GOOGL - Google

[txlaw]

Btw, I don't want to get into it again with you, ValueInv.  I don't particularly enjoy participating in these jihads against anyone who competes with or is critical of Apple.

But you do like contradicting yourself  ;)

 

Haha, well I don't enjoy it, per se, but I did feel compelled to respond to your post and point out why it was wrong.  ;)  Because the point about "control" is actually a very important one to discuss, given that it applies to all of our discussions about the OS providers and how things might shake out going forward. 

 

So thank you for giving me the opportunity to put my thoughts down on paper.  I'll try to stop now. ;D

[Guest valueInv]

Who said lower their profits?  I said lower their profit margins in this narrowly defined scenario (no upside impact regarding any other Google services, such as Play or AdWords).  Google's profits will continue to build as search volume increases.  Probably well above that trend.

If they have to sink their profits from search into selling devices at costs, what do you think happens to their overall profits. In fact, look at Google's profit growth before they bought Motorola and after. Do you see a difference?

 

 

I think that Motorola's profits will match those of other handset makers.  Something on the order of 5-15% operating margins over the long term.

If you add up Samsung's and Apple's share of profits in the smartphone market, its totals more than 100%. Do you know why?

 

 

Note that Google's core business isn't currently under threat of commoditization.  This is a key distinction when comparing handset makers.  You could say the same of Microsoft, whose businesses are (to date) largely unaffected by the mobile industry's vicissitudes.

You could have said the same of RIM a few years ago.

 

BTW, how have Google's margins been lately?

 

Yes. Yes. 25% operating.

 

What's your point?

Ask why the drop? Why did profits increase 6-7% when revenues increased about 30% YoY last quarter? Why did profits drop 20% YoY the quarter before?

[Guest valueInv]

Btw, I don't want to get into it again with you, ValueInv.  I don't particularly enjoy participating in these jihads against anyone who competes with or is critical of Apple.

But you do like contradicting yourself  ;)

 

Haha, well I don't enjoy it, per se, but I did feel compelled to respond to your post and point out why it was wrong.  ;)  Because the point about "control" is actually a very important one to discuss, given that it applies to all of our discussions about the OS providers and how things might shake out going forward. 

 

So thank you for giving me the opportunity to put my thoughts down on paper.  I'll try to stop now. ;D

Still not decided on preventing control vs gaining control? Or are you "speculating" like in the RIMM thread?

[VAL9000]

What's your point?

Ask why the drop? Why did profits increase 6-7% when revenues increased about 30% YoY last quarter? Why did profits drop 20% YoY the quarter before?

The answer to all of these questions is that Google bought MMI, a money-losing business.

 

Again, what's your point?

[Ross812]

Who said lower their profits?  I said lower their profit margins in this narrowly defined scenario (no upside impact regarding any other Google services, such as Play or AdWords).  Google's profits will continue to build as search volume increases.  Probably well above that trend.

If they have to sink their profits from search into selling devices at costs, what do you think happens to their overall profits. In fact, look at Google's profit growth before they bought Motorola and after. Do you see a difference?

 

 

I think that Motorola's profits will match those of other handset makers.  Something on the order of 5-15% operating margins over the long term.

If you add up Samsung's and Apple's share of profits in the smartphone market, its totals more than 100%. Do you know why?

 

 

Note that Google's core business isn't currently under threat of commoditization.  This is a key distinction when comparing handset makers.  You could say the same of Microsoft, whose businesses are (to date) largely unaffected by the mobile industry's vicissitudes.

You could have said the same of RIM a few years ago.

 

BTW, how have Google's margins been lately?

 

Yes. Yes. 25% operating.

 

What's your point?

Ask why the drop? Why did profits increase 6-7% when revenues increased about 30% YoY last quarter? Why did profits drop 20% YoY the quarter before?

 

Siri says:

 

"valueInv,

 

I have no idea what you are getting at here. Let's say Google profits a $1 from $4 of revenues in their search business. They then sells a smartphone at cost, not above, not below, but exactly at cost and receive $2 of additional revenue and $0 in additional profit. Their total revenue increases to $6 their profit is maintained, not sunk into, not lowered at $1. Yes their operating margins fall from 25% to 16.5% but their profit stays at the same level. Do you understand this?"

 

 

 

[Palantir]

  I don't particularly enjoy participating in these jihads against .....

