Google Opens Up about Mobile Strategy, new Platform called Android shows Promise

Reports trickled in over the weekend that Monday was to be the day that the long awaited "gPhone" announcement would come in some form. Google (GOOG) complied with those rumors and held a conference call announcing an Open Mobile Platform rooted in a Linux based Operating System.

This system, dubbed Android, was announced by Google and several of its partners in the Open Handset Alliance, including Qualcomm, T-Mobile, HTC, Sprint and Motorola. Over 30 partners in all for the Internet search giant, all committed to produce the technology to make a powerful, open Operating System for cell phones a reality. Google will provide the backbone programming for the Linux-based OS and will release an SDK (Software Development Kit) so that developers of all shapes and sizes will be able to create applications for a multitude of devices.

The first of these devices are expected to be available in the 2nd half of next year touting as its main feature a complete full scale Web Browser, much like Apple's Safari on the iPhone or the Opera Mini browser available for certain other smart-phones. Thus far details are scarce and not well known about Android, but next week's sneak peak at the SDK should give several more clues. This open initiative by Google comes right after the announcement of OpenSocial, an open development platform for Social Network sites, with which Google has signed up several partners including MySpace, LinkedIn, Salesforce.com and its own Orkut network.

The power of the mobile Internet is something Google has its sights squarely on, and the advertising platform that that could bring. The world has billions of cell phone users and over a billion handsets are sold each year, which represents a fantastic opportunity for localized and personalized advertising. It just so happens that Google has become a virtual expert at both of those flavors of ad-serving. Analysts and economists are throwing around estimates for growth in the mobile ad space and their particular 'Billions of $$$ by Year X' don't matter just yet, what does, is the resounding emphasis that it is the next great Internet growth sector.

The Android platform will provide Google a foundation to port its Internet software on a multitude of devices, and as CEO Eric Schmidt pointed out during the call:

"This is not an announcement for gPhone, we hope to see thousands of gPhones"

The thinking by Google of course, is that, why make the hardware when so many others already do. Create a platform that will excite partners, can cater to everyone's needs, and everyone succeeds. Google doesn't make the computers that sit at your desk do they? No! But they provide an expansive software platform and a multitude of services that arguably are simpler and better than competitive services. With powerful enough phone hardware and screens that can somewhat do justice to the "Complete Internet" Google can follow the same model with cell phones that they have used to dominate in the Internet space for Personal Computers. Not to mention innovation can foster truly and freely on an open software platform, which Android is touted as being. Google's planning to be there every step of the way and innovate as quickly as they can in this space.

Google shares have risen tremendously since August lows around $500/share, hitting a new all time high of $730 today, closing at $725. The hype built around a mobile push by Google stemmed some profit taking but the potential of this being a major platform and a revamp in mobile industry thinking is too hard to pass up for Investors. The sentiment that phone carriers lock in consumers and halt innovation, both on the hardware and software side, can die a quick and painful death if an open software platform for mobile devices in embraced. Google knows this as do its partners, and most importantly customers are starting to take notice as well.

The mobile space, especially for advertising is still wide open and Google is trying to out innovate its major competitors Yahoo (YHOO) and Microsoft (MSFT). Both companies of course missing from Google's partner list on this project. The simple fact in the mobile industry is that cell phones are turning more and more into little powerful computers capable of doing much more than phone calls and this is no different with the Internet. Consumers will see Internet on their phones much more prominently over the coming months/years and the expectation will be for a complete and encompassing experience.

The quicker that experience becomes reality the quicker Google will be able to grow into a mobile advertising conglomerate. Today's technology consumer is much more mobile than in years past and the thinking is, and I completely agree, that these mobile users will have many more opportunities to use Google products such and Search, Gmail and Maps on the go. With more usage, comes more advertising placement opportunities when it will really matter. Getting advertisements for local restaurants when you're at home is one thing but getting localized and personalized ads for local restaurants when you're hungry and on the town is something completely different. And for this to work well, Android must become the platform of choice.

Disclosure: Author is long GOOG

Major Tech Earnings Start Q3 with a Bang Part 3: Google Growth Continues

All eyes were on Google (GOOG) Thursday as Investors had digested a couple days of very positive Technology earnings and some not so positive Financial earnings. Momentum Traders hoping to continue the Tech ride further into the Fall pinned their hopes on favourable numbers from everyone's favourite Internet Giant, Google.

In terms of raw numbers it was an all around exceptional quarter from the Internet Advertising behemoth. Revenue climbed 57% year over year to $4.2Billion, which also represented a 9% quarter over quarter increase. Profit numbers, without stock option expenses, were $3.91/share, beating analyst expectations of $3.78. Google continues to dumbfound analysts when it comes to growth prospects and projections.

All the rage last quarter surrounded a drop in margins from 35% to 29% due to over hiring. Management was adament that hiring would be more disciplined and they re-iterated that same fact during this conference call. Google infact added even more employees this quarter than last. However, these additions were due to pre-signed contracts with University Graduates and 300 employees from the acquisition of Postini. Management seemed to relieve analysts during the call with specifics about hiring and their diligence about keeping an extra eye on hiring practices. Margins improved to 31%, becoming more normalized, however this number is still below year ago levels. This I believe, can be attributed to a tax rate rise from 25% to over 27% this quarter. Google typically projects a tax rate of near 30% and the assumption is that the company wil be paying more with an increased rate in the following quarter. A cause for concern perhaps, but at these growth levels, expected tax levels shouldn't be a real problem.

