I finally found some time to read the 2005 Google annual report. I recommend any investor to get in the habbit of reading such documents (10-K's, 10-Q's), because they give you the real story behind a business, not to mention a birds eye view of what's going on that's not easy to see following day to day news. If somebody had asked me, "what's the most significant thing Google did in 2005?" I would have said a whole bunch of things, all of which would have been wrong, but reading the annual report makes clear what the right thing is. I'll get to what I think is the most important thing later, but first I want to mention a few things that caught my attention.
1) In 2005, Google bought 15 companies for a total of $85M. That's less than $6M per company, and a scary number for VC's who are investing in Internet companies with hopes to sell them to Google. They'd better be really, really capital efficient :-)
2) Top competition is Microsoft and Yahoo. No surprise here. But we know what Microsoft is doing about is, you may have seen Steve Ballmer's "advertisers, advertisers, advertisers" video. They want to get a hold of all the advertisers and choke Google there. Again no surprise. What's surprising to me is that nobody know what Yahoo is doing? Are they doing anything?
3) Google did $6.1B top line, $1.5B bottom line, but increased it's cash position from $2 to $8B. They did that by raising $4B in the secondary offering.
4) They spent $483M on R&D but spent $1,417M on property and equipment, not counting depreciation.
Point #4, makes me conclude that point #3 is the most important thing Google did in 2005. It's raising that $4B. Why? Because it gives them a war chest that Yahoo does not have. In 2005, Yahoo generated $600M in cash, and Google generated $6B. This could spell disaster for Yahoo, if Google starts to force them to spend capex at a rate that they can't keep up. While Yahoo tries to keep up with Google coming up with products, they may lose the game if they can't bid for the data centers like Google can. They may lose the war by losing the hardware battle, not the software.
I have a lot of respect and admiration for the products Google is building, but if somebody asks me what's the most important thing Google did in 2005, the answer is the secondary. Obvious as it sounds, I bet it wouldn't be the first thing most people say.