After a brief hiatus while transitioning from ZDNet to CNET News, I have returned to the blogosphere. It was like going without my favorite tea (tie kuan yin) for nearly a week.
Google's precipitous share price fall seems to have abated this morning. The shares are on a rebound, after tanking more than 8 percent in the previous two days due to a decline in paid search. The decline can be explained away by the slowing economy or fewer ads on pages, but Fred Wilson exposes a nugget worth exploring in this blog post:
But the bigger story on Google is that it has been a one trick pony for years. Everything that Google does is paid for by its paid search business. In the fourth quarter, Google generated $2.9bn of gross profit (gross margin) and $1.7bn of operating cash flow. That means it spent $1.2bn on operating expenses. I bet that only $200-300mm of those operating expenses had anything to do with paid search. So if that's true, and it's a wild eyed guess, then Google is spending close to a billion dollars a quarter on stuff that is not producing revenue right now.
In other words, Google is spending immensely to become more than a highly profitable one-trick search pony. The bubble bursting of late puts Google's situation in bas-relief. While the company is increasing its share of the search business, and a Microsoft-Yahoo combo would take at least a year to gain any traction in search, the Googleplex is focused intensely on the next frontier--applications and services, which so far haven't contributed much to revenue as Fred pointed out. It's also the space where Microsoft and Yahoo have an advantage. A Microhoo union (it's been quiet that front so far this week) could make life difficult for Google as it attempts to convert searchers into community members and application users.