Corporations are allegedly people. As such, Google Inc. (GOOG) is the biggest egomaniac on the Fortune 500 block. The Google business model calls for it to effectively download the Internet, track our every move as individuals, and operate as a broker-dealer between consumers and producers. Google's dominance of search, of course, is obvious and well documented. With search well under lock, stock, and barrel, Google is a juggernaut with the means to throw its weight around the Web 2.0 sector. To this point, "Do No Evil" Google marries the operational excellence of Microsoft, alongside Silicon Valley idealism.
In the case of Android, Google's smug "Do No Evil" campaign is ironically backfiring as narcissistic elitism that harms shareholders. Despite Android's popularity, Google has yet to generate significant revenue from this platform. Google is literally giving the Android barn away for free, in its Don Quixote quest to preserve the world from the Apple Inc. (AAPL) threat.
Apple iOS - Google Android Phone War
Behind its effective "I'm a Mac. I'm a PC" campaign, Apple inadvertently fired the opening salvo in this iOS-Android war. In this series of advertisements, Apple personifies itself as a young and personable hipster. The Apple brand is chic, yet professional and eager to help. Alternatively, Microsoft is a bespectacled geek in a tweed suit. Microsoft is a corporate relic that cannot get out of its own way.
Airing between 2006 and 2009, these commercials marked a changing of the guard for consumer electronics. Rather than a pure play for technocrat functionality, Silicon Valley must now make a broad based, consumer-friendly appeal to the market. In laymen's terms, technology must be "cool." Warren Buffett describes cool as a "moat," whereas Wall Street defines cool as "goodwill" on the corporate balance sheet.
Over the past decade, Apple assumed command as the alpha technology enterprise. The iPod, iTunes, iMac, iPad, and, of course, the iPhone form a closed-circuit loop of integrated products that reinforce Steve Jobs' halo effect. The iPhone is arguably the most important link within the Apple food chain. As a mini-computer, the iPhone functions as a telecommunications, entertainment, and work device. In its latest report for quarterly period ended June 30, 2012, Apple reveals that it sold 26 million iPhone units during Q3 2012. These iPhone sales calculate out to $16.2 billion revenue, which is nearly half of Apple's $35 billion in total sales. By all measures, the Apple iPhone enjoys more than 25% year-over-year growth. This party is likely to continue into next year, as the iPhone 5 launch looms prior to this Holiday Season.
Away from the Apple Store nightclub, the Samsung - Android matrix has quietly emerged as the world's leading handset platform in units sold. According to research firm IDC and its August 8 report, Google's Android operating system now captures a 68% share of the smart phone market. Taken together, the Google Android and Apple iOS duopoly now maintain a stranglehold over 85% of all smart phone sales. Lastly, Nokia (NOK) Symbian, Research in Motion Blackberry (RIMM), and Microsoft (MSFT) Windows desperately fight over the remaining scraps at the telecommunications table.
Cheerleading analysts, such as Jay Yarow, describe Google's Android investment as a defensive move. Android effectively blockades against an Apple iOS monopoly, while also providing another platform for Google to penetrate mobile and develop search technologies. Cynics, however, will dismiss Google's Android division as a money pit that is merely a lower-grade Apple copycat.
Android Phone Specifications
Similar to Microsoft, Google offers its Android operating system across multiple hardware platforms. Google executives keep their Android software "open," in order to accommodate tech geeks who revel in writing and sharing code for creating customized applications. At present, the Samsung Galaxy SIII is the premium Android phone. As such, this phone serves as the best example of Google - Android operating system firepower. Over time, it is obvious that Android and iOS specifications have converged together.
The Samsung Galaxy SIII packages Google Search, Maps, Play, G-Mail, Plus, and YouTube as pre-installed programs. This phone features an 8 mega-pixel camera and video playback at 1080p. For web browsing, the Samsung Galaxy SIII can connect to 2.5G, 3G, and 4G networks. Similar to Samsung's Olympic track relay campaign, the Galaxy SIII has the vertical look (Physical Dimensions: 134 x 71 x 9 mm) of a baton. Despite its size, Galaxy's plastic components lend the device a somewhat flimsy feel. Verizon Wireless offers the Galaxy SIII for $199 (16GB Memory) and $249 (32GB Memory), if you agree to the terms and conditions of a two-year contract with this carrier. Without a contract, unlocked Samsung Galaxy SIII phones cost $699 and $799 for the 16GB and 32GB versions, respectively.
