Google's Capacity Utilization Problem

| About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) is very transparent about many things. But one thing it's completely opaque about is how much of its computing and data carrying capacity is being used.

On the surface there are sound reasons for that. Computing managers don't really like to use most of what they have. They like to keep a lot of capacity in reserve. They like to build ahead of need, and if their operations were being compared with, say, car factories it would be bad for them.

But even compared with other computing giants, Google has always used just a tiny fraction of its computing and data capacity. Its cloud data centers and its dark fiber are legendary and, like legends, this means they can grow in the imagination without having to be exercised.

But the current strategy of CEO Larry Page is to demonstrate that capacity and to focus on increasing its profitable use. That's what its Google Fiber project in Kansas City is about. That's what selling access to its Google Compute Engine, against Amazon's (NASDAQ:AMZN) EC2 cloud, is all about. That's why it's propping up a rival browser, Mozilla's Firefox, to the tune of $1 billion. That's why it's talking with a bunch of companies, including Dish Network (NASDAQ:DISH), about wireless networking.

Traditionally, Google has not shown its hole cards. Why the change?

It comes down to something I wrote about in September, when I called Google's cloud stronger than Apple's devices. I still think that's true in the long run, and I have no doubt Google believes it to be true, but when you look at short-term revenues and profits, it's not entirely true.

A series of charts from Asymco tell the tale. Samsung's (OTC:SSNLF) strength in devices -- it's the dominant player in the Android space -- means its income from operations is now outpacing Google, and could be twice that of Google by the time this quarter's numbers come in. Horace Dediu concludes with this intriguing question:

What would happen if Samsung soaks up so much profit from mobile that it's in a position to acquire Google and control the trajectory of its enabling platform?

In other words, Google has to justify the "faith" I described in September in the marketplace, and the only way to do that is by dramatically increasing the use of its resources. Samsung has awoken the sleeping giant in Google, and the results should be something to behold.

Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.