Google's Q4, 2012: This Looks To Be The Leader Of The New Distributed Information Paradigm, As I called It In 2010

Reggie Middleton's picture

As the video denotes below, here we have big brother, traded on an exchange. The following are anecdotal notes and observations on Google's Q4, 2012.

Revenues were up 36% year-on-year, and 8% quarter-on-quarter. Google hit $50 billion in revenues last year - the company is only 15 years old. Motorola is still pulling income margin down, but I (and it appears the market) am confid-ent that Google will successfully monetize the IP and OEM production assets, if they have not already done so. Of concern is the fact that margins are shrinking sans the Motorola acquisition (see below). Does this concern me? Well...

Fears of maturation and saturation in Google’s core ad business appear to have been drastically overblown:

Paid Clicks increased approximately 24% over the fourth quarter of 2011 and increased approximately 9% over the third quarter of 2012. 24% growth in a business that was supposed to start leveling off is a hell of an achievement. What the armchair pundits apparently failed to realize is that the mobile market is akin to almost an entirely new field for Google to plunder. If anything, one should be looking at this from a bullish perspective, not a bearish one. Alas, the margins on this high growth, big opportunity market are bound to be lower – at least thus far, which brings us to…

Cost-Per-Click, which  decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012. Google is apparently losing some pricing power with the shift to mobile, as has everybody else in the business. It appears that some firmness has been found Q on Q, as was the case with Facebook as well. Time will tell if this is a seasonal thing, a temp blip, or the start of something more lasting. Remember, this is a new market and a new business for all.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.08 billion in the fourth quarter of 2012, compared to $2.45 billion in the fourth quarter of 2011. TAC as a percentage of advertising revenues was 25% in the fourth quarter of 2012, compared to 24% in the fourth quarter of 2011. Google’s cost of revenue acquisition is going up!

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012, compared to $1.25 billion, or 12% of revenues, in the fourth quarter of 2011. For those who are not paying attention, this is a Google "Call to War"! Google is rapidly ramping investment (incorrectly categorized and classified as expense by GAAP). I believe this is attributable to two things:

  1. The preparation for mass monetizing of the hardware/cloud integration side of the Motorola acquisition. Motorola brought valuable IP, patents,and a mobile OEM business, but it brought material dead weight as well. This dead weight has been (is being) jettisoned, but we have yet to see the positive results of the handset/tablet business. Expect to see that in 2013.
  2. Google is in a cloud infrastructure arms race with those most capable of competing in this arena, namely – Microsoft, Amazon and Facebook. No, I no longer believe Apple is a challenge, and I didn’t think they were much of a challenge last year either. See the accompanying video, Apple is more a purveyor of fads than cloud tech. In the push to usurp Windows as an OS (see Chrome OS and the Chromebook), Microsoft Office with Google Docs/Drive, conventional network TV with YouTube (see below) and the smartphone tablet space with Android - Google plans on tying everthing together in a massive cloud infrastructure. It singularly has the assets, infrastructure, IP and managerial expertise to become the world leader in all of the aforementioned categories - and most importantly, it can afford to be very entrepreneurial and take risks for it can subsidize its experiments with the Google Ad revenues.

Rumor has it that Google is reportedly developing real estate in London for about $2 billion and is doubling its investment in a South Carolina data center to $1.2 billion. There is a practical barrier of near impenetrable expense, not unlike a moat around an olde English castle, that protects Google’s primary and secondary revenue producing assets, not to mention many of the tertiary ones.


To replicate or challenge this hegemony will take the massive resources and extant footprint of a company like Microsoft, with the strategic partnership of extant, long time players such as Yahoo to come in a distant second place.

Mobile Computing

What was the hottest (non smart phone) portable computing device of 2012? Hint: It was designed and marketed by a search company and only costs $200 - the Google Chromebook.See the reviews

What was the hottest mobile OS last year? Which one grew the fastest? Which one had the largest market share? Which had the most tech innovations and capability? Hint: It came from a search engine company. There's no need to tout the Android OS. With roughly 76% market share and still growing faster than all of its competitors combined, Android will soon be the de facto mobile computing platform, much as Windows was the de facto desktop computing platform. Imagine the profit potential that came from thinking different!!!

Online video (YouTube)

Currently has no true competitors, with the second runner up being roughly 90% smaller AND growing slower.  If you look at the second and third most popular video sites, you can probably tell where Google is heading with YouTube. 

