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Google and Microsoft speak volumes with silence

The following charts show Google and Microsoft revenues and operating income:

Both companies showed healthy growth. Revenues: Microsoft 6%, Google 24%. Operating Income: Microsoft 12%, Google 48%. Google had a particularly weak margin Q1 2011 so its income growth appears very strong.

The surprise in Microsoft’s performance was the 4.8% increase in Windows revenue at a time when PC sales were expected to be declining or flat. Final PC numbers are not yet out so we’ll have to check back on this figure to see whether Microsoft has been able to get higher pricing for Windows or whether the market did expand. (Average revenues per PC sold have been quite steady for years). Overall, Microsoft’s business shows consistency. Of course, that should not be cause for comfort. Nokia had remarkable consistency until it jumped from a burning platform and RIM grew more rapidly until its platform imploded.

As Google still obtains 96% of its income from advertising, it’s quite remarkable that it is now at 61% of Microsoft’s revenues. Google is also growing more rapidly than Microsoft so the possibility exists that the top ad service will overtake the top software company in revenue, establishing a new benchmark for how software can be monetized.

The curious thing about both of these companies’ financial performance is that mobility does not appear to have had any impact on either top or bottom lines[1].  There is no business division or income statement line that can be attached to mobile revenues. Microsoft placed Windows Phone under Entertainment and Devices but that division is dominated by Xbox and accessories. Google bundles everything under Advertising and has never broken out mobile, much less Android-derived income.

The surge in valuation for mobile-focused startups seems to leave investors in both these companies unaffected. The damnation for both companies lies in mobility being non-core businesses whose strategies center on reaction and defense.

Notes:

  1. Google does not answer specific questions about the impact of mobile on their business but they do acknowledge that there are traffic acquisition costs (TAC) associated with OEMs and Carriers who deploy Android. This means that there are costs of mobile sales (i.e. Search) but not to any measure of specific value.
  • Walt French

    Surely some of the Windows anomaly is explained by their accounting practice of realizing revenues over many quarters following the first license sale. A surge of sales in 2009 and 2010 would translate into revenues building even as recent sales declined.

    As I understand it, anyway.

    I’m still having trouble seeing some of the gains you’re describing. For instance, Windows Operating Income looks to be well off of last quarter and 4 quarters ago. Is there a link to the data behind these charts?

    • http://www.asymco.com Horace Dediu

      They do have deferrals in their business, which might explain the situation.
      I have not uploaded my tables but last quarter’s Windows income was $2.93b vs. 2.76b the year before.

      • KirkBurgess

        I imagine microsoft charges a cheaper licence for netbooks using the less featured windows starter (or whatever its called)? If so, the decline in netbook shipments (thanks to mobile devices) may improve microsofts margins.

        Even if PC shipments contracted or slowed in growth, if a higher % of those shipments were paying the full microsoft windows licence, I can see their income growth outpacing the overall PC market.

      • Duwain Powell

        One flaw in your analysis: The marginal cost per license is approaching zero. Conversely, margins are approaching 100% with each additional license sold (beyond the first license of course). A decline it netbook sales would only serve to decrease revenues and profit — margins would not be affected.

      • hkhard

        Wouldn’t this probably be due to MS selling more “expensive” Software Assurance licenses in re enterprises upgrading to Win7?

  • https://twitter.com/#!/reda_ek Reda

    I think in the slides from MS, I saw that PC market actually grew in line with revenue (~4)

  • r.d

    What was the TAC before Android was deployed.
    2 Billion TAC is going to Apple, Mozilla, Cell operators, OEM?

    As far as Microsoft is concerned XBox is most like was channel stuffed for the
    holidays so the first quarter was down.  Windows division could also be like that.

  • Flooey

    Google doesn’t break out mobile revenue in the earnings statement, but they sometimes address it in the earnings call.  The most recent appears to be in Q3 2011, when they said they had a $2.5 billion annual run rate from mobile.  That’s up from a $1 billion run rate the previous time they addressed it, in Q3 2010.  So mobile appears to be a small portion of their revenue, but a sizable absolute number, and growing at around 150% a year (extrapolating from only two points).

  • http://twitter.com/isellsoap Francesco Schwarz

    Just

    • Secular_Investor

      Thanks, Great Stuff Francesco,

      A really valuable resource.Why don’t you post a link on the Braeburn Group blog site?

      • http://twitter.com/isellsoap Francesco Schwarz

        Thanks for the tip, I will do that.

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  • http://twitter.com/Marcos_El_Malo Marcos_El_Malo

    This is interesting context for Larry Page’s testimony in the Oracle v. Google trial that Android is not “critical” to Google. I was wondering how he could say that with a straight face.

  • KirkBurgess

    Would it be accurate to say that Googles biggest external supplier of its main product (users) is infact Apple, given the large payment google makes to Apple for default search position on iOS devices and the Mac/PC Safari browser?

    Or would Mozilla’s firefox still account for more users, leaving apple in number 2 position?

    • http://www.asymco.com Horace Dediu

      I think of Apple and Microsoft as Google’s primary channel partners. The trouble is that these partners may put pressure on this one supplier as Google is increasingly trying to disrupt up-stream.

  • echotoall

    “The damnation for both companies lies in mobility being non-core businesses whose strategies center on reaction and defense.”

