txlaw Posted May 23, 2011 Share Posted May 23, 2011 And to be sure, Android's "profitability" is a joke. This isn't a business worth caring about in its current state. What I can tease from Schmidt's cryptic statement is that if you assign the ads clicked on by Android users to the Android business unit, then it's profitable. This seems like a weak attempt to appease people that you shouldn't need to appease. There's really nothing cryptic about Schmidt's statement. Google's goal is to organize and make accessible the world's information, and to play a major part in AI/augmented reality. They monetize this core service they are providing to the world by gaining users' attention so that they are able to serve up advertisements to the users. Things they do that increase Google's timeshare with consumers will increase revenue. The concept of a "loss leader" applies here. Android is not profitable if you think of profitability in a very simplistic manner. Take, for example, the typical movie theater business. The actual showing of movies is mildly profitable or just break even for the theater. They make most of their money on concessions and advertising. But showing movies is a necessary step for being in the movie theater business. Android can be thought of as a loss leader that makes tons of money for Google by increasing consumers' use of the web. What is good for the web is good for Google. And Android, like iOS, absolutely has increased consumers' use of the web during their day. Have you ever wondered what the hell Google is trying to do with its ultra high speed fiber to the home project? It's not just because they love to burn money for cool stuff and to demonstrate to the public just how much innovation we've missed out on due to the machinations of the old line telecom industry. Google intends to light a fire under the telecom and technology world and accelerate people's use of the cloud because Google is not just a "search company," it's also a cloud infrastructure provider. There probably won't be direct cash returns from the Google fiber project, but in the long run, there will be immense returns if they can show just how much better the Internet could be in the US for consumers. If Google misses the opportunity to make Android hugely profitable then it will be a loss for everyone. Part of the reason why I hate myself for buying Apple devices is because I can see the hole that I'm digging myself into. Pretty soon I'll have more to lose by switching from Apple than to gain - even if the go-to-device were free. The world needs a serious competitor to the Apple ecosystem, otherwise the freedom that we enjoy today on our PCs will be seriously jeopardized in the "post-PC era". The world will be much better if Android never becomes hugely profitable in the sense that you seem to be arguing for (i.e., licensing fees a la Windows). Android should remain essentially free for manufacturers to adopt and adapt for various uses. The openness and low-cost nature of Android will increase its penetration into the market and will eventually allow Android to compete with iOS on the user experience front. Even Woz has said that he thinks Android will eventually become the dominant mobile device platform. Android doesn't need to be monetized directly because, as I said before, what's good for the web is good for Google. Link to comment Share on other sites More sharing options...
Liberty Posted May 23, 2011 Author Share Posted May 23, 2011 Here's a detail from the 2010 GOOG AR that I found interesting: 48% of revenues are from the USA, 52% from the rest of the world. Nice geographical diversification. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 24, 2011 Share Posted May 24, 2011 There's really nothing cryptic about Schmidt's statement. Google's goal is to organize and make accessible the world's information, and to play a major part in AI/augmented reality. They monetize this core service they are providing to the world by gaining users' attention so that they are able to serve up advertisements to the users. Things they do that increase Google's timeshare with consumers will increase revenue. The concept of a "loss leader" applies here. Android is not profitable if you think of profitability in a very simplistic manner. Take, for example, the typical movie theater business. The actual showing of movies is mildly profitable or just break even for the theater. They make most of their money on concessions and advertising. But showing movies is a necessary step for being in the movie theater business. Maybe the statement itself isn't cryptic, but the assignment of revenues is. I like the theater analogy so let's go with that. In the theater business, Android is the movie theater and search is a movie. Google plays the part of both theater builder/operator and movie producer. What Schmidt is doing is assigning the profitability of the movie production business to the movie theater that it was played in. I think it's a flawed assignment because it assumes that if they didn't build these theaters, these movie goers would stay home instead. I don't think that's true. I think the number of total searches that Android's existence truly accounts for is somewhere between 0% and 100% of the searches performed on Android. That is, the assignment is flawed to the degree that the number of users who, in the absence of Android, would have purchased a smartphone anyway and searched on Google anyway (Keep in mind, Google owns 97% of the mobile search market, so this isn't a trivial amount). It's not that Android isn't profitable if looked at this way, it probably is. I think Android has been good for Google. I just don't really agree with this kind of arbitrary revenue assignment. I don't see Chrome or FireFox or IE getting credit for their various search enabling contributions to Google's bottom line. To me, the whole statement seems disingenuous - why would Google need to justify Android at all? The world will be much better if Android never becomes hugely profitable in the sense that you seem to be arguing for (i.e., licensing fees a la Windows). Android should remain essentially free for manufacturers to adopt and adapt for various uses. I don't think I suggested anywhere that this should be the model. I said that Google should look to Apple for the model of how to monetize Android. Apple's model obviously doesn't include any software licensing. The model that I'm suggesting is to provide a platform where commerce can take place. Android runs on phones and tablets, and it's also the basis for GoogleTV. The potential that I see here is in media (music, movies, applications) - whether it's cloud streaming or standard rights-driven, or if it's free or ad-supported. Google's opportunity with Android is to create a market and a platform that fosters creativity and commerce, and for doing so they are justified in making a profit. Like Apple, Google can sit between the customer and the media provider, sucking up little percentages of transactions.. except with Android they have the considerable advantage of being device independent and more widely adopted. Currently, the solution for the customer is sub-par. The whole process of buying media is fragmented and under-served. Google doesn't really have their game together on the media side. It's disappointing but I think they can fix it. To use the theater analogy, to turn a good profit in the movie theater business, Google needs to get its concession stands in order. Link to comment Share on other sites More sharing options...
