Google's Mobil Push is Exciting Investors
Maxwell 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) recently completed its acquisition of Motorola Mobility, having gained approval from Chinese regulators in exchange for a promise to keep Android free for at least the next five years.
More importantly, the completion of the Motorola Mobility acquisition grants Google with some patent protection, not the least of which is from Motorola (NYSE: MSI) itself.
The positive news on the Mobile front did not end there for Google. It won the second phase of its trial with Oracle (NASDAQ: ORCL), which dealt with Patent Infringement. That means that Google can go on innovating on its Android platform without fear that injunctions will prevent it from moving forward as the dominant player in the smartphone space.
Of course, the question for Google is, what now on the mobile front? It paid Motorola $12.5 billion for Motorola Mobility and, beyond patent protection, the move was supposed to give Google access to its own handset maker.
Presumably, that meant that rather than partnering with handset makers such as Samsung or HTC to produce a Google flagship smartphone, as it had done it prior years, Google would use Motorola Mobility to exercise more control of the Android platform, which critics had accused of being excessively fragmented.
Indeed, developers had complained to Google that, with nearly 4,000 different handset models running different versions of the Android O/S, it was difficult - not to mention financially prohibitive - to keep the user experience consistent for their applications. It has even been reported that commoditization is what drove Nokia into the arms of Microsoft.
Contrast that with the more curated experience of Apple's (NASDAQ: AAPL) iPhone. Since its debut 2007, the iPhone has only had 5 main models and 3 carrier/regional variants; no one makes iPhones except Apple and while later software updates to iOS have created some fragmentation at the operating system level, for the most part the user experience across devices is comparable.
Given this, it's no wonder that developers prefer developing for iOS. That's supposed to change with Motorola Mobility now part of its stable.
That said, I see all the talk of Android's fragmentation overwrought. In this case, if there's one company that Google can take lessons from, it's Microsoft (NASDAQ: MSFT). Microsoft's Windows Operating System is installed on over 1.25 billion Personal Computers the world over, with a market share of over 80% - yet it's a fair assumption that there are far more models of Personal Computers - including un-branded "clones" - than the nearly 4,000 models of Android handsets.
What's more, Windows has 3 versions - Windows XP, Vista and Windows 7 that are in wide use today yet nearly every version of Windows has consistently scored better in customer satisfaction than its predecessor. Microsoft succeeded not because it controlled every aspect of the hardware running its software but because it adopted an open approach and built partnerships with various equipment manufacturers and software developers over the years and gave them incentives to continue supporting its platforms.
Google seems to have responded to its challenges in the smartphone space in the same manner. Previously, it adopted a nearly laissez-faire approach to its Android Original Equipment Manufacturers (OEM). Yet it made some inroads towards enhancing the user experience this year when it indicated that it would engage multiple OEMs to build reference Android handsets using design guidelines that it released.
As I see it, if Google wants to give an advantage to Motorola Mobility, it can do so in an indirect way and relative innocuous way: giving it preferential access to Google Drive. This is a lot simpler than it seems. Recently, handset makers such as Samsung, HTC and LG have partnered with services such as Dropbox and Box to give users premium access to Web Storage.
By giving Motorola Mobility handset users preferential access to Google Drive premium services, Google gives its OEM an edge without risking the ire of its other OEMs since they have already cut separate deals with other providers. At the same time, Google is able to expand Google Drive's market share.
Regardless, I see Google's willingness to engage with multiple OEMs an advantage. As it stands, Android has an increasingly dominant place at the head of the smartphone market.
In fact, Google probably realizes that the best way to stay at that the head of the smartphone market is to continue keeping Android as open as possible. After all, if Android were to favor Google's in-house OEM over larger ones like Samsung or HTC, these could Android in favor of Microsoft's Windows Phone platform, for which it already produces handsets.
Moreover, Microsoft, as it did with Windows in the desktop market, is only too willing to licenses it software to as many manufacturers as possible.
Of course, all of Google's efforts in the Android space are in service of its larger Search business. Android, to paraphrase Larry Page, is a delivery mechanism for its search service, but what does that do exactly?
From a pure profit standpoint, it appears not to be much: since 2008, Android has only contributed $550 million in profits, but back-of-envelope calculations suggest that Google has earned $4 to $5 per handset.
That might seem to be a pittance considering the 300 million handsets that Android has been shipped on but to better appreciate this contribution, it's instructive to consider Facebook's case.
Facebook's average revenue per user (from roughly 850 million users) is roughly $5 yet it is currently valued at a Price-Earnings (P/E) Ratio of 82, despite the fact that its earnings face challenges from declining advertising revenue. Given that Google actually earns just as much per handset as Facebook does per user, Android's future performance is being undervalued.
That's why Google's moves to attract more developers are critical. More developers producing Ad-supported apps will enable it to monetize its Android presence the way it's been able to do with iOS - iOS purportedly contributes 4 to 6 times as much as Android does.
Android is the engine that drives Google's search services into users' digital lives. I believe that Google has come to realize that it has not been effective in monetizing its mobile platform and has taken steps to rectify this, primarily by engaging its OEM partners and attempting to create a more unified and cohesive user experience, thus attractive developers.
What's encouraging for Google is that it already holds a commanding share of the smartphone market despite the perceptions fragmentation and commoditization. Developers already know the potential payoff of working with Google, Google just needs to make it easier for them to do so.
Ultimately, I believe that Google's current share price undervalues the as-yet unlocked potential from Android and that, as Larry Page and Co. execute a more focused strategy, it is poised for a significant move higher.
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