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Google's just in the ad business, people

Do a thorough job of googling Google Inc. and you discover its business is advertising — hardly an endeavor to justify the lofty stock prices the company has enjoyed since it went public in 2004.

While its technology is unparalleled at the moment, the Mountain View, Calif., company got virtually all of its $17-billion in sales last year from selling ads that appear alongside its search results.

As long as the U.S. economy was healthy — and Google could steal ads from traditional media — the strategy worked gloriously. Google's 2007 profit, $4.2-billion, was higher than its 2004 sales, $3.2-billion. Google shares, sold initially for $85, had leaped as high as $747.24 on Nov. 7.

Ad sales are notoriously cyclical, however. When the economy slumps, companies look for ways to reduce spending. Ad dollars are among the first cuts.

There are signs that harder times are affecting Google. Clicks by Web browsers on the company's so-called sponsored links dropped 3 percent in February from January's clicks, according to ComScore Inc., a Reston, Va., research company. That followed a 7.5 percent decrease in January from December.

Clicks don't necessarily mean sales for an advertiser in any case. But no clicks mean no chance.

Eventually, advertisers will pull back, just as they stopped buying newspaper ads and TV commercials in past recessions.

Superior electronic technology won't protect any company during bad economic times. Sales of Intel Corp.'s microprocessors, Cisco Systems Inc.'s networking equipment and Apple Inc.'s iPhones will be hurt if U.S. consumers rein in their spending.

Google's situation is analogous to that of the publishers it has diverted ads from. Just as Google will lose ad sales no matter how good its technology, newspapers like those published by New York Times Co. and Washington Post Co., have lost ads to the Internet no matter how good their content might have been.

Google shareholders can take heart in that there is no even-newer media in sight that could abscond with its ads. Their company may get tougher competition from rival search engines, more so if two of them, Microsoft Corp. and Yahoo Inc. combine.

After acquiring DoubleClick Inc., Google can offer picture and video ads along with its familiar four-line text ads. The company also sells ad space on YouTube, the video Web site it bought in 2006. It's all still the advertising trade.

Google co-founders Sergey Brin and Larry Page, now in their mid 30s, and CEO Eric Schmidt try to be different. They refuse to make earnings predictions and plan to use alternative energy sources like solar to power their computers.

Investors finally seem to be realizing, though, that Google is no different from any company that depends on advertising for its life. Since its November peak, Google stock has plunged 41 percent to $438.08. The shares now trade at 33 times last year's earnings.

That compares with 20 times for stocks in the benchmark Standard and Poor's 500 Index — and an average of 60 times for Google shares since the end of 2004.

Google's just in the ad business, people 04/02/08 [Last modified: Wednesday, November 3, 2010 11:23am]
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