GOOGL - Google

[txlaw]

I actually have the opposite view of Android. 

 

Android is very low cost (despite the patent issues) for hardware manufacturers, and the difference between it and that other OS (I own an iPhone 5 btw -- it's great!) is increasingly getting smaller and smaller.  Most importantly for Google, though, is that Android is absolutely, positively designed to fit with Google's mission to be the dominant search and augmented reality company. 

 

So it doesn't matter much if they make any direct revenue off of Android -- I think they've already made their money back on it by displacing MSFT and making sure that GOOG search stays number 1.  I think it's highly likely that they will write case studies about the Android strategy in the future, even if Android fades away and something else replaces it (e.g., another GOOG OS: ChromeOS).

 

That is my opinion as well.  I don't think Google cares if it ever directly makes a penny from Android, nor from its fiber to the home business.  What Google wants is for every human being to be connected to the internet all the time with as fast a connection as possible.  If Android didn't exist, many fewer people would have smartphones.  Right now the iPad dominates (just like the iPhone dominated at first), but I predict that a few years from now inexpensive Android based tablets will outsell iOS tablets.  Sure Apple will make the margins and people will scream that Google isn't making any money off of it, but it will put tablets into the hands of countless people who would never spend the money to get an iPad, just like there are tons of people world wide who are walking around with Android phones who wouldn't have a smartphone at all otherwise.    How much more difficult would it be for Amazon, or Barnes&Nobel, or Acer, or HTC, or Samsung, to compete with Apple if it weren't for Android?  Would mobile web traffic be 14% off all web traffic today if Android never existed? No it would be much smaller.  IMHO, this is all Google is trying to accomplish here.  Google is looking for ways to get more people online, get them online with faster connections, and getting them to stay online more of the time.

 

Absolutely.  And I'd go further. 

 

GOOG is a search/AR/AI company.  It tries to deliver answers to what people are searching for, and it even hopes to anticipate what people are looking for based on user profiles.  It also wants people to be able to overlay data over the physical world (think Google Glass). 

 

Android helps them to do this by driving the use of GOOG products and services, which results in a virtuous cycle that increases GOOG's moat in this regard.

 

GOOG is also an infrastructure company.  It delivers computing power to businesses/developers on an industrial scale (Compute Engine and App Engine).  It also delivers video to the masses (YouTube, which happens to be both an infrastructure and content company).

 

Android drives the use of that infrastructure by connecting people to the Internet all the time.

 

GOOG has a real moat, and Android helps that moat.  I personally think GOOG will be here for a long time.

[Guest rimm_never_sleeps]

android has been a grand slam for goog. from zero to dominating global smart phone share in the space of 4 years. they also know how to do mapping, which IOS users are unabashedly grateful for.

[Palantir]

I agree with rkababang.

 

Google is a search advertising firm. Everything they do tries to funnel into keeping users online and therefore using their search. Their business model has always been to give stuff away for free and get people using their search/other products that will allow them to sell advertising. They're slightly moving away from that model in charging enterprises for Google Apps.

 

I think it's fair to say that Apple and Google are not really competing in the same market, Apple is happy being the niche provider, and if they use Google products like search, they can coexist.

 

I think GOOG's biggest worry has to be FB, as FB becomes the centerpiece of how people spend their time online, it's a threat to Google's products.

 

PS. I am long MSFT, GOOG, and FB.

[txlaw]

I'm not convinced Android is a good investment for Google. They spent 12.5 billion on Motorola Mobility… Does Android have a moat versus iOS or Microsoft? I don't think so.

 

Anyway, just thinking out loud. I believe Google is a high quality business that has a wide moat around their ad network.

 

Agreed....at least mostly. Regarding whether Android was a good investment, getting people to use Android gets them to use other Google Services and helps ensure they use Google search on mobile devices, which lets them display more ads.

 

And Google could always decide to start licensing Android (which I think they should do).

 

I actually have the opposite view of Android. 

 

Android is very low cost (despite the patent issues) for hardware manufacturers, and the difference between it and that other OS (I own an iPhone 5 btw -- it's great!) is increasingly getting smaller and smaller.  Most importantly for Google, though, is that Android is absolutely, positively designed to fit with Google's mission to be the dominant search and augmented reality company. 

