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The cold wind of the downturn that has been blowing though Silicon Valley finally reached the doors of the world's biggest internet search engine yesterday when Google cancelled its staff Christmas cash bonus.

This year, instead of the usual $1,000 present to plump up the festive pay cheque, Google is giving all its employees a version of the G1, the mobile phone it released this year to compete with Apple's iPhone.

In an internal e-mail, the company told staff: “The holiday bonus is a Google tradition - it's a great way to thank everyone for their hard work. In the past, we've done this in cash. This year, we've decided to give Googlers a different kind of present - a Dream phone.”

The mobile, which runs on Android, Google's own mobile operating system, went on sale in October to

tepid reviews. It was dubbed by The Register, the tech website, as “an unattractive and uninspiring piece of plastic”.

The e-mail calls on “Googlers”, as staff are called, to “dogfood” the phone - an industry term meaning to test it in-house. “Some of you will of course be wondering why we decided to change from a cash bonus to the Dream phone,” the e-mail reads.

It continues: “Googlers globally have been asking for the Dream phone and we're looking forward to seeing all the things that you do with them. This is a chance for us to once again dogfood a product and make it even better!”

The company, which had previously revealed that it was considering plans to trim its contract staff, did admit to other, baser reasons, for the switch. “Second, the current economic crisis requires us to be more conservative about how we spend our money.”

The e-mail does not dwell on negatives and goes on to finish on an upbeat note: “Thank you for all that you do to make Google the company that it is. We hope that you will enjoy using your Dream phone in 2009 and have a very happy holiday!”

The customised G1 devices will be given to all permanent Google employees in the United States, Western and Central Europe, Canada, Australia, Singapore and Japan, covering about 85 per cent of its 20,123 global staff.

However, the e-mail explains that for legal reasons the G1 cannot be shipped to other parts of the world, so Googlers elsewhere will receive $400 instead.

The loss of the cash bonus is not the first blow for Google staff. The number of restaurants on its campus open in the evening has already been cut.

Google's fellow residents of Silicon Valley have been badly hit by the credit crunch. With consumer spending down, so, too, are sales of gadgets. And, with the cost of credit so high, companies are cutting back as far as they can on IT spending.

An estimated 140,000 jobs have been cut this year, according to Challenger, Grey & Christmas, the recruitment consultancy, with the axe falling at groups such as Hewlett-Packard, Yahoo! and Sun Microsystems.

However, Google is a long way from being in trouble: it enjoyed turnover in excess of $21 billion (£13.6 billion) during 2008. However, quarter-on-quarter revenue growth, which hit

14 per cent last year, was only 3 per cent in the three months to September 30, reflecting the slowing growth rate of internet advertising.

How it clicked together

Larry Page and Sergey Brin founded Google in 1998, backed by $100,000 from Andy Bechtolsheim, the Sun Microsystems co-founder

It is now worth in excess of $94billion, although its value has more than halved since December 2007

Google attracts 61.9 per cent of all internet searches, according to comScore

The company's name is a play on the word googol, which is the mathematical term for a 1 followed by 100 zeros

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