Google (NASDAQ:GOOG) is on a roll.
The stock price is up one-third in the last six months. Co-founder Larry Page is getting the kind of rave reviews as CEO that Jerry Yang of Yahoo (NASDAQ:YHOO) could only dream of. The PE multiple paid on the stock has been on a steady climb, now standing at 21 against Apple's (NASDAQ:AAPL) 14.7.
Yet all this could come tumbling down unless the company finds a way to spin the straw of its success with Android into gold shareholders can enjoy. And that effort is being hampered by Google's closest friends, its Android OEMs.
Because Android is open source, those OEMs can legally go their own way. And they are. This is leading to a fragmentation of the operating system, so what buyers get when they buy an “Android” from HTC may be quite different from what they get when they buy an “Android” from Samsung (OTC:SSNLF) or Amazon.com (NASDAQ:AMZN).
This is especially true when it comes to updates. Users who bought an “Android” from Samsung expecting an update to the next version of the software, dubbed Ice Cream Sandwich, will find they won't get it. Instead they're getting a proprietary Samsung interface called TouchWiz, which has analysts like GigaOm crying foul.
This comes as Android enjoys unprecedented success. Andy Rubin, the company's senior vice president for mobile, reported on his Google+ page that the company got 3.7 million activations of the software over the Christmas holiday, and there are an average of 700,000 new activations each day.
Flurry Analytics, which tracks apps downloaded in the after-market, said 242 million apps were downloaded on Christmas, with 7 billion downloads from the Android Market in the period of March to December.
The question occurs, how will Google fight fragmentation of Android (Amazon's Kindle Fire is also Android-based, but tweaked to support Amazon's own store) and profit from its work with the world's leading mobile operating system?
The answer seems to be, with its own hardware. Soon after Apple launches its iPad 3 in February, Google plans to announce its own high-end tablet. Following completion of its Motorola Mobility (NYSE:MMI) acquisition, this should mean that anywhere from 35-50% of Google's 2012 revenue will be coming from the sale of hardware. (Motorola sales during its most recent quarter were $3.259 billion, Google's $9.720 billion.) Motorola is presently running at break-even, so Google's net margins (currently about 25%) will take a severe hit when the merger is completed.
Supposedly, the late Steve Jobs warned Page years ago that Google was too fragmented, that it should “decide what it wants to be when it grows up.” Focus on five products and leave the rest behind, he said. So search, advertising, Google+, Android and Google Wallet. That's five. Most of the rest of Google's experiments, like Google Labs, Google Health and its foray into energy, have been jettisoned.
In 2012, we'll see what a grown-up Google looks like.
Disclosure: I am long GOOG.