Google’s hardware ambitions proving costly

October 18, 2012

By Robert Cyran

The author is a Reuters Breakingviews journalist. The opinions expressed are his own.

Google’s hardware ambitions are proving surprisingly costly. The search giant paid $12.5 billion for Motorola’s handset business. The division lost another $527 million in the third quarter and the mistaken early release of unexpectedly weak earnings knocked over $20 billion off Google’s market capitalization in afternoon trade. A bigger concern is the risk of long-term management distraction.

While no company wants to release an earnings statement that begins “PENDING LARRY QUOTE” in the middle of a trading day, Google doesn’t appear to be at fault. It blames RR Donnelley, the financial printer. But the search giant can’t point the finger at anyone else for the awful results inside. Earnings fell 20 percent from a year ago to $2.2 billion.

So far, Google’s big bet on hardware isn’t paying off. Not only is Motorola losing sizable chunks of cash, but sales are shrinking. Turning around the division will not be easy since, unlike much-larger rival Samsung, it can’t harness huge cost efficiencies. Revamping the business will also take time, making Motorola a likely drag on profits for several quarters.

That could take management’s eye off a more pressing problem: Google’s ad business. The number of people clicking on its ads rocketed 33 percent compared to last year as more and more users perform searches on cellphones and tablets. But Google, like Facebook, still hasn’t entirely figured out how to get advertisers to pay more for mobile hits. The amount paid per click fell 15 percent over the past year. That dragged down net ad business revenue growth to about 17 percent, or roughly half the rate of clicks.

Getting advertisers to pay more for mobile would supercharge Google’s ad business. Unfortunately, Google executives have plenty of other messes to sort out, such as fixing the phone business – and finding snappier quotes from Chief Executive Larry Page.

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