 

So it doesn't matter much if they make any direct revenue off of Android -- I think they've already made their money back on it by displacing MSFT and making sure that GOOG search stays number 1.  I think it's highly likely that they will write case studies about the Android strategy in the future, even if Android fades away and something else replaces it (e.g., another GOOG OS: ChromeOS).

 

They paid 13B to 'defend' Android in addition to losing 1B per year at Motorola. I think it does matter how much money they make offa Android.

 

BTW, they are also the search provider for iPhone. They would have made the same amount of money without Android.

 

Android isn't about money. It's about egos and empire building.

 

I disagree, and I think you are not looking at the counter-factual.  How much revenue would GOOG have foregone for the next ten years if they didn't put smart phones in the hands of people all across the world who can't afford an iPhone?  And how could they trust that AAPL wouldn't flame out?  Or that AAPL would not try to extract high rents from GOOG in the future?  AAPL certainly isn't bashful about extracting rents from its partners and customers.

 

Your point about Motorola needing to be included in the cost is a good one, though, and I think that there is certainly an argument that they overpaid given what has turned out to be the value of the patents in assisting in a MAD strategy.  But the game isn't over yet.

[rkbabang]

They paid 13B to 'defend' Android in addition to losing 1B per year at Motorola. I think it does matter how much money they make offa Android.

 

BTW, they are also the search provider for iPhone. They would have made the same amount of money without Android.

 

Android isn't about money. It's about egos and empire building.

 

 

 

Look at this chart again. Now picture the green (Android) going away (never having existed).  Sure the brown might be a little larger, but the reality is that many fewer people would have smartphones and Google would be at the mercy of one company.    I agree they can't spend too much on Android, but I think that is how they look at it.  Not "how much is Android making us", but rather "How much is Android costing us".  As long as it doesn't cost too much, it doesn't matter if it ever directly makes them anything.  I don't think ego has anything to do with it.  Google has built an empire and protecting it from Apple is exactly what they should be doing.

 

http://www.technologyreview.com/sites/default/files/styles/view_body_embed/public/images/MeekerAndroid.jpg

 

[Guest rimm_never_sleeps]

mmi did not cost $13b. it cost less than $10b when you factor in the over $3b of net cash on mmi balance sheet at time of acquisition. mot is not costing goog $1b of Cash operating losses. perhaps gaap, but certainly not cash losses. goog is restructuring the mot business. some of the reported losses are one time. finally goog is going to recover some of the cost of the mmi purchase when they sell the modem business. all in all, a very strategic purchase of over 24k valuable mobile patents for what is a pittance for goog. I certainly prefer that to letting $120b of cash sit there and do nothing.

[Guest valueInv]

I'm not convinced Android is a good investment for Google. They spent 12.5 billion on Motorola Mobility… Does Android have a moat versus iOS or Microsoft? I don't think so.

 

Anyway, just thinking out loud. I believe Google is a high quality business that has a wide moat around their ad network.

 

Agreed....at least mostly. Regarding whether Android was a good investment, getting people to use Android gets them to use other Google Services and helps ensure they use Google search on mobile devices, which lets them display more ads.

 

And Google could always decide to start licensing Android (which I think they should do).

 

I actually have the opposite view of Android. 

 

Android is very low cost (despite the patent issues) for hardware manufacturers, and the difference between it and that other OS (I own an iPhone 5 btw -- it's great!) is increasingly getting smaller and smaller.  Most importantly for Google, though, is that Android is absolutely, positively designed to fit with Google's mission to be the dominant search and augmented reality company. 

 

So it doesn't matter much if they make any direct revenue off of Android -- I think they've already made their money back on it by displacing MSFT and making sure that GOOG search stays number 1.  I think it's highly likely that they will write case studies about the Android strategy in the future, even if Android fades away and something else replaces it (e.g., another GOOG OS: ChromeOS).

 

They paid 13B to 'defend' Android in addition to losing 1B per year at Motorola. I think it does matter how much money they make offa Android.