txlaw Posted May 24, 2011 Share Posted May 24, 2011 Maybe the statement itself isn't cryptic, but the assignment of revenues is. I like the theater analogy so let's go with that. In the theater business, Android is the movie theater and search is a movie. Google plays the part of both theater builder/operator and movie producer. What Schmidt is doing is assigning the profitability of the movie production business to the movie theater that it was played in. I think it's a flawed assignment because it assumes that if they didn't build these theaters, these movie goers would stay home instead. I don't think that's true. I think the number of total searches that Android's existence truly accounts for is somewhere between 0% and 100% of the searches performed on Android. That is, the assignment is flawed to the degree that the number of users who, in the absence of Android, would have purchased a smartphone anyway and searched on Google anyway (Keep in mind, Google owns 97% of the mobile search market, so this isn't a trivial amount). The movie theater example was used to demonstrate how a loss leader works. I could have used the razor and blades model or the selling of burgers at cost to sell high margin fries and beverages as examples, as well. Let's not get too cute with the analogy. Look, the real question is whether consumers would use Google search, browse the web, watch videos on YouTube.com, or watch videos on third party sites powered by YouTube as often if there were no iOS or Android. I don't think they would. It's pretty well known that when you reduce the latency of a website, people will be more likely to use the website more often. The reduction of latency across the web, in general, has gotten people to use the web far more often than they used to. It's not just the proliferation of content that has caused increase use of the Internet. It's also the faster speed at which we are able to access the info, apps, and media that has caused us to use the Internet more and more. The demand for/interaction with Google services goes up when the web is made easier and cheaper to use, and Android does that. It's not that Android isn't profitable if looked at this way, it probably is. I think Android has been good for Google. I just don't really agree with this kind of arbitrary revenue assignment. I don't see Chrome or FireFox or IE getting credit for their various search enabling contributions to Google's bottom line. To me, the whole statement seems disingenuous - why would Google need to justify Android at all? Assigning credit to Chrome and Firefox is warranted, and if you were to ask Google people why they developed the Chrome browser or why they supported Firefox, they would say they did it to make the web better. There's no question in my mind, at least, that Chrome and Firefox have made the web experience much better. IE? The only reason it has gotten better is because of Firefox and Chrome. Better web, better for Google. Not just for search but for all Google services. I don't think I suggested anywhere that this should be the model. I said that Google should look to Apple for the model of how to monetize Android. Apple's model obviously doesn't include any software licensing. The model that I'm suggesting is to provide a platform where commerce can take place. Android runs on phones and tablets, and it's also the basis for GoogleTV. The potential that I see here is in media (music, movies, applications) - whether it's cloud streaming or standard rights-driven, or if it's free or ad-supported. Google's opportunity with Android is to create a market and a platform that fosters creativity and commerce, and for doing so they are justified in making a profit. Like Apple, Google can sit between the customer and the media provider, sucking up little percentages of transactions.. except with Android they have the considerable advantage of being device independent and more widely adopted. Currently, the solution for the customer is sub-par. The whole process of buying media is fragmented and under-served. Google doesn't really have their game together on the media side. It's disappointing but I think they can fix it. To use the theater analogy, to turn a good profit in the movie theater business, Google needs to get its concession stands in order. I don't consider applications media, but I suppose if you are going to take the position that iTunes is a platform, then you have to characterize apps as media. I don't think that really makes much sense, though. iTunes is merely a storefront that is integrated very tightly with the iOS platform. There's really no reason why anyone should have to buy their media or apps from a platform provider such as Google or Apple, where the platform provider gets some cut of the revenues. You might argue that buying through the platform providers allows for a less fragmented experience. But why does this less fragmented experience have to come from either Google or Apple? I'd love to see Spotify come to the US and take market share away from iTunes. I like having Netflix as my main source of professionally created video rather than iTunes. Both these services reduce the fragmentation that you're talking about. YouTube.com is a great service that provides a "platform" for user generated video. It happens to be owned by Google, but that didn't have to be the case. Amazon is actually trying to be a major storefront for Android apps. I don't think it would be so bad if Amazon succeeds because Amazon will be much better than either Apple or Google at allowing the best apps to rise to the top. You're right that Google does not have its game together when it comes to partnering with content owners. But that's really not their expertise. It would be nice for shareholders if they could expand on that (and they're trying), but if all they get out of Android is the expansion of their core mission, we will do just fine. Link to comment Share on other sites More sharing options...