 

Perfect.

[VAL9000]

A timely blog entry from Fred Wilson, a highly respected venture capitalist:

http://www.avc.com/a_vc/2013/03/short-term-thinking-vs-long-term-thinking.html

 

There's not much for me to add; this is precisely what I have been posting over the past few weeks.

[no_free_lunch]

Val, it's an interesting article and fred is obviously a smart guy but I don't take the point for granted.  Yes, android will likely be dominant but google services will not necessarily be offered on android phones.  Samsung, for instance is offering drop box on it's newer lines which directly competes with google drive.  As I have been saying, couldn't samsung find replacements for many of these services if it so wanted?  Why not just pimp them to the highest bidder?

[VAL9000]

Val, it's an interesting article and fred is obviously a smart guy but I don't take the point for granted.  Yes, android will likely be dominant but google services will not necessarily be offered on android phones.  Samsung, for instance is offering drop box on it's newer lines which directly competes with google drive.  As I have been saying, couldn't samsung find replacements for many of these services if it so wanted?  Why not just pimp them to the highest bidder?

I think the point Fred is making is that even if you ignore Android, Google is still in a favorable position.  Google's mobile services are superior to those of their competitors, and these services are far more difficult to switch from than a handset or even an OS. Since Google's center of profit is on the Internet, not on the handset, the impact of a switch is dulled.  Example: you get a Samsung with Dropbox preinstalled.  Do you switch your existing Google Drive setup for DropBox? Or do you download the Google Drive app?  One path is simple where the other is fraught with complications.

 

Search is an area where this switching cost doesn't really apply, so Bing has an opportunity to deny Google profits in mobile there.

 

[no_free_lunch]

I see,  I think we are on the same page then.  As bullish as I am on google it is the relative lack of switching costs that has me concerned with them.  gmail, google+ (if it ever takes off), google drive, these types of services do have high switching costs.  Youtube has a network effect.  Google search just works really well but is not so far ahead of it's competitors that it couldn't be caught up to.  It is a very complex eco system, changing by the month and all you really have to hang your hat on is that google hires the best and up until now has managed to stay dominant in search.  Given these complexities where do you put IV at?

[Guest valueInv]

Siri says:

 

"valueInv,

 

I have no idea what you are getting at here. Let's say Google profits a $1 from $4 of revenues in their search business. They then sells a smartphone at cost, not above, not below, but exactly at cost and receive $2 of additional revenue and $0 in additional profit. Their total revenue increases to $6 their profit is maintained, not sunk into, not lowered at $1. Yes their operating margins fall from 25% to 16.5% but their profit stays at the same level. Do you understand this?"

 

So why is Motorola causing a drop in profits and margins? Why don't they simply sell the phones at cost and not take a hit to profits?

 

Do you think Google can win marketshare from Samsung by selling at cost? Samsung owns 40% of Android marketshare and has massive economies of scale not only because of marketshare but also because it manufactures components for other vendors. Vendors like Motorola, HTC, etc buy components from Samsung, LG, Qualcomm, etc and package them up into phones. Samsung has huge cost advantage not only in components but also marketing, carrier relationships, distribution,etc.  So Google is just going to waltz in and sell phones at cost while paying more for components? In fact, they will probably have to buy components from Samsung if they want the latest and greatest. I'm sure Samsung will have a "special price" for them.

 

Samsung outspends even Apple in marketing. How much do they have to invest in marketing to take marketshare from Samsung? How are they going to keep up with Samsung throwing in every feature they can into the phone every six months using the latest camera, processor, memory, etc? The new components cost a lot more.

 

And then there's the worlds biggest market - China when Google's services have no presence and where people are already selling $100 Android phones. So they are going to sell phones for cost in China and get almost 0 search revenues? What about the inventory costs and marketing costs?

 

Then there is Amazon who is happy to sell devices "at cost" and make a loss. What ever Google prices at, Amazon will price lower. Do you know who has the cheapest Android tablet? How soon before they enter the smartphone market? How will Google counter Amazon's distribution power while selling devices at higher prices?

 

The thing no one pays attention to is that cheap phones are sold to cheap people. These are people who primarily use the phone for calls and text messages. They don't surf the web much, do search, don't buy apps or books or songs. Why do you think when they look at browsing, content or mobile advertising marketshare, Apple still holds half or even more? Even though they sell only 20% of the devices? Why do you think Apple is not chasing marketshare?

