FE Editorial : The Google shock

Written by The Financial Express | Updated: Oct 20 2012, 06:35am hrs
Googles problems are more incidental than systemic

A large part of the reason behind Wall Streets adverse reaction to Googles third quarter resultsGoogles stock was down 8% at the end of Thursdaywas likely the shock of seeing numbers that fell short of expectations after a long time, exacerbated by the inadvertent early release of the result, which, analysts say, spread confusion. The numbers themselves are not so bad. Googles third quarter revenue rose to $14.1 billion, up 45% over the same quarter last year, but net income fell to $2.18 billion from $2.73 billion. What must be kept in mind here is that this was the first quarter Google incorporated results from its recently-acquired Motorola Mobility business. It bought Motorola Mobility for $12.5 billion, and it should come as no surprise that Google has so far been unable to turn that business around; it hasnt been one of the search giants focus areas. As it is, Motorola Mobilitys quarterly loss of $527 million was a large drag on Googles numbers. But that shouldnt be too worrying. Google bought Motorola primarily for its hardware capabilities and patents; the long-term plan, analysts say, is to use these to create Googles own phone. Thus, Motorolas real value to Google doesnt come from how much it can earn (though Google wouldnt mind if it could pull its own weight) but from what value additions the acquisition of the company can make to Googles long-term plans. These are monetarily unquantifiable at the moment, but be sure that Google is extracting value nevertheless.

The second area of concern for Googles investors is declining ad rates, referred to as cost per clickthese numbers fell 15% y-o-y. But this, too, cannot have come as a surprise since this is the fourth consecutive quarter that Google has reported declining costs per click. In addition, the declining costs were somewhat balanced by an increasing number of paid clicks on ads, which climbed 33%. The reasoning behind this is that an increasing number of people are accessing Googles services through their phones, and mobile ad rates are lower than their PC counterparts. Google CEO Larry Page acknowledged this, but said the variety of internet-connected devices people were using is creating a vastly expanding universe of opportunities for advertisers. In other words, scale will make up for lower costs per click in the future.