With Google (Nasdaq: GOOG ) Chrome as the new No. 2 browser in the world, trailing Microsoft's (Nasdaq: MSFT ) Internet Explorer but quickly closing the gap, the elephant in the room is what the search giant should do with Mozilla Firefox.
Nonprofit Mozilla derives the vast majority of its revenue -- 98% last year -- from search partners including Google, Bing, Yahoo! (Nasdaq: YHOO ) , Yandex (Nasdaq: YNDX ) , Amazon.com (Nasdaq: AMZN ) , and eBay (Nasdaq: EBAY ) .
It's like having a rich uncle...
In Mozilla's recently released 2010 annual report, the foundation indicates that 86% and 84% of royalty revenue came from one contract in 2009 and 2010, respectively. Mozilla separately confirms that Google is its largest contract. Last year's royalty revenue was $121.1 million, and quickly drawing my handy scientific calculator -- the one I keep holstered at my side at all times -- shows us that adds up to approximately $101.7 million coming from Big G.
This contract expired last month, and Mozilla has opted not to confirm whether this contract was renewed. Instead, it provides a frustratingly vague statement: "We have every confidence that search partnerships will remain a solid generator of revenue for Mozilla for the foreseeable future."
...who has always wanted to kill you
At the end of last year, Firefox had $34.9 million in cash and equivalents and $105.7 million in investments on the balance sheet, and ran through $87.3 million in total expenses. Software development expenses comprised $62.8 million of that last year, up from $40.2 million in 2009, as the browser wars have been technologically escalating.
If Google decides not to continue handing down nine-figure paydays, would Firefox be dead? This question is especially timely since fellow Fool Tim Beyers points out that Microsoft isn't Mozilla's worst enemy -- it's Google.
Let's assume for a moment that Google bails on Mozilla's contract. That's a gaping multicolored hole on its income statement, one that's large enough to cripple Mozilla. While $100 million may be but a drop in Google's bucket, which brought in $9.7 billion gross revenue last quarter, that figure is the majority of Mozilla's entire bucket.
Would any of Mozilla's other search partners step up to foot the bill?
Time to get a new rich uncle
Microsoft Bing has already lost billions getting up and running. The company's online services division, which includes Bing, is slowly narrowing its losses; it lost $494 million last quarter, down from $549 million in red ink a year ago. According to comScore's October figures, Bing carries a 14.8% market share, lagging Yahoo!'s Bing-powered 15.2% and Google's 65.6%.
Microsoft can certainly afford to take Google's place funding Firefox, but the question is whether it should. Just when Mr. Softy's online services division losses start to stabilize, expanding its partnership with Mozilla would reverse that trend and make the division's red ink even brighter.
Yahoo! has enough problems of its own to deal with, from running around with its head cut off to fending off AOL (NYSE: AOL ) CEO Tim Armstrong's advances, who keeps trying to go steady (no means no, mister!). Armstrong's nuptials aside, Yahoo! might even be considered the prettiest girl at the ball if the recent round of Microhoo rumors are to be believed.
While Yahoo! technically has enough cash to consider stepping up, finishing last quarter with around $2 billion in cash, equivalents, and short-term investments, it also saw its revenue shrink by about a quarter. Yahoo! has already agreed to let Bing be a backseat search driver anyway, so it's hard to imagine that the company could justify picking up where Google left off.
Itchy trigger finger
At this point, it should be pretty clear that Google has its finger on the Mozilla switch and could easily turn off the development spigot at its discretion. Doing so would give search rivals an opportunity to come in and buy the precious spot as Firefox's default search engine.
Microsoft is the only one that would presumably come to the rescue, but that's far from a sure bet. At that point though, the Redmond giant would be better off just buying Mozilla, letting it continue its own development path, rolling it into the online services division, and conveniently steering people toward Bing search. I doubt Microsoft would easily relinquish more than 15 years of IE branding, but a Fool can dream, can't he?
If no one stepped up, Firefox would eventually die a slow and painful death as development halted and users slowly migrated from a stagnant browser to the shiniest version of Chrome. It may see its search market share flinch slightly as Firefox swirled down the drain, but the long-term result would be one less contender. Ultimately, Google should pull the trigger and put an end to Mozilla's successful seven-year run. Next stop: becoming the browser king.
Add Google to your watchlist to see if it takes out Firefox and becomes the browser king. Google Android is helping drive the mobile revolution; get access to this free report on a handful of component suppliers that are winning from the mobile revolution.