Google gears down for tougher times

MOUNTAIN VIEW, Calif. - Corporate austerity is reaching one of the most extravagant spenders of the boom years. Google Inc. has begun to tighten its belt.

For much of its 10-year history, Google spent money at a pace that was the marvel of Silicon Valley. It hired by the thousands and dished out generous perks, including three free meals a day, free doctors, ski trips and laundry facilities, and subsidized personal trainers. It let engineers spend 20 percent of their time pursuing pet projects. The company's goal was to develop new products that would reduce its nearly total reliance on selling ads connected to Internet searches.

But revenue growth has slowed dramatically over the past year. Products such as Google Checkout, a Web payment service, and Google TV Ads, which sells television advertising time, haven't generated significant revenue, leaving online ads still accounting for 97 percent of revenue. Google's share price has fallen to $275.11 in trading Tuesday on the Nasdaq Stock Market, less than half its record close of $741.79 in November 2007.

So with the U.S. economy in a recession, Google is ratcheting back spending and cutting new projects.

"We have to behave as though we don't know" what's going to happen, says Google Chief Executive Eric Schmidt. The company will curtail the "dark matter," he says, projects that "haven't really caught on" and "aren't really that exciting." He says the company is "not going to give" an engineer 20 people to work with on certain experimental projects anymore. "When the cycle comes back," he says, "we will be able to fund his brilliant vision."

Last month, it pulled the plug on SearchMash, a Web site it used to experiment with new ways to organize search results. This month, it plans to do the same with Lively, a "virtual world" launched this summer where online users can create characters and rooms for them to hang out in. Google explained that it wants to "prioritize our resources and focus more on our core search, ads and apps business."

Google is also rethinking its practice of providing some Web services without ads, so that it can generate more revenue. On Nov. 17, Google began running ads on Google Finance, a financial-news site, and said it would soon start showing ads to some users of its Google News service as well.

Google's years of rapid growth were fueled almost entirely by a single business: sales of search ads, the small text ads that appear next to search results cranked out by its Internet search engine. The company realized that the torrid growth couldn't continue forever. So far, it hasn't come up with any big new revenue streams.

"Letting a thousand flowers bloom and letting many of them stall and go nowhere has worked well to this point," says Thomas Eisenmann, a professor at Harvard Business School. "But if you want to be the dominant advertising network across every medium, you need more top-down management."

Google executives say they started preparing for slower growth more than a year ago. But the economic crisis is forcing them to step up their efforts.

In recent weeks, Schmidt has held meetings with top executives to determine where to focus investment more narrowly. Top priorities include display ads, which use graphics and appear on Web pages; advertising on mobile phones; and the company's online business software.

Schmidt says the company is shifting more engineering and sales resources to those areas, and away from less-promising projects. Teams on projects the company is merely "fiddling with," he says, will get "naturally smaller as people get plucked off."

This fall, the company announced plans to "significantly" reduce its roughly 10,000 contract workers, whose jobs range from engineering to food services. While the timing and focus of the cuts remain unclear, Google employees already are joking that it's getting easier to find a spot in the company's crowded parking lots.

Google has also begun chipping away at perks. In recent months, it reduced the hours of its free cafeteria service and suspended the traditional afternoon tea in its New York office. A Google spokesman says its core culture is not changing. "Our unique culture is an essential part of what makes Google Google," he says.