Google's Conference Call: What was left Unsaid

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG) management held one of its more opaque earnings conference calls on Jan. 22.  All the obligatory financial factoids required by the SEC were there, but not much insight otherwise. Here, what remained unsaid may be as significant as what was said.

It's the Ecosystem

The financial news was mostly good: Google quarterly revenues (exclusive of Motorola, which wasn't included in Q4 2011) were up a very healthy 22% y/y with GAAP income from operations up 7% (Google only).  Conspicuously absent was any mention of metrics I watch closely to gauge the growth of the Android ecosystem: Android activation rate and total Android activations to date. 

Google hasn't been shy about reporting Android activation data in the past, so no news is probably not good news.  Last quarter, Google proclaimed a truly impressive 1.3 million/day Android device activation rate with over half a billion total devices activated. 

As I pointed out in a previous article, this meant that the total population of Android devices had pulled ahead of Apple (NASDAQ: AAPL) iOS devices by a large margin.  Even assuming that activation rate has fallen off, it probably is still about 1 million/day.  In the chart below, I show my current estimates for Android and iOS population growth. 

 

 

Android device growth probably took a hit due to Apple's gains in US market share in Q4.  According to a Kantar WorldPanel survey released in December, iPhone captured 53.3% of the US market in the 12 weeks ending Nov. 25, due largely to the release of iPhone 5.  This will probably be only a temporary setback for the Android juggernaut as iPhone 5 sales taper off in the new year.   

The mobile device populations provide a platform for Google advertising, thus contributing to Google's bottom line.  In addition, the Android population is a ready market for Google apps and content distributed through Google Play. 

The growth of Play is one of the few areas that did receive a little extra color: Play is counted under the “Other” revenue category, which has grown to $ 829 million in Q4 2012, up a whopping 102%.  According to Larry Page, most of this growth is due to Play.  However, overall cost-per-click, the average fee an advertiser pays to the site hosting the ad, is down approximately 6%, reflecting the higher mix of mobile advertising. 

Google is definitely starting to reap the benefits of its market share expansion strategy for Android. Google has very successfully borrowed from the Microsoft playbook: Become the purveyor of the dominant operating system, then team up with manufacturing partners to commoditize the computing platform.  Google has gone even further than Microsoft by making the OS available for free, thus forgoing short-term revenue in favor of market share. 

When Microsoft (NASDAQ: MSFT) fans envision Windows Phone doing to Apple iOS what Windows did to Mac OS in the 1980's, they overlook the obvious fact that Google's already been there and done that, to the extent that it could be done. With Windows Phone 8, Microsoft is embarked on more or less the same path as Google, distributing their OS essentially for free: Nokia receives financial support from Microsoft in excess of the OS licensing fees. However, Microsoft has been less successful so far in commoditizing Window Phones, with only Nokia and HTC as manufacturing partners. 

This is significant because Windows Phone and Android are competing for essentially the same target audience. Most Android users are Windows PC users, and both groups disdain Apple as a manufacturer of “toys” and Apple customers as technically illiterate “fanboys.” If Windows Phone 8 makes significant market-share headway this year, it will probably come at the expense of Android not Apple.

What to Do about Motorola

Motorola continues to drag on earnings, posting an operating loss of $353 million on revenues of $1.514 billion.  Google is making progress restructuring Motorola and losses are down sequentially from the previous quarter.  The sale of Motorola's cable box unit should also help reduce losses, as well as bring in  $2.35 billion in revenue. 

Still, one wonders what Google's endgame is. Google has outsourced manufacturing and reduced Motorola's headcount by over 4,000 people, but this hasn't fully stanched the flow of blood. In the conference call, one got the impression of general exhaustion, especially in Larry Page.  Motorola is a drain on Google's financial resources, but also on the energy and enthusiasm of its management.

The Motorola purchase never meshed well with the commodity mobile OS strategy, and $12.5 billion is a lot to pay for the privilege of losing more money.  Google management haven't articulated what they intend to do with Motorola, other than a claim to want to maintain its independence and reduce its product portfolio, both worthwhile objectives. 

I've suggested in the past that Google's ultimate objective should be to employ Motorola as a hardware R&D arm for the Android  consortium.  Motorola would still make a few very high end products in its role as product incubator, but in the end, the benefit to Google would come from licensing Motorola developed IP to the rest of the Android community. In this role, it really wouldn't make sense to continue Motorola as a separate division, however, since it's unlikely that product revenues or even licensing fees would ever pay for the R&D costs. If Google moves to integrate Motorola organizationally into the rest of the company, this will be a sure sign of what Google intends. 

Chromebooks Anyone?

Last quarter, Larry Page reiterated the importance of discontinuing ventures that are not panning out financially.  Google exhibits admirable daring in trying out new things, and the automated car could turn out to be a very big source of revenue in the not-too-distant future. 

Therefore, I was disappointed to hear Larry Page once again extol the virtues of his Chromebook. It's clear he likes it very much, but Google never mentions how many have actually been sold.  I can't see much to appeal to consumers: The Chromebook is an underpowered netbook without Windows.  As such, it's mainly good for running Web apps. There appears to be some enterprise and educational interest, but not much consumer interest.  Why should there be, when touchscreen Android convertibles and Windows 8 Ultrabooks are competing for the consumer's attention? 

Chrome OS has become a needless diversion. It's time for Google to ditch it and focus exclusively on Android. As Larry Page himself admitted in this latest call, the big danger for Google is lack of focus. 


MarkHibben has a position in Apple Inc. The Motley Fool recommends Google. The Motley Fool owns shares of Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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