Google: Weathering the Storm?

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Capital spending rose a relatively modest 21%, to $698 million, though executives indicated they would continue spending on computers and networking gear for the company's massive data centers.

Despite after-hours traders' disappointment, Google's results contrasted with warnings from two other companies focused on online advertising. Earlier in the day, ValueClick (VCLK), whose main business is funneling consumer leads to marketers, reduced its sales and earnings estimates, saying "the macroeconomic environment negatively impacted revenue in the quarter, primarily in the U.S. comparison-shopping and U.S. display-advertising businesses." ValueClick's stock fell 20% on July 17. On July 7, consumer-banking information company Bankrate reduced its outlook, sending its stock plummeting as much as 24%, to a 52-week low.

Yahoo! (YHOO) reports its second-quarter earnings on July 22, and Google's tepid results may be seen as a negative sign for the beleaguered Internet portal. A disappointing report from Yahoo could hamper that company's attempt to extract a better deal from unsolicited suitor Microsoft (MSFT). That battle, which also includes a proxy fight by activist investor Carl Icahn, is expected to come to a head at Yahoo's annual meeting on Aug. 1.

Gaining Ground on Rivals

Comparisons aside, Google is in something of a class by itself, thanks to its dominance of the most lucrative part of the online advertising business. Leading up to the earnings announcement, Google continued to gain ground on rivals. Its share of search queries rose to 69% last month, at the expense of Yahoo and Microsoft, according to market researcher Hitwise. Even more important, Google's share of search ad dollars rose in the second quarter to more than 77%, according to search marketing firm Efficient Frontier.

And in search advertising, market watchers say they aren't yet seeing a slowdown. "At some point the macroeconomic factors have to take a toll on search," says Richard Stokes, CEO of AdGooroo, a firm that provides competitive intelligence to search marketers. "But it has been growing so fast that this has been masked. Google will be insulated for some time from the overall economy."

The key reason: The greater measurability may appeal to cash-strapped advertisers more than brand-oriented display ads. "They prefer advertising that is measurable," says Roger Barnette, CEO of search marketing firm SearchIgnite. "The return that advertisers are getting on their search advertising is still healthy." If that continues, Google likely will remain healthy as well.

Hof is BusinessWeek's Silicon Valley bureau chief.