Google was a victim of its own success to some extent. With half of its
revenue coming from the U.S., the company showed a troublesome slowing in
advertising click-throughs, thanks perhaps to the struggling U.S.
economy. Google puts partners' text ads beside search results and is then
paid when visitors to the search engineer clicked the links.
It was used to seeing rapid growth in traffic throughout its history and this yielded
rapid growth in clicks. Last year, the quarterly growth was 47
percent. This year growth had slid to 19 percent, which for anyone
besides Google would have been very impressive. However, for Google, this
meant that its profits were not as high as expected, and it disappointed
analysts' lofty expectations.
It posted a profit of $4.63 a share, well below the average of $4.73 a share,
which a Bloomberg compilation of analyst projections predicted.
Partly to blame also were rising costs of operation. Google saw its
research spending budget rise 65 percent. It also languished under the legal
war of attrition it has been waging against Viacom over its video sharing
Thanks in part to the extra overhead from defending itself against Viacom,
Google's general and administrative costs rose 49 percent to $475M USD.
Google also was nonplussed
to see employees leaving the company, a foreign experience for the company
who promoted a "lifer" mentality among its workforce thanks in part
to feel-good perks.
Microsoft also felt some heat from its Q2 results. The company,
which gets 60 percent of its income inside the U.S., disappointed analysts with
only producing a profit growth of 42 percent, yielding $4.3B USD in profit (42
cents a share). Analysts predicted stronger profits of 47 cents a
Its problems stemmed in part to sliding
Microsoft Office sales, which were thought to be negatively impacted by
piracy. The sales missed the company's goals for a second straight
quarter. Worse, Microsoft saw its online advertising missing targets and
losing ground to Google. Overseas Microsoft showed more promising growth,
but this growth was unable to offset its slippage in the U.S.
Brian Rauscher director of portfolio strategy at Brown Brothers Harriman &
Co. in New York says this is to be expected, and that there is little Google
and Microsoft can do to escape the reality of the U.S. economy's
struggles. He said, "For any U.S. company, the domestic part of
their products are going to come under pressure. The U.S. consumer is
Jerome Dodson, chief executive officer of San Francisco- based Parnassus
Investments, which has $1.4B USD in investments, including holdings in Google
and Microsoft stock, stated "You can't consider technology a defensive
sector at all. We're going to have a small sell-off in technology."
Even Google CEO Eric Schmidt admitted that his company was struggling under
"a more challenging economic environment."
Microsoft and Google paid a heavy price for falling short of expectations on
the stock market. Google stock fell $52.12, or 9.8 percent, Friday, its worst
loss since its 2004 initial public offering. Microsoft saw slightly less
severe, but still grim, losses $1.66 a share, or 6 percent, its own worse loss
since April 25 of this year.