In many respects, the Apple iPhone 4S is eerily similar to the Samsung Galaxy. In terms of physical dimensions, the iPhone 4S is 4.5 inches (115 mm) high by 2.3 inches (59 mm) wide by four-tenths of an inch (9 mm) deep. The iPhone is notable for its metal and glass components. Easily palmed, Apple's iPhone is a structurally sound device for taking phone calls, navigating icons, and firing off text messages. Technical specifications also include one 8 mega-pixel camera alongside video playback at 1080p. Apple's sleek phone features both iTunes and Google Maps as pre-installed programs. Verizon Wireless offers the Apple iPhone 4S for $199 (16GB Memory), $299 (32GB Memory), and $399 (64GB Memory), if you agree to the terms and conditions of a two-year contract. Without a contract, the unlocked Apple iPhone 4S retails for $649, $749, and $849 for 16GB, 32GB, and 64GB versions, respectively.
The Apple iPhone 5, of course, is likely set for release prior to the 2012 Holiday Season. Sprint has already begun to offer the iPhone 4S at a discount, in anticipation of the iPhone 5 launch event. I must speculate that the iPhone 5 will therefore retail at similar price points to the Samsung Galaxy SIII. According to Jeff Bertolucci and Information Week, processing speed improvements of Apple's A6 for the iPhone 5 above the Samsung Galaxy SIII "won't be too dramatic."
With billions of dollars on the line, it was inevitable for Apple and Samsung to hire lawyers, subpoena evidence, and declare war in the courts. In a flurry of activity, both parties have filed lawsuits and countersuits to accuse each other of patent infringement concerning phone and software interface design. On August 24, a California jury ruled in favor of Apple and ordered Samsung to pay Apple $1.05 billion in damages. Samsung is expected to appeal this decision that effectively bans its smart phones and tablets from the U.S. market.
Ultimately, a loss for Samsung further threatens the Google-Android business model. Google would then be guilty by association; and its smart phone software engineers will be forced to beat a retreat back to the drawing board.
The Bottom Line
In 2005, Google acquired the then obscure Android start up for an estimated $50 million. According to David Lawee, Vice President of Corporate Development, this buyout of Android was Google's "best deal ever." Although this price tag is admittedly cheap, I would argue that Google include its May 2012 $12.5 billion Motorola acquisition within any Android purchase costs. According to David Goldman and CNNMoney, Google now carries prospective rights to roughly 25,000 patents as a result of closing the Motorola deal. For Google, this Motorola buyout was clearly a calculated and defensive move to protect its Android interests against lawsuits. Analysts speculate that Google is not likely to create newly integrated hardware and software through this Motorola division.
Google has yet to provide detailed financial results of its Android business. Interestingly, Google does offer its Android operation system to original equipment manufacturers (OEMs) for free. This playbook would call for Google to aggressively mine information and adjust its search technology accordingly to accommodate a slew of new customers. A detailed analysis by Horace Dediu, however, calculates shockingly bleak figures for what he terms "Android Economics."
According to Dediu, Google clocks $2.75 in profits on every Android device sold every year. This miserly pittance trickles down towards Google's $9.7 billion bottom line after numerous players within the Android ecosystem take their cut out of a 40% revenue share model. Charles Arthur and The Guardian calculate that "Android generated less than $550 million in revenues for Google between 2008 and the end of 2011." For 2011, Google is posting $38 billion in total revenue.
Charles Arthur cites Google's settlement offer to a pending Oracle lawsuit as basis for his estimated Android financials. To add insult to injury, Google actually collected more than $2 billion in revenue from its Apple iPhone applications during the same four-year period.
In the aggregate, Google is losing billions of dollars on Android, while also antagonizing Apple. To date, Apple is Google's most formidable economic partner in the smart phone market. In retaliation for the bitter Samsung rivalry, Apple will develop new applications that minimize Google's presence on both the iPhone and iPad. Ironically, Google's insatiable ego has jeopardized its best growth opportunities into smart phone and tablet devices. Mobile has already destroyed the Web 2.0 bubble for Facebook (FB), Pandora (P), Yelp (YELP), and GroupOn (GRPN) investors. Going forward, the mobile revolution threatens to transform Google shares into a long-term beta investment tracking the S&P 500.
At $678, Google shares trade for 21 times earnings. After flat lining between 2007 and 2008, Google's profit growth has decelerated quickly from 54% to 31% to 15% over these past three years. Super investor Peter Lynch, who covets a price-to-earnings-to-growth (PEG) of one, would describe Google stock as fairly valued. For the sake of comparison $660 Apple stock changes hands at fifteen times earnings, despite the fact that this business is averaging 66% annual profit growth over the past for years.
For Q3 2012 report, Apple posted $117.2 billion in cash and investments on its balance sheet. Broken down further, this calculates out to $125 in cash and investments on a per share basis. Day by day, Apple's liquidity hoard increases, as evidenced by the $41.7 billion in cash generated by operating activities during the last quarter. These superior financials are largely due in part to Apple's leverage of integrated smart phone components, at the expense of the Google-Android model.
Apple remains the unquestioned alpha investment of the technology sphere.
Disclosure: I am long AAPL.