Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jeremy Glaser | 04-12-2012 05:00 PM

Wide-Moat Search Business Still Google's Growth Engine

The search giant's first-quarter results underscored the fact that even with Android's explosive growth, Google's bread and butter remains its still-fast-growing advertising business, says Morningstar's Rick Summer.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Google reported a 61% rise in first-quarter earnings. I'm here today with Rick Summer, our senior equity analyst who covers Google, for a closer look.

Rick, thanks for joining me.

Rick Summer: Thank you.

Glaser: Let's start with the core of Google search and the text ads the company serves with its search results. What's happening there? Is Google still just driving most of the business from this part of the company?

Summer: Yes, absolutely. This is still primarily a search company. We talk about this a lot, where we really think Google has a big wide moat around the search capability. What we saw yet again, the company has held onto market share, and we're seeing search spending continue to go very dramatically at the same time. We're looking north of 20% growth in search year over year. Google has continued to hold onto its fair share of that and more, in spite of the fact that there's more of a sensitive pricing environment around each individual ad unit at the same time.

Glaser: Even though Google is serving more units, it is actually getting less money for each of them. Is that a trend do you think is going to continue? Is that a long-term threat for the company?

Summer: This is one thing that we really think doesn't matter in isolation. So, when you really think about it, if you and I as an advertiser wanted to spend $100 million on advertising, I as a company am more concerned that you want to continue to spend $100 million. I don't care if I give you 20 ads or 40 ads because ultimately I'm getting conversions for you; I'm getting return on investment for you at the same time.

What we're not seeing is, we're not seeing an advertiser pull back, an advertiser decrease its demand for advertising. Generally speaking, the way the auction algorithm is run, Google can actually tweak what pricing ends up resulting from that and end up changing conversions for the advertiser.

Glaser: So, let's take a look at mobile. Android has also become a large part of the market. Did you get any color on where Android is going and how exactly Google is going to take the Motorola Mobility acquisition and be able to deal with that and keep the rest of its Android handset partners happy?

Summer: Sure. So, I think, there's three things to look at there. I think, one, we didn't get a lot of real significant update around Android. We know activations are just being blown out of the water. They are doing tremendously well, continuing to grow Android market share in the smartphone environment across the globe. We know that's been a real boon for the company.

I think, two, is that we're starting to see from a mobile ad-inventory perspective Google is able to start to present mobile ad inventory to advertisers as unified as a display ad inventory at the same time. So, that becomes interesting not only for Android, but anywhere where Google's AdMob unit is which includes Apple iOS devices.

I think third thing to look at, and this is the first time we've really heard a lot of allusion to this, is that CEO Larry Page started to talk about tablets and the importance of tablets. More importantly, he mentioned that Google feels that low-end tablets are going to be real beneficial for Android. So, we're going to see cheaper-priced tablets in a place where Apple as of yet has not come as a premium price device maker at the same time. Is this Google's strategy longer term? That will be interesting. In the acquisition of Motorola Mobility, that is certainly not the cheap device maker at the same time; Motorola's always come in as a premier device maker. We don't think that that's what Google means when it's talking about that.

For Motorola Mobility, there was not a lot of update there. The companies are still planning on closing in 2012. We're having a little bit of review going on in China for them to be able to prove that acquisition.

Read Full Transcript

{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: