Google’s (GOOG) recent quarterly report showed the impressive revenue growth that many have been anticipating from mobile over the last several years. At this time last year, Google projected a run rate for its mobile revenues at around $1B/year; they are now are at a run rate of $2.5B/year.
While some may argue exactly what the definition of run rate and revenues really means, the trend is what we should focus on. In a year, the run rate has jumped to 2.5 times what it was just a year ago. These are impressive numbers and the stock was well rewarded, jumping over 5% on Friday.
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The underlying driving force in mobile growth is the ever expanding reach of smart phones. Currently, 40% of every phone sold is a smart phone, and that trend is only going to increase. Tablet devices are also being sold at a huge clip and that trend seems likely to continue. The move towards more and more mobile advertising is like the move from dial- up to cable internet to eventually wireless. The main difference is that even though dial-up will eventually go away, standard internet advertising will remain a factor - even though I strongly suspect mobile advertising will dominate going forward.
This was echoed by an analyst from Susquehanna Financial Group when discussing Google. “We think mobile is near a massive volume inflection point,” wrote analyst Herman Leung in a note to investors on Friday. “At these growth rates, we think mobile revenue could be larger than display (advertising revenue) by 2012.”
As many questioned Google's purchase of AdMob for $750M, which was well over 30 times its revenues at the time, I think it is clear that it is a critical component of this growth. This type of purchase is an excellent example of how a large company can scale up technology at rates 10 to 20 times faster than the original company ever could. So while at the time these purchases can look pricey, the eventual investment turns out to pay for itself much quicker than anyone can imagine, other than Google itself. A true case of buying the right company right before it explodes and valuations make it unlikely to be acquired.
Google’s next main purchase, Motorola Mobility (MMI), is actually being purchased more for its intellectual property than the business itself. While the purchase price of $12.5B is steep and current MMI shareholders will decide in the next month if it is adequate, this is more a strategic move to protect Google’s business than grow revenues. This comes on top of the two separate purchases of IP from IBM (IBM) of over 2000 patents in the last several months.
Even though the public purchasing of IP has quieted a bit over the last few months, it is likely still brewing behind the scenes as companies try to position themselves and their customers away from potential large damages caused by infringement of IP. A previous article was written on this subject titled Intellectual Property Stocks to Remain Hot.
Google is showing the clear case for what mobile is going to do to the advertising markets. Companies who have been hesitant to jump in with mobile campaigns are going to be left behind in the dust. This year's shopping season, which starts in a little over a month, will be unique with more utilization of mobile technology than ever before. It is not hard to imagine, in a year from now, Google having a run rate of over $5B/year from mobile alone. While it will still not be as large a percentage of its revenues that it will eventually become, it will continue to be a sign of the trends in mobile advertising.