[Guest valueInv]

Look up what a "vanity metric" is:

 

http://ben-evans.com/benedictevans/2013/3/18/googles-penetration-of-android

[VAL9000]

So why is Motorola causing a drop in profits and margins? Why don't they simply sell the phones at cost and not take a hit to profits?

 

Do you think Google can win marketshare from Samsung by selling at cost? Samsung owns 40% of Android marketshare and has massive economies of scale not only because of marketshare but also because it manufactures components for other vendors. Vendors like Motorola, HTC, etc buy components from Samsung, LG, Qualcomm, etc and package them up into phones. Samsung has huge cost advantage not only in components but also marketing, carrier relationships, distribution,etc.  So Google is just going to waltz in and sell phones at cost while paying more for components? In fact, they will probably have to buy components from Samsung if they want the latest and greatest. I'm sure Samsung will have a "special price" for them.

 

Samsung outspends even Apple in marketing. How much do they have to invest in marketing to take marketshare from Samsung? How are they going to keep up with Samsung throwing in every feature they can into the phone every six months using the latest camera, processor, memory, etc? The new components cost a lot more.

 

And then there's the worlds biggest market - China when Google's services have no presence and where people are already selling $100 Android phones. So they are going to sell phones for cost in China and get almost 0 search revenues? What about the inventory costs and marketing costs?

 

Then there is Amazon who is happy to sell devices "at cost" and make a loss. What ever Google prices at, Amazon will price lower. Do you know who has the cheapest Android tablet? How soon before they enter the smartphone market? How will Google counter Amazon's distribution power while selling devices at higher prices?

 

The thing no one pays attention to is that cheap phones are sold to cheap people. These are people who primarily use the phone for calls and text messages. They don't surf the web much, do search, don't buy apps or books or songs. Why do you think when they look at browsing, content or mobile advertising marketshare, Apple still holds half or even more? Even though they sell only 20% of the devices? Why do you think Apple is not chasing marketshare?

 

Some pretty interesting questions in here.  Probably some of the better challenges facing Google are touched on.

 

There's a lot going on here, but I'll try to organize it:

1) Motorola losing money

This is going to take time.  You can't just turn off the cost switch.  As Google digests what they have, they will keep the stuff that aligns and dispose of the stuff that distracts.  There's really no other way around it.  Google inherited an 18 month product pipeline, which includes things like trying to sell RAZR Droids instead of Nexus 4's.

 

2) Google can't compete on cost of hardware, distribution vs. Samsung and Amazon

As you point out, Amazon sells the cheapest Android tablet.  Amazon has less leverage than Google/Motorola re: hardware costs.  Therefore, Google can probably build a cheaper tablet with the same specs.  Amazon's tablet is cheaper than Samsung's.  Therefore, Google can sell cheaper than Samsung.  Nexus 4 is already cheaper than equivalent spec competitors.

 

Wrt distribution, Google has better distribution than Amazon.  Google+Motorola have comparable distribution vs. Samsung in the US, although probably not internationally.

 

3) Google can't compete on specs, marketing vs. Samsung

Maybe, but specs are collapsing.  They're like laptop specs.  The class of individual who needs the $1200 vs. $600 laptop for the specs takes up a small fraction of the market.  Granted, they are profitable for hardware makers (like Apple), but Google doesn't care about hardware profit.  Wrt marketing, Google owns the world's biggest advertising capacity..  I think they can turn on the juice if needed.  Although, they probably won't.

 

4) China

Google's screwed.  There is no way that China's government is going to allow Google any meaningful market share in services.

 

5) Cheap phones are for cheap people

This is plain short-sighted.  There are two sides: data is expensive, mobile services are nascent.  As data gets cheaper, the adoption rate will increase.  As mobile services get better, the adoption rate will increase.  Both are happening.

 

 

[Palantir]

I see,  I think we are on the same page then.  As bullish as I am on google it is the relative lack of switching costs that has me concerned with them.  gmail, google+ (if it ever takes off), google drive, these types of services do have high switching costs.  Youtube has a network effect.  Google search just works really well but is not so far ahead of it's competitors that it couldn't be caught up to.  It is a very complex eco system, changing by the month and all you really have to hang your hat on is that google hires the best and up until now has managed to stay dominant in search.  Given these complexities where do you put IV at?

