Google’s problems are more incidental than systemic
A large part of the reason behind Wall Street’s adverse reaction to Google’s third quarter results—Google’s stock was down 8% at the end of Thursday—was 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. Google’s 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 hasn’t been one of the search giant’s focus areas. As it is, Motorola Mobility’s quarterly loss of $527 million was a large drag on Google’s numbers. But that shouldn’t 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 Google’s own phone. Thus, Motorola’s real value to Google doesn’t come from how much it can earn (though Google wouldn’t mind if it could pull its own weight) but from what value additions the acquisition of the company can make to Google’s 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 Google’s investors is declining ad rates, referred to as cost per click—these 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 Google’s 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.