Twelve years ago, two Stanford University students created a new internet service, which turned out to be the best single business idea in history, with turnover in excess of $21 billion (£13.6 billion) during 2008.

Yet, a month after marking its entry into the corporate establishment - by playing host to the Queen - even Google has admitted that it can no longer defy the elementary laws of economic gravity.

The company is is cutting back its workforce - although not the permanent staff. Instead, it is reducing its 10,000-strong army of contractors, who are not entitled to the same benefits as full-time employees.

A spokesman for Google said: “We have been thinking for some time, before the acute phase of the economic crisis, about significantly reducing the number of contract workers.”

The contract staff, who are easier to shed, amount to about a third of Google's workforce and include not only programmers but service staff, such as canteen workers and campus bus drivers. As yet, the company will not specify how many will go as it tries to cut a cost base that hit $3.9 billion in the three months to September 30.

Until now, Google had been so profitable that it could adopt an almost profligate approach to developing new businesses, sponsoring a range of projects such as Google Earth and its own virtual world, Lively, that generated little or no revenue. Even YouTube, bought for $1.65 billion, is expected to turn over only $100 million this year, despite dominating video views on the internet.

The cutbacks, though, reflect a gradual slowing in the growth rate of internet advertising, as the world economy tips into recession - although other media companies, suffering from declining turnover and profits, would still love to have Google's problems.

Quarter-on-quarter revenue growth, which hit 14 per cent last year, was only 3 per cent in the three months to September 30. In Briutain, Google's most advanced market, growth has all but stalled, with revenues of £406 million in the first quarter, falling to £392 million in the second and rising only modestly to £409 million in the third.

Investors have taken notice, and a share price that was above $700 in December of last year, fell below $300 this month, for the first time since 2005. However, Google's conversion to corporate realism sparked an 8 per cent revival yesterday, taking the shares to $277.96 in afternoon trading.

Sergey Brin, the co-founder of the company with Larry Page, hinted last month that cutbacks could be expected when he told the San Jose Mercury News, the Silicon Valley newspaper, that contractor expenses were “really high”.

Nor is Google alone, companies based in Northern California's Silicon Valley are estimated to have cut 140,000 jobs this year since the downturn began, according to Challenger, Grey & Christmas, the recruitment consultancy, as the axe has fallen in groups such as Hewlett-Packard, Sun Microsystems and Yahoo!.

Search result

$277.96

Google's share price in afternoon trading on Nasdaq

$87.4bn

Google's market capitalisation

20,123

Number of employees worldwide at the end of the third quarter

10,000

Number of contractors

63.1%

Google's share of internet searches in America in October

Source: Nasdaq/Google/ConScore

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