 

BTW, they are also the search provider for iPhone. They would have made the same amount of money without Android.

 

Android isn't about money. It's about egos and empire building.

 

I disagree, and I think you are not looking at the counter-factual.  How much revenue would GOOG have foregone for the next ten years if they didn't put smart phones in the hands of people all across the world who can't afford an iPhone?  And how could they trust that AAPL wouldn't flame out?  Or that AAPL would not try to extract high rents from GOOG in the future?  AAPL certainly isn't bashful about extracting rents from its partners and customers.

 

Your point about Motorola needing to be included in the cost is a good one, though, and I think that there is certainly an argument that they overpaid given what has turned out to be the value of the patents in assisting in a MAD strategy.  But the game isn't over yet.

 

If people didn't use smartphones, they would use desktops to search. On android, they pay rents to operators and device makers instead of Apple. Why do you think their profits are dropping?

 

They are going to lose more money on Android. Not because of Apple but because of Amazon, which will enter smartphones soon.

[rkbabang]

I agree with rkababang.

 

Google is a search advertising firm. Everything they do tries to funnel into keeping users online and therefore using their search. Their business model has always been to give stuff away for free and get people using their search/other products that will allow them to sell advertising. They're slightly moving away from that model in charging enterprises for Google Apps.

 

I think it's fair to say that Apple and Google are not really competing in the same market, Apple is happy being the niche provider, and if they use Google products like search, they can coexist.

 

I think GOOG's biggest worry has to be FB, as FB becomes the centerpiece of how people spend their time online, it's a threat to Google's products.

 

PS. I am long MSFT, GOOG, and FB.

 

Google has protected itself from Apple using Android.  How Google protects itself from FB is a more interesting question to me.  Google+ was an attempt to do so and I think it is safe to say that so far it has failed.  Apple has expensive products so Google was able to beat them by pretty much giving away the Android source code allowing hardware companies to undercut Apple on price.  The problem with Facebook is that it is free to its users already, so how does Google get people to use something else?  I personally think they will co-exist, you search Facebook for different things than you search Google for.  But I agree with you, if Google is vulnerable, it is from this direction.  What happens if FB comes up with a really good search engine for the web and a shopping search engine, etc... using what it knows about you to customize the results?  Come to think about it, why isn't FB doing that already?

[Liberty]

If people didn't use smartphones, they would use desktops to search.

 

Are you saying that smartphones don't increase the absolute number of search queries?

[rkbabang]

If people didn't use smartphones, they would use desktops to search.

 

That just isn't true at all.  How many times have you been talking with someone and you or someone in the group pulls out a phone to look up the topic?  This happens constantly, in coffee shops, malls/stores, breakrooms, living rooms, kitchen counters, in cars, walking down the street ....  Don't tell me they would have found a computer and went there instead.  People have access to the web, 24/7 wherever they happen to be and thus they use it more.  Not just a little more, a lot more.

 

If Amazon does comes up with a phone, it will most likely run a forked version of Android.

 

[txlaw]

If people didn't use smartphones, they would use desktops to search. On android, they pay rents to operators and device makers instead of Apple. Why do you think their profits are dropping?

 

They are going to lose more money on Android. Not because of Apple but because of Amazon, which will enter smartphones soon.

 

See Liberty question and rkbabang's comment on the first point.  I don't really get why you think that searching on a desktop substitutes for search on a smart phone or tablet.

 

As to your point about hardware manufacturers losing money, that's a result of intense competition among hardware manufacturers, not the use of Android, per se.  Imagine what would happen if these guys didn't have Android.  They'd be dominated by Apple and would really be bleeding cash.

[Guest valueInv]

If people didn't use smartphones, they would use desktops to search.

 

Are you saying that smartphones don't increase the absolute number of search queries?

 

If you have data comparing growth trajectory of total queries/year of the 2004-2008 period to 2008-2012

period, do share.

[Guest valueInv]

If people didn't use smartphones, they would use desktops to search. On android, they pay rents to operators and device makers instead of Apple. Why do you think their profits are dropping?

