Motorola puts the Brakes on Google
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As second quarter earnings continue to roll in there have been some eyebrow-raising results from technology companies. Microsoft (NASDAQ: MSFT) posted its first ever quarterly loss, due to a onetime $6.2 billion write-off from a 2007 acquisition. Microsoft had record revenue for the quarter and for their fiscal year; not counting the write-off, Microsoft had a good quarter.
Nokia (NYSE: NOK) also released second quarter results. The headline was a billion dollar quarterly loss. Nokia is still receiving large quarterly checks from Microsoft for their switch to Windows Phone and their net cash actually rose slightly. Nokia also managed to sell 4 million Lumia smartphones. This is double the number they sold the quarter before and is on track with their plan for the success of the Lumia line. The next tech company to report their second quarter results was Google (NASDAQ: GOOG).
Google announced that their revenue jumped by 35% year over year to $12.2 billion. Compared to the first quarter of 2012 Google’s revenue was up by 15%. The second quarter of 2012 was the first quarter that Google officially owned Motorola Mobility. This was part of the reason that Google’s revenue was up so sharply; backing the Motorola revenue out Google’s revenue was up by 21% year over year and 3% compared to first quarter.
The Motorola acquisition was completed on May 22 and so Motorola only partially impacted these second quarter results. Motorola generated $1.3 billion in revenue for Google during the second quarter. Motorola showed strength with their smartphones sold on Verizon. These include many of the ‘Droid’ branded Android smartphones that Verizon carries. The hottest selling Android smartphone on Verizon right now is the Motorola RAZR Maxx, which at one point by one report was outselling the iPhone. Samsung’s Galaxy SIII, which just launched on Verizon, is set to outsell the RAZR Maxx. However Motorola saw weaker revenue in international markets where Motorola feature phones and mid-tier smartphones continue to underperform. Motorola brought in $843 million from their mobile device division and over $400 million from their home division. Overall Motorola had a $233 million loss for the quarter. The operating margin for Motorola was -18.6% and for Google was 31.3%.
Google had a $2.79 billion quarterly profit and paid clicks were up 42% year over year and up 1% from the first quarter. However the average cost that advertisers pay for every click on one of their ads dropped 16% year over year and 1% from the prior quarter. This is partially because the amount Google can charge for a mobile ad is less than they charge for ads on computers. As mobile advertisements become a larger percentage of Google’s business, their average paid click revenue may continue to see slight declines. However this quarter fluctuating exchange rates were the largest single factor for the declining ad click prices. Google expects mobile ad rates will steadily rise as the mobile market matures.
Google is in a transition phase from simply an advertising company to an advertising, hardware and software company. Going forward Google will need to refresh Motorola’s devices. They will need to make more of their devices available on more carriers under a unified brand, as Samsung has with their Galaxy brand and Apple has with the iPhone. Google should also focus on toning down or completely getting rid of the skin, motoblur, which Motorola now puts over stock Android.
Google is even more directly in the hardware business with their Nexus 7 tablet and Nexus Q. The Nexus 7 tablet is designed and controlled by Google but it is actually built by Asus. The Nexus Q social streaming device is built and designed by Google, here in the US.
As Microsoft and Apple (NASDAQ: AAPL) build competing services and platforms to Google’s, Google will face increasing competition. One of the most recent examples of this was Apple’s move away from Google maps to their own internal solution. This not only shuts Google out when it comes to serving mapping and location data to hundreds of millions of iOS users, but it also means they lost out on a source of revenue. The future of advertising is increasingly mobile and local; targeting ads based on your location will now be much harder for Google on iOS devices.
On Windows Phone Microsoft uses a combination of Bing maps and Nokia location technology for their local services. Microsoft also runs an online advertising business. Though it has been less successful than Google’s and Microsoft recently took a $6 billion write-down on an advertising acquisition, they will no doubt be pushing their own advertising business on their phones. Apple also owns a mobile network, iAds, which they offer to developers on iOS. This puts Google in increasing competition with some very big names for mobile ad dollars.
Google will continue to perform well. As mobile ads play a larger part in their business mobile revenue will stabilize, this will come through better targeted ads, more mobile ads and different types of mobile and non-mobile advertising. Hardware is a little bit of a tricky issue. Google wants to keep up the success of the Android platform, which has been built through Google’s hardware partners. However Google also wants to exercise more control over Android devices; this is hard to do through their hardware partners. Combine Motorola, the Nexus 7 tablet and Nexus Q and Google’s hardware partners may be less than thrilled about Android if they feel that Google is competing directly with them.
This may also happen with the Windows Phone ecosystem. Microsoft has a special billion dollar deal with Nokia for Windows Phone smartphones. This deal may be the reason we have seen other hardware partners drag their feet when it comes to launching their own full line of Windows Phone smartphones. This may also happen with Windows 8 tablets. Microsoft is building their own Surface tablets and selling them directly, putting Microsoft in direct competition their hardware partners. Both Microsoft and Google need to watch their backs and make sure that they don’t step on their partners' toes too much.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.