DCG Posted May 24, 2011 Share Posted May 24, 2011 Oh no...this thread has been lvlt'd. Link to comment Share on other sites More sharing options...
txlaw Posted May 24, 2011 Share Posted May 24, 2011 A good example of why Google needs to be involved in developing mobile device OS's: http://arstechnica.com/open-source/news/2011/05/new-mobile-web-google-maps-highlights-sorry-state-of-native-ios-app.ars Apple's lack of updates to the native iOS [Google Maps] app is another indication that the company intends to create its own mapping application. Around a year ago, Apple acquired both the online mapping company Placebase and mapping mashup firm Poly9, which was about the same time that the native iOS app started to diverge, capability-wise, from the desktop and Android versions. Lately, speculations have arisen that Apple will create mapping features that integrate with a revamped MobileMe. Link to comment Share on other sites More sharing options...
txlaw Posted May 24, 2011 Share Posted May 24, 2011 PS Hopefully it will dawn on the mayors around the world that they too can usurp the last mile guys and become the new at&t or Comcast in their towns. Unfortunately, the last mile guys will fight tooth and nail to make sure that that doesn't happen, including getting legislation passed that prevents municipalities from effectively deploying fiber. See, e.g., http://arstechnica.com/tech-policy/news/2011/03/cable-backed-anti-muni-broadband-bill-advances-in-north-carolina.ars That's why we need forward thinking companies like GOOG to break the stranglehold on the last mile so that both consumers and GOOG will benefit in the long run. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 24, 2011 Share Posted May 24, 2011 The movie theater example was used to demonstrate how a loss leader works. I could have used the razor and blades model or the selling of burgers at cost to sell high margin fries and beverages as examples, as well. Let's not get too cute with the analogy. It wouldn't matter which analogy you used.. It's not me getting cute with the analogy, it's Schmidt getting cute with the revenue. The assignment of revenue to Android means that you need to unassign it from search. It doesn't sit well with me because there's no consistency in reporting along those lines. It's a one-off sound bite, one that I think is unnecessary. Look, the real question is whether consumers would use Google search, browse the web, watch videos on YouTube.com, or watch videos on third party sites powered by YouTube as often if there were no iOS or Android. I don't think they would. I agree, but the question is to what degree with regards to Android. For me, I don't look at the numbers that way. I see search as search and people use it because it's good. Android is a defense mechanism but I think a revenue generator primarily. I could be wrong, but that's life with opinions :) I don't consider applications media, but I suppose if you are going to take the position that iTunes is a platform, then you have to characterize apps as media. I don't think that really makes much sense, though. iTunes is merely a storefront that is integrated very tightly with the iOS platform. There's really no reason why anyone should have to buy their media or apps from a platform provider such as Google or Apple, where the platform provider gets some cut of the revenues. You might argue that buying through the platform providers allows for a less fragmented experience. But why does this less fragmented experience have to come from either Google or Apple? I consider apps media because they act roughly the same from the platform perspective. You pick from a catalog, pay for a download, suck it in over the web, etc. It's not traditional media and there's definitely a gradient running from music/movies, to video games, to newspaper apps, to productivity apps. That is, the thing that looks most like media is former, and the bit that looks the least like media is the latter. It's just a convenient label. Buying through the platform provider isn't required, but giving up the opportunity would be waste. They can do it, and they should do it. I think they will do it. Look at the next step in Android's evolution: NFC. Android acting as a credit card. I don't see Google saying "buy an android, and then find a third party provider to run your credit card transactions through at a retailer." It just doesn't jive. An integrated solution is so much better. And frankly I'd feel much better if I only had to give my credit card information once to a single payment processor with a lot on the line to secure that payment, rather than give it to a bunch of different small vendors. Sony is a good example of what happens when a bunch of amateurs achieve scale in credit card processing. Link to comment Share on other sites More sharing options...
