Google and the Android Eco-System

  • Posted: 14 June 2011 03:42 PM

    In additional to following Apple, I also track Google and HP. I’m working on a major post on Google. An investor who bought a share of Google as far back as November 2006 may not have realized any appreciation in the value of their investment at today’s trading price.

    Google is the undisputed leader in desktop and mobile search. I use Google’s cloud-based services everyday and I do like Google Apps.

    Google is integral to the development of Android and the development of the Android app market. Yet for all of the claimed success and talk about Android handset sales, where’s the revenue and earnings benefit for the company?

    The Chrome OS came to market later than originally planned and Microsoft is making a concerted effort to compete with Google in search.

    The consensus median and mean target prices are smack at $700 per share yet the shares have not advanced from prices first seen in late 2006 and the shares are trading off nearly one-third from the all-time high of $747 set in late 2007.

    How is Android benefitting Google’s top and bottom lines and is Google’s efforts in competing with Microsoft (and vice versa) impacting revenue growth?

    I’d like input on these questions as I search for credible answers.

    The company is seeing top line growth. But is it enough to vault the shares to new all-time highs over the next 18 months?

         
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    Posted: 14 June 2011 04:07 PM #1

    From my layman’s POV, Google’s business model harbors an enormous conflict of interest.  When I conduct a search as a consumer, I prefer non-paid search results and try to avoid clicking on paid links.  I prefer companies selling products that do little advertising, as lower expenses translate into lower prices.  Just as the internet demolished the brick and mortar expenses of retail, I expect it to demolish advertising and sometimes even dealers/middlemen.  So if many out there are like myself, Google is left deciding how to trick me into believing their paid advertisers are part of their superior comprehensive search results.

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    Posted: 14 June 2011 04:57 PM #2

    The Android “division” alone probably still loses money. I think Schmidt might have claimed that Android is profitable, but I wonder if he was talking about the combination of Android & AdMob. If not, then it’s a very small profit.

    At the beginning of this year Google claimed that mobile advertising (AdMob) was on a $1 billion run rate. That’s revenue. I’m sure you can find margins for ads, but I don’t know how you find out operating expenses for just the AdMob division.

    Android does license some Google apps, but the revenue is relatively small. It certainly isn’t anywhere close to $1 billion. But I’m guessing the cost of developing & maintaining Android is pretty high. If Apple is spending ~$1.3 billion/yr. to run the iTunes Store, imagine what Google has to do with all the equivalent Android related stores.

         
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    Posted: 14 June 2011 06:26 PM #3

    One of the guys I follow who has interesting thoughts on Google is Bill Gurley.  Here are links to a couple relevant posts.

    http://abovethecrowd.com/2011/03/24/freight-train-that-is-android/

    http://abovethecrowd.com/2010/01/05/android-or-iphone-wrong-question/

         
  • Posted: 14 June 2011 06:51 PM #4

    pats, I’ll get to the content tonight but just reading the topic titles. I’ve said from the start this isn’t an Android v. iPhone battle and anyone lost in that mode of thinking is missing an understanding of the market.

         
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    Posted: 14 June 2011 07:07 PM #5

    pats - 14 June 2011 09:26 PM

    One of the guys I follow who has interesting thoughts on Google is Bill Gurley.  Here are links to a couple relevant posts.

    http://abovethecrowd.com/2011/03/24/freight-train-that-is-android/

    http://abovethecrowd.com/2010/01/05/android-or-iphone-wrong-question/

    This is obviously an oversimplified summary, but Gurley basically says Android is a very expensive moat trying to protect Google’s castle (advertising). The question is how much of that castle is represented by mobile devices? Furthermore, how much of the mobile castle is actually protected by the Android moat? Ad income from iOS apps don’t get any protection from the Android moat. It’s conceivable that Google is spending $1 billion for a moat that protects a $500 million castle. Maybe that will change, maybe not.

