Did Google Issue a Bear Call?

Updated with correction: A few months ago, Sequoia Capital doused the ever-ebullient Silicon Valley with a bucket of ice cold reality when it laid “good times” to rest. Today, one of Sequoia’s all-time stars laid a big wreath on that grave in the pages of The Wall Street Journal: Google (s YHOO). And while it didn’t implicitly state that it might face tough times next year, comments by its CEO amount to a proverbial bear call, which could mean bad news not only for Google but also for the rest of the media and advertising sector.

“We have to behave as though we don’t know what’s going to happen,” Google Chief Executive Eric Schmidt told the Wall Street Journal. It seems like a prudent move. But I see it as a big red flag and I think Schmidt is preparing us for what could be a terrible 2009. The WSJ says that Google executives have been preparing for slower growth for a year but that “the economic crisis is forcing them to step up their efforts.”

According to conventional wisdom (and investors), Google is the best-positioned company to survive and perhaps thrive in the current advertising slump. If the leader of the pack is feigning ignorance about its chances, what can one say about mere mortals?

I find it hard to believe that a company that keeps world-famous economist like Hal Varian (who muses on the economy and Google’s prospects often on the investor calls) doesn’t know. As a company, Google collects enough data on a daily basis that it can take a fair pulse of the broader economy. Remember, they could accurately track the spread of flu across America just based on searches, so why can’t they track economic sentiment? Additionally, it sells ads to everyone from mom-and-pop shops to consumer durable goods giants and as such it has a fair idea on the degree of tightness with which people are holding their billfolds. They have enough intellectual horsepower on campus to put two and two together.

Beyond Schmidt’s statement, one has to look at their other moves, such as plans to slash 10,000 or so of their contractors, slowing cap-ex investments and killing off projects. These point to tough times for the company that has lived a lush life so far.

Projects that are too pie-in-the-sky are going to be killed. Schmidt calls it the “dark matter.” Google Lively and Google SearchMash are two of the many projects which will soon not matter. Google is contemplating killing off Google Notebook and Google Audio Indexing as well. Google Page Creator has given way to Google Sites. In that vein, Google is going to prune overlapping products. No more the 20-percent time for pet projects for engineers, though it might come back once the economic wheel churns. These are smart and prudent moves even if they are prompted by desperate need to control costs and meet their numbers.Update: I totally misread the WSJ post and made an incorrect interpretation. In other words, I totally messed up about the 20 percent timing thing. A commenter from Google was quick to point out that the 20 percent rule still stands and I am just flat-out wrong. This is what Schmidt said, which I misread:

He says the company is “not going to give” an engineer 20 people to work with on certain experimental projects anymore. “When the cycle comes back,” he says, “we will be able to fund his brilliant vision.”

I know it might sound hokey, but the rich don’t stop driving their Aston Martins just because the price of gas is going up. They do so when they are not as rich! The same analogy holds for Google and its cost-cutting efforts. Just remember how much of PR they milked out of their 20-percent philosophy. They are essentially eating a cow-pie on that. (Now I am the fool for making the wrong assumption on the 20-percent philosophy, though the rest of my sentiment still stands.) They wouldn’t be doing this unless things are really really REALLY tough.

Google needs to keep its sales machine going at a time when it is facing the same malaise as that of the broader market – slowing spending on marketing and advertising. There is some argument that Google is going to win because of their performance-based advertising system.

While that is true to some extent, what happens when the economy goes into a deep freeze? If you don’t have the money to splurge on a large-screen plasma TV, there is little chance you are going to search for that, and thus there are fewer opportunities for Google to sell more ads against those searches. Of course, if there is no intent to buy amongst the searchers, then there is less inclination to click on those ads as well. And that is not good news for Google.

Google, of course, is going to try and meet its targets by taking more out of the pocket of its “adsense” partners and undercutting competitors. The WSJ points out that the company is focusing heavily on display, mobile and other ad opportunities, which can only mean bad news for their rivals.

Related: Why Silicon Valley Should be Worried