Feeds

Buffett falls for free ride Google

Er, data smelters aren't cheap, Mr. Oracle

Maximizing your infrastructure through virtualization

In his recent letter to Berkshire Hathaway shareholders, Warren Buffett appeared to flirt, ever so briefly, with Google.

Buffett and partner Charlie Munger have shied away from technology companies, confessing a lack of understanding for their wares and unease over the pace of change in the technology racket. That said, the grand poobah from Omaha found time to celebrate both Microsoft and Google during the 2007 letter (PDF) to the Berkshire clan.

"A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment," Buffett wrote. But then he added that, "It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google."

The bit about major capital requirements caught our attention, since Microsoft and Google are engaged in a data center arms race.

Google's annual statement for 2007, for example, highlighted the burden of these data center costs.

"We believe our operating margin will experience downward pressure as a result of increasing competition and increased expenditures for many aspects of our business," the company said.

Google shelled out $2.4bn on property and equipment during 2007, while pulling in $16.6bn in revenue. The company also spent $2.1bn on research and development and stock-based compensation, in part, to keep its data centers humming and to keep smart workers happy.

While more profitable than a longtime Buffett favorite such as Coca-Cola, Google dished out almost $2bn more in capital expenditures than Coke will spend this year. Google will likely increase that spending in 2008 and the years to come if the announcement of so many $600m data centers is any indication.

Microsoft too looks set to pump billions and billions of dollars into its infrastructure.

This type of spending makes the so-called "cloud computing" types look less attractive than old-line software sellers, at least in the near-term.

In the good old days, Microsoft could spend a $1bn for a new version of Office and then just print CDs or have PC vendors burn the software onto their machines. This model required very little investment from Microsoft for distribution.

Now, however, we're talking about companies such as Google, Microsoft, Amazon.com, Yahoo!, IBM and Sun Microsystems building data smelters - a line we stole and tweaked from Horst Simon, a computer scientist at Berkeley. The costly information plants of these technology giants eat up just as much energy as, say, an aluminum smelting center, but there's no physical product that appears as a result of the consumption. Instead, the data smelters just swap around and store bits.

Beyond powering the systems, these companies must spend hundreds of millions of dollars on server, storage and networking equipment to fill the centers.

We hardly expect Buffett to stay up-to-date on the latest in data center technology and perhaps we're missing some part of his thinking. Lord knows, you will all be sure to inform us about such mistakes. Please accept the apologies in advance.

But we do wonder if some of the financial gurus out there aren't missing what it will take from an investment standpoint for the major technology players to have a serious go at the next wave of computing. ®

Bootnote

We'd go into more about how Google's secrecy and management eccentricities seem to violate a number of Buffett's other value investing principles, but this is not the time or the place.

Instead, have a listen to our interview with a man who grew up learning from Buffett, or read this outstanding (PDF) speech from Munger.

The Power of One eBook: Top reasons to choose HP BladeSystem

More from The Register

next story
Sysadmin Day 2014: Quick, there's still time to get the beers in
He walked over the broken glass, killed the thugs... and er... reconnected the cables*
Auntie remains MYSTIFIED by that weekend BBC iPlayer and website outage
Still doing 'forensics' on the caching layer – Beeb digi wonk
SHOCK and AWS: The fall of Amazon's deflationary cloud
Just as Jeff Bezos did to books and CDs, Amazon's rivals are now doing to it
BlackBerry: Toss the server, mate... BES is in the CLOUD now
BlackBerry Enterprise Services takes aim at SMEs - but there's a catch
The triumph of VVOL: Everyone's jumping into bed with VMware
'Bandwagon'? Yes, we're on it and so what, say big dogs
Carbon tax repeal won't see data centre operators cut prices
Rackspace says electricity isn't a major cost, Equinix promises 'no levy'
Disaster Recovery upstart joins DR 'as a service' gang
Quorum joins the aaS crowd with DRaaS offering
prev story

Whitepapers

Implementing global e-invoicing with guaranteed legal certainty
Explaining the role local tax compliance plays in successful supply chain management and e-business and how leading global brands are addressing this.
Consolidation: The Foundation for IT Business Transformation
In this whitepaper learn how effective consolidation of IT and business resources can enable multiple, meaningful business benefits.
Application security programs and practises
Follow a few strategies and your organization can gain the full benefits of open source and the cloud without compromising the security of your applications.
How modern custom applications can spur business growth
Learn how to create, deploy and manage custom applications without consuming or expanding the need for scarce, expensive IT resources.
Securing Web Applications Made Simple and Scalable
Learn how automated security testing can provide a simple and scalable way to protect your web applications.