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Google doesn't talk about its server operations very often; most of what we know boils down to one word: "big." The company lifted the lid ever-so-slightly yesterday (no April Fool),
and gave the world a peek inside a data center that's normally locked up tighter than Fort Knox. The results (and the company's focus) might surprise you.
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Search advertising is finally feeling the full impact of the weak economy, according to a new report out this morning from online marketing analytics firm Covario. In fact, search spending fell from quarter to quarter for probably the first time ever, by 1.4% in the first quarter.
The report isn't comprehensive--it's based on Covario's largely tech and consumer electronics customers--so it may not be typical of overall spending on search ads. But with those clients spending $250 million a year on search ads, it's also worth mentioning.
Although search ads seemed to hold up decently in the fourth quarter thanks to holiday budgets getting set before all hell broke loose last September, there was no such luck in the first quarter. Virtually all the decline came in Europe and Middle Eastern and African countries, which were down 16% from the fourth quarter. U.S. spending was actually up a little under 1% and Asia-Pacific rose 7%.
What's more, search ad prices--known as cost per click--continued to fall, to their lowest level in two years--a result of falling demand as marketers cut back on all ad spending. "The pullback is starting to happen," says Craig Macdonald, Covario's chief marketing officer. "We expect this erosion in spending to continue the rest of the year."
Google, which had reported surprisingly good fourth-quarter results, came in for the worst of it--oddly enough, mostly because of its dominant position. For one, it commands around 95% of search spending overseas, so all of that decline landed on Google.
Also, marketers simply saturated their spending on Google, as they started to see lower returns on their search spend: Click-through rates, or the rate at which people clicked on search ads, fell to 0.7% in the first quarter, way down from 1.8% in the fourth quarter. That trend sent them to Yahoo and Microsoft to find more clicks. Yahoo's click-through rate rose to 1.7% from a little under 1%, and Microsoft's rose a bit, to 2.3%.
Of course, you have to put this in perspective: If Google's problem is that it's essentially selling out its inventory because it has about 80% market share, that's a problem Yahoo and Microsoft would love to have. Also, I've been hearing that while January and February were pretty awful for all of online advertising, search ads, at least, saw an improvement in March.
Still, Google could report a pretty tough quarter on April 16 when its first-quarter earnings are due out. The company will have to hope that its recent cost-cutting, spurred by relatively new Chief Financial Officer Patrick Pichette, will help save the bottom line. 
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In recent months, most of the news about Google focused on the cutbacks it has made to both staff and experimental projects. On Monday, however, the search giant announced a major expansion, a venture capital fund with full Google branding: Google Ventures. In contrast to some of the efforts of Google.org, these investments will be all about profit, and the company is taking great pains to ensure potential investees that the money will come with no strings attached. Those assurances, however, come in a message that's fairly mixed.
This is not Google's first foray into investing, but the company's past efforts were placed under its charitable arm, Google.org. These investments were mixed with grants, and had a clear focus on things like alternative energy and emerging diseases. Google Ventures, in contrast, doesn't appear to have any specific goals beyond "making money from the investment." There is the possibility that there will be some overlap—areas of interest highlighted by the announcement include clean tech, biotech, and health care—but those investments will be made alongside those in software, consumer Internet, and other businesses. Google promises that its ventures will borrow "the best practices of top-tier, financially focused venture capital firms."
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Once companies grow large, it's always tough for them to come up with great new innovations like the one that built them. As Harvard Business School professor Clay Christensen has outlined in detail in his books, once companies are successful, they tend to focus on serving their existing customers better, often leading them to miss or actively avoid producing new products that might disrupt their business.
That "innovator's dilemma" is one that Google, like many large tech firms before it, faces today. So this morning, it announced one way to avoid missing the next big thing: Google Ventures. Unlike most other corporate venture funds, Google Ventures will seek to make returns, not just support existing Google businesses. It will invest up to $100 million over the next year. The "partners" in the fund will be William Maris, a onetime entrepreneur who joined Google last year, and Rich Miner, a cofounder of Android, a mobile phone software startup that Google acquired in 2005.
Google Ventures has made two investments so far: Silver Spring Networks, which helps utilities manage electrical grids, and Pixazza, an online ad firm that Iwrote about last week. Already, many startups have looked to a Google acquisition as an exit strategy during a time when public investors have little appetite for initial public stock offering. Now, as many venture firms are cutting back thanks to their limited partners suffering in the economic downturn, a lot of startups will be looking to Google to help fund them at the outset.
Here's the post, and I will add more from Maris and Miner after I talk to them later this morning:
Today we're excited to announce Google Ventures, Google's new venture capital fund. This is Google's effort to take advantage of our resources to support innovation and encourage promising new technology companies. By borrowing the best practices of top-tier, financially focused venture capital firms and bringing to bear Google's unique technical expertise and brand, we think we can find young companies with truly awesome potential and encourage their development into successful businesses.
