Google (GOOG) meet Amazon (AMZN), your worst nightmare when it comes to Android. If you thought the carriers were bad with their Android overlays and bloatware, or the amazing fragmentation and non-upgradability of Android branded devices, you're giving free services, R&D and back end support to your direct digital competitor.
Like a Bad Movie
The fact is someone had to make a competing OS to Apple (AAPL). Had Android not become what it is, iOS would have 98% market share, competition would have been dead and innovation would have rested on Apple. The low end market would have suffered and smart phone adoption would have moved at a dramatically slower pace.
But Google's rationale, from a business standpoint, was that they wanted to get their digital brand and products in front of as many eyes as possible. Owning the OS and controlling the experience was the only way to ensure that, so they said. When I heard that the first time, my jaw literally dropped.
Wasn't Google the company who was consistently kicking Microsoft (MSFT) all around the block, from search to online office software, even though Microsoft owned the OS? I felt like I was watching a horror flick with the villain standing in a dark room, the hero about to enter. I may have even screamed out "Don't go in there!"
The Aftermath of Introducing Android
I realize that Android is still very young and many of the battles are still to be fought. "Fought" here is my key point. Google has brought on its own largest enemy, all the while propping up another major competitor.
By entering the mobile OS market, they've made Apple their arch-rival. Apple has so much momentum, there's debate over how long someone will wait for the next version of the iPhone to come out. Because of the rivalry, Google is getting dumped from iOS Maps, likely 50%+ of Google Maps traffic. Baidu is coming to Safari for China. Siri is serving up more results from Google's competitors. And Facebook is getting integrated into iOS and Mt Lion, a blow to G+.
And on top of that, they've become entangled in multiple massive legal battles. To arm themselves, they justified a $12 billion purchase of Motorola for patents. This transaction for leverage in fighting the good fight for Android is quite the distraction. It is likely to lead to inflamed relationships with those hardware partners who've bought into the OS.
I can't figure how these factors work into Google's plan for world content domination. When you've got a content product, you want to make friends with OS and hardware makers. You want your software and your services to be available everywhere on any device, not just the devices you make or who's OS you maintain. (This is why I sincerely hope Facebook (FB) stays out of the hardware business.)
One Big Burning Issue
While there is much ooo'ing and aaah'ing over the Nexus 7, this fall is sure to see the first refresh to the Android based Kindle Fire line-up from Amazon. Jeff Bezos and team have likely learned a lot from its debut. It's safe to expect fixes to the glitches and smoothing of the experience.
Amazon is rumored to be working on their own maps platform. Plus, with the new releases of Amazon's In-App Purchase system and its own version of Game Center, they're clearly serious about all of this 'tablet stuff'.
Google should feel literally burned by the Fire. Their Android work props up this digital competitor with an easily customizable, free to use OS. And in a fail for Google's plan to dominate, Amazon is using it's own services front and center on the device - not Google's. It's a rather amazing place for Amazon to be; like one bakery giving another free, ready-made dough.
It's In The Chart
I'm no technician, but the chart helps prove the point. Google's stock is down over 18% since launching the Android beta on November 5th, 2007. Compare that to Apple, which is up 227% and Amazon.Com, up 143%.
While its stock has been lower over the past 5 years of Android, the first 3 years before it, April 2004 through November 2007, the stock was up over 550%.
Can't Count Them Out
Google still has potential for long term greatness, but much of this depends on the "Labs" division inventing something great and cool. Given the talent, it's entirely possible Glass, their Robo-Cars or something else unheard of before will emerge from the company and make it big. I do like the idea of investing in Google longer term from that perspective and will continue to own a few long shares.
The world needs to have OS competition for there to be great innovation. Microsoft dropped out of that race long ago and while they may be coming back to the table, we do need Android.
But in its current state, Android is a drag on Google and its core businesses. It's certainly helping to keep the stock price stagnated. Further, it's putting pressure on the company to find new eyeballs for its existing businesses as it creates enemies in the market.
In Conclusion
I expect Google's stock to remain stagnant over the medium term. In the short term, the stock may move down as earnings disappoint. The new iPhone, iOS6 Maps and Amazon's Kindle Fire update are amongst the downdrafts for Google in the coming months.
One trade to consider would be to buy a Sep 550 - 525 put spread ahead of earnings at a cost of $700. The spread stands to be worth $2,500 if my predictions are correct and the stock sheds roughly 10% from it's $575 price from the July 13th close before September 22nd. It's 52 week low is $480.
To cover the cost, Google would have to drop at least 6% to $543. It's a very risky trade. In the event of a Google beat, a disappointing or late October iPhone 5 debut, this spread would likely expire worthless with a 100% loss!
I appreciate all comments. If you agree with my near term prediction, I'm very interested in hearing your own trade ideas.
Additional disclosure: At the time of submitting this article, I have not purchased the put spread mentioned in the article.