txlaw Posted May 24, 2011 Share Posted May 24, 2011 Some more color from Schmidt on building platforms: http://news.cnet.com/8301-30685_3-20065613-264.html Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 25, 2011 Share Posted May 25, 2011 Some more color from Schmidt on building platforms: http://news.cnet.com/8301-30685_3-20065613-264.html The Chrome web app store reads to me like it's similar to the iTunes business from Google's perspective. Offer a store for a captive market and make revenue by charging a fee based on the transactions. Regardless, it looks like we'll find out part of the answer to the Android revenue stream riddle soon: http://online.wsj.com/article/SB10001424052702304066504576343613260587314.html?KEYWORDS=android+nfc Last week, I'd have said firmly that Google would take a cut of these payments (and other payments), and that's how they'll make money on Android. However, your arguments have been really well formed and insightful... so I think it's equally possible that during this unveiling Google will say that they won't take a cut, and instead rely on point-of-sale advertising/couponing to drive revenue for Android. I like this model because it is significantly more aligned with the Android product offering - the search reassignment of revenue didn't do it for me (for reasons stated). I can also see a similar advertising model applied to app store media, although I don't think it would be as effective as the traditional couponing model. So, we'll see, but either way I appreciate you taking the time to debate the various revenue models with me. Link to comment Share on other sites More sharing options...
txlaw Posted May 25, 2011 Share Posted May 25, 2011 Some more color from Schmidt on building platforms: http://news.cnet.com/8301-30685_3-20065613-264.html The Chrome web app store reads to me like it's similar to the iTunes business from Google's perspective. Offer a store for a captive market and make revenue by charging a fee based on the transactions. Regardless, it looks like we'll find out part of the answer to the Android revenue stream riddle soon: http://online.wsj.com/article/SB10001424052702304066504576343613260587314.html?KEYWORDS=android+nfc Last week, I'd have said firmly that Google would take a cut of these payments (and other payments), and that's how they'll make money on Android. However, your arguments have been really well formed and insightful... so I think it's equally possible that during this unveiling Google will say that they won't take a cut, and instead rely on point-of-sale advertising/couponing to drive revenue for Android. I like this model because it is significantly more aligned with the Android product offering - the search reassignment of revenue didn't do it for me (for reasons stated). I can also see a similar advertising model applied to app store media, although I don't think it would be as effective as the traditional couponing model. So, we'll see, but either way I appreciate you taking the time to debate the various revenue models with me. Yup, tomorrow will be interesting. Always good to get differing views of a holding because it forces you really think through your analysis. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 26, 2011 Share Posted May 26, 2011 Yup, tomorrow will be interesting. Always good to get differing views of a holding because it forces you really think through your analysis. I just saw that Google isn't making money on payments, so it looks like it's the couponing model. Related, Groupon just got smoked. Link to comment Share on other sites More sharing options...
txlaw Posted May 26, 2011 Share Posted May 26, 2011 Yup, tomorrow will be interesting. Always good to get differing views of a holding because it forces you really think through your analysis. I just saw that Google isn't making money on payments, so it looks like it's the couponing model. Related, Groupon just got smoked. Groupon should have taken the offer. What a bunch of idiots. Link to comment Share on other sites More sharing options...
Guest VAL9000 Posted May 26, 2011 Share Posted May 26, 2011 Groupon should have taken the offer. What a bunch of idiots. Well at least Google Wallet explains what they were thinking, offering $6bn for Groupon. Link to comment Share on other sites More sharing options...
Liberty Posted May 27, 2011 Author Share Posted May 27, 2011 http://www.bloomberg.com/news/2011-05-26/google-says-demand-surges-for-video-advertising-on-partner-website-network.html Google Inc. (GOOG) said it has doubled the number of video ads that it places on partner sites in the past year, a sign it’s making headway in a push to expand display advertising. Demand for video ads also has boosted Google’s AdMob network, which targets applications and websites on mobile devices. Requests for the spots have grown an average of more than 70 percent month to month since July, the company said. Link to comment Share on other sites More sharing options...
