Behind Google profits, massive spending on computing gear

Google's capital expenditures, which mostly go toward computing and networking equipment, have risen dramatically over the last year.

(Credit: Stephen Shankland/CNET)

You think it's easy printing money at Google? Think again.

The company on Thursday reported enviable financial results for the fourth quarter of 2013, with revenue of $16.86 billion, up 17 percent, and net income of $3.38 billion. It's just another three months of success for Google's money machine, but to make it work Google has to spend a gargantuan amount on its own infrastructure -- chiefly servers, networking equipment, and the data centers that house them.

In the fourth quarter, Google spent $2.26 billion on that infrastructure -- a few pennies short of its all-time capital-expenditures high of $2.29 billion in the third quarter but more than double what it paid in the year-earlier quarter.

For comparison, General Motors spent $1.9 billion on capital expenditures in the third quarter of 2013.

The computing industry has done well in the last couple decades finding businesses where top-line revenues can drop to bottom-line profits without too many capital expenses getting in the way. Microsoft profited by creating software, an intangible but useful product that, once written, could be sold over and over again. Today, startups rely on Amazon Web Services to avoid big up-front payments on the hardware that provides the services people reach through mobile apps and Web browsers.

But in the big leagues where Google plays, with a broad array of online services available across most of the planet, capex is big and getting bigger.

"We expect to continue to make significant capital expenditures," Google has drily noted in every financial earnings press release for at least the last three years. Boy, is that an understatement.

All that computing gear is what lets Google not only retrieve 765 links for a search on something as obscure as "amblongus pie"within 0.38 seconds but also to predict partway through typing "amblongus" that the second word likely will be "pie." That infrastructure also houses photos on Google+, runs instant auctions to place advertisements next to search results, delivers Android apps through Google Play, and lets people edit documents edited at Google Apps.

Of course, Google has plenty of other expenses -- for example, paying 48,000 employees to maintain the infrastructure, create the next-generation services, fight the patent lawsuits, and vacuum the carpets.

But make no mistake: underpinning all that Google profit is an awful lot of hardware.