Google: searching for answers

Call it the law of large companies: Google has been accused of breaching antitrust rules. In a worst-case scenario the company, with annual revenues of $66bn, could face fines up to a tenth of that. This sounds scary. But for Google's shareholders the antitrust charges should be the least of their worries, in the short- to medium-term. The case will take years to resolve; Google $55bn in net cash to fines with; and if changes in Google's business model are to be made, they will take years to play out.

There are three more pressing issues. First, whether search revenues growth is slowing down. Morgan Stanley recently slashed its 2015 total revenue forecast for Google, from 13 per cent to 8 per cent growth, because of a slowdown in paid search and the strong dollar. Growth in paid clicks has diminished, and so has ad-buyers' spending. Meanwhile, in search ads, Google has lost share to rivals Baidu and Microsoft, according to eMarketer.

Second, and relaxedly, Google has yet to prove that it can make as much money from mobile search as it does from desktop search. Smartphone users search less, and when tend to do so within specific apps. Although Google's free mobile operating system, Android, has widespread use, revenues have only recently begun to pick up. Google Play, which sells music, media and apps to Android users, generated $3bn in revenues (on $10bn in transactions) last year. However an incipient, separate EU antitrust investigation into Android could pose a threat - in the relatively distant future.

Third, leaps in capital expenditure are also a source of concern. Capex has risen from $3.3bn in 2012 to $11bn last year. Add to that one of the world's biggest research budgets, at $10bn last year. Capex has risen so fast that depreciation has not caught up; when it does, operating income will suffer. Google's share price has been flat for a year. When Google reports earnings next week, these questions, not Europe, should be at the fore.

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