should Google spin off it’s advertising business?

This intriguing article for web entrepreneurs has a lot of useful information in it – particularly the interesting metric for assessing a companies value: 10 x (revenue – cost). However, in the course of the discussion he also makes an intriguing point about Google:

Google has one incredibly amazing business – keyword advertising. It relies on its own search service and deals with other search services and content partners for the audience that drives the keyword business. If you stripped that business out of Google, you’d probably have a business that has gross revenues of $20bn, net revenues of $13bn, and operating profits of $8bn to $10bn. That business is worth the approximately $100bn of market value that Google has right now. Everything else is valued at zero because it has a lot of costs and no revenue. Could Google unlock a lot of value by giving up on everything else they are doing? Maybe not, but they probably wouldn’t lose much value either. I am not suggesting they do that, by the way. But again, I just want to make a point.

That’s a fascinating point. It should be noted that everything Google does that isn’t directly related to search and advertising is essentially a distraction, and that shows: Feedburner has been moribund after it’s acquisition, YouTube can’t make a dime, and Gmail for all it’s wonderfulness is still labeled as beta. Even properties that are actively innovating, like Google Maps, Picasa, and Blogger, are still not earning any revenue for Google and are being actively competed against by Microsoft and open source software.

Of course, what would happen to all those projects if they weren’t subsidized by the web advertising business? In some ways, their very presence forces the competition to innovate. But in the looming economic clouds ahead, maybe the golden era has ended and everyone, even Google, has to abide by the rule that cash flow is king.

(via retweet of @TimOreilly from @JoeTrippi)