Google presents itself as a technology company. However, in reality they are an advertiser exchange board. Vendor A creates good or service. Customer B wishes to purchase good or service. Google makes it possible for Vendor A to be found by Customer B. Vendor A is willing to pay Google some money for that service.
The problem, and here’s the nut that needs to be understood, is to create that switchboard Google has to expend vast amounts of cash to maintain its vast server farms. In effect, Google’s server farms provide the medium through which Vendor A is found by Customer B.
Why is this important?
Google makes money from trades. They don’t manufacture the content. To be the preferred location for the trades they need to invest huge amounts of capital to create the best platform for making the trades. As long as the trading exceeds the capital cost things are going well. If the trading were to drop all of a sudden, the capital costs remain and things start getting very interesting.
Let me try this differently.
Once you bring a data center online, if the trading revenue does not match the cost of running the data center, the capital cost remains. Given that trading revenue can disappear overnight, the danger is that overnight the total revenue that Google has can collapse. In that case Google would have vast operational liabilities with no revenue stream. The net effect would be complete collapse.
That of course is an absurdly negative belief, but it is interesting to observe that Google’s vast resources are being deployed into vast capital expenses,and that the vast resources are dependent on trading and that if the trading were to stop, then the capital expenses would remain creating all sorts of interesting pressure on their bottom line.
Strange thesis. I guess I gt two reactions.
1) As long as you are postulating you can extend it more. Your thesis is that Google’s customer base COULD disappear over night and it would collapse. But that is true for many companies. If suddenly customers didn’t need to store data. Netapp would collapse. Or if suddenly we were all friends the people who make uzis would find their business collapse.
All enterprises live beneath this cloud of uncertainty.
2) While Google makes money off ad switching, they also provide many other services that are based on new technology. Some argue it’s a technology company that can give away it’s tech fueled by trading revenue.
Just another POV.
mhr
I believe the notion that Google’s customer base would disappear overnight to be an absurd hypothesis. Business’ disappear overnight only if they are banks. And Google is not a bank.
I was just reflecting on how the company created an exchange and to maintain that exchange had created a vast physical infrastructure. And that was interesting.
And yes every company lives under the cloud of death, the question is how can a company die. I just find it interesting that Google has a different kind of exposure.
Having said all that, Google is a fantastic company that has obviously created fantastic amounts of wealth for it’s employees and shareholders. As a fantastic company, of course, studying the company is worthwhile to understand it’s strength and it’s weaknesses.