         
  • Posted: 14 June 2011 07:12 PM #6

    I use google as little as possible.  What I view as their lack of care for privacy rights and their lack of regard for intellectual property rights are serious matters.

         
  • Posted: 15 June 2011 11:34 PM #7

    Drew Bear - 14 June 2011 10:07 PM
    pats - 14 June 2011 09:26 PM

    One of the guys I follow who has interesting thoughts on Google is Bill Gurley.  Here are links to a couple relevant posts.

    http://abovethecrowd.com/2011/03/24/freight-train-that-is-android/

    http://abovethecrowd.com/2010/01/05/android-or-iphone-wrong-question/

    This is obviously an oversimplified summary, but Gurley basically says Android is a very expensive moat trying to protect Google’s castle (advertising). The question is how much of that castle is represented by mobile devices? Furthermore, how much of the mobile castle is actually protected by the Android moat? Ad income from iOS apps don’t get any protection from the Android moat. It’s conceivable that Google is spending $1 billion for a moat that protects a $500 million castle. Maybe that will change, maybe not.

    The Android eco-system is far more complex than most people want to take the time to understand. I’m actually intrigued by Google’s approach and I;‘m looking for hard data not on unit sales but on advertising revenue flow and paid app purchases.

         
  • Posted: 19 June 2011 09:48 PM #8

    GOOG is now trading at November 2006 levels of sub-$500 per share. What’s the recovery time frame? Is Android helping or hurting the share price?

         
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    Posted: 19 June 2011 10:20 PM #9

    Five years from now, I can’t see Google much better off than they are now, assuming current DNA.

         
  • Posted: 19 June 2011 10:40 PM #10

    DawnTreader - 20 June 2011 12:48 AM

    GOOG is now trading at November 2006 levels of sub-$500 per share. What’s the recovery time frame? Is Android helping or hurting the share price?

    Google certainly is an odd duck. It seems like they spend all of their time building moats and none of their time building castles. They need to stop making so many defensive plays and focus on creating their next big thing.

         
  • Posted: 19 June 2011 11:02 PM #11

    FalKirk - 20 June 2011 01:40 AM

    They need to stop making so many defensive plays and focus on creating their next big thing.

    Which is?


    It doesn’t appear all of the Android handsets sold have positively impacted the share price. How long will it take for Android to benefit the share price?

         
  • Posted: 20 June 2011 12:05 AM #12

    DawnTreader - 20 June 2011 02:02 AM
    FalKirk - 20 June 2011 01:40 AM

    They need to stop making so many defensive plays and focus on creating their next big thing.

    Which is?


    It doesn’t appear all of the Android handsets sold have positively impacted the share price. How long will it take for Android to benefit the share price?

    I think Android is a purely defensive play. They were afraid that Microsoft, and perhaps Apple, would shut them out of the mobile market. They felt it was necessary to jump in there with an open operating system as a preemptive strike - a way to stop Microsoft from dominating the market. Totally worked.

    But now what? Android is never going to make them enough money to “move the needle” on their stock evaluation. Google has search, but nothing lasts forever. What is their next big moneymaker?

    I’m looking at Chrome, but I’m not sure if this was designed to make money either. Perhaps Google thought it was the future of computing and that by selling dumb terminals everyone would have to do their work and store their data (think Ad revenue) on Google’s servers. Or perhaps Google saw Chrome as another defensive play, a way to steal share from Microsoft’s two foundational pillars: Windows and Office.

    But it doesn’t look like Chrome is going to be what Google thought it would be or, at the very least, it’s not going to be what they wanted it to be for some time to come. So, what’s next? What’s their next big thing? I don’t know. I’m not sure they do either.

         
  • Posted: 20 June 2011 01:01 AM #13

    I don’t really have any ‘credible’ answers for your post DT but I do have what I believe to be one GIANT question that someone should look into which may lead to the rest of the answers.  Google and Apple have purportedly been sucking much of the talent available in silicon valley to their respective causes.  My question is…, what does it feel like to be part of the engineering talent on the android team?  Your knowledge and passion are being given away as if it’s worth less than nothing and often bastardized at the whim of the providers?  It’s very clear at Apple that OSX and iOS are the crown jewels to be guarded at all costs.  It’s equally clear that hardware is what drives sales and thus is equally valued.  It’s my feeling that this is where the seeds of Googles long term problems will manifest themselves.

