Page last updated at 16:55 GMT, Friday, 22 July 2005 17:55 UK

Q&A: Search engine giants

Google logo
Is the bloom coming off Google?

Yahoo and Google, two of the web's most well-known brands, have announced soaring revenues and profits - although investors have not responded entirely positively.

BBC News looks at what the future holds for the two internet icons.

So what's happening to Google and Yahoo?

The two companies are by far the biggest players in the search engine world.

Google, which is valued at $85bn in the stock market less than a year after its float, and Yahoo, which is valued at $50bn, are the two biggest pure internet companies on the stock exchange.

In the past few days, both have announced their financial results - and both have reported growing profits.

Yahoo reported that it earned $755m in the three months to June - six times more than in the same period of 2004, on revenues that rose 45% to $875m after payments for advertising.

Most of that came from the sale of shares in arch-rival Google, but even leaving out the one-time gain the profit figure was $192m, well up on the previous year.

For its part, Google saw profits quadruple to $343m during the same period - and that was after factoring in the cost of stock options for its staff. Its revenues for the quarter were $1.38bn - or $890m, once payments for advertising to other sites in its network were subtracted.

If the profits and sales shot up, what happened to their shares?

This is where it gets interesting.

Investors in both companies responded in similar vein: they sold the shares. Google shares fell 5% the day after the announcement, while Yahoo shares lost 11.5%.

For Yahoo, what would have been wildfire growth for anyone else nonetheless was lower than not only its own predictions but also those of the analysts whose job it is to watch everything they do - and advise investors accordingly.

For Google, part of the problem was that its shares had shot up to a record of almost $318 ahead of the announcement. Even though the firm's results beat analysts' forecasts - Google itself does not announce detailed performance predictions - the shares then fell back.

So forecasts are failing to line up with reality?

Both firms are certainly facing expectations problems.

Google shares went on sale for the first time in August last year, and are now worth almost three times their value then. Breakneck sales and profits growth accompanied the flotation.

But all internet companies face a time when their performance begins to mature, and Google is proving no exception.

Its chief executive, Greg Schmidt, warned that the current quarter would see revenue rise less than the 15% recorded in the same period of 2004 - a far cry from earlier breakneck growth.

Part of that comes from the fact that a "summer slowdown" tends to hit online firms, as people spend more time away from their screens outside or on holiday.

But surely Google and Yahoo are very different? One's a lot older, for a start.

Yahoo has a much longer pedigree than Google, and so could be seen as mature already.

Yahoo logo
Yahoo's money comes from a more diverse base

But the fact that it declined to raise its estimates for its performance over the rest of the year was just as disappointing for investors.

And both firms are priced by the market at more than 50 times annual earnings per share - meaning investors are expecting stellar results for some time to come,

So any misstep, perceived or actual, is likely to hit shares.

Where does all this leave the two firms?

It's important to note that financially, both are still doing well. Both are making healthy profits, in stark contrast to the days of the dot-com explosion.

Search remains a cornerstone of the modern internet - to the extent that smaller competitors appear to be doing pretty well, despite the dominance of the two giants.

The number of searches on AskJeeves, for instance, grew 16% between March and June - in comparison to a 6% increase for Google and 9% for Yahoo. Microsoft's MSN saw a fall of 4% over the same period.

Both the big two are looking to expand their offerings. Yahoo is rolling out a music rental service to compete with Apple's iTunes music shop, while Google emits a stream of free services which nonetheless help bring eyeballs to its advertising.

The brash creativity - and apparently non-commercial attitude - of Google's approach has kept it in the spotlight and Yahoo in the shadows for the past year or so.

But there are some who believe that Yahoo is better placed for the long term.

Its revenue base is broad in comparison to Google's reliance on small spot ads, since Yahoo revenues include subscriber services and the more traditional banner advertising.

Online advertising drives Google
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