Anatomy of a Downturn

The Wall Street Journal dedicated today's front page to Google's dwindling fortunes, and how the company has reacted to the broader economic meltdown. It's a study in how Silicon Valley firms slide from the glorious start-up days into the middling reality of running a company that doesn't know how to mint money anymore, and no one has been more glorious than Google.

First, the Journal runs through the perks Google used to offer: delicious meals on site three times a day; personal trainers; ski trips; volleyball courts. The company's famed twenty percent philosophy, in which engineers get to spend one day a week fiddling with interesting projects that won't necessarily make money, led to a bushel of nifty Web tricks, from the virtual world Lively to Google's plan to scan and archive all the books in major American libraries. If you were smart, Google wanted you, regardless of where you lived or whether the company even needed you.

Those days are gone now, of course. Lively is dead, and so is the experimental SearchMash. The meals are being scaled back, the twenty percent time is being reexamined, and Google is closing some of its satellite offices. The company works with some ten thousand contract employees, but in the last few weeks, Google has been canceling more and more of these contracts, effectively laying off people without having to admit it.

In short, as its revenue growth slows to a trickle, Google is scaling back its efforts to diversify its revenue streams, and focusing on its core business: search ads, and display ads to a lesser extent. Normally, companies that only have one service at its core are in danger of wild fluctuations in the marketplace; if the advertising market collapses, for example, so will Google's ad revenue. But as the economy continues to melt down, Google executives have decided to walk away from many attempts to expand its revenue sources, and leave itself more dependent on search ads than ever. In fact, they've decided to place more search ads on different pages, slapping ads on Google Finance for the first time, for example.

Perhaps the most interesting element of the story is how early Google saw the coming collapse, and moved to insulate itself from the worst effects. More than a year ago, according to the Journal, company executives slowed down its hiring pace and allocated the new employees to projects that generated the most money. Advertising sales representatives were actually given quotas, with their compensation tied to performance. (Frankly, we're shocked that Google hadn't implemented this system before, since it's standard operating practice in sales.) They've shut down offices in Denver and Dallas, stopped building data centers like there was no tomorrow, and redirected the bulk of its research budget to projects deemed likely to, you know, make money.

This last point, the Journal warns, may have some unhappy consequences. For the last two years, analysts and reporters have been speculating about a Google brain drain, in which talented engineers and programmers, many of which weren't around to cash in on stock options, decide that working for Google isn't as fun as it used to be, and start shopping their resumes around town.