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How much money is Google (Nasdaq: GOOG ) making off Android? What's Google's greatest untapped opportunity? Does Google need to work on its connections? I recently asked Michael Copeland, author of the Fortune cover story, Google: The Search Party Is Over.
Mac Greer: According to some new Nielsen numbers this week for Q2, Android now represents around 27% of new smartphone purchases in the U.S., compared to 23% for the iPhone. And yet in the article, you make the point that Android generates "scant" revenue. Why isn't Google making more off Android?
Michael Copeland: Well for one, they license the Android operating system for free, so they give it away to handset manufacturers to use. Then those handset manufacturers can do what they want with it, so even to the point where they could make Bing the default search engine on an Android phone if they wanted to do that, and there is some discussion of carriers and handset manufacturers doing that. Google tries to make money off of Android via mobile search and it could make money in the app economy if people are buying Android apps. But even Apple (Nasdaq: AAPL ) doesn't make a whole lot of money on apps yet.
It is a volume business for Google, but they need to get the mobile search part right, and none other than Steve Jobs commented recently that they are finding that people do fewer searches on iPhones. What they're doing is using apps instead. I asked Marissa Mayer at Google whether they are seeing that with their kind of mobile efforts, and she is saying, well no, we don't see searches going down. But clearly people do fewer searches on mobile devices than they do sitting at their desktop, and there are different kinds of searches. The question is, can they be monetized as effectively as desktop searching.
Greer: In your article, you said analysts estimate that around 91% of Google's revenue comes from search advertising, and 99% of Google's profits. So far, none of these other Google initiatives have really had much of an impact on the bottom line in relative terms. What do you think Google sees as its greatest untapped opportunity?
Copeland: I think mobile search and Android would be my guess as what they view as their biggest opportunity, and maybe secondarily YouTube and display ads and advertising on video.
Greer: In the article, Tom Coates, who until recently was the head of product at Yahoo!'s defunct Brickhouse lab, said, "Google is very good at building these utility-type products: search, email and messaging. They are sort of like the power company of the Internet, but what they lack is a sense of how people share and collaborate."
Copeland: Yeah, power companies make money, but it is a stolid, boring business that doesn't have a whole lot of growth potential, right? If Google wants to be this growth company that it has up to this point, it needs to find a new engine to really rev that up. I think there is good reason why you want to still be this growth company. Microsoft (NYSE: MSFT ) is the analog and Microsoft, as we all know, had MS DOS, which became Windows. And then they found Office, which was this other second leg of their big growth, and they have been looking for it ever since. When you compare Microsoft on a price-to-earnings multiple, it is somewhere I think around 10, whereas Google is in the high teens, and the reason being is that Google still has got more growth potential than Microsoft, but the question is, is that same compression in P/E ratio that we saw with Microsoft going to happen with Google? There is no reason to believe that it won't, unless Google can find this other big engine of growth or multiple big engines of growth to both satisfy it as a company and satisfy investors.
Greer: And you pointed out in the article that like IBM (NYSE: IBM ) , eBay (Nasdaq: EBAY ) , Cisco (Nasdaq: CSCO ) , Microsoft, and Oracle (Nasdaq: ORCL ) , that Google, and I think the phrase you used was "against its will," is really transitioning into a cash cow.
Copeland: There are still a lot of interesting things going on, but you become like these other great technology companies, which is fine. You start paying a dividend and you are viewed differently by Wall Street and also by people within your industry, within Silicon Valley, so all the cool kids are going to go to Twitter or Facebook or the next thing. OneRiot or Groupon. You lose that kind of psychological momentum, that turns up in your products and before you know it, somebody else is the belle of the ball.
So who is the bigger threat to Google, Apple or Facebook?