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Hot Stocks: Google’s Drive for Dominance Extends Into the Burgeoning Smartphone Market

Source: http://www.moneymorning.com/2009/11/03/google-dominance/
 Posted on Tuesday, November 3rd, 2009 | In Investing Lessons
Contributed by: Money Morning (http://moneymorning.com) -

By Bob Blandeburgo
Associate Editor
Money Morning

Google Inc. (Nasdaq: GOOG) was founded in 1996 and went on to become the undisputed king of Internet search and advertising. Ten years later, it brought its ubiquitous search engine to mobile phones with the launch of Google Mobile.

And now, with the proliferation of smartphones, Google is pursuing a broader range of mobile initiatives that will make it a leader in mobile software and take its advertising business into territory that so far has been uncharted.

Google’s original business model, as it applies to its trademark search engine, was to give away a product and have it funnel users to its targeted ads. Last year, the company built on that model by giving away its operating system (OS), Android, to any wireless handset maker that would have it.

So far, Android has only appeared on 12 phones worldwide since its launch a little more than a year ago. But according to industry analysts, that’s just the beginning.

Market research firm Gartner Inc. (NYSE: IT) expects Android to appear on 14.5% of all mobile phones by the end of 2012, second in market share behind Nokia Corp.’s (NYSE ADR: NOK) Symbian OS, which the firm predicts will command a whopping 39% of the market. Apple Inc.’s (Nasdaq: AAPL) iPhone OS will be third by that time with 13.7%, while Microsoft Corp.’s (Nasdaq: MSFT) Windows Mobile will be fourth with 12.8% of the market.

Gartner predicts Research in Motion Ltd.’s (Nasdaq: RIMM) BlackBerry OS, currently No. 1 in the United States and No. 2 in the world, will fall to fifth place with a 12.5% market share.

“Android adoption is literally about to explode,” Google Chairman and Chief Executive Officer Eric Schmidt told analysts in a conference call last month. “You have all the necessary conditions: You have the vendors, you have the distribution, and so forth.”

Here’s how Android is igniting that “explosion:”

  • Open source code: Android, based on a Linux kernel is distributed for free to handset makers, which then can customize it any way they wish. This gives handset makers a way to differentiate their Android phones from others.
  • Developer appeal: With a growing number of handset makers using the platform and availability on almost every wireless carrier in the world, the Android Market – Google’s equivalent to Apple’s App Store – will have the broadest reach. Also, there’s no cost of entry for developers, unlike the $99 Apple charges or the $200 RIM gets.
  • Consumer appeal: Just like developers, the wide availability of Android on numerous phones and carriers will draw consumers looking for an alternative to the iPhone. Currently the number of apps in the Android Market pales in comparison to the App Store – 10,000 versus 85,000 – but the gap should narrow over time as more consumers and developers embrace the platform.
  • Advertiser appeal: Google is already synonymous with desktop search, and the growing number of mobile web users will look to a familiar name to find what they need on the Internet, as well as what’s around their area. The company is also starting to integrate its popular targeted ads into the free apps distributed on Android Market.

While Android isn’t the first platform for Google’s numerous free properties to appear, it’s the leading candidate to be the one that drives Google’s growth to the next level.

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Google’s software as a service (SaaS) model has rivals like Microsoft perplexed.

“I don’t really understand their strategy. Maybe somebody else does,” said Microsoft Chief Executive Officer Steve Ballmer at a conference last year. “If I went to my shareholder meeting, my analyst meeting, and said, ‘hey, we’ve just launched a new product that has no revenue model!’…I’m not sure that my investors would take that very well. But that’s kind of what Google’s telling their investors about Android.”

Ballmer contends that wireless carriers would ask to be paid to carry Google’s search, but since that statement, there’s been no mention of such actions.

The Google Mobile Effect

Google’s aim is to put all of its products in consumers’ pockets, purses or belt clips, and it’s not just limited to search.

Last week Google revealed it was working on a free navigation application for the latest version of Android to be released on Friday. The news forced shares of GPS giants Garmin Ltd. (Nasdaq: GRMN) and TomTom NV down 16.4% and 20.8% respectively.

Of the plethora of products Google is bringing to Android the one that has the most potential is Google Docs, which gives users access to word processing, spreadsheet and presentation programs.

Google is selling licenses to use Docs to companies for $50 per user per year, which it says is one-third the cost of competing applications. Google Docs can be viewed through Android’s built-in Web browser, but so far only spreadsheets can be edited.

The company’s working on giving Android users full functionality enjoyed by computer users. Google’s advantage will be in the cloud, which it is positioning as a more efficient way of working, since it prevents two different copies of the same edited file from being e-mailed among employees.

Similar mobile platforms such as BlackBerry and Windows Mobile already offer the ability to edit files through their phones, but still require users to e-mail them to one another. Google’s competitors all have cloud initiatives, but Google has a head start – and the momentum.

“Inherently, Android is tailor-made for enterprise business of its open platform,” Jason MacKenzie, vice president of North America operations at HTC Corp. told The Wall Street Journal.

Google Your Neighborhood

Internet searches are becoming more local, and Google knows this.

If an Android user searches the phrase “pizza” using Google’s mobile search, the results will not only yield every pizza shop in the area but also highlight any paid advertisement by shop owners.

Roughly 97% of Google’s revenue comes from its targeted ads, and its foray into mobile searches – not just on Android – could keep that number high for the foreseeable future.

“Advertisers are seeing 10 [times the] increase in click-thrus via mobile devices,” Citigroup Inc. (NYSE: C) analyst Mark Mahaney wrote earlier this year. “Mobile search activity is ramping fast this smartphone summer, and ad dollars are following.”

While Google is already dipping its toes into the local advertising waters, rising sales of smart phones bode well. Adoption of smartphones – which are more Web-friendly – is on the rise, despite a slumping overall mobile phone market.

While sales in the overall mobile phone market fell 6.1% in the second quarter, smartphone sales grew 27%, according to Gartner.

Smartphones represent a new avenue for consumers and businesses to use the Internet, and Google CEO Schmidt reiterated his company’s SaaS stance when an analyst asked if there was no opportunity for it to make money despite development costs.

“For example, our Android product, there are many other pieces of technology that Google builds and the rough argument is that we do things that are strategic because they get people to ultimately use the Internet in a clever and new way,” Schmidt said. “We know that as they use the Internet more, they ultimately search more or watch more on YouTube and we then know that our advertising works in a particularly strong and targeted way.”

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