Wednesday, 15 December 2010 10:40

Reggie Middleton Takes The Challenge To Goldman Sach's Apple Proclamation One Step Farther, Apple's Closed System Risks Failure!

[caption id="attachment_4227" align="alignleft" width="575" caption="I'm not saying that I'm bigger than those guys over there at West Street doing God's work, but I'm not a small man.... BoomBustBlog and the new media cabal vs Goldman Sachs and the established socio-political oligarchy, Ooooh! You couldn't script a better reality TV show."][/caption]

It appears as if I wrinkled a few feathers of the birds that are doing God's work with my missive "Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?". This is a good thing! A little creative destruction and anarchy is positive for the complacent masses. I say we take this up a notch, pull down our pants and see who is truly the most intellectually endowed, the outside the box researcher, entrepreneurial investor and thinker that has called nearly every major financial institution bust and market downturn since 2007, or those who are doing God's work with a 38% accuracy rate over the last 3 years with billions of dollars of government assistance.

In my rant yesterday illustrating weaknesses in Goldman's argument of Apple, I hinted at the potential for Google to turn the App Store delivery model on its head by transforming application sales into an advertising based model, of which Google thus far reigns supreme and the closes runner up is not yet close enough to compete. I will take this concept further in an attempt to show those who cannot see the forest due to an excess of tree bark in the way one of the several risks that Apple faces now that it has become so successful - risks that are not mentioned in the reports of prominent sell side analysts - Yes, even those that are doing God's work!

To begin with, let's excerpt a piece from  Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!! Monday, November 8th, 2010 and File Icon Google Q3 2010 review for all paying subscribers (click here to subscribe). Be aware that Google beat each and every sell side analyst's expectation last quarter, yet was just about right in line with what BoomBustBlog told its subscribers to expect...

Let’s walk through the logic behind this wise man’s thinking by looking at the phenomenal growth that is Android.

  1. Android Sales Overtake iPhone in the U.S.: Tech News
  2. Google: Android now shipping on 60000 handsets per day Feb 16, 2010
  3. 160000 Android Phones Sold Per Day Jun 23, 2010 ..
  4. Google: 200000 Android Phones Sold Every Day | Gadget Lab | Aug 5, 2010
  5. @ARubin: 300000 Activations Per Day December 2010

According to Millennial Media, iOS average monthly ad impressions rose 12% month-over-month in October in the US, while Android OS requests
were up 65%. Remember that Apple practically created this category (meaning ad rich mobile computing category) in 2007 with the iPhone (although Microsoft was pushing 3.7 inch smartphone screens nearly 10 years ago).

[caption id="attachment_4224" align="alignnone" width="632" caption="Source: Macquarie Research, Japan"][/caption]

As can be seen in the graphic above, Google's Android has come from nearly nothing to actually matching the market leading Apple in just a few short months. This figure will probably show Google leading the pack by next month as Android's growth continues to ramp at such an exponential rate.

As explained in "Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?":

Android now outsells iOS in the US and worldwide. This is not lost on developers who wish to monetize their efforts. The most ubiquitous platform will get the most developer attention. It’s as simple as that. We have modeled and predicted this occurrence in detail for paying subscribers (click here to subscribe) with our our File Icon Smartphone Market Model – Blog Download Version; which granularly breaks down the market share of various handset manufacturers with data as recent as last quarter, catching the launch of the iPhone 4 and the HTC Evo, two of the most important product launches of the year. We have also included the Mobile Operating System Market Share Model which compares OS shipments across device and hardware type.

So, what does this all mean? Google was able to commoditize, and then cannibalize several other industry’s revenues by offering their products for free or at a highly discounted price while still profiting by subsidizing the offering with ad revenues. Google takes the advertising model to the next level – just ask those in print media! In order to do this, Google needs volume and mass. They need to be the leader in client software. They have actually achieved this in an phenomenally short period of time and their rate of growth is actually increasing dramatically. If Google succeeds in transforming the software delivery model to that of an ad-based model, the current Apple App Store model and all of its competitors (Ex. Microsoft and Research in Motion) who are trying to emulate it are going to have their business models totally up ended. The kicker is, even they recognize this risk, the only way to do anything about is to have both the advertising infrastructure (ex. Google’s Acquisition of AdMob) and the sales mass and volume (ex. 300,000+ activations per day) to be able to monetize such aspirations.

