Google, (NASDAQ:GOOG) has announced that it is selling Motorola’s home division to Arris, a cable equipment manufacturer, for $2.5 billion.  This sale is in step with Google’s strategy of focusing on high-end smartphones with Motorola so that it can maximize the potential of its Android OS. Overall, we are encouraged by the clarity that the sale provides in regards to Google’s intentions with the Motorola division, and think that successful Motorola phones can give Google a big opportunity to drive revenues in the growing mobile advertising industry.
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Google Bought Motorola to Strengthen Android
One of the reasons that Google bought out Motorola was to gain control of its numerous patents, allowing it to not only innovate with new smartphones, but also protect itself from litigation from companies such as Apple (NASDAQ:AAPL). With the high number of patents acquired with the purchase of Motorola, we think that Google will be able to create an innovative smartphone line, which likely won’t be subject to any major litigation issues. If this smartphone line gains traction in the U.S., it can help Google gain market share with its OS and can provide downside protection to the stock. Google gaining market share with its own Android phones has become more relevant recently, as it will mitigate the impact of Android manufacturers such as Samsung releasing phones on a competing operating system.
Opportunity in Mobile Advertising
While many tech companies have yet to drive significant revenues via the mobile platform, we think they will be able to do so over the coming 2-3 years. According to Mary Meeker of KPCB, users spend approximately 10% of their time using mobile phones, but mobile ad spending is only around 1% of total ad spending.  If this metric gets to a point where advertisers spend the same proportion of money on mobile advertising to total advertising as users spend time, the total ad spending on mobile phones would reach approximately $17 billion.
We think that this large opportunity on mobile devices will largely be captured by the operating system leaders in the mobile industry, primarily because of their ability to control the application ecosystem. This is why if Google’s purchase of Motorola helps ensure that it is able to retain market share, we will see the company capture a big chunk of mobile ad spending. For example, if it retains around 50% market share with the Android platform in the United States, the increase in total mobile ad spending would represent around $8-9 billion in revenues per year.
We currently have a $661 price estimate for Google, which is approximately 5% below the current market price.Notes:
- Google to Sell Motorola Home to Arris for $2.35 Billion, Bloomberg [↩]
- Internet Trends Deck, KPCB [↩]