At its core, Google Ventures is charged with finding and helping to develop exceptional start-ups. We'll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven't thought of yet. Central to our effort will be our fellow Googlers, whom we view as a critically important resource to help educate us about potential investments areas and evaluate specific companies.
Economically, times are tough, but great ideas come when they will. If anything, we think the current downturn is an ideal time to invest in nascent companies that have the chance to be the "next big thing," and we'll be working hard to find them. If you think you have the next big idea, or if you just want to to learn more, please see our website at www.google.com/ventures.
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By now, it's apparent even Google is no longer unaffected by the economy, and now the company has announced further cuts in its staff--the third reduction this year.
In a blog post today, Omid Kordestani, Google's senior vice president for global sales and business development, said the search giant had simply hired more people than it needed for the current level of business. So 200 jobs in sales and marketing will be cut, though some of the people will be able to apply for jobs that Google is still hiring for.
Clearly, Google has seen its business hurt by the economy more than it expected even in January, when CEO Eric Schmidt said deeper cuts were unlikely. It seems likely that whatever revenue growth Google achieves in its first quarter, which it will report on April 16, it won't be as much as the company thought a short time ago. According to many advertisers and search experts, January and February saw fewer searches and less search spending, though March may be showing some improvement.
At the same time, although this is the largest layoff this year, it still strikes me as remarkably small given Google's 20,000-person staff and the severity of the recession--even with the earlier layoffs of 100 recruiters in January and 40 people after Google closed its radio ads business in February. Although more could come especially if the economy continues to worsen, these appear to be rather selective at a time when nearly every company seems to consider a 10% to 20% layoff mandatory. That indicates that while Google's business certainly has been hit by the downturn, it's not doing as badly as most businesses.
At least one search expert thinks Google won't much miss the lost sales people. Google's core product sells itself. "Most savvy marketers would spend the same, with or without a sales rep," Kevin Lee, CEO of the search marketing firm Didit, emailed me today. "Reps are important, but mostly to educate on new products. Some of that is handled better via PR or webinars."
The layoffs bear the mark of relatively new Chief Financial Officer Patrick Pichette, who was hired last fall. Google people have been telling me Pichette has imposed a new discipline on Google's spending. "Patrick has helped us uncover opportunities" to cut operations that weren't performing, such as Google's Lively virtual world, which was jettisoned recently. Dave Girouard, president of Google's corporate enterprise efforts, says Pichette "digs very deep" in asking questions about which ads are working for which advertiser.
Here's full memo from Kordestani, after the jump: 
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A start-up called Wrike has announced an important product today that could make Android-based smartphones more attractive to business users. 
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Google just announced two new refinements to its search engine today, continuing to leave little room for competitors to get a foothold. The tweaks, announced in a Google blog post this morning, generally aim to produce better results for search... 
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Just days after Tim Armstrong, a top Google sales executive, announced he's leaving to become CEO of Time Warner's AOL unit, the search giant has already replaced him. Dennis Woodside, who has been vice president in charge of sales... 
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With no news for so many months after Google bought GrandCentral Communications in July 2007, a lot of people thought it might be one more Google acquisition that ended up getting shut down. But the service, which essentially gives you... 
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Despite Google's dominance of the Web, its many apps are susceptible to occasional bouts of downtime just like its competitors. In what is either a move to keep its users informed or to simply steal traffic from Down for everyone or just me, Google has quietly introduced an Apps Status site.
Featuring a list of Google's core apps for both consumers and Google Apps users, Google's new Apps Status Dashboard page features a daily tally of any outages or disruptions. Google maintains status information for Gmail, Google Calendar, Google Talk, Google Documents, Google Docs List, Google Spreadsheets, Google Presentations, Google Sites, Google Video for business, and the Admin control panel for Google Apps users. Any time a service has trouble, various icons notify the users, and after the problem is fixed, information is added about what the problem was, when it occurred, and how long it took to implement a solution.
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Google today will step into an emerging but controversial method of targeting ads to people's interests and online behaviors. This morning, the company announced it will begin offering these ads using what is known as behavioral targeting. To date, Google... 
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At this year's Cebit, Reinhard Clemens, CEO of Deutsche Telekom's large businesses division T-Systems, criticised Windows Mobile -- while giving thumbs up to rival Android software for mobile phones. The comments are interesting, as they seem to shed new light on the future of Android as software for corporate users vs. only consumers. They also may show that Microsoft's corporate supporters are starting to look elsewhere, to alternative software and devices like the iPhone, which also offers access to corporate e-mail. 
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Today's Gmail outage naturally raised questions about the reliability of trusting mission-critical applications to the vagaries of cloud computing. But just how bad a blow to Gmail's reliability was the outage, which Google puts at 2 1/2 hours, but user... 
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Gmail service seems to be mostly restored after a major worldwide failure took it down for more than three hours this morning. Although a status update on the Gmail support page says "the problem is now resolved," lots of... 
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After nearly six years in business, Google's Gmail is still officially classified as "beta." Maybe there's a reason. The service has suffered an embarrassing string of breakdowns lately and htis morning appears to be entirely unavailable. No word from Google... 
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