This is why those who proclaim that Google only makes the OS, not the hardware and Apple profits from both are absolutely missing the forest because of all of that brown bark stuck in their eyes! Some of the best apps available for smart phones ring now are ad supported and free to the end user, save certain premium upgrades. Guess who those apps come from? Google Voice, Google Earth, Google Apps, GMail, Google Analytics, Google Voice Search, etc. Then there are other apps that are simply phenomenal which don’t come from Google but still look to take advantage of the ad model. Long story short (that is if it isn’t already too late in this lengthy missive:-)), the probability of Google succeeding in making mobile and even desktop software (Google has added an app store to its Chrome OS as well) ad supported is simply too great to ignore. If it succeeds, significant disruption will ensue to the benefit of the consumer and to the detriment of Google’s competitors.

As excerpted from Even Steve Wozniak, the Co-Founder of Apple, Made a Freudian Slip Extolling the Virtues and Inevitable Dominance of Android! Friday, November 19th, 2010:

The Mac OS actually had the first mover advantage and blew it doing the same thing that they are doing now, which was trying to fight the commodization of their cash cow platform by maintaining a totally vertical manufacturing and distribution channel – controlling software, hardware and firmware while refusing to license any portion out. The result was the proliferation of PC clones that drove the costs of computers considerably below $1000 per unit while Apple was charging up to $3000+ while having an inferior selection of 3rd party applications. Does this sound familiar??? Think of the growth of the Android platform to date.

Ironically, Apple has a decent chance of challenging Google on this front, but instead is retreating its tried and true (but ultimately limiting) proprietary walled garden business model. It is, again, the classic open vs closed business model battle.

Flash Notes

Apple's proprietary tech business model allowed it supranormal profits in the 80s, but nearly caused its demise in the early 90s, see A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple. Apple is following a similar path today, with similar results. Supranormal profits as is occurring currently, followed by what looks to be market cannibalization and commoditization. For those who don't feel this can happen, look at all of the objective stats in my work. Apple is already falling behind Google in market share AND market growth! Just as they did with Microsoft about two decades ago, while sporting thick margins and heavy profits. This game is played in the future, not the present. This is the threat coming from Google's Android and the ad model for software delivery.

  1. According to

    The main defense Apple gives of its closed system is that it makes it easier to preserve the quality of the ads and the targeting, something that has previously hindered the space. By establishing its apps as valuable real estate for advertisers, Apple says that it has signed up half of the top 25 U.S. marketers for the system, but most of those ads haven’t appeared yet.

    Apple’s system lets advertisers know exactly where their ads are placed. In terms of specifics, that’s about as far as it goes. Agencies and marketers have been fairly unsatisfied with the level of data Apple has been willing to part with, such as total number of ad impressions served via iAds, clicks, amount of page views, and average time spent in app. But Apple only provides an aggregate number, not the details specific to each advertiser. For the marketers, that’s galling, considering the premium prices they’re paying. Plus, Apple keeps all the ad coding to itself and even has a hand over the creative. The company has shown some willingness to loosen the reins a bit, but only for even higher prices.

    Google’s App Inventor, in contrast, gives marketers greater freedom with which to create and manage their mobile ads on Android.

