In the evolution of personal computing devices, we have seen waves of change, and numerous times when a few companies dominated. The first wave was the power of software unleashed by affordable computers. The next battle was operating systems, each trying to improve ease of use, though the need for software compatibility in part determined winners and losers. Applications and information were restricted to what could be installed on each computer. Then there was an explosion of removable drive technology to make information more portable between computers. The early internet disrupted that, though the lack of reliable fast content transfer limited early internet growth. When the internet grew with broadband deployment, content proliferated, prompting a need for more accurate search. Despite many players in early search markets, the winning player that emerged, with the idea of simplicity as the biggest draw, was Google (GOOG).
Often when someone suggests searching for information on the internet, they simply state "just Google it". The original draw of using Google was that the page would load fast regardless of the connection one had to the internet. Even now, with broadband becoming more widespread in the developed world, the Google landing page remains very simple and fast loading. There is an ease of use that remains to this day, allowing anyone to quickly accomplish a search.
I use Yahoo (YHOO) search more than Google, though as the chart above indicates, I am the exception. Yahoo recently managed to pull Marissa Mayer away from Google to become the new CEO of Yahoo. It's interesting to note that recent Yahoo earnings were essentially flat. In 2006 Marissa Mayer was the Vice President of Search and User Experience at Google. In 2010 she became the Vice President of Location and Local Services at Google. If anyone can turn around Yahoo, then Marissa Mayer may be the person to do it, though Google is so far ahead in search, the best I would expect for Yahoo would be a more solid number two in search. Her oversight of Google Maps and Google Earth, and influence in the business world, might point Yahoo towards different future products, areas of growth beyond search generated revenues.
If Yahoo manages to increase search revenues, that would leave third place to Microsoft's (MSFT) Bing. I cannot imagine anyone saying "just Bing it", though there have been a few recent mobile deals creating wider distribution of Microsoft's search engine. Bing.com starts with a clean, fast loading landing page, then adds in a Popular Now area at the bottom. Software still generates 3/4ths of the revenue for Microsoft, meaning that gains in search for Bing are unlikely to generate a large percentage increase in revenues. Where Bing might gain more ground is in mobile search, though the $6.2 billion writedown of aQuantive throws into question future search related advertising revenues.
Mobile internet and mobile search are two of the fastest growing technology trends. Google have a commanding position in mobile search, due to early placement on iPhones and smartphones running Android. Unless smartphone and tablet vendors exclude Google Search, or pre-install a default version of a different search engine, Google dominance is likely to continue on mobile devices.
Larry Ellison: The big thing was the Internet. Right now, our daily lives are on the Internet or the social network. For a very long time, we've known how much you earn, what clothes you recently bought, because we had your credit records. That was the single most important database in the world. It tracked every consumer and everything they were doing. Now we can track not only what you're buying, but what you're saying about them. We know who your friends are, and what you're saying to your friends.
We suddenly have consumers instrumented, because they are willing to share their information. Consumers just tell us everything about themselves. Every time you make a comment or tweet, all of this stuff, we have all this detail of people's lives online, which allows us to market things and sell things and service the consumers in a more insightful way.
Oracle (ORCL) CEO Larry Ellison's comments during the recent D10 conference, indicate the potential of the internet, social networking, and search engines. What Google learns from searches are patterns of behavior about things people find interesting, and what they want to buy. This is incredibly valuable information for nearly any company in the world today. The only country where Google does not dominate search is China, where Baidu (BIDU) dominate. That may not be a bad situation as Google continues to fight anti-trust charges in Europe where Google controls over 94% of the search engine market, compared to just over 1/3rd of the Chinese search market.
Google has little room to grow in search, and it may be a disadvantage for Google to attempt to grow search further, considering the potential for more anti-trust litigation due to market dominance. Just Google It is now ubiquitous in many cultures. It makes sense that the next areas of expansion for Google are software and hardware.
The greatest software success so far for Google has been Android. At first this was accomplished through partnerships with smartphone vendors, who chose Android to launch new mobile devices. After a few years of Android, the platform has grown to surpass all other smartphone operating systems. Nielsen recently compiled subscription information to show devices in use in the United States (chart and link below). Subscriber data is different than market share data, which only tells us about new device sales.
The relevance of the subscriber data over market share data, is that Google gather information about usage trends amongst Android users, but do not directly generate revenues from Android. Microsoft generates some revenues from Android smartphone vendors, with estimates of 70% of Android smartphones sold in the United States coming from vendors with licensing agreements with Microsoft. Microsoft stand to gain more revenues directly from Android, though that was never the intention of Google. Mobile search is still considered to be more valuable to Google.
Pew Internet research recently published a usage study for mobile phone internet trends. In this study published in June 2012, Pew Internet found that 31% of mobile internet users primarily go online through their mobile phones. Mobile phones are convenient and always available, are simple and more effective for basic internet activities, and fill access gaps for users who would otherwise not have any connection to the internet. In a way, smartphones can help bridge the digital divide, as Pew Research found that United States smartphone users making under $50k a year, and without a college degree, are more likely to use a mobile phone for internet access.
According to Chitika Insights, smartphones and tablets now comprise about 1/4th of all web traffic, based upon hundreds of millions of ad impressions in the United States and Canada. Apple (AAPL) iPads comprise nearly 9 out of 10 impressions amongst tablets, and around half of all smartphone internet traffic, implying that those device users are more likely to be accessing the internet more often. The link to this data is updated every 24 hours, though this usage pattern has remained fairly steady. Despite the proliferation of Android devices, Google could do better amongst mobile internet users.