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  • Posted: 20 June 2011 12:33 PM #14

    Here’s an interesting take on all this:

    RIM Is Finished, Is Google Next?

    by Michael K. Dawson

    ...Google?s secret sauce is under attack. Android manufacturers love it, because it?s a much better OS than they could design and the price is right ? $0. Google gives Android away hoping to make money from ads.

    Well ? free is not free anymore. HTC pays Microsoft (MSFT) a $5 fee for every Adroid device it sells as part of a patent settlement between the two companies. Microsoft has also filed a lawsuit against Motorola (MMI) claiming their devices infringe on nine patents. Microsoft is also pursuing patent deals with other Android manufacturers including Acer and ASUS.

    Oracle (ORCL) is also getting into the mix. A filing from Google hinted that Oracle wants more in damages than Android has earned in its entire existence. Hot off the press ? an Oracle expert claims that Google may owe up to $6 billion. If Microsoft delivers on its upcoming Windows Phone 8 OS ? these lawsuits may push many Android OEMs into Steve Ballmer?s arms.

    (Google’s) entire mobile revenue/expense structure is upside down. Although Android is growing like wildfire, Google?s share of profits is not growing proportionally. It has effectively become the software R&D department for Android manufacturers in exchange for a hope that an end user will click on an ad.

    Google?s Wallet mobile payment service continues its ?hope for a click model.? IMO, the amount of money that it has/will spend is not commensurate with its return. Its desktop search advertising cash cow has allowed Google to maintain its current business model. However, desktop search is under attack as different discovery models emerge.

         
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    Posted: 20 June 2011 03:42 PM #15

    In the early part of this century Google’s biz model of linking of search and ad revenue caught the edge of the wave of shifting advertising spend from traditional media to web advertising and Google shares rocketed as Google grabbed the great proportion of that shifting spend. By 2007 we were at the peak of that wonderful euphoria of ignorance of leveraged play money that drove the world economy ever higher and P/E ratios had no trouble expanding.

    A new shift is happening from the desktop web to the mobile web and Google is now defending the gains that it made in the first shift. I’ll never understand why Google thought Apple would lock them out of smartphone advertising but that seems to have been the fear of Eric Schmidt in 2007.

    We’re 3 years into the euphoria bubble burst and P/E ratios are compressing. Additionally we’re seeing the rapid growth of competition to Google world wide, Baidu is not only filling the vacuum of Google’s China departure but competing in the far East for market share. In Russia Yandex is growing by leaps. It’s reasonable to assume that other regional search engines will grow which appeal to local users more than Google which in the end is a hegemonic American company (and Americans are the country that many people world wide love to hate, the sort of Apple of the political world).

    Further the rise of Facebook to become a major competitor for advertising spend is well recognised. 

    With this confluence of factors I don’t expect Google to return to $700/share. Android ad revenues may or may not justify Google’s support depending on how much Google can make on ads on the iPhone, WinPhone7 and WebOS. Personally I’m discounting RIM already.

    While Google does a lot of socially good/interesting things with their money, none of them seem to have the potential to be an independent significant revenue stream that can propel Google to new heights (or at least back to old heights) separate from their core stream of ad money.

    While Apple has consistently shown itself capable of creating disruptive products in new markets, Google has not. They disrupt markets but its all in support of ad revenue and in the end I can see their ad revenues growing for their next 3-5 years by 20% year on year but I don’t see anything that will allow them to return to hyper growth.

    To counter my argument Google claims that the display ad market could grow to $200 billion/yr. but I"m not sure for reasons I outlined above that Google’s revenues from that are sufficient to propel it to 700/share. This article may also be useful.

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