Payoff Time for Google as Juggernaut Business Model Rolls Ahead

Rarely in the history of American industry has such a young company been able to amass the company to potentially acquire two multi-billion dollar businesses in as many years' time. But the unparalleled Google business model showed every sign yesterday, in its quarterly earnings report, of being able to support what for others would be an impossible dream.

The beauty of it, from an analyst's perspective, is this: A billion dollars of profit for the quarter, on under $3.7 billion in revenue. Google doesn't really make a lot of money, but it earns a lot. Compare this to another player in the online search space, Yahoo, whose numbers earlier this week spoke volumes: $142 million in profit - less than the same quarter last year - on higher revenue of $1.67 billion.

Google's business model is one where "cost of goods sold," from a manufacturer's perspective, is replaced with traffic acquisition costs, which is the amount of Google's revenue that's distributed to partners who provide it with an influx of traffic. That increased in the last quarter as well, from $976 million to $1.13 billion.

But even that increase has a positive spin to it: As Google's fortunes rise, its partners' rise with them. And with profit as a percentage of revenue increasing, that rise is more and more manageable. For a nation that has exported a degree of even its agricultural capacity to China, online advertising has become a singular American success story.

The downside is...well, it's missing. Seeking Alpha blogger Phil Davis this morning noted Google's higher-than-expected tax bill for the quarter as being the downer of the day. But the company managed to tackle that problem it time, bringing taxes below the benchmark 30% range anyway. "That's right, you have to drill down to taxes to find a flaw in this company's execution and they've fixed that too!" Davis writes.

Google is nowhere near a colossus in terms of capital - it is not the behemoth that Microsoft is. But with a business model like this, it might not have to be, and that's what's worrying Microsoft at this point. The Redmond company has perhaps invested most seriously as well as quantitatively in the past year to combat Google in the online advertising space, even though it's sometimes difficult to remember which brand Microsoft's services go by this week; meanwhile, Yahoo is recovering from its own financial as well as social setbacks, dealing with - and in some cases, letting go - recently acquired executives with conflicting goals and philosophies.

While Google has indeed stepped away from one part of its original business model - growth by design rather than by acquisition - what has typically made those acquisitions work has been their ability to fit harmoniously within the Google grand scheme. YouTube has not exactly been resulted in the harmonious tones some expected; but although YouTube lacks a cohesive business model, Google appears to have plenty of spare time to graft its organic business logic onto the video distribution service.

"In 2007, we expect to continue to make significant capital expenditures," a portion of Google's quarterly statement reads. No kidding.