Today's Opinions, Tomorrow's Reality
Big Piles of Money
By David G. Young
Washington, DC, July 7, 2015 --
Fears of declining profits at Google are a distraction from the company's more important value.
The $10,000 that Thomas Edison made on the sale to Western Union of his quadriplex telegraph may not seem like much today, but back in 1874 it was a big pile of money. The cash was used to fund his famous research laboratory in Menlo Park, New Jersey. Over the next 30 years, an incredible stream of revolutionary inventions came out of his labs, including the electric light bulb, direct current generators, the phonograph, and the X-Ray.
Today, the biggest single engine of innovation is not in Menlo Park, but in Mountain View. Over the past 16 years, inventors at Google have brought us not just search engine software, but access to library content from any point on the globe, detailed hand-held maps of the entire world, automatic language translation, and the self-driving car. These among other inventions offer to remake the way we live much like the inventions of Thomas Edison a century ago.
While Edison funded his research based on profits from telegraph technology, Google funds its research from selling search advertising. Since its founding in 1998, almost all of Google's income has been from selling the ad words and other sponsored content you see in your Google search results. The pile of cash and securities generated by this income now amounts to $65 billion.1
This enormous cash pile is impressive, but it is not bottomless. Currently, Google employs over 55,000 people2, many of whom are highly paid engineers. A cash pile amounting to over $1 million per employee can cover salaries for a long time without additional revenue. This cash pile may be critical, because Google's ad-based revenues may soon slip.
Competition for online ads from companies like Facebook and Yahoo, as well as a shift in browsing habits from larger desktop and laptop computers to handheld mobile devices has put downward pressure on what advertisers pay. The "cost per click" paid by advertisers declined by 7 percent year over year in the quarter ending in March.3 This trend is expected to continue.
Google's money problem is that it has not found another product that comes close to search ads as a profit generator. If Google fails to find another business line to replace expected declines in ad revenue, it will one day cease to be profitable. A century ago, Edison's companies found bigger profits in the light bulb and electrical equipment that continued to fund research well after telegraph technology profits dwindled. So far, Google has produced many great inventions. A few have provided some modest financial successes. But Google has so far produced no financial blockbusters to offset an expected decline in ad revenue.
If Google stops being profitable, will the company continue to be such a great center of research and development? Fortunately, Google's founders Sergey Brin and Larry Page have maintained voting control over the corporation despite declines in their stock holdings to under 20 percent each.4 This control will help them to resist pressure from Wall Street to reduce research expenditures in favor of dividends or stock buy backs. But if it comes down to this, Google's share price will certainly take a tumble as investors who see no chance of near-term profit growth ditch the stock.
Such a move would separate Google from the other technology powerhouses of our time. In terms of profitability, Apple is by far the biggest success, with a design-focussed product line that produces near slavish devotion by its customers. This success has given Apple an even bigger pile of cash than Google, allowing it to focus on its own research projects as do technology companies like Amazon, Tesla Motors and Facebook.
But none of these companies can match the sheer scope of the "moonshot" projects funded by the Google X division. Project Loon hopes to provide worldwide high speed internet access from remote-controlled high altitude balloons. Project Wing is a drone delivery system.5 Other projects focus on smart contact lenses6, kite-like wind turbines, and advanced neural networks for image processing and language analysis.
Investors who expect near-term profits would be wise to shy away from such projects, and perhaps from owning Google stock at all. But for technology-obsessed uber-rich inventors, like Thomas Edison, Sergei Brinn and Larry Page, these are exactly the kind of projects that make life exciting. The beneficiaries — nearly all of us — are the people whose lives are eventually improved by their inventions. That these men should choose to direct their big piles of money towards research that benefits us, as opposed to the benefit of short-term investors or their own frivolous personal expenditures, is something all of us should respect.
Related Web Columns:
Stealing Android, May 26, 2015
Google vs. the Anti-Cloud Axis, December 29, 2009
1. Google, Google Inc. Announces First Quarter 2015 Results, March 31, 2015
2. Google, 2015 Financial Tables, as posted July 5, 2015
3. Forbes, Google Q1 Earnings: Ad Revenues Post Growth Once Again, April 27, 2015
4. Wall Street Journal, Google's Stock Split Means More Control for Larry and Sergey, February 3, 2013
5. The Atlantic, Inside Google's Secret Drone-Delivery Program, August 28, 2014