Significance: Both Google and Motorola have spent many years and many millions of dollars creating mobile platforms and extending their PC offerings to new devices, in anticipation of the ‘post-PC’ world. However, while Google at least has had a huge impact via Android, the business models and eventual success levels of both software giants remain unclear in the mobile world, and this was reflected in their latest results. Traditional businesses are holding firm and there is much talk of mobile opportunities and growth, but the hard forecasts on revenues, profits and share remain difficult to call in such a fluctuating environment. And that’s not to mention Facebook, itself seeking to monetize and drive the mobile web, and setting up a new development center to help the process.
There’s a sense of waiting for something to happen at both Google and arch-rival Microsoft. Both delivered quarterly results which showed them weathering the supposed decline of the PC quite robustly, but assessments of their future fates will only be fully possible when their mobile strategies are fully visible. And despite the massive activity and investment both firms put into transferring their PC-oriented success models into the mobile and post-PC worlds, the outcomes and many of the revenue opportunities remain cloudy.
Both, of course, have recently taken the plunge into hardware to strengthen their evolving operating systems. But Google remained secretive about its future plans for its new Motorola Mobility unit, which boosted its second quarter revenues but depressed its profits.
The search giant’s revenues were up 35% year-on-year to $12.21bn, with its controversial handset purchase accounting for $1.25bn, or 10%, of the total. However, the Motorola division reported an operating loss of $233m ($192m from mobile, the rest from its home and set-top box business). Motorola’s results were included from the date the acquisition closed, May 22.
Google also revealed that less than half of the $12.4bn it paid for Motorola Mobility was about patents and technology. In fact, $5.5bn was attributed to IPR and ‘developed technology,’ Google wrote in an SEC filing, while a further $2.6bn related to goodwill (the financial benefit the firm expects to derive from the acquisition). ‘The acquisition is expected to protect and advance our Android ecosystem and enhance competition in mobile computing,’ said the filing. In addition, $730m related to customer relationships and $670m to other assets. The deal also included $2.9bn in cash.
Beyond that kind of detail though, many had hoped for some kind of roadmap for the smartphone business, as speculation still mounts over whether Google will turn itself into a fully fledged hardware/software vendor like Apple or, at the other extreme, offload most of Motorola except for its patents and software. CEO Larry Page hinted at the former, but all he said in his statement was: ‘We’re excited about the potential to build great devices for users’, citing ‘rave reviews for the newly unveiled (and non-Motorola) Nexus 7 tablet. (Page did not join the call as he has lost his voice.)
CFO Patrick Pichette said: “We’re totally excited about this opportunity’, adding somewhat ominously: ‘Everybody should expect some changes at Motorola.” But he said Google had ‘nothing to announce yet … It’s a little too early to comment on big changes right now.’
Motorola Mobility reported revenues of $1.25bn ($843m from the mobile products and $407m from the home segment). Its $233m operating loss was partly the result of one-off charges, some related to the Google purchase, but Pichette said that, while those factors might take a few months to work through, he believed Motorola would not continue to lose money.
He also pointed to the growth in interest in its mobile advertising services. “We are seeing a phenomenal amount of queries in mobile across the board,” he said. “For us, mobile is like desktop in 1999.” It now numbers over a million advertisers that are targeting handset users through Google.
Overall, Google turned in respectable Q2 figures, with income up to $2.79bn from $2.51bn a year earlier. For all the excitement about mobility, online advertising remains the core business and was seen as resilient despite the global economic slowdown. The number of paid clicks grew by 42% compared to Q211, though the cost-per-click was down by 16% and traffic acquisition costs ‘ mainly revenue shares with partners ‘ were up to $2.6bn, or 25% of advertising revenue, from $2.11bn a year before.
Those kind of trends, though not disastrous, create underlying nervousness and emphasize the importance of generating new revenue streams in the growth areas of mobility, social networking and location ‘ areas where Google has often been outsmarted by rivals.
But there is no panic. ‘The fact that click volume was up 42% was quite impressive,’ Colin Sebastian, an analyst at Robert W Baird, told Bloomberg. ‘That’s big growth, obviously influenced by mobile devices. Expectations were low.’
Over at Microsoft, its fiscal fourth quarter was an atypical one on many fronts. Despite record revenues, it posted its first ever loss because of a massive writedown on the disastrous 2007 acquisition of online advertising firm aQuantive. And while its core enterprise businesses were solid, any real evaluation of the company’s prospects will rest on its ability to transition into the mobile and ‘post-PC’ worlds. The company is, at last, retooling all its main platforms to this end, but there is the sense of the market biding its time until the results of those launches start to filter through.
The $6.2bn writedown related to aQuantive led to a quarterly loss of $492m though revenue was up 7% year-on-year to $18.6bn, with operating income up 12% to $6.9bn. For the full year, revenues increased to $73.7bn, though profits dropped to $192m from $6.1bn a year earlier.
Predictably, much of the focus of the earnings call was on the upcoming dual-stranded Windows 8, which will straddle many form factors from the PC and mobile worlds, and also converge significantly with Windows Phone. That broad platform is Microsoft’s big play to remain relevant in the world of Apple, Google and Amazon, and CFO Peter Klein commented: “With Windows 8 and Windows Phone 8, we see a great opportunity to benefit from the trend towards smart mobile devices.’
