February 1, 2008 | posted by Michael Baxter in New Media |

Profits soared at Google in the last quarter, but investors were nonplussed.         In the final quarter of last year, Google produced its best performance ever, posting $1.2bn worth of profits – that was an impressive 17 per cent up on the same quarter the year before, yet investors did a passing impersonation of a spoilt child, screaming in fury because Santa only brought him one games console for Christmas.    

And as the company’s profit reached heights that the most-bullish of analysts would only have dreamt about when the company was floated three years ago, a shadow appears over the Google horizon.  Is the mighty wonder of Mountain View California seeing an imminent end to its era of heady growth?

The problem, of course, is that analysts are used to seeing more-rapid growth from Google.      A year ago, for example, profits were 176 per cent up on the previous year.

 There are two clouds that hang over the company, at least they are clouds from Wall Street’s perspective – we have a sneaky suspicion management at Google don’t see it that way. 

The first cloud relates to the credit crunch and the all-round feeling of gloom.    They are asking, is even Google feeling the heat from the economic downturn?  If it is, then that’s a tad worrying, because it somehow makes Google seem normal, it makes its management seem mortal, and their veneer of invincibility suffers a nasty scratch.

The second cloud, though, is altogether more worrying, and it concerns fears that the company is approaching some kind of market saturation.  Maybe the scope to eke out many more dollars from online advertising is fast receding.   You can see the rationale behind this second fear.  After all, Google is now enjoying more revenue from advertising in the UK than ITV – surely there just isn’t much more scope for expansion.

The fears, though, seem overdone.   Cynics fall into the trap of seeing advertising as a cake. To begin with, Google’s slice was so tiny, the company could expand without impacting by very much on the overall cake.     But then, as the slice starts becoming the one that has the cherry on it, a really big stomach-filling slice, analysts start saying, well, the cake just isn’t big enough to facilitate much more growth from Google.  But this analysis is wrong. 

Thanks to the Internet, the advertising cake is changing, it is becoming more like a soufflé, before it was set in the oven.    

There is more than one reason for this. 

Firstly, for the online retailer, advertising takes on a level of importance that just does not apply to the traditional retailer.  They say that three key ‘Ps’ determine success in retail:  position, position, and position.  That’s why rent, position on the High Street and, for some retailers, ownership of prime retail space, are so important.  A retailer that can point to a balance sheet brimming over with property ownership, is seen as a business based on solid foundations.    

But in the Internet sphere, it’s position on Google that counts.  A Google ranking is more important than ownership of land.    

No doubt you know this Christmas was a record for Internet shopping, and most predictions say we have many more record Christmases to look forward to.     And thus, there is plenty of scope for the advertising soufflé to rise and rise again.   

Secondly, there is this new era of carefully targeting ads.   How much more successful would advertising be, if it was only pushed in front of people who are inherently interested in the products being sold.?  How much more effective would an ad for a restaurant be, if the advertiser could somehow know who would be in the region of its restaurant that evening.    

But as you know, this kind of advertising targeting is highly controversial, and it will take quite a while, two or three years, maybe longer, before it gains acceptance.    But when this new type of advertising finally takes off, the advertising soufflé will rise to unprecedented heights.   

Right now, Google is surely doing no more than pausing for breath.    Sure, its management is mortal, sure the company is not invulnerable, but there is no reason to assume the advertising growth phase is near an end.    

As Google co-founder Sergey Brin said about fears that the economic downturn was affecting the company, “We have not been able to detect any such effects from macroeconomic trends.”