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Google: Android Skepticism, Plunging Stock

by: Joel West October 10, 2008 | about stocks: GOOG    

Joel West

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In a part of the world where everyone is either praising or fearing every move of Eric Schmidt and the Monster of Mountain View, Merc columnist Chris O’Brien this morning had a very skeptical column about Google’s new cellphone operating system, entitled “Why we'll all soon forget about Google's Android.”

Citing a Chinese VC’s indifference to the T-Mobile G1 announcement, O’Brien concludes:

[His] response provides a little perspective on the immense hype Android has generated in Silicon Valley. Around the globe, Android is barely a blip on the radar. And that's unlikely to change.

Instead, expect Android to remain the latest in a long list of Google curiosities introduced amid great fanfare, only to quietly fade into the background.

…
But there are several challenges I don't see Android overcoming.

First, it starts off way down the list of operating systems for smart phones. At the top of the heap are BlackBerry, Windows Mobile, the iPhone, and Symbian. This last one is produced by a consortium of the largest cell phone manufacturers in the world, including Ericsson and Nokia.

And it was recently announced that Symbian will become open-source. Throw in the fact that a group called the LiMo Foundation is developing a Linux-based operating system for mobile phones, and Android becomes just one of three open-source options.

Yes, you say, but this is Google. To which I say: Yes, but this is Google.

The company has been churning out countless initiatives in every direction, but they seem to have no coordination. A year ago, it launched the Open Social initiative to counter Facebook. Heard anything about that lately?

Another factor cited by O’Brien is Google’s lack of focus. Quoting CNET, O’Brien notes that in the near future Android will not use Chrome (proving my earlier speculation false). Instead, Google funded two separate WebKit-based open source browser efforts, one for the mobile phone Linux stack and one for personal computers. I read this as Google allowing decentralized innovation without concern for synergy or even code reuse.

O’Brien is now our most provocative local tech columnist, and he raises some excellent points. Still, there’s no way to prove (or disprove) his thesis today. We don’t know if this is the next Maps or News or Gmail — building on its search dominance — whether this is the latest unsuccessful, loosely related diversification effort ala Google Answers or Froogle or Lively.

Of course, as Nick Carr observed, Google still gets ad revenues off of failure. All those gPhone users will be using Google.com and Google Talk and Google Maps rather than their Yahoo or MSN equivalents.

O’Brien is bearish on Android, and some of his larger indictments imply he’s bearish on Google too. I’m not sure the markets yet agree. I don’t normally speculate on stock values, but in this case, Google’s stock is certainly the #1 indicator of industry and financial market sentiment about its prospects for growth and perhaps Total World Domination.

Google’s shares are off 52.5% this year, versus 55.2% for Apple (perceived as a luxury brand) and only 38% for the NASADAQ as a whole. Google (according to Yahoo Finance) still has a trailing 12 month P/E of 21.6 vs. 17.4 for Apple. IBM (with a great quarterly earnings and forecast) has a P/E of 11.0 and is only off 17.7% this year, while P&G sports a P/E of 16.7.

Google is no longer priced as invincible, but do the fundamentals justify its growth P/E? Or is the price price sustained by an unwillingness of Google zillionaires and stock speculators to lock in this year’s 50+% paper loss and sell at prices not seen in three years? I think the real test will be on Dec. 31 — if the stock is below 300 (or even 350), money managers may cleanse the shares from their public portfolios to avoid embarrassment.

Disclosure: No positions

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This article has 4 comments:

  •  
    Oct 10 09:52 AM
    How can you point to Google using webkit for two different projects and say they are "without concern for synergy or even code reuse"? Using Apple's webkit for Android and Chrome is a great example of reusing code.
    Reply
  •  
    Oct 10 02:40 PM
    We are a mobile software development company and deal with all kind of phones - so we do deal with all kind of phones, and can see the software trends in this space. As member of this team, and someone who has spent over 2 decades in the cellular and mobile space, I do agree with Joel. Google's problem is that they don't understand mobile space well, but pretending that they know it. They should stick to space that they know - which is Web. Even with all the money, they cannot upstage device manufacturers like Nokia, Motorola, Ericsson, Samsung, LG, Siemens, Panasonic etc. that have more experience in mobile space than the age of Google's founders. Producing a GSM phone these days of readily available components is not a big thing. Anyone with money can do it - so it is not such a big achievement to produce a G1 phone. Android in my opinion is dead on arrival, and it is a big mistake of Google to think they can define the mobile space with their go alone strategy. It may work in the Web application, but it simply doesn't work in Mobile space where every thing is based on standards and alliances (thats why we have OMA, 3GPP and 3GPP2 etc.). For linux phones, Limo is the future. Symbian, Brew, Windows Mobile and Blackberry all have some unique advantages and good features. And, Limo will join this group since it has backing several key players that know the mobile consumer markets much better than Google does. Android is a good story - but will G1 sell?
    Reply
  •  
    Oct 11 12:24 AM
    A lot of people in New York do not get Google's business investments; a fund manager on CNBC once questioned why having your own browzer helped Google?

    Google operates in a chaotic, hyper-dynamic and nebulous domain. The domain is unique because the distribution, marketing and support costs are significantly less than traditional businesses, even traditional software businesses.

    This gives Google the luxury to run a thousand R&D experiments, and expose some of them to the public, with very little incremental cost after the initial development effort. Even if the experiment goes nowhere, it often generates enough ad revenues to justify the investment. But perhaps more significant, by becoming one of the players, Google develops a significantly better understanding of that particular niche. As a result, Google reduces the chance of missing the Next Big Thing; further it gives them the insight on how to monetize that particular domain with their core offering.

    The conversion from cell-phones to smart-phones is still in an early phase which opens up opportunities for 2nd-tier hardware vendors to get a leg in. MacOS, and Linux have shown that even in a Windows world, other OSes' too can thrive. Android will never dominate the market; however it will find a place in open-source mobile OSes.
    Reply
  •  
    Nov 16 09:18 PM
    Anyone not under a rock knows that share prices are falling all across the board. Google's stock is not falling because of an experimental platform that they made, it's falling because consumer confidence has been falling since January. Google's main source of income is their advertising program, which relies heavily on the rest of the market (the people advertising and seeing advertisements). Android's expectations are already built in to the share price.
    Reply
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