Only a few weeks ago, Google was calming anxious investors during an analysts’ day at its Mountain View, California headquarters. News that Google was censoring its Chinese language web site, and remarks from the company’s CFO stating the obvious fact that Google’s rapid growth will one day slow, had the Googlesphere spooked in early March.

But if Wall Street was spooked when Google released its quarterly earnings last week, it was only because the search giant’s growth is getting faster. The company’s profit, excluding traffic acquisition and other one-time costs, was $697 million—up from $489 million in the fourth quarter of 2005—or $2.29 per share (see Google Hasn’t Lost is Mojo). Analysts, who do not receive guidance on the company, had expected $1.97 per share, according to Thomson ONE.

Reflecting its growing positioning as an Internet portal, Google attributed 58 percent of revenues to Google-owned sites, with that category up 97 percent year-on-year. The firm did not say what portion of this amount was due to advertising, but it’s safe to bet that it was a lot. And that’s the reason Google is spending more to lure traffic. Morningstar analyst Rick Summer points to Google’s increased traffic acquisition costs: $723 million in the quarter, compared to $629 million in the preceding one. “The content owners are continuing to extract a greater pound of flesh out of Google,” he says.

But Google has a lot of flesh. And that abundance represents another great unknown for the search engine. Pointing to the cautionary tale of AOL and Time Warner, Mr. Summer says that Google will come under pressure to do “huge things to justify its huge stock price.”

He also says the company is still too young to have proven itself as a sound steward of its fortune. “We know they know how to buy servers,” he says. “But we haven’t seen them as investors.” Still, Google’s upcoming reporters’ day in early May should be a more lighthearted affair than the show staged for the analysts.

Arch Angel

If you’re talking consumer Internet startups in Silicon Valley, you’re probably talking to or about Stanford computer science professor Rajeev Motwani. His investments include Kaboodle, Renkoo, SimplyHired, and Zazzle. A long line of Stanford graduate students and future tech legends have developed under his wing—Google founders Larry Page and Sergey Brin among them. When one-year-old Kaboodle, an online shopping and research tool, announced a $3.6-million round last week from a large group of angels, including Mr. Motwani, Red Herring took the opportunity to chat with him about his newest venture.

Q: Where do you go after Google?

A: Search is a success, but what comes next? If you go back to Google and look at the core of the technology, it was, in a sense, user-generated content.

The PageRank algorithm looked at what people were saying about other web pages implicitly by linking to them.

Q: How does Kaboodle build on that?

A: Kaboodle will provide a service to users that will do something useful for them, and in the process, as a side result, it will be used to actually give better search results to people.

Q: Might you utilize your connections for a sale to Google?

A: You know, Google is a large public company. I could make an introduction and they would probably examine it. But I doubt if I could make them acquire the company if it’s not right for them. For any company in this space I think any of the search portals are a natural exit option.

Q: What are some other areas you think search can improve?

A: Everything I can think of involves people on a large scale providing some sort of intelligence about what’s going on, on the web. If you look at a company like StumbleUpon, that’s basically letting people discover new information; Digg does the same thing.

Yahoo’s China Problem

Not long before Chinese President Hu Jintao tried to speak over a heckler on the White House lawn last week, Reporters Without Borders alleged that Yahoo helped Chinese police identify a pro-democracy journalist in November 2003. The case of Jiang Lijun follows those of Shi Tao and Li Zhi, both of whom also were allegedly ratted out by the Sunnyvale, California-based search company.

While the jailed journalists represent a public relations concern for Yahoo, there does not seem to be much of a backlash. News reported earlier in the year, that Google aids Chinese censorship laws,” didn’t stop that company from posting banner earnings in its most recent quarter. Yahoo’s financials are also in good shape.

Yahoo told the U.S. House of Representatives that it regretted its role in the identification of Shi Tao, who was sentenced to prison for 10 years, and claimed to know nothing about Mr. Lijun (see Yahoo Defends China Policy). “Let us make clear that we condemn punishment of any activity internationally recognized as free expression, whether that punishment takes place in China or anywhere else in the world,” says Yahoo spokesperson Mary Osako.

In an address before the Subcommittee on Africa, Global Human Rights and International Operations earlier in April, Rep. Christopher Smith (R-New Jersey) took Yahoo to task. “When I asked under what conditions—court order, police demand, a fishing trip—Yahoo surrenders emails and address files, Yahoo told us that they couldn’t reveal this information to us because it would break Chinese law,” the congressman said. “Give me a break!”