Google's cash horde is ever increasing and analysts began to question the company on potential uses of that cash. In response management seemed very disciplined in their approach to spending the money on only causes that make seemingly perfect sense strategically. This is clearly a company with a vision of the future, not ready to throw money around to get into businesses that don't fit. I believe this is one of Google's greatest core competencies! The minds at Google have a plan, a broad plan, and things that fit this plan get bought or invested in. They don't go after fliers, buy on whims, or buy things on hype.

Cases in point:
YouTube -> a clear direction in online video and its expansive possibilities into video and TV advertising
DoubleClick -> a clear direction for display advertising and advertising campaign management
Writely -> Online word processing technology to create an online Office suite
Postini -> Strengtening security in Email for Google Apps to break into Enterprise markets heavily
GrandCentral -> Telephone consolidation with online management, another pool for Apps or AdWords campaigns

Capital Expenditures at Google are always a concern for Investors as Google seems to wave its nose at the concept of Cost Cutting/Slowing. It's building a vast network of computing architecture and no one will tell the company differently. Where this comes into effect in the Finances is when the depreciation and replacement of all that computing equipment starts to kick in. The upside though, is that Google's technology is far and wide beyond its competitors and they can't catch up if Google keeps spending more, and more effectively, on development and technology.

Google's AdSense partners are getting less and less of a percentage of revenues. Last year at this time, the amount Google paid out to its partners was 31% of revenues, this year 29%. This percentage has been dropping steadily since Google became a public company. This means that an increasing percentage of revenue is coming from Google's own properties, meaning that all of the advertising dollars are going to Google's bottom line and not its partner sites (Of which this blog is one).

Google is growing still, has its mind set on strategic advancements and search improvements, is leaving its competitors in its Search dust (60% of searches at last count), and is continuing to make money hand over fist. What's next for the company? TV ads?, The Mobile Space?, GPhone? Only management knows and only future quarters will tell. So this isn't a boat to jump off of just yet.

Disclosure: Author is long GOOG

Google Seriously Looks to the Mobile Space

gPhone? That's the moniker that's been plastered over the headlines since the Wall Street Journal article (Link) that cited Google (GOOG) as having "invested hundreds of millions" into cellular phone development. Reports are that this project goes far and beyond current incarnations of Google products on today's mobile handsets.

So what exactly is Google up to? Are they in fact developing hardware to show to carriers and manufacturers? This in effect could be a Google Phone or gPhone if you so desire to call it. So to break down Google's strategy, I think we need to look at their current and past offerings. Google's made major leaps into the mobile space of late as it expands Google Search, Gmail and Maps onto any and every phone. I expect this strategy to seriously continue, the problem is however, that carriers bog down their cell phones with all kinds of proprietary software. Why do you think Google fought so hard to win open access for the 700Mhz band in the FCC auction. By making that area of the network open, it means that any and all devices would in essence have to work with any and all types of software. It also happens that this band is ideal for longer distance broadband Internet, a space Google desperately wants to be and excel in.

The Wall Street Journal also quoted figures saying that the mobile ad market could be worth $14Billion in 2011, up from about $1.5Billion currently, now that's sizable growth for a business. While Google already makes its billions from Internet advertising; attempts at print, radio, video and mobile ads show the company is intent to broaden itself from a Search company to an Ad firm. The mobile space is that next wave of advertising. Phones with full Internet capability are here and more are on the horizon, none more publicized than Apple's (AAPL) iPhone, which features a majority of full-fledged browser features in its Safari application. Not surprisingly, Google's products (GMail, Maps, YouTube) are available as standalone applications on this product.

If Google is indeed pushing multi-millions into R&D in the cellular space I would think the money is used currently to provide a framework for openness within mobile devices rather than the development of a Google Uberphone. When iPhone was announced it was labelled the "Jesus Phone" so any product that Google may or may not be working on would have the grave distinction of falling under the category of "Yeah, it is pretty cool but it's no iPhone".

With Google's CEO on Apple's board of directors it would be an odd step for the company to try to push itself with a new product into this competitive space, given that Google has no experience creating hardware, except for its servers and mini appliances. A more realistic approach is that Google may in fact be using some R&D resources to create mock-up or engineering versions of cellular device concepts that it shows to manufacturers and carriers in order to try to get everyone on the same page as to what the next generation of technology could and should be. Both from the hardware perspective and the software perspective. For an innovative software company this seems like the logical course of action, however Google is anything but conventional. For all we know, during the Google's Engineering 20% personal time someone had the bright idea for make a "simple Internet phone" and here we are today.

What this all leads to is Google's attempt to place itself within the mobile space in a very meaningful way. Reports go on to say that Google's device would offer free subscriptions to customers and support the costs with advertising. Now that is certainly the ambitious undertaking and one that has the potential to turn the industry on its ear. However, the idea of advertising before, after or during phone calls or regular phone use is certainly a tough sell. If Google can get the message across that devices should be open and function equally well with all types of software, then the innovative nature of Google's products would be at the forefront for millions of cellular users. A new wave of Internet enabled handsets are much more likely to prominently feature Google services, ad supported of course, if the company is deeply involved during the development phase.

No one at this point who is speculating can say for certain what Google's plans are, but the facts of the matter are clear. Google making a push into the hardware space would be by far its toughest challenge yet and the carriers would certainly have high demands of their own. On the software side expect to see the G inside more devices as Internet capabilities of cellular phones improve and users become accustomed to using their mobile phones the same way they use the Internet at home. Google's shown that a broad base of users click aplenty on targeted advertising and if the same Net experience can be found while on the go, I would, and certainly Google hopes for strikingly similar advertising results.

Disclosure: Author is long GOOG, AAPL