Where’s Google’s Money Going?

[jmiller]

Google's doing something very interesting with all the money they're making: they're spending it. CEO Eric Schmidt promised us in January that 2006 would be a huge year for innovation, as the company geared up to launch a lineup of new products in the second and third quarter.

There's plenty of speculation as to what exactly Google plans to innovate this year. The more sensible will remind the starry-eyed dreamers that the Big G will continue to do what it has been doing.

Namely:

1. Making search searchier through steady improvements

2. Expand infrastructure and data centers; enhance with speed, depth, flexibility

3. Push more server-based applications to reduce reliance on traditional PCs

4. Expand advertising channels (that's where the money comes from) through video, audio, and print

5. Scare the bejeezus out of Microsoft (and eBay too)

Though Google is very tight-lipped about their future plans (which regularly creates a web of wild speculation and devastating disappointments outside the Googleplex), the now publicly traded company cannot be so quiet about its money. The first-quarter report revealed some incredible expenditures.

An anonymous investment blogger explains it well:

· Dramatic capital expenditure -- Google has been investing at a blistering pace in new data centers, spending $838 million in new capital equipment, plus $600 million in expensed R&D in 2005. Already in the first quarter of 2006, Google ramped up investment again, with $345 million in capital expenditure and $247 million in R&D -- more than 40% of 2005's already giant investment in just one quarter. CFO Reyes said analysts should expect the rate of investment growth to exceed the rate of revenue growth -- with revenue growing at 79%, that means 2006 capex of at least a $1.5 billion, and R&D of at least $1.1 billion. That's a *lot* of servers and innovation.

Indeed it is. In fact, says Henry Blodget, Google is spending twice as much as Yahoo! and more than Yahoo! and eBay combined.

"The difference between the CAPEX levels, moreover, is so vast that it seems safe to assume that either Google is overspending (in which case, the question is "on what?") or Yahoo! and eBay are underspending (in which case, free cash flow is about to take a hit at both of those companies as well)," writes Blodget.

Some believe one of Google's motivation is to stay ahead of major competitors like Microsoft and Yahoo! who are getting the reputation of being cumbersome, stagnant, or worse - always on the heels of Google.

Microsoft is certainly shaken by this new competition, but the Beast of Redmond, if it has to, can outspend its new nemesis. Even if it did, Microsoft would still have to find a way to be faster than Google. And though Gates and Co. have adjusted their strategy, pushing their own services to the Web (something again on the heels of Google), they have to become nimbler and even more forward thinking than they're known to be.

So why all this money so fast? Why this upcoming blitz of Google products? Our anonymous blogger points to Paypal's Max Levchin from last September:

"If you can go fast, no one will ever catch up," said Levchin. "Can you strike the fear of God into your competitors by releasing every two weeks the features that takes them three months to write? And by the time they're done copying the features that you built last week, you've got three more months on them?"

This isn't to count Microsoft out - only to count them behind. But that all could change in the blink of an eye.