  2. Major social networking sites develop proprietary apps for both iOS and Android, but are increasingly throwing their weight behind HTML5. Facebook, the 800 lbs gorilla in this camp accounts for 40% of mobile traffic according to Comscore and Macquarie. To a lesser extent, Twitter is force to be reckoned with as well, particularly as it builds out its richer multimedia interface and attempts to shut out 3rd party twitter clients. AgainHTML5 as a defacto standard weakens the grip of iOS proprietary stance. To date, there is no mobile advertising on Facebook or Twitter. Once that changes, the landscape will be altered.
  3. Apple's ostracizing of Adobe's Flash technology has opened the door for competition from more open platforms, a side effect that Steve Jobs may not have anticipated. With the ubiquitous use of HTML5, proprietary apps are not necessary, hence the proprietary lock-in strategy of Apple actually serves to work against it. As vendors choose to deliver ads in pure HTML, Apple loses the advantage as proprietary lock in goes from boom to hindrance.
  4. Google's Android system utilizes both open HTML5 and proprietary apps, and even those proprietary apps are built on an open sourced language base.
  5. Apple, in concentrating (and successfully so) on creating a higher end ad market, has pushed the lower and midtier advertisers into the larger and lower priced Admob camp. This creates large up front profits, but also creates the critical mass that Google needs to drop the margins of the entire industry if Google succeeds in having Android become the most ubiquitous mobile OS - a feat which Google is well on the way to accomplishing and, on a monthly growth rate scale - has already succeeded. Apple cannot afford for this to happen. The damage of having Google capture the OS market crown is more dangerous than the advantage of ruling the higher end market, for Google can easily pierce this market one critical mass is attained. It is not as if Google is creating what is arguably more compelling and capable technology in its Android platform - reference A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone.

From the aforementioned Macquarie report (which is a very good report, I may add, but contains a material error or two or at least a point with which we strongly disagree):

iAds create a tightly controlled environment …

Apple acquired ad network Quattro earlier this year, and quickly adopted its technology to create iAds. Apple then shuttered Quattro to focus its technology exclusively on apps as its source of ad revenue. The effect of this was to push out smaller-scale advertisers that can‟t afford the platform, which are then more likely to go to Android-supported phones or Blackberry or Nokia devices. This marked the clearest cut yet seen between open-system mobile internet advertising and closed-loop apps, effectively segmenting the landscape for these different players. Not content with creating the revolutionary mobile app, Apple has tried to overhaul the pricing system for online advertising as well, by charging a punchy $1m minimum participation fee, plus a charge of $10 CPM and a $2 CPC for use of its iAds platform. This pricing runs substantially ahead of most prices in display advertising and is also a significant premium to Google‟s AdMob, which charges CPMs up to $10-15 and no CPC, or a CPC-only rate of $0.15-0.30 on average. With pricing at this level it aligns iAd at the top-end of the market with highly targeted internet rich-media and video campaigns. Part of the success of Apple‟s apps is they provide incentives to developers to use the Apple platform. The table below provides an example of the revenue potential for Apple and app developers: the developer of the “LED Light for iPhone 4 Free” app had 26,700 requests (app  launches) on a single day, which generated 9,300 impressions. Of those impressions, the developer saw an 11.8% click-through rate (CTR) for 1,100 clicks. This admittedly is a very successful app (12% CTR is huge) and is based on only one day‟s sale, but it illustrates the point. The revenues break down as follows:

... Apple says half of the top 25 US advertisers are signed up for iAds, though we have only seen a few of these actually complete iAd buys to date. iAds launched in Europe in December: Apple says it has sign-ups from blue-chip advertisers including AB InBev, Absolute Radio, Citi, Evian, LG Display, L'Oréal, Louis Vuitton, Nespresso, Perrier, Turkish Airlines, Renault and Unilever.

… So tight that advertisers and agencies feel frozen out

iAds offer targeting based on prior user behaviour, and advertisers know exactly which apps their ads appear on. However, Apple still owns the data and processes and has been stingy about sharing this data. This in addition to the hefty participation fee has served as a barrier to widescale adoption by advertisers and agencies. Apple does provide metrics such as the total number of ad impressions served via iAds, number of clicks, number of page views, and average time spent in app ads – but these are all aggregated data, not specific to the advertiser. This is a major problem for agencies and advertisers who can access such data clearly in other media, and indeed on Google‟s Android systems.

So Apple‟s combination of high pricing and lack of transparency appears to be a stumbling block. In addition, Apple has put obstacles into the production process, by keeping its ad development codes in-house and by essentially vetting the advertisers and intruding into ad creation.

