Stock analysts have consistently misunderstood Google. They think it's an advertising company, or a search company, or a media company, even a software company. It's none of those things.
Google is an infrastructure company.
Every major innovation Google has ever come up with was aimed at improving its efficiency. PageRank was a way of delivering relevant search results for less, by using clickstream data. Google pioneered the use of off-the-rack PCs as servers, to lower costs in its server rooms. It bought dark fiber to lower the cost of moving data. Google opened the windows on its server farms, letting air cool its computers, to lower its costs, and it has put money into alternative energy as a way to lower its costs, too.
This focus on costs has allowed Google to be creative in monetizing what it does, or just ignore money entirely. It can be very late on a technology trend and still catch up, because it doesn't have to make as much from that trend to make a profit.
It sometimes seems, to outsiders, that Google doesn't care about money at all, but there is method to its madness. The more demand it can create for Internet services, its own or those of anyone else, the more obvious its cost advantages become.
Scott Cleland uses this hard-won fact to argue for strict regulation of Google. But his criticism hides a dark secret, namely that he is carrying water for AT&T (NYSE:T) and Verizon (NYSE:VZ) – he always has been.
The contrast between Google and the phone companies could not be more stark.
American taxpayers have tossed literally hundreds of billions of dollars in subsidies at the Bells over the last decade, and our last-mile Internet services still trail those of other countries, because the money has been squandered. Meanwhile Google, with absolutely no subsidy, brings its services closer-and-closer to that last mile, and provides far more service at a far lower price than the Bells ever can.
This is Google's secret source. Google is the nation's real phone company. The Internet replaces the phone network with something that is far more flexible, turning voice, video, and everything else into bits. Google handles these bits, whatever their purpose may be, for far less money than anyone else. Usually with no charge.
I wish someone with vision and technical know-how would take control of AT&T, Verizon or both, and create real competition in this market. Instead the phone companies seem intent on trying to extract every dollar and dime they can get from consumers for every bit they move or transform, while Google chugs along, growing merrily while charging nothing.
Who might buy the phone companies? I don't think anyone will. I think all their capital, including everything taxpayers invested at the demand of lobbyists, is money wasted.
Efforts by the Bells to sell part of their local wired networks have, so far, been financial failures.
Comcast (NASDAQ:CMCSA) is eating their lunch, because it sells Internet services as a sideline and can provide faster on-ramps than the Bells ever could. It's made enough from this to buy NBC/Universal. Note that's in preference to investing more in its local networks.
The on-ramps to the Internet will remain a problem until Google finds an efficient way to solve that problem, and can do the job for free.
Disclosure: I am long GOOG.
Additional disclosure: My IRA owns 20 shares of Google common, bought earlier this year. I consider them a long-term investment.