"The one drawback of super-high-margin revenue streams is that they create the illusion of endless and effortless profitability. Google has so much money right now that one of its biggest challenges is finding ways to spend it ($200 million on Googleplexes, $600 million on server farms, $500 million worth of product development per year). What this translates to is a high and rapidly increasing fixed cost base--one that, on the income statement alone, now amounts to a run-rate of about $2 billion a year (excluding traffic acquisition costs).
Importantly, almost all of this $2 billion is fixed, not variable. If revenue drops, these expenses will remain the same--unless Google takes painful steps to cut them."
It's interesting to note that heavy fixed costs could haunt Google even without a decline in its advertising revenue. It's now widely known that Google has ambitious telecom plans, and those will almost certainly lead to lower margins. It's not clear how investors will react.
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