In addition, Apple’s browsers aim to mitigate the success of the mobile web

Here again, Apple has set up walls to ensure its closed iAds system will succeed. Apple introduced technology in its latest Safari 5 web browser that can block ads on individual websites. This could have significant implications for the amounts online advertisers are willing to pay publishers and more importantly (given online is still small but needs to grow for the publishers to survive) may have adverse effects on the potential opportunity represented by mobile advertising. How? The opportunity in mobile advertising lies in the fact newspaper applications on the iPad (like the Financial Times or the Wall St Journal) can be formatted to be more conducive for advertisers – however, if Safari blocks this, it blocks the revenue upside for the papers as well. This clearly sounds like part of a plan to migrate all advertising to Apple‟s own iAd platform, where Apple takes a 30% share of all advertising revenue in which it hosts.

Google's Wedges Its Foot In The Doorway

Search is the most ubiquitous door into mobile advertising. Google controls 97%+ of mobile search and over 67% of overall search. Search (including mobile search) can easily lead to other forms of advertising. This, apparently, is not easily seen by many of Google's competitors until it is too late. Ask any major or minor ad agency who the leading global ad agency is in terms of revenues, profits or reach! You can also query the print media industry if there is still a doubt.

As for other forms of mobile search reach, Google is not only climbing exponentially in terms of reach (via Android, and potentially Google TV and Chrome OS), but is quickly gathering the low and mid-tier advertisers due to Apple's eschewing them for the big fish. This is clearly Apple's business model forte, but it appears that Apple is failing to play defensive in preventing Google from getting those advertisers that they are tossing to the side. This is not a matter of profits and revenues, now, but who controls the bulk of the web tomorrow. This is a game of chess, and Apple is gathering many of Google's pawns but allowing Google to make an end game run the Apple King!

Remember, if or once Google gains critical mass they will drop the prices of everything in the industry and rely on its heavy and ubiquitous ad revenue cash flow to support it. This is already happening in the handset and mobile OS market where Google is forcing Apple to expedite its refresh cycle. Google and its hardware partners (who are also the sole sourced suppliers of the most critical components of Apple's most profitable product - responsible for 70% of the company's earnings) are also throwing superior technology at the market at comparable price points to the iPhone (and most likely the iPad very soon), while also offering comparable tech at lower and lower price points. Apple will not be able to compete with the entire open source universe and its hardware partners from a brute force perspective, yet that appears to be exactly the game that Apple is being drawn into. Its Microsoft vs Apple, Open vs Closed all over again, just this time the company is Google and the ubiquitous cash flows come from advertising instead of the Windows OS and Office suite of productivity apps.

I actually questioned the IDC numbers that the Macquarie report heavily quoted above used to infer that Apple was the leader in mobile display advertising. You have to be very careful when using 3rd party data as confirmed fact without fact checking. The Macquarie report was very well done (kudos), but they made a grave error in their 4G pronouncements in the US regarding Verizon (who is currently in 2nd place behind Spring whose Android phones are currently the only handsets to use 4G technology, although they probably advertise more) and according to our research regarding Apple's lead on Google in mobile display. From

Earlier this week a Bloomberg/BusinessWeek article appeared under the headline: Apple Threatens Search Giants’ Mobile Ad Shares. It gained a tremendous amount of secondary pickup and discussion for the proposition that Apple had tied Google in mobile advertising revenue.

The article relied on IDC estimates to argue “Apple may be gaining share in the U.S. mobile advertising market this year at the expense of Google and Microsoft.” Here are the IDC US mobile advertising marketshare figures (based on revenue) cited in the article:

  • Apple: 21%
  • Google: 21%
  • JumpTap: 13%
  • Millennial: 11%
  • Yahoo: 9%
  • Microsoft: 7%
  • Nokia: 2%
  • Other: 16% (missing from the figures mentioned in the article)

When I saw this it immediately struck me as wrong. IDC has gotten it wrong before. But how could Apple with its very recent entry in mobile advertising (albeit based on the Quattro acquisition) have greater share than a combined Google and AdMob?