 

They are going to lose more money on Android. Not because of Apple but because of Amazon, which will enter smartphones soon.

 

See Liberty question and rkbabang's comment on the first point.  I don't really get why you think that searching on a desktop substitutes for search on a smart phone or tablet.

 

As to your point about hardware manufacturers losing money, that's a result of intense competition among hardware manufacturers, not the use of Android, per se.  Imagine what would happen if these guys didn't have Android.  They'd be dominated by Apple and would really be bleeding cash.

 

I am talking not only about hardware manufacturers losing money, but also Google losing money on Android.

 

Do you think Asus is in the business of manufacturing a Nexus 7 for $200 and selling it at cost? Or Samsung is in business to sell Chromebooks at cost? Where do you think they make their margins from?

 

http://iterativepath.wordpress.com/2012/10/22/how-many-nexus-7-did-google-sell-and-at-what-margin-revenues-and-cost-of-revenues-analysis/

 

[bargainman]

I am talking not only about hardware manufacturers losing money, but also Google losing money on Android.

 

Do you think Asus is in the business of manufacturing a Nexus 7 for $200 and selling it at cost? Or Samsung is in business to sell Chromebooks at cost? Where do you think they make their margins from?

 

http://iterativepath.wordpress.com/2012/10/22/how-many-nexus-7-did-google-sell-and-at-what-margin-revenues-and-cost-of-revenues-analysis/

 

One of Google's biggest competitive advantages is that they make their money from advertising which means they don't charge consumers or businesses who use search anything.  As such they give away all sorts of things in order to strengthen their search pool - ie people searching.  Android is just another way to increase and sustain that pool, the same way Chrome is.  Do you think they make money on Chrome?  Directly, no!  Indirectly by funneling people into search, yes!  Same goes for Android.  They probably don't right now, but they will.  Android is part of their distribution system and hence their moat.  They lose money all all sorts of moat building, and make it up in search.  Other companies need to get people/consumers to pay for software (MSFT), hardware(Apple), to make money. Google gives away the sw and hw, and makes all their money on the back end.  Disruptive business model is probably their biggest advantage.

[Guest valueInv]

I am talking not only about hardware manufacturers losing money, but also Google losing money on Android.

 

Do you think Asus is in the business of manufacturing a Nexus 7 for $200 and selling it at cost? Or Samsung is in business to sell Chromebooks at cost? Where do you think they make their margins from?

 

http://iterativepath.wordpress.com/2012/10/22/how-many-nexus-7-did-google-sell-and-at-what-margin-revenues-and-cost-of-revenues-analysis/

 

One of Google's biggest competitive advantages is that they make their money from advertising which means they don't charge consumers or businesses who use search anything.  As such they give away all sorts of things in order to strengthen their search pool - ie people searching.  Android is just another way to increase and sustain that pool, the same way Chrome is.  Do you think they make money on Chrome?  Directly, no!  Indirectly by funneling people into search, yes!  Same goes for Android.  They probably don't right now, but they will.  Android is part of their distribution system and hence their moat.  They lose money all all sorts of moat building, and make it up in search.  Other companies need to get people/consumers to pay for software (MSFT), hardware(Apple), to make money. Google gives away the sw and hw, and makes all their money on the back end.  Disruptive business model is probably their biggest advantage.

 

The reason why search is such a great business is the cost of serving a query and an ad is minuscule compared to the revenue. That is why even with a a tiny click through rate, they make huge amounts of money. Same with email, etc. The cost/ user for Chrome is tiny.

 

With hardware , networks etc the costs/ user is multiple orders of magnitude higher. Lets say the y promised Asus $30 / device. How many searches does a user have to perform to make that kind of money with a 0.05 ctr and 10c per click. How many apps do that have to buy with 70% free and the rest costing 99c with the app maker taking 70% of the price. How does that change Googles margins ?

 

Now the economics look more like AT&T or HTC rather than Google. Wonder why their profits dropped 20% yoy last quarter?

[DCG]

The problem with search is that it's typically not very profitable for businesses paying for ads now that prices have been driven up pretty high. Businesses can easily cut back on thd amount they're spending on Adwords.

