Pie’s not free at the truck stop – the cost of scalability….

One little sentence in a 10Q tells the story:

“The annual rate of growth in 2006 of our spending on property and equipment will be substantially greater than the annual rate of growth of our revenues.”

Now who would be saying that?....... Google

This is the real problem behind service plays. On the Internet as your user base grows so do your costs. Think about YouTube – the demand for FREE has never been greater. The cost to support FREE goes up with each transaction. Hold on a minute aren’t costs meant to go down? Yes. As you streamline processes and become more efficient your profit margins should rise.

So what’s fascinating with Google’s statement is that CapX/opX growth is rising faster than the growth in their revenues. What happens when they hit a peak in their ability to charge for adwords. Adam Smith will eventually determine the price. When it does, supply and demand have peaked for the revenue generator – however costs will keep on rising as they try and maintain their status as the lead search engine. Google HAS to find additional revenue streams. Right now they are seen as a “mile wide and an inch deep”.

Google is an incredible success story. What will be fascinating to see is what happens to Google in the next 7 years. Can they add another string to their bow to support their mounting and never ending CapX/opX expenditures?