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Google Outlines Plan To Spend to Expand

Company Predicts Stiffer Competition

By David A. Vise
Washington Post Staff Writer
Friday, April 1, 2005; Page E05

Google Inc. is planning to rapidly boost spending this year to expand operations and promote its brand name as the Internet giant braces for increased competition from rivals.

In its first annual filing with the Securities and Exchange Commission since going public in August, Google disclosed this week that it anticipates spending more than $500 million on technology and other capital items in 2005, a substantial jump over the $319 million it spent in 2004 and the $176.8 million it spent in 2003. The company also said that its payroll, which grew to 3,021 in 2004 from 1,628 employees in 2003, must grow significantly to support its global expansion and research efforts, and to compete effectively with the two bigger firms it identified as its chief competitors, Microsoft Corp. and Yahoo Inc.

Google executives Sergey Brin, left, and Larry Page anticipate spending more than $500 million on technology and other capital items in 2005. (Ben Margot -- AP)

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Google, known for providing fast, reliable search results to computer users hunting for information on the Internet, said it will encounter new challenges in maintaining the high standards that have made it so popular. "In 2005, we expect to spend substantial amounts to purchase or lease data centers and equipment and to upgrade our technology and network infrastructure," Google said. "This expansion is going to be expensive and complex."

Google further said that its careful hiring practices may be more difficult to adhere to as the company expands rapidly. And it said it faces increased challenges in hiring and retaining top talent.

"Competition in our industry for qualified employees is intense, and we are aware that certain of our competitors have directly targeted our employees," the company said.

Google, which plans to disclose first-quarter 2005 financial results in several weeks, warned that its financial performance may not match the fourth quarter of 2004. The company gets 99 percent of its revenue from advertisers, adding that the seasonality of its business means that the fourth quarter's holiday shopping season cannot be replicated in the first three winter months of 2005.

In its latest filing, Google described its business model as akin to that of a newspaper, with clearly delineated separation between its free search results and paid advertising. But Google also characterized its evolution over the past year in more far-reaching terms, reflecting the breadth of expertise that it needs to continue to be a leader in the search-engine marketplace.

"We began as a technology company and have evolved into a software, technology, Internet, advertising and media company all rolled into one," the company said.

Google, however, warned that it may be at a competitive disadvantage with rivals such as Microsoft, which recently announced plans to test new search software. Microsoft, in the past, has obliterated some competitors by building new features into its dominant computer operating system. Yahoo, too, recently has made improvements to its search engine.

"Microsoft and Yahoo also may have a greater ability to attract and retain users than we do because they operate Internet portals with a broad range of content products and services," the company said. "If Microsoft or Yahoo are successful in providing similar or better Web search results compared to ours, or leverage their platforms to make their Web search services easier to access than ours, we could experience a significant decline in user traffic."

To date, Google has relied mostly on word of mouth and savvy public relations to build one of the world's best-known brand names in just seven years. But as competitors begin spending more heavily to market their search engines -- and if those search engines deliver quality results for computer users -- Google said it may be forced to respond in kind.

"We anticipate that as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive," Google said.

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