Viking Posted June 16, 2011 Share Posted June 16, 2011 How are people valuing Google? (I wonder if holding equal amounts of MSFT and Google at current prices does not lower risk and still provides outsized return potential over next few years?) 2010 Act Op Earnings = $29.62 (all from RBC) 2011 Est Op Earnings = $32.18 2012 Est Op Earnings = $37.62 Net Cash per Share = $97.00 Share Price (June 16) = $501.00 Est 2011 Op Earnings PE = 15.6; after cash 2011 PE = 12.6 1.) The first hurdle is how do you value their cash hoard? One way is to assume all is international and reduce by 35% (tax rate); $97 - 35% = $62/share; after cash 2011 PE = 13.6 2.) How good is management at deployment of retained earnings? Incomplete, as it just looks to be building up as cash on the balance sheet. 3.) Is management good? Yes (they dominate their main markets) 4.) Is management shareholder friendly? Doesn't look like it to me; if I had one really big immediate concern this would be it 5.) Is there a moat? Yes, if Charlie's comments are to be believed. 6.) Business ecomonics good? Look great. 7.) Primary risk? Perhaps lack of social angle (i.e. Facebook). Link to comment Share on other sites More sharing options...
Guest Hester Posted June 16, 2011 Share Posted June 16, 2011 GOOG is definitely getting attractive. I'm not big on forward earnings, but even using trailing earnings they are making at least $27 per share. Putting a tax discount on the net cash, they are at a 16 multiple. The way I look at it is, the market's historic (that is to say over the last few decades) after tax multiple is about 16-17ish. So even on a conservative, tax discounted ex-cash trailing multiple they are selling for the same valuation as the market historically. Yet, they have better growth and a much higher quality business. A security's reward should match it's risk, and if GOOG's business model has less risk than the average stock, why are they selling at the same valuation? For a higher quality business to thus be efficiently priced, it should sell at a higher multiple than the average business, because future earnings are safer and have a higher probability of occuring. Investors are offered the chance to buy, in Munger's words, the highest moat business in the world, at the same price as an average business. Doesn't make any sense. Link to comment Share on other sites More sharing options...
Viking Posted June 16, 2011 Share Posted June 16, 2011 Hester, I like your thinking. My learning over the last year has been to stop messing around with average companies trading at steep discounts. Too much work and too much risk. I am going to try and limit my search to great companies and buy them when they get reasonably cheap (hence my interest in Google). I would rather spend my time learning as much as I can about industry leaders; my experience is they all evenually go on sale (over a 12 to 24 month time horizon); maybe not crazy cheap but on sale. Link to comment Share on other sites More sharing options...
bargainman Posted June 17, 2011 Share Posted June 17, 2011 Not sure if this was posted, but here's a look into what they've been planning with their cash: http://www.businessweek.com/magazine/content/10_23/b4181033582670.htm Link to comment Share on other sites More sharing options...
Liberty Posted June 17, 2011 Author Share Posted June 17, 2011 Reuters reported that Oracle Corporation is seeking damages 'in the billions of dollars' from Google Inc., in a patent lawsuit over the smartphone market, according to a court filing. The disclosure on Thursday was the first time either side publicly mentioned the cumulative scale of Oracle's damages claims. Barring any settlements, a trial between Oracle and Google is expected to begin by November. Google has called an Oracle damages report "unreliable and results-oriented," and asked a U.S. judge in San Francisco to ignore it, court documents show. In disputing Oracle's methodology, Google also asked the court to keep private some damages information Google disclosed in a court filing. Oracle then accused Google of trying to conceal the fact Oracle's damages claims in the case are in the billions, according to a document filed on Thursday. Oracle said it did not object to having the information about its damages become public. http://www.reuters.com/finance/stocks/GOOG.O/key-developments/article/2345579 Link to comment Share on other sites More sharing options...
Liberty Posted June 20, 2011 Author Share Posted June 20, 2011 Nibbled on some GOOG today. I agree with Charlie Munger on the size of their moat, and I think they'll also do pretty well in mobile and cloud services. Their ad platform is basically infrastructure now, and I don't really see what could kill it in the next decade, so they should keep capturing a good fraction of the growth in advertising online and on mobile (with nice margins) for the foreseeable future. Link to comment Share on other sites More sharing options...
JAllen Posted June 20, 2011 Share Posted June 20, 2011 Where has Charlie Munger discussed Google's moat? Link to comment Share on other sites More sharing options...
Viking Posted June 20, 2011 Share Posted June 20, 2011 www.marketwatch.com/story/buffett-munger-praise-googles-moat Link to comment Share on other sites More sharing options...
JAllen Posted June 20, 2011 Share Posted June 20, 2011 Thanks guys! Somehow I missed that.... I don't perceive it to be that big myself but going to have another gander ::) Link to comment Share on other sites More sharing options...
Liberty Posted June 20, 2011 Author Share Posted June 20, 2011 And eventually all the data centers will be connected to allow the end users device to do voice and visual searches. Google's way ahead of you. Voice and image searches, for both mobile and desktop: http://googleblog.blogspot.com/2011/06/knocking-down-barriers-to-knowledge.html Link to comment Share on other sites More sharing options...
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