Google Is Making Itself a Lot Leaner and Meaner

With Google unshackled from Motorola, the Internet giant can focus on its next generation products and services

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Andrew Kelly / Reuters

Google's logo is seen at the company's New York City office.

First, Google cracked the code on Internet search. Then the company used its search platform to build the world’s largest online advertising business. Now, the Silicon Valley icon is turning its attention toward streamlining its business to focus on next-generation hardware and services, particularly in the mobile space. Judging by Google’s latest earnings report, the company’s core business remains robust, as the Mountain View, Calif.-based cash machine posted strong sales and profit growth on Thursday, sending its stock price surging more than 4% in after-hours trading to an all-time high for the second consecutive quarter.

Scott Devitt, a technology analyst at Morgan Stanley, believes Google’s stock price could rise even higher “as investors gain confidence that social networks are less of a threat than feared, mobile is more incremental than cannibalistic, and video becomes a more interesting story. Google’s history of innovation suggests a reasonable opportunity to capture meaningful share in travel, local, or other new areas,” Devitt wrote in a note to clients after the earnings report. Google shares have increased by more than 60% since the beginning of 2013.

Google posted a 17% increase in sales and a 17% increase in profit, as Internet users flocked to the company’s online ads in search of holiday bargains. A new type of ad, one that incorporates pictures of the product for sale, was particularly successful for Google. Revenues from these ads, called product listing ads (PLAs), are growing faster than traditional search ads, according to a new study by Adobe, which found that the price marketers paid each time a user clicked on a PLA rose 80% over last year, compared with 11% for conventional search ads, which still constitute the bulk of Google’s ad business.

Google, which is sitting on nearly $59 billion in cash, said it earned profit of $3.38 billion, compared to $2.89 billion one year ago. Excluding certain items, Google earned profit of $12.01 per share, which was below Wall Street expectations of $12.20. One factor that contributed to the weaker-than-expected profit number was deepening red-ink at the company’s Motorola Mobile division, which reported a loss of $384 million compared to a loss of $152 million in the fourth quarter of 2012.

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The Motorola division’s negative impact on Google’s earnings may have actually been one reason why Wall Street analysts and investors seemed to shrug off the company’s mild profit miss. This week, Google announced plans to sell Motorola’s handset business to Chinese technology titan Lenovo for nearly $3 billion. From a strategic perspective, the deal makes sense because it removes a major albatross from around Google’s neck and allows the company to focus on its core business and cutting edge research projects. From a financial perspective, the Motorola sale will boost Google’s earnings per share by removing a money-losing division.

Google’s mobile strategy has never been about the mass production of mobile devices, but rather the creation of a mobile ecosystem powered by its Android operating system. In that respect, Google has been wildly successful: Android is by far the world’s leading mobile platform, with an astonishing 81% market share, according to research firm IDC. Apple’s iOS platform is a distant second with 12.9% market share, a figure that is declining.

But like all Internet advertising companies, Google continues to grapple with the fact that marketers tend to pay less for mobile ads, which can be less appealing for users to click than desktop ads. That’s one reason why Google’s “cost per click,” the price marketers pay to advertise on the company’s platforms, decreased by 11% from last year as mobile advertising accounts for a growing share of its business.

On a conference call with Wall Street analysts, Google CFO Patrick Pichette urged analysts to look at Google’s business more holistically. “Rather than to speak about mobile and only mobile, it’s really about living with the user,” said Pichette. “And once you think through living with the user, supporting our users across all their day, whether it would be on a TV, whether it would be on a mobile phone, whether it would be on the desktop, whether it would be with Google Glass wearables, that’s really the aim that we’re actually shooting for.”

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As part of the Motorola sale, Google will maintain ownership of about 15,000 of the 17,000 patents it acquired during the original purchase. “Google retains a superior patent portfolio and is now well-insulated against future intellectual property attacks, in our view,” Devitt wrote. Jeffries tech analyst Brian Pitz added: “These patents serve to defend both Google and its Android partners from lawsuits, and as such maintaining patent ownership is critical. We have always maintained that Google was more interested in owning Motorola’s patent portfolio than its hardware business.”

The sale also restores Google to its role as a neutral entity in the Android ecosystem. After Google purchased Motorola, there was concern that Google might favor its new division at the expense of other Android partners, like Samsung. That’s why Apple couldn’t fully leverage the Motorola business without the risk of alienating crucial Android partners, lest they embrace one of Android’s operating rivals. “Overall, Google’s exit from the handset business should strengthen Android by reducing the risk that handset makers will deploy competitive operating systems,” Pitz wrote.

There are already signs that Google and Samsung are growing closer, which is important considering that Samsung is the world’s largest smart phone maker, with 32.3% of the market, according to research firm Strategy Analytics. Earlier this week, Google and Samsung signed a major, 10-year cross-license patent deal that will allow the companies to share technologies. Samsung has also reportedly agreed to dial-back efforts to introduce its own apps on Android devices, and instead will highlight Google’s suite of native Android apps.

Now, rather than get bogged down in the increasingly mature and highly competitive smart phone device space, Google can focus on newer markets where it has a head start, from the Google Glass wearable computing product to smart-home devices through its recently announced acquisition of Nest to self-driving cars and robots. Analysts have occasionally expressed concern that these efforts could divert focus and resources away from the company’s main mission, but with Google’s core business firing on all cylinders, investors seem content to let the company pursue these projects.