 

It does not have a huge switching cost, but there is no real reason to switch, in that sense, I see Google as a consumer staple rather than a software firm. I'm not saying Google is impenetrable, there are always unknown unknowns, but it does appear to have a fairly robust moat in my opinion.

 

Regarding IV, I think up to $1000 should be IV. I think 820s and below should give you an 11% return. I would be buying more, but GOOG is already more than 10% of my portfolio.....

[Guest valueInv]

A view from inside Google:

 

http://blogs.msdn.com/b/jw_on_tech/archive/2012/03/13/why-i-left-google.aspx

 

It echoes a lot of points I have made before in this thread. Probably the most important:

 

Google is a technology company but an advertising business. Evaluate it as such.

[Guest valueInv]

Funny how economies of scale work:

 

http://gigaom.com/2013/03/19/htc-one-phone-delayed-as-parts-suppliers-focus-on-other-customers/

[Guest valueInv]

Thoughts from Roger McNamee, another "well respected" venture capitalist:

 

http://www.bloomberg.com/video/tech-industry-is-misdefining-innovation-mcnamee-R5IBBFiST5KGUxWg8CCnQA.html

 

VAL9000, you should watch it all the way to the end  ;)

[Guest valueInv]

See comments on reasons Samsung's success:

 

http://www.asymco.com/2013/03/20/samsung-vs-google-an-interview-with-rafael-barbosa-barifouse-of-redacao-epoca/

[compoundinglife]

Google launches their Evernote competitor:

http://officialandroid.blogspot.ca/2013/03/google-keep-save-whats-on-your-mind.html

[rkbabang]

"why bother getting used to a system that might go away? And I don't understand how Google can get anyone to rely on its experimental products unless it has a convincing answer for the "how do we know you won't kill this?" question."

 

I have the same question, being effected by the coming demise of Reader, why on earth should I put any effort into using Keep or any other new product from Google?

 

A Problem Google Has Created for Itself

 

[Guest valueInv]

Another loss for Motorola:

 

http://www.bloomberg.com/news/2013-03-22/microsoft-wins-ruling-in-xbox-case-brought-by-google-s-motorola.html

[compoundinglife]

"why bother getting used to a system that might go away? And I don't understand how Google can get anyone to rely on its experimental products unless it has a convincing answer for the "how do we know you won't kill this?" question."

 

I have the same question, being effected by the coming demise of Reader, why on earth should I put any effort into using Keep or any other new product from Google?

 

A Problem Google Has Created for Itself

 

Another one from The Guardian: http://www.guardian.co.uk/technology/2013/mar/22/google-keep-services-closed

 

"Google Keep? It'll probably be with us until March 2017 - on average"

[Guest valueInv]

"why bother getting used to a system that might go away? And I don't understand how Google can get anyone to rely on its experimental products unless it has a convincing answer for the "how do we know you won't kill this?" question."

 

I have the same question, being effected by the coming demise of Reader, why on earth should I put any effort into using Keep or any other new product from Google?

 

A Problem Google Has Created for Itself

 

Another one from The Guardian: http://www.guardian.co.uk/technology/2013/mar/22/google-keep-services-closed

 

"Google Keep? It'll probably be with us until March 2017 - on average"

 

Throwing crap at the wall and seeing what sticks has consequences.

[no_free_lunch]

The Google I was passionate about was a technology company that empowered its employees to innovate. The Google I left was an advertising company with a single corporate-mandated focus.

 

This article, it is from a link that was posted earlier, the guy is basically arguing that there is not enough throwing crap at the wall.  That google needs to work more on innovating.  Innovation often happens through a somewhat random approach of trying different things, picking the ones that work and re-iterating.  It was what GE has done, it is what MMM does, it is to some extent what universities do, it works.  It is frequently cited by silicon valley tech entrepreneurs as a valid approach.  This argument that it's something they should stop doing is preposterous.  They have created a $267B company from 2 people 15 years ago.  They have proven the approach.  Find a better argument.

 

There are plenty of things to dislike about google but there approach to innovation is not one of them.

[bargainman]

Well the ironic thing about the change at Google is that it was actually in part brought on by Apple's Steve Jobs.  When Larry Page called him up for advice he told him that Google was too scattered and that he needed to focus the company more, like Apples does.  Now they are doing just that, although that last article attributes it more to FB than to Jobs.