Google's Eric Schmidt recently spoke in Sun Valley, Idaho. While he did not classify Google as a hardware company, he did show off many of the latest Google branded devices. I suspect Google will continue to generate more revenues from higher margin advertising tied to search and software. The more recent moves to hardware have the potential to invigorate the Google brand, and make it even more popular. The Motorola acquisition was definitely a move to hardware, yet Google branded devices are still separate from Motorola devices. Many analysts suspect that Motorola was bought for the patents, as a way to combat Apple in the courtroom. Unfortunately for Google, Microsoft has been successful in gaining an injunction against certain Motorola devices in the United States. There are many lingering doubts concerning Google's hardware strategy. Some of that is due to a lack of clarity on future hardware spending. This hardware strategy may be coming at an opportune time for Google, given that slowing developed economies often experience reductions in advertising spending. I don't expect Google branded hardware revenues to make up for any potential shortfall in advertising revenues in the near future.
Google co-founder Sergey Brin launched an impressive publicity stunt at the recent Googe I/O developer conference. The introduction of Google Project Glass to developers, involved a live first person video viewpoint of skydivers jumping out of an airship, then landing on the roof of the Moscone Center, a hand-off to bicyclists doing stunt jumps, followed by men rappelling down the side of the building, another hand-off to more bicyclists, who then peddled their way into the main presentation room. It was a stunt that could've gone wrong at any point, and a huge risk with a live video feed, but everything went smoothly. While the stunt, Google+ video feed, and product intros were impressive, the real accomplishment was in making Google cool. Even if something went wrong, there would've been reason for people to talk about Google. Sergey Brin managed to create excitement for Google, at a time when some investors have been wondering whether the company would cruise along on search revenues.
Beyond geeky tech appeal, with product names like Nexus loosely referencing the movie Blade Runner, other new technologies like those hinted in Minority Report, or self-driving cars as in the movie I Robot, Google is generating brand appeal. It does help that the Nexus 7 tablet, introduced at Google I/O appears to be a resounding hit amongst consumers, with major retailers reporting running out of devices due to demand. Google got it exactly right with the combination of price point, size, features, and software integration. Even a long term self-described Apple lover gave a favorable review of the Nexus 7, declaring that it opens the door to truly mobile computing.
It has been widely rumored that Apple may enter the 7" tablet market. So far those rumors have not been enough to deter purchases of the Nexus 7, nor have they appeared to have swayed investors and analysts. One early victim of the success of the Google Nexus 7, appears to be the Amazon (AMZN) Kindle Fire. Hardware vendors using Android may not like the Nexus 7 either, though they have room to offer more in connectivity over the WiFi only Nexus 7. Manufacturers could add value with more connection ports, additional internal memory, or a slot for removable memory cards. As Microsoft is unlikely to cannibalize Windows tablet sales with Surface, it appears that Google left room for Android hardware vendors to compete.
Apple target obviousness and simplicity in iOS. Arguably Google uses the same approach with Android. There are some power-user features in iOS, though casual users are unlikely to find those in the user interface. After five years of iOS, The Verge note that "The progression of iOS has been a steady drumbeat of new features that often felt inevitable." The basic field of apps and app switching is still there, with only the recent addition of Siri voice interaction. However, it appears that Apple Siri does not work as well as the newest Google Now (video). Google Now is the new voice activated search feature of Android Jelly Bean. Steve Jobs in 2010 claimed that Apple was not a search company, and that the plans for Siri went beyond search. At the time, he felt that other companies "did search well enough". Google Now shows the emphasis is still on search within Android.
Recent moves by CEO Tim Cook appear to push Google out of iOS, though the battle does not end there. After a recent court injunction Apple sent retailers a take-down letter against selling earlier Samsung (OTC:SSNLF) Galaxy Nexus and Nexus 10.1 tablets. This launched a small backlash against Apple, and a response at The Cult of Mac generated a number of negative Apple comments. I don't think there will be a widespread Boycott Apple movement. While Apple may win some concessions in courts of law, they still must stand up to the court of public opinion. If the public moves towards a position not in support of the patent wars by Apple, then it may impact some future purchase decisions. Tim Cook has managed public perception across a few potential crisis moments quite well, though in comparison Google have not needed to deflect similar criticisms.
Holders of shares of Class C capital stock will have no voting rights, unless otherwise required by law. In addition, the New Charter increases the number of authorized shares of Class A common stock to 9 billion (from 6 billion) to accommodate the potential conversion of all shares of Class C capital stock into Class A common stock in connection with a liquidation of Google, and provides for the treatment of shares of Class A common stock in a manner that is at least as favorable as shares of Class B common stock.
At the recent Google annual meeting shareholders approved a stock split. Shareholders at the time of the split stand to gain one non-voting Class C share for each Class A share. This will maintain voting power with Google's founders. Existing share price will be halved to create Class C shares. It's an unusual move for a split, and may put off some investors. No date has yet been announced for the split.
The author in that piece, quoted and linked above, points out that many people see most aspects of things as an either/or proposition. This observation can be quite useful to apply towards investing. The false idea is that in order for one company to gain ground, another company must lose ground. If we apply that to Google and search engines, we might think that searches originating elsewhere must reduce revenues at Google. As long as the number of users expands, revenues should increase. While mobile advertising revenues are currently lower than for desktop, the growth in this segment should eventually increase overall revenues. Mobile ad rates may increase over time as companies figure out more effective mobile advertising. Reductions in advertising spending, driven by macro-economic trends, are more likely to affect Google ad revenues in the future. As Google moves more into hardware, investors can take comfort that the emphasis is still on ad revenues generated through search and related software products. Any weakness in shares due to doubts over hardware, might be a great opportunity for investors to increase positions, or start new positions in Google.
Additional disclosure: I may initiate a long position in AAPL, MSFT, or YHOO this summer.