    To lump google into this statement is unfair and defies their proactive nature. Google is a tech company selling ads. Their ultimate objective is to make the user experience great enough to comeback, regardless of platform. From this prism ultimately it doesn’t matter where the revenue comes from, especially as “the web” becomes synonymous across all platforms.)

    MIcrosoft waited for the new mobile landscape to get established and then entered the competition. Your statement is very relevant with msft. And since they license their OS for each hardware, they should be breaking down the mobile revenue share.

    As an investor, I would love to get a better breakdown of google’s ad revenue from all mediums (pc search, mobile search, pc billboards, mobile billboards, pc/mobile video) but from the perspective of an ad company I understand why they do not.

    Also, Google’s gm margins slightly declined to 64.4% but their over all margins increased significantly to 37.7%. (in sept 2011 they were 31.4%) probably being proactive for the mmi merger.

    I’m so pro apple its ridiculous, but I feel google is being underestimated across the blogosphere or tumblrverse (which ever is more relevant now a days).

    • joelypolly

      I think the key piece missing from Google data is how much they are investing into Android and how much revenue they generate from it. Without that it is hard to see how successful Android has been for Google. Marketshare with low revenues isn’t exactly a good place to be.

      • echotoall

        Google really had no other choice.

        If they stayed out of the mobile OS race msft would have arguably captured a solid second place market share. Google would have been effectively shut out of msft share. (of course we would only be witnessing that theory now. 5 yrs after the iPhone was launched.)

        If android was not acting as a competitor iOS would not be as good as it currently is, especially on notifications.

        If android did not enter the race, smartphone adoption would not have seen the growth it is currently seeing.

        Android has not dented iPhone growth, and will not so long as apple keeps executing. (If anything android helped apple prove its business case to the carriers. This is why everytime I hear the ‘subsidy risk’ for apple i think it’s bullshit. We can thank android for that.)

        To deny the tangible/intangible value google has created for mobile adoption (for apple, google and the sector), by calling them ‘reactive’ is completely disingenuous.

      • joelypolly

        I think you are giving Android too much credit in smartphone adoption. Android gave manufacturers a ready to use OS when their only options were WinCE/Mobile, Symbian and custom OS. What really drove smartphone adoption was the wholesale switching by manufacturers from feature phones to smartphones at the same price points as feature phones. 

        What we saw over the last 5 years was just that, technology was at that point cheap enough for it to start occurring. First the high end then progressively lower price points until now when you can get an off contract smartphone for about 100 USD.

        Google’s contribution has been that freely available OS which has levelled the playing field so that companies such as Samsung who has always had excellent manufacturing but perhaps considered poor software to compete with Apple/RIM/Nokia. It is a huge appeal when you can rollout a new smartphone by just providing the driver stack and leave the OS implementation to others.

        Which brings us to today where manufacturers compete on price as Android smartphones become commodities (excluding the high end). The bulk of sales in Android will likely be for phones with ASPs of less than 300 which means there really isn’t much margin to compete on.

        Apple has it easy vs Android compared to Individual OEMs vs each other. OEMs have to convince consumers that they Android phone is both better than the iPhone but also better than other Android phones.

      • TheEternalEmperor


        If android was not acting as a competitor iOS would not be as good as it currently is, especially on notifications.”

        How do you figure? Apple has no credible competition in the tablet space, yet are relentlessly improving their tablet.

        Heck, Apple hired the guy who created the Jailbreak hack for iOS notifications and no one knows for sure when Apple starting working on the code. It simply may not have been the highest priority.

        Finally, Android owes pretty much its current form to iOS. By now, we’ve all seen that Android started life as a Blackberry clone so it is lunacy, in my opinion, to rewrite history giving such credit to Android for sparking the smartphone rise. iOS would have done this with our without Android.

      • jbrandonf

        Android was an iOS clone based on one prototype? Give me a break. Android was always meant to be on multiple hardware type but your claim is a common misconception.

    • Tim F.

      “Their ultimate objective is to make the user experience great enough to comeback, regardless of platform.”
      I hear people say this, but it doesn’t remotely ring true to me. 

      It seems Google’s ultimate objective is wholly dependent on controlling the platform (but they are failing). The “defensive” move of preventing “any one platform” from achieving dominance is nonsense.

      Had they actually pursued making users comeback regardless of the platform, they might be succeeding.

    • http://twitter.com/echotoall echotoall

      @tim F @joelypolly:twitter   TheEnternalEmpor

      All I am saying is that Google was not reactive when it came to mobile.

      Regardless of Apple, Google was going to enter the mobile OS race. They did not want to be in a position to be locked out of the future.

      Once they saw the iphone UI, they shifted strategies to their UI. This was arguably their only reactive instinct. (I would categorize it more of a shift in strategy to better position themselves toward where mobile was going.  Something MSFT did not do for 5 years, GOOG did it in 7-8months.)

      I like iOS better. Apple is, and will be, far ahead of all competitors so long as they maintain their iOS usability lead and ‘A’ series chip performance lead. But to deny what Google has brought to the table, from a mobile perspective, simply ignores the truth. 

      All I am saying is that Google is no Microsoft, and should not be compared as such. That is all I am saying. 

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