I immediately reached out most of the companies on the list to get their feedback and reactions to the IDC figures. I talked to several people though no one wanted to be quoted. Almost without exception those whom I spoke with faulted the numbers.  I was told by one party (in an informal estimate) that the universe of mobile display advertising in the US looks like this as a practical matter:

  • Google, Apple, Yahoo, Millennial Media (60%)
  • Publishers (20%)
  • Other (20%)

I reached out to the IDC analyst mentioned in the article. He did not respond to my questions in email, however. So I’m relying on others who’ve talked to him or are more directly familiar with the IDC estimates.

One question that immediately arose is whether the market share figures above include mobile search revenues. According to second-hand information I obtained they apparently do but don’t include “hybrid” campaigns, those that run both on PCs and mobile devices. But since this describes most of Google’s mobile search advertising it undercounts Google’s mobile ad revenues by a mile — at least.

One reputable source told me that the $60 million that Apple reported was based on upfront commitments and not actual billings. That same source said that at least two major advertisers had canceled their iAd campaigns over frustration with Apple’s tight control and the slow pace of the process. (There’s been a mixed reaction to iAd.) That would mean the $60 million figure will translate into less actual revenue for Apple.

God love ‘em, Apple has done more for mobile consumers and mobile advertising than any other single company. But they’re not the revenue leader. And if the Mahaney figures are anywhere near correct — and they’re search numbers exclusively — then Google has got to be, far and away, the mobile ad revenue leader in the US.

According to eWeek:

Sterling isn't the only one to dispute the IDC numbers. Jumptap CMO Paran Johar said iAd may be capturing 21 percent of the dollars today, but not the impressions or the opportunity."They are a very focused on the super premium brand advertisers willing to spend $1 million minimum while controlling the brand's creative," Johar said. Moreover, he said Apple shut down iAd to mobile Internet publishers, causing a surge in publishers wanting to work with a partner that is platform agnostic and open. Jumptap is reaping the benefits of this shift, he added.

While Weide is bullish on iAd in the near term, he also told eWEEK that Google will "in years to come crush Apple" because its Android platform will outsell the iPhone. Indeed, Apple sells a handful of versions of the same iPhone. As good as that handset is, Android's open source delivery model has spurred many major phone makers--Motorola, HTC, LG and Samsung--to build more than 60 Android smartphones.This provides a greater footprint for application developers to seed their software and generate revenues from mobile ads. But that will take some time for in-app ads to foment on Android devices in earnest. For the time being, Weide said the iPhone and iAd, with richer ads and higher click-through rates, is the more attractive distribution vehicle in the U.S. Accordingly so the majority of mobile marketers are looking at advertising on iPhone and iAd over Android devices and Google's AdMob unit.

May I reiterate the dangers to Apple if they allow Google to escape with the lion's share of ad market share, particularly enough to overcome any potential margin benefit Apple may be able to accrue. By dropping margins across the board, Google can transform the landscape. As it stands now, many more apps in Google's marketplace are ad supported as compared to Apple's app store, which leads at least this particular consumer to try out and eventually buy more apps on the Google platform.

I strongly urge all paying subscribers to read and reread the longest forensic analysis that I have ever released (@63 pages): File Icon Google Final Report, as well as the File Icon An Analysis and Valuation of Google’s Android and AdMob. Below, those that do not subscribe can find an extensive excerpt that illustrates how we clearly articulated to our research subscribers the rise in Google's prominence that the ENTIRE sell side of Wall Street somehow missed...

Subscribers should also review the following documents (click here to subscribe):

Relevant links:

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  5. Android is gaining preference as the long-term choice of application developers
  6. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  7. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  8. Apple on the Margin
  9. RIM Smart Phone Market Share, RIP?
  10. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  11. More of the Android Onslaught: Increasing Handset Revenues and Growth
  12. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  13. The Complete, 63 pg Google Forensic Valuation is Available for Download
  14. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  15. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  16. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  17. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
  18. Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?

Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!!

Summary: A full analysis of the grand slam Q3 earnings performance that was anticipated in full detail by BoomBustBlog, yet took the Street by surprise.

