Google-Motorola: Can This Marriage Be Saved?

Stock plunge, premature earnings release, Motorola's losses, what more could go wrong for Google?

To say that yesterday was not a good day for Google would be a gross understatement. RR Donnelly, its financial printer, released Google’s Q3 results in the middle of the day (East Standard Time), rather than after the markets closed. In addition to the embarrassing snafu, Google’s profits were well below expectations. Since Wall St. hates surprises, the double whammy caused the company’s stock price to decline 8% on 6 times the normal volume. 

Much of the media attention is focused on the weakness in advertising revenue. Total activity is up, but the cost per click is declining, in part driven by the move to mobile, which commands a lower price and potential competition from Facebook. Only a few analysts and reporters focused on the more than half a billion dollar GAAP loss from Motorola this quarter. 

I have been consistently (since its announcement) saying that the Google-Motorola wedding was not a match made in heaven (read the original blog here). My analysis focused on how Google’s poor track record with hardware, its potential conflict with its customers and how the cultures did not fit. (Yes, I may be wrong in the long term if Google can successfully expand its Kansas City gigabit fiber experiment nationwide and have a captive market for its CPE, but that is a big if). 

The company’s results to date have been validating my position. The Home segment was down over 3% Y-Y, which will likely reinforce its market share losses. Interestingly, my comments about the Home segment were more pronounced for the mobile segment, which was down 27% Y-Y this quarter. Since I do not focus on mobile handsets directly, I did not write much about the mobile segment. In hindsight, this is not a surprising outcome given how competitive the handset space is and how aggressive Samsung has been in its battle with Apple. 

Year-to-Year Change	3Q11	4Q11	1Q12	2Q12	3Q12
Home	-9.5%	-10.3%	-2.2%	-8.4%	-3.4%
Mobile	19.7%	4.7%	3.1%	-24.7%	-27.0%

Google is facing serious issues in its main business and the distractions of a half a billion loss from Motorola, weakness in the handset business, and the slow decline in the home segment are not helping it financially or strategically. Maybe it is time for a divorce? 

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David Dines
ddines@acgresearch.net
www.acgresearch.net