Killing With Kindness: Death By Big Iron

After reviewing the impressive Google File System, I wondered about Google’s competitors: MSN, AOL and Yahoo. Is it possible to quantify the economic advantage of GFS over conventional enterprise architectures?

NetApp’s web site notes that Yahoo Mail uses NetApp equipment. They also claim in one of their 10-K reports:

NetApp success to date has been in delivering cost-effective enterprise storage solutions that reduce the complexity associated with managing conventional storage systems. Our goal is to deliver exceptional value to our customers by providing products and services that set the standard for simplicity and ease of operation.

Uh-huh. Like those 520 byte sector disk drives with the Advanced Margin Enhancement Technology?

The Smackdown: Yahoo vs Google
The idea: compare the revenue returned for each dollar of IT capital cost for two tech-savvy, leading-edge internet firms. For every dollar they invest in IT, what do they get back in revenue? Capitalism 101. Since IT is virtually all they do, the differences should be stark

I chose Yahoo! to compare to Google, since they are roughly similar in revenue, they each run always-on data centers with at least 100,000 servers, and they offer a similar range of services. AOL and MSN are both part of larger companies, so digging out numbers would be difficult if not impossible.

Another YHOO/GOOG similarity: Yahoo also uses open source software: FreeBSD, Apache, and Perl. So the differences between Yahoo and Google should be mostly hardware, not software, except for, I’d guess, proprietary management software. And since storage is typically the largest part of IT capital expense, that hardware should be mostly storage. NetApp for example.

Stalking the Wild IT Numbers
This is where I explain where the numbers come from. If you are a financial type you’ll want to know, but most of you can skip ahead to The Bottom Line. The numbers are conservative. The YHOO problem is worse than they indicate.

I went to the SEC’s Edgar database, combing through 10-K (annual) and 10-Q (quarterly) reports to dig out the numbers. I’ve done this before — some pretty amazing things get revealed in footnotes if you can decode the financial double talk — but this was harder. Companies don’t have to detail their capital spending and most don’t.

But bless their accountant’s little green eyeshades, Yahoo actually breaks out their capital investment in Computers and Equipment as a line item in their 10-K. No quarterly numbers, but a solid annual number. I’d prefer quarterly numbers, but Yahoo has been around for a while. Quarterly twitches aren’t critical.

Google isn’t so accommodating.

Is there a Google Computers and Equipment category. Nope. In a couple of 10-Qs (Note 3) they break out the total Information Technology Assets. If they did that consistently it would be easy to calculate the quarterly deltas, but for some reason they don’t. Infrastructure spend is folded into capital spending. They do say Capital expenditures are mainly for the purchase of information technology assets. Which makes sense. 40U of pizza box servers costs a lot more than a half-dozen square feet of tilt-up greenfield data center.

So I did something conservative: I took the line item Purchases of property and equipment and broke that up by quarter. Because this includes buying buildings and other capital goods, it overstates GOOG IT spend.

So we are comparing the actual YHOO Computers and Equipment spend with GOOG total property and equipment spend. My guesstimate is that IT is about 2/3rds of the GOOG P&E spend.

Two more things.

  1. Google is a much younger *public* company than Yahoo. Their reporting starts in 2003, and the catagories aren’t quite the same. So I used quarterly numbers, looking to get more samples to help smooth things out. For YHOO, I used annual numbers for the same years. I could have used more years, but the dot-bomb implosion hit them hard and their 2002 number was awful. I believe the net effect of the annual vs quarterly numbers is conservative, i.e. it understates the GOOG advantage.
  2. Infrastructure gets built in one period and in production the next. So the numbers take that into account. I take the prior quarter (GOOG) or year (YHOO) IT spend and divide that into the following quarter or year of revenue to get the revenue per dollar of IT spend. Is that perfectly clear?

Click here to download the Excel spreadsheet with the numbers. Go crazy. Prove me wrong!

The Bottom Line
Google’s IT spend nets them at least a third more in revenue than Yahoo’s, and probably 50-60% more. I didn’t look at operating expense, but Google employs about 4,000 fewer people, too. So the autonomic GFS is probably saving money on the OpEx side as well.

This is a HUGE competitive advantage. Google can undercut rivals in pricing or offer more in services, or both, any time they choose. They are currently frittering away this advantage — more on that in a later post — but the entry costs for GFS-like functionality are high, so they’ve got some time.

At the enterprise level, where IT spending may be only 10% of CapEx, Google-style infrastructure would still be significant: cut IT CapEx by a third and you’ve boosted the average manufacturing firm’s net by close to 50%. Not many CFOs can ignore numbers like those, nor will they. will be teasing out some more implications of this in future posts. So bookmark us now and come back often.

The ZDNet blogger Dan Farber has a podcast interview with Lars Rabbe, Yahoo’s CIO. Maybe Dan can ask a follow up question: what are you going to do about your IT cost structure?

The JPMorgan analysts concur, without the level of detail has, in a recent report. The money quote:

Technology. Finally, we believe Google has a leg up on its competition due to its massive technological infrastructure, which includes hundreds of thousands of low-cost Linux based servers. . . . We believe Google’s technological advantage provides cost savings and performance advantages that enable web services such as Gmail, Google Maps and Google web search to function with impressive speed.