Google hit the ball out of the park with their latest earnings release, yet I feel the gist of their success is missed by many. Although Google was able to increase revenues and profits on expanding margins (a win, win, win situation), what is most impressive is that they were able to do it while simultaneously investing in very high risk/high reward ventures. Google TV, Android, YouTube and AdMob are the ones that come immediately to mind. Android alone threatens to, and actually is, disruptively transform the entire ultra mobile and mobile computing space. The potential of Android coupled with Google’s ad revenue subsidy prowess and plethora of cloud services is not only quite formidable but obviously the wave of the very near future – a future that Google is more apt to dominate than most of the technology powerhouses of today.

On that note, I am releasing the File Icon Google Q3 2010 review for all paying subscribers (click here to subscribe):

As is customary, I am excerpting a generous swath of the subscription report (sans updated valuation) for free distribution on the blog…

Google Q3 results

For the quarter ended September 30, 2010 Google reported gross revenues (before traffic acquisition costs) of $7.29bn, an YoY increase of 22.6% and QoQ increase of 6.8% while net revenues (after traffic acquisition costs) increased 25% YoY and by 7.7% sequentially to $5.48bn. These results clearly demonstrate decoupling of digital economy vis-à-vis the real economy, or put more aptly, the wholesale movement of traditional marketing and advertising to that of the Web-based variety.

Google continues to be a reckoning force in the online search market commanding almost two-thirds of worldwide search queries. In Sep 2010 Google’s share of core search queries was 66.1%, the highest since January 2009. Despite commanding over 60% of market share the company continues to expand its share of search.  After a slight blip in May and June, the share has increased for four straight months in a row.

All the three reporting segments and geographies delivered strong growth rates during the quarter. Google website (66% of total) revenues increased 22.2% YoY and 7.4% sequentially to $4.8bn while Google Network Revenues (AdSense, 30% of total) increased 22.1% YoY and 6.6% sequentially to $2.2bn and Licensing & other revenues increased 34.9% YoY to $254m. In terms of geographic split, both US revenues (48% of total) and RoW (41% of total) grew 26%) and UK (11% of total) witnessed revenue growth of by 10% (19% organic growth offset by negative currency movements).

Total cost of revenues increased at a slower pace compared with revenue growth positively impacting the margins. Total cost of revenues excluding stock based compensation expenses (which includes Traffic Acquisition Costs) grew 15% YoY to $2.5bn (35% of gross revenues in Q3 2010 vs. 37.2% in Q3 2009). Traffic Acquisition Costs grew 16% during the quarter to $1.8bn (or 25.7% of advertising revenues) compared with $1.5bn in Q3 2009 (or 27.1% of advertising revenues). Cost per click increased 3% YoY and 2% QoQ. Research and development excl stock based compensation grew 33% YoY to $750m and stood at 10.3% of revenues versus 9.5% in the previous year. Sales and marketing expenses excl stock based compensation increased 35% YoY to $586m, or 8.0% of revenues in Q3 2010 vs. 7.3% in Q3 2009 while general & administrative expenses excl stock based compensation increased 39% YoY to $479m, or 6.6% of revenues in Q3 2010 vs. 5.8% a year ago. Stock based compensation increased to $380m (5.2% of revenues) from $318m (5.3% of revenues) in Q3 2009. Overall, income from operation increased 23% YoY to $2.5bn with operating margin of 35%. However, due to lower tax rate (20.2%) net income increased 32% YoY to $2.2bn, or diluted earnings per share of $6.72 over $1.6bn in Q3 2009, or diluted earnings per share of $5.13. Adjusted dilutive earning per share (adjusted for stock based compensation) was $7.48 in Q3 2010 compared with $5.90 in Q3 2009 and $6.45 in Q2 2010.

