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Google profits hit by social networking sites

Google has blamed the difficulty of generating ad revenues from social networking sites for slowing down its growth in the last quarter, as it reported a profits rise of 17% to $1.2bn (£602m), disappointing analysts and sending its share price down.

The 17% rise in profits is well below the 46% Google achieved in the third quarter. The perceived underperformance sent Google's shares down by almost 7% yesterday, or by $38.60, to $525.70 They have fallen by around 18% this year.

The search giant said it also experienced a slowdown in "paid clicks" on ads, which were up by only 30% year on year, compared to 45% for the year before.

The slowdown has led to investors becoming concerned about changing internet behaviour and tougher competition.

Google has guaranteed to make minimum payments to a number of social networking sites, such as MySpace, Facebook and its own social networking site Orkut. This would leave the company out of pocket, as it struggles to make money from placing ads on these sites.

George Reyes, chief financial officer at Google, said: "We have found that social networks are not monetising as well as we were expecting."

Other Google executives said that the difficulties arose from creating an appropriate look and feel for ads, so they did not appear out of place alongside the content on social networks.

There are also fears that America's economic slowdown is having an impact on Google's traffic, but Eric Schmidt, Google chief executive, said the company was "very, very pleased" with its progress.

He said: "Advertising dollars are continuing to move from off-line to online -- a trend that's not to reverse", he said in a conference call.

The company's revenues, excluding the traffic acquisition costs paid to other websites that carry its ads, rose by 51% in the fourth quarter to $3.39bn. This is slower than the 55% growth analysts had expected.

Analysts have become accustomed to Google comfortably surpassing expectations. For the whole of 2007, profits increased 40% to $4.2bn, with net income up by 17% to $1.2bn.

In Britain, Google said revenue grew by only 5% to $692m, well below the rest of the world. Google attributed the figures to a seasonal slowing in finance and travel ads.

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