Google: Still Going Gangbusters

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And Chief Financial Officer George Reyes cautioned that capital spending, at $597 million in the quarter, would continue at a high rate thanks to more spending on data centers, computer servers, and networking gear.

Where the Growth Is

Google's growth on the bottom and top lines came from at least two areas. For one, the company continues to improve its ability to wring sales from pay-per-click advertising, where marketers pay based on the number of times users click on an ad. Google does that by refining its targeting, or the placement of ads next to ever more relevant search results. Although Google doesn't reveal revenue per click, it said aggregate paid clicks on its own site and those of its partners rose 52% from a year ago. Rob Sanderson, an analyst at American Technology Research, figures that means Google extracted about 1.15% more from each click than just three months ago. "There's every reason to expect those gains to continue in coming quarters," he says.

Google's international business also remained on a tear. Sales outside the U.S. rose 81%, to $1.7 billion, accounting for about 47% of the total. Schmidt said that's one big reason he expects Google's core search and search ad business to provide the bulk of the company's growth for years to come. "We're still at the beginning of this business," he said. "We still have a lot of room to grow there."

As a result, he added, Google can continue to take "calculated risks" in areas outside search. So far, the results of those efforts, which include everything from its video-sharing site YouTube to Google Apps Premier Edition, a paid corporate bundle of online office-productivity software, pale next to its search ad business, which is still about 99% of sales (see BusinessWeek.com, 4/20/07, "Google's Nonsearch Services").

Room to Play

Analysts don't show much concern that some of those new services don't seem to produce much revenue yet. Schmidt said the purpose of those services isn't always to make money directly. Instead, the aim is to improve user experience and keep more people reliant on Google services so that the company ultimately can better target ads to them. "The vast majority of products outside search are about creating a community around search and the search ad business," says Devitt.

One question that will hang over Google the next few months is its recent acquisition of DoubleClick. Google said it could take several months to close the deal, and it likely will undergo a review by antitrust regulators. But even now, rivals and other players anticipate an even stronger Google in the future, as the acquisition moves it into a new form of online advertising: display ads. "Google's got the ear of half a million advertisers or more, from the top to the small local advertisers," says Kevin Lee, executive chairman of Did-It Search Marketing. "Extending the reach of those advertisers makes a lot of sense for them."

At the same time, coupled with Google's moves into selling ads in newspapers, radio, and television, the DoubleClick deal is raising new fears among advertisers and Web publishers that could cause them to cast about for alternatives to Google (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?"). "You're going to see some pushback," says Samir Patel, CEO and founder of SearchForce, a search marketing software firm in San Mateo, Calif.

Copyright Challenges

Another area of concern remains whether Google can come to terms with Viacom (VIA) over a $1 billion copyright lawsuit concerning TV show clips illegally posted on YouTube. Google recently said it will introduce a new tool called Claim Your Content that will speed the takedown of pirated clips. But Schmidt said Claim Your Content will not filter clips or prevent uploading, so it's unclear whether the tool will mollify Viacom and others.

So far, though, those challenges aren't slowing Google. More than anything, Danny Sullivan, editor-in-chief of the Web site Search Engine Land, recently told BusinessWeek, that's because "people have no particular reason to stop going to Google." So the dominance Google showed in the first quarter isn't likely to wane soon.

Hof is BusinessWeek's Silicon Valley bureau chief .