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Google Fans Fidget

The stock slumps as investors await the company's next big act.



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again breezed by Wall Street's earnings estimates and topped revenue expectations, the company's solid performance didn't seem to keep par with the upward spiraling expectations set for it.

On Wednesday, Google

reported earnings of $3.18 a share on an adjusted basis, well ahead of the $2.92 consensus for analysts surveyed by Thomson First Call. Revenue came in at $2.23 billion, ahead of the $2.19 billion that analysts had predicted.

Curbing that revenue figure was Google's aggressive promotion of its Checkout online payment service during the holiday season, which UBS analyst Ben Schachter estimates amounted to about $30 million. UBS makes a market in Google shares.

A major new push for Google that was launched in 2006, Checkout extends the company's reach into e-commerce and capitalizes on its dominance as the start destination for a growing number of web searches, even as it makes Google's ad platform more appealing to merchants.

Google's solid performance for its fourth quarter mirrored the impressive numbers it posted in the third quarter that preceded it. The company beat analyst expectations by 8% during the third quarter, compared with 8.9% for the fourth quarter.

And were it not for the discounts offered to promote Checkout, the company would have exceeded revenue expectations by virtually the same amount in the third quarter as it did in the fourth. Revenue came in 3.3% ahead of consensus in the third quarter, compared with 3.2% for the fourth quarter, excluding the Checkout promotion.

"Our fourth quarter marketing investment paid off, with dramatic growth of the user base, and repeat usage stayed strong, which is a good measure of convenience and ease of use" said Google co-founder and head of technology Sergey Brin about the Checkout promotion efforts.

But while Wall Street rewarded Google with an 8% pop in its share price the day following third-quarter results, the fourth-quarter numbers seemed to be greeted by disappointment that the company did not blow them away by even more this time around.

Shares of Google were recently off $11.59, or 2.3%, to $489.91.

"Business at Google remains very strong, but it seems that expectations have finally caught up," wrote American Technology Research analyst Rob Sanderson in a note to clients on Thursday. "At least until new growth initiatives kick in."

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Indeed, while Google further tightened its grip on the paid search market over the fourth quarter -- the company continued to gain market share and fine-tune its system for assessing the relevancy of ads it displayed -- the focus now seems to be on Google's next acts.

The company, for its part, seems to understand this and provided an ambitious vision in a conference call for investors. "Google is now presenting a much larger business mission," CEO Eric Schmidt said in reference to the myriad new initiatives the company is pursuing.

The strategy for the search giant seems to be to branch out aggressively in adjacent lines of business such as traditional media ad sales, graphical Internet advertising and the emerging mobile advertising space. Google will then hope to be the one-stop shop for a company's advertising needs across all mediums.

Google upped the ante in targeting traditional media markets over the fourth quarter. The company made initial forays into print media advertising by signing a deal with a consortium of newspapers and is reportedly in talks to acquire more radio inventory as well.

Google hopes that the type of transparency and technology it brought to paid search will also be its ticket in traditional outlets.

"If you think about accountability and an enabling of measurement for radio, one of the things that we provide is real-time reports on exactly where the ad played and when it played," said Jonathan Rosenberg, Google's senior vice president of product management. "These are things that sounds simple, but they are a pretty huge improvement over the way traditional raido reports, which aren't otherwise available until 12 weeks after the ads run had previously played out.

With rich, graphical advertising, Google is looking to YouTube to play a leading role as the company makes an aggressive push into that market. Google is mulling over ways to monetize the hugely popular video-sharing site, which it acquired in October and which has steered largely clear of profit concerns in the nearer-term hopes of gaining more users.

But Google will now begin experimenting with placing video ads ahead of clips, behind clips or on the pricey real estate on the video page, among other options.

"We expect to see more meaningful monetization efforts around YouTube and video from Google in

the second half of 2007," Shachter wrote Thursday. "We also believe the company may sign significant content partnership deals with key video providers before then."

And while Schmidt said that Google doesn't expect to reap revenue from mobile advertising until 2008, the land grab in that lucrative space is already underway. Google introduced a well-received mobile email client during the fourth quarter as yet another way to stake out territory in a medium that Google has said will provide much more profit-per-search than fixed, Web-based methods.

With its reach extended into media spaces both old and new, Google believes it will be able to use its vaunted technology to be the standout company in all types of advertising.

"It's much easier to bring automation and efficiency with the platform that we have and with the advertisers that we have in terms of getting the kind of dashboard that most

chief marketing officers would like with respect to their campaign performance across all available media," Rosenberg said.