display, partly thanks to the takeover of DoubleClick, is now a large source of income and a strong competitor to Yahoo!. However there is the issue of double counting, as revenues from AdMob are counted in both categories. Meanwhile Google said that YouTube is good for 2 billion views per day and 2 billion views week generate ad revenues. To sum up, Google is running along at expected revenues this year, according to market estimates, of USD 21.2 billion.

   As usual, Google did not give any guidance apart from the standard remark it continues to expect “significant capital expenditures”. In addition, the company remains “committed to aggressive investment in both our people and our products as we pursue an innovation agenda”. The company’s presentation says that Google invests in products “to leverage computer science to solve big problems”.

   What does this innovation strategy include?
   • People: during Q3 the company added 1,500 for a total of around 23,000. Of the 1,500, some 300 came from acquired companies.
   • Capex, mainly for infrastructure (data centres, servers, network equipment): in Q3 the budget was an almost-record USD 757 million.
   • Acquisitions: so far in 2010 there have been around 20.
   • New products and services: not just mobile and display advertising, Google is innovating quickly in all kinds of areas. Innovation is also bought in, namely through smart acquisitions.

   Google can allow itself some arrogance (no guidance, freely investing in everything under the sun, focus on the long term) due to the strong cash generation of its assets and its solid cash position. Despite the high capex and series of acquisitions, the cash position (including short-term securities) grew by USD 3.3 billion in the last quarter to USD 33.4 billion.

   To finish, a glance at some of the innovation, which does indeed look at ‘big problems’ and the long term (“when I say the long term, we really mean not the next quarter or the following quarter, but we are just thinking about the next five to 10 years”). A few of the recent reports:
   • Google Instant: instant search results, a relatively expensive innovation, but “we launched it because we could and because it’s great for our users”.
   • WebP: a new image format as an alternative to the JPEG. It loads more quickly and the average file size is 39 percent smaller.
   • a new ‘operating system’ for cars. The company has succeeded in having a computer drive a car thousands of miles with no damage. The aim here is to increase safety but also to save energy. With such as system, cars can drive more closely to each other, increasing road capacity. And if it works, cars can be built lighter, reducing petrol usage.
   • Google took a stake in an offshore transmission backbone near the American east coast in order to stimulate the use of wind energy. The undersea cable will cost USD 5 billion.
   • Google Price Index: an alternative for the CPI (consumer price index) and a benchmark for inflation. The GPI is calculated based on a range of online transactions and is available in real-time, while the CPI takes months to be published. In an initial reaction, Google, which has not yet published the GPI, claims it’s seeing a deflationary tendency.
   • Google gave a university in West Virginia half a million dollars for research into geothermal energy, and the study found that there was 78 percent more energy below the state than previously thought. Google itself has invested USD 10 million in geothermal energy collection.

   The conclusion can be no other than that Google is indeed engaging with the ‘big problems’ and investing with an eye to the long term: sustainable energy, efficiency and ‘customer happiness’ are the top focus areas. Data centres are notorious wasters of energy, so the interest for Google is clear. And how to make money with all this is always the next question for Google. There will always be a few failures in there, but you have to be a player to be a winner.

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