The BoomBustBlog Investment Thesis Remains Intact

As highlighted in the Google forensic report, our key investment thesis for our bullish view on Google includes:

  • Secular mix shift from offline to online ad spending, and Google with c67% share in search market is set to benefit enormously from the secular mix shift though growth in search ad spend (ad words)
    • We had meticulously demonstrated the case for several of the next multibillion dollar business lines after search in the form of display, mobile and other emerging business.
  • o   Increase  in share of display revenue as Google which currently lags Yahoo in display is ramping up its efforts through YouTube monetization, the DoubleClick acquisition and Teracent acquisition
  • o   Opportunities in wireless search as Google goes mobile with Androind and AdMob. The success of Android coupled with Google’s traditional dominance in search advertising has laid a solid foundation for Google to thoroughly monetize the opportunity in the mobile space.
  • o   Potential premium free call options on several new multi-billion revenue opportunities in the form of Google TV / Google Voice / Google Cloud Computing (for details refer to Google Forensic report)
  • Bolt-on acquisition strategy

Given our investment thesis, Google’s consensus beat in Q3 was hardly a surprise to us at We have been persistently arguing for higher share of display and mobile space. In Q3 revenues annaulised revenues from display segment were $2.5bn with total revenues of $625m for the quarter with revenue share of Q3. Mobile revenues at annualized rate were $1bn, or $250m for the quarter with revenue share of 3.4% in Q3. We believe these numbers put a definitive end to the argument on whether or not Google would be able to successfully monetize Android on which we had spent considerable ink in our Forensic report. We were however pleasantly surprised at Eric Schmidt response during earnings conference call when he mentioned that mobile space has potential to outgrow that of the PC market – a view which Reggie Middleton has espoused consistently!

Eric Schmidt, CEO of Google:

It would be I think premature to – for us to estimate what that would be, but if you assume that search monetization on handsets will become equivalent to PCs and then eventually exceed it, which is my personal view, then it should be highly lucrative, because those – the customers that are using Google services, they are going use it more because they are more personal and more targeted. And so ultimately, it should be a very, very strong revenue stream compared to a PC.


At current price ($625) Google has already reached our base case target price of $630 (which would have given handsome returns of 20% since we released the report (and a return of 35% when we first mentioned about long opportunities in Google when it as c$470). However, unlike sell side analysts who change their target price post math the share (studies show that actual share price is leading indicator of sell side target price contrary to the logic that target price should be leading indicator of actual price) we reiterate our base case valuation of $635 (marginally up from $630 previously as a result of stronger-than-expected Q3). As a reminder, our sell side target price of $595 reflected Google’s fair value including online ad spend (display and search) and mobile while our base case fair value of $635 reflected sell side valuation plus base case valuation of  Google TV, Google Cloud and Google Voice (assuming nominal returns from each of the returns). That is, at $625 we believe the current price fully reflects above opportunities. However, if one were to assume success of Google TV, Google Cloud and Google Voice the stock could potentially reach…

The balance of this quarterly report is available here File Icon Google Q3 2010 review for all paying subscribers (click here to subscribe or upgrade). For those wondering how the two first technology reports released fared in terms of performance, please see below (and keep in mind that we were contrarian on all of these calls at the time of initial publication)…

A recent, 1 month snapshot of Google medium term calls, up nearly 350%

Excerpted from (the must read) A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!:

So, following up on the piece that I did just a few hours ago – Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He? along with this cute chart…

Excerpted from BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM:

Google is seeking new revenue streams, including searches on mobile phones. Its Android software has surged in popularity among consumers, overtaking Research In Motion Ltd.’s BlackBerry to become the top smartphone operating system in the U.S. in the second quarter, according to research firm Gartner Inc.

Display advertising at Google is growing as its YouTube video-watching service attracts more marketers. The company said in May it had boosted the number of display advertisers 10-fold on YouTube.

“Our newer businesses — particularly display and mobile — continued to show significant momentum,” Chief Executive Officer Eric Schmidt said in a statement.

Display revenue is on pace to top $2.5 billion annually, Jonathan Rosenberg, senior vice president for product management, said on the conference call. Mobile-ad sales are on track to exceed $1 billion annually, he said.

This is pretty much verbatim as we predicted it, and the stock and option prices are performing accordingly…

And on the short side, as excerpted from The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download:

I strongly urge all paying subscribers to read and reread the longest forensic analysis that I have ever released (@63 pages): File Icon Google Final Report, as well as the File Icon An Analysis and Valuation of Google’s Android and AdMob.

Last modified on Wednesday, 15 December 2010 10:48


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