[txlaw]

If people didn't use smartphones, they would use desktops to search. On android, they pay rents to operators and device makers instead of Apple. Why do you think their profits are dropping?

 

They are going to lose more money on Android. Not because of Apple but because of Amazon, which will enter smartphones soon.

 

See Liberty question and rkbabang's comment on the first point.  I don't really get why you think that searching on a desktop substitutes for search on a smart phone or tablet.

 

As to your point about hardware manufacturers losing money, that's a result of intense competition among hardware manufacturers, not the use of Android, per se.  Imagine what would happen if these guys didn't have Android.  They'd be dominated by Apple and would really be bleeding cash.

 

I am talking not only about hardware manufacturers losing money, but also Google losing money on Android.

 

Do you think Asus is in the business of manufacturing a Nexus 7 for $200 and selling it at cost? Or Samsung is in business to sell Chromebooks at cost? Where do you think they make their margins from?

 

http://iterativepath.wordpress.com/2012/10/22/how-many-nexus-7-did-google-sell-and-at-what-margin-revenues-and-cost-of-revenues-analysis/

 

Are you assuming that GOOG will subsidize all Android hardware into perpetuity?  That's a very odd POV.

 

GOOG will only sell the Nexus line at their cost (or below their cost), and Nexus will remain a small subset of total Android phones sold per year. 

 

You can think of the Nexus line as a yearly expense that increases GOOG's moat.

[txlaw]

Come to think about it, why isn't FB doing that already?

 

rkbabang, FB is very aligned with MSFT.  In fact, Zuckerberg recently said that he'd be working at MSFT if he hadn't started FB.

 

Bing already integrates FB into its personalized search results.  I wouldn't be surprised if FB and MSFT  team up strongly to take on GOOG. 

 

That's why I think FB won't just implode.  Of course, whether it's worth $60 billion is another story.

[Palantir]

How exactly does Google lose money on Android? They're not building and selling hardware.....and before you mention Nexus, that's only a tiny little piece. You're blaming declining margins on being a hardware manufacturer, when that's not the case...

[DCG]

How exactly does Google lose money on Android? They're not building and selling hardware.....and before you mention Nexus, that's only a tiny little piece. You're blaming declining margins on being a hardware manufacturer, when that's not the case...

 

Well, between development costs, the Motorolla acquisition, patent lawsuits, etc, Google has spend $15-$20 Billion on Android and has made very little money from it. A majority of the money they make on mobile search comes from iPhone users, which is why Google is motivated to update apps like Maps, Gmails and others for iPhone instead of making them exclusive to Android.

[Palantir]

Motorola is not Android, and the patent costs have mostly been between the OEMs and MSFT/AAPL. They're making apps for iOS because they want to benefit from people being online. They are competing with Apple, but they have a very different view of this space....

[DCG]

Motorola is not Android, and the patent costs have mostly been between the OEMs and MSFT/AAPL. They're making apps for iOS because they want to benefit from people being online. They are competing with Apple, but they have a very different view of this space....

 

If they did not have Android, they would've had zero need/reason to purchase Motorolla.

[Palantir]

But you don't know the opportunity cost of that. Without Android, google could potentially miss out on the mobile market as they'd remain a niche search provider. Android allows Google to be a "platform" rather than a "product" which plugs into a "platform".

 

For value investors you guys are thinking very short term....A few billion USD is nothing for Google, and in this industry you need to invest a lot of money into projects that have a serious risk of failure to stay relevant. Returning cash to shareholders is not always the answer. MSFT is pouring billions into Bing for similar reasons. They must have presence in this market.

[Palantir]

I think GOOG is undervalued all the way up to 850....after that maybe fairly valued.

[DCG]

But you don't know the opportunity cost of that. Without Android, google could potentially miss out on the mobile market as they'd remain a niche search provider. Android allows Google to be a "platform" rather than a "product" which plugs into a "platform".

 

 

I agree with this; I was just responding to your question about how Google loses money on Android. So far, they've spend a lot more money on Android (and things related to Android) than they've made. So far is of course they key phrase here.