While Microsoft will need to rely heavily on partners like Nokia and the PC vendors to raise its consumer profile, Klein was concentrating mainly on his comfort zone ‘ the mobile enterprise and cloud. He said: “We feel that we are uniquely positioned to address the security and manageability challenges that CIOs are dealing with today as a result of this trend. And for users, we offer compelling experiences across devices with data and services that are connected seamlessly via the cloud.”
Though the Windows giant was reporting its results in the shadow of poor figures from its most critical mobile ally, Nokia, it reported that there were now about 100,000 applications in its Windows Phone marketplace and that WP7 units had risen by over 50% between Q1 and Q2.
However, the powerhouse of the Entertainment and Devices division, which houses Windows Phone and the new Surface tablet, remains the Xbox franchise. As well as offering rare proof that Microsoft can succeed in hardware gadgets, the Xbox brand increasingly fronts a wider offering of online content and a media hub that stretches beyond gaming. The E&D unit’s revenue grew by 20% year-on-year in the fiscal Q4, and 8% for the full year, which also reflects the addition of Skype. For the full year, E&D’s revenue was $9.6bn but profits fell to $364m, from $1.3bn in fiscal 2011.
Xbox has been the bestselling games console in the US for 18 consecutive months and during its financial year, Microsoft has added new video and content partnership as well as SmartGlass, which integrates Xbox into the whole home and mobile network, connecting it to handsets, tablets and PCs.
Meanwhile, the reliable profit generators, Office and enterprise servers/tools, turned in revenues gains of 7.1% and 13% respectively. Even the online services division was more robust than usual, delivering an 8% increase in revenue including a 12% boost in advertising sales, most of that linked to the Bing search engine.
A company with even less certainty about how it will ride the mobile web wave is Facebook, whose IPO was beset with doubts about whether it could turn its massive cellphone presence into revenue and profit. Attempting to address this, the social networking firm is to open its first engineering office outside the US, specifically to focus on mobile products, services and ideas. It will recruit about 25 developers to be based in London and led by Philip Su, an engineer who joined from Microsoft in 2010. His remit will be to accelerate and expand the work Facebook has been doing over the past two years to turn itself from an application into a fully-fledged platform, with a developer network spanning many device types and relying heavily on HTML5.
Su said the office would “grow over time and eventually focus on building products in key areas like mobile and platform.” It will also have responsibility for attracting third party developers, to try to rival the networks of Google and Apple.
Facebook co-founder and CEO Mark Zuckerberg said in May that improving mobile applications was his “first priority” for 2012, with an emphasis on improved quality as well as quantity ‘ Facebook mobile apps have often come under fire for being slow or buggy. The company recently launched its App Center ‘ a recommendation hub and streamlined discovery tool rather than a full app store ‘ in the US and UK.
The social firm will base its new center in London’s emerging Tech City, where Amazon also announced a media development unit this week. Facebook will merge the development teams of two UK companies it has acquired, and is looking to hire a manager for software engineering, an Android developer, a platform developer, a mobile developer and a tools engineer, according to its jobs page. The firm’s existing engineering teams are in New York, Seattle, and Menlo Park, California.
Google close to EU truce, but Android probe could follow
Google is reported to be close to a settlement with the European Commission which could avert a full-scale antitrust trial. In recent days, the EC has extended its probes beyond the core PC search/advertising business to include Google’s mobile activities, and the web giant has come up with proposals to address all these areas, sources said. However, separate probes regarding Android have not been ruled out.
The European Union’s competition commissioner Joaquin Almunia told the Wall Street Journal that the EU had “reached a good degree of understanding” with Google based on its expanded proposals. The parties will now start technical talks in order to reach a final agreement and there seem to be high hopes of success, which would save Google a long-drawn out battle and potentially huge fines if found guilty.
According to Reuters, Google has set out a set of proposed changes to its business practices, covering four main areas of EU concern, which have been extended to cover all its platforms, not just the PC. In particular, the new concessions center on the presentation of search results, how reviews appear in those results and some changes in contractual restrictions.
The main EU issues revolve around whether Google gives unfair advantage to its own products in its search results, and whether it copies content from rivals without permission. It is also accused of blocking competitors with its advertising agreements with other websites and preventing clients from moving their ad campaigns to rival engines.
Interestingly, the sources say Almunia recently added a new area of concern, the possible dominance of the mobile market by Android, which Google controls. It is not clear whether Google has included proposals on this in its list of concession, but regardless of the outcome of the current discussions, the EU could potentially open a separate probe around Android. ‘Some other aspects of Google activity can be investigated also,’ he commented, citing applications for smartphones as an example.
Several large European operators, including Vodafone and Telefonica, have been lobbying the EU over the power of Android, and the issue was central to the European review of Google’s Motorola Mobility acquisition, though that did receive the green light. Almunia was clear, at a press conference on Wednesday, that the possible settlement of the search results issues would not prevent him from undertaking enquiries in other areas that raised competition concerns.
Almunia also said that any concessions made by Google over search results could be applied globally. However, he summarized the progress so far, saying: ‘They will try to solve it. And I have reasons to believe that they think it’s worth it’, adding: ‘We will look for worldwide solutions.’ Google also is being investigated by antitrust regulators in the US.