Google: The Recession Takes Its Toll

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Thanks to belt-tightening, Google's profit picture was much brighter. After years of high spending on hiring and capital improvements, which started easing last year, Google cut expenses sharply. It has shaved its employee count by 58 since December, to 20,164. Capital spending, $263 million, was down 40% from the fourth quarter, though the company said it could rise again.

Under the direction of Chief Financial Officer Patrick Pichette, who joined the company last August, Google has announced two rounds of job cuts since January, eliminating up to 300 positions in sales, marketing, and employee recruiting. That's in addition to cutting thousands of contractors late last year. At the same time, it has shuttered several small operations, including a radio advertising project. All that helped Google earn $5.16 a share, notably more than analysts' forecasts of $4.93 a share and up from $4.84 a year ago.

Notable Departures

Google also announced that Omid Kordestani, Google's top sales executive and senior vice-president for global sales and business development, is stepping into a new role of advising the company's executive trio, Schmidt and co-founders Sergey Brin and Larry Page. Kordestani's departure from the sales job (he has been replaced by Nikesh Arora, current head of European and Middle Eastern operations) caps a tumultuous period in Google's sales organization. In recent weeks, top sales executive Tim Armstrong left to be CEO of Time Warner's AOL unit, and Sukhinder Singh Cassidy, former president for Asian and Latin American sales, left for venture capital firm Accel Partners.

Later in the day, Google's video-sharing site, YouTube, announced plans to offer free TV shows and full-length movies from several studios. The studios involved are Sony Pictures (SNE), CBS (CBS), MGM Mirage (MGM), Lions Gate Entertainment (LGF), and Liberty Media's Starz—though it's uncertain how much content each will make available. YouTube also redesigned its site to put greater emphasis on professionally produced material.

As for Google's core business, analysts aren't anticipating a return to higher growth for online advertising anytime soon. Recent reports from search marketing firms indicated first-quarter drops in search ad spending comparable to the one suffered by Google, though they also saw an uptick in March. Search marketers continue to be careful about how they spend. "People are coming to us with more stringent metrics for returns," says David Karnstedt, CEO of search marketing firm Efficient Frontier.

More Clicks Per Sale

What's more, consumers are shopping around more before buying, making ads placed on sites such as Google's less valuable to marketers on a click-by-click basis. Google said the number of paid clicks in the quarter rose a healthy 17% from a year ago. "People are searching and clicking on ads as much as ever," says Jeffrey Lindsay, senior analyst with Sanford Bernstein. "But it's now taking 15 to 20 clicks vs. 10 to 15 clicks to sell something." As a result, prices per click on search ads fell 13% in the first quarter from the fourth, Efficient Frontier says.

Another search marketing company, SearchIgnite, said in a recent report that the average time between when a consumer clicked on an ad and subsequently bought something increased 32% from a year ago. "Consumers are being more cautious," says SearchIgnite President Roger Barnette. "But they're eventually making the purchase."

Analysts said Google may have an advantage over other companies in advertising and technology once the economy improves. "Paid search will respond almost immediately to an upturn," says Lindsay, because marketers can instantly start spending, unlike in traditional media, where more planning is required. But as Google made clear, that upturn is still nowhere in sight.

Hof is BusinessWeek's Silicon Valley bureau chief.