1 | YouTube
4 - eBizMBA Rank | 450,000,000 - Estimated Unique Monthly Visitors | 4 - Compete Rank |4 - Quantcast Rank | 3 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

2 | NetFlix
81 - eBizMBA Rank | 55,800,000 - Estimated Unique Monthly Visitors | 34 - Compete Rank| 108 - Quantcast Rank | 100 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

3 | hulu
110 - eBizMBA Rank | 40,000,000 - Estimated Unique Monthly Visitors | 121 - Compete Rank | 39 - Quantcast Rank | 171 - Alexa Rank.
Most Popular Video Websites | Updated 1/4/2013 | eBizMBA

See for more info.

Expect the barriers to network TV and subscription TV (ex. cable TV & satellite) to be cost shifted, just as the newpsaper, mobile advertising, classifieds and mobile OS industries have been.

Yes, TV is will soon be Googled! One would expect the TV and Movie distribution industries to be on their toes, looking for a new model that will actually usher in paradigm change versus sitting on their collective asses waiting to be commoditized. Yeah, one would expect...

Of additional concern is the fact that Google's total cost of business appears to be rising. Not only is the cost of revenues increasing (alhtough there was a QonQ decrease), but their operating expenses are increasing as well. Operating expenses, other than cost of revenues, were $4.81 billion in the fourth quarter of 2012, or 33% of revenues, compared to $3.38 billion in the fourth quarter of 2011, or 32% of revenues. This should be of concern to the casual observer. The not so casual observer should realize that much of what is being characterized as expense in the Google statements, is actually investment. GAAP accounting is deficient in capturing efficient economic investment vs actual expenses. Google is a master of long term vision, investment and risk taking. Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.

Operating Income – Although Google's net income is growing briskly, their margins have been shrinking. One obvious cause of the shrinking was the monstrous Motorola acquisition. The question is, "Was that the only reason?".

On a consolidated basis, GAAP operating income in the fourth quarter of 2012 was 24% of revenues as compared 33% of revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was 30% of revenues as compares to 38% of revenues in the fourth quarter of 2011.  Even when separating the Motorola acquisition, we find Google's margins are still dropping...

  • Google Operating Income – GAAP operating income for Google was $3.75 billion, or 29% of Google revenues, in the fourth quarter of 2012. This compares to GAAP operating income of $3.51 billion, or 33% of Google revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was $4.42 billion, or 34% of Google revenues. This compares to non-GAAP operating income of $4.04 billion in the fourth quarter of 2011, or 38% of Google revenues.

  • Motorola Mobile Operating Loss – GAAP operating loss for Motorola Mobile was $353 million, or -23% of Motorola Mobile revenues in the fourth quarter of 2012. Non-GAAP operating loss for Motorola Mobile in the fourth quarter of 2012 was $152 million, or -10% of Motorola Mobile revenues.

I feel that margins may increase slightly but for advertising they are on a long-term downward trend. That is the price Google will pay as digital advertising becomes more ubiquitous. What will be bought at this price? Google will permeate all aspects of digital life with cost-shifted products, based in large part on advertising revenues. In general, margins will drop, but revenues will explode. No longer will we get to keep 40% of our single dollar, but we will get 20% on the $10 dollar revenue bill. While Apple is pondering the Apple TV, Google is working on a wide variety if literally paradigm changing products - many of which are literal game changers: Google Glass,driverless carsGoogle Fiber...

As is customary, I'm willing to discuss my views, opinions and findings with any professional or institutional BoomBustBlog subscriber over the phone or via Google+ Hangout. If you wish to have such a discussion, please email me.

Related articles...

  1. More Evidence That Google Is Already The New Microsoft, and Android Is The New Windows (To YOUR OWN Information)
  2. Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!
  3. As Lower Margin, High Price iPad Minis Outsell All Other iPads The BoomBustBlog Apple Margin Compression Theory Is Incontrovertible & Mainstream
  4. Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...

There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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orangegeek's picture

Google follows the NASDAQ100 well.


And the NASDAQ100 is showing bearish.  This may change, but for now, long google looks high risk.

joego1's picture

Once they have locked onto my buying habits I like to see how much I can run up their click bill. I think I can run it up fairly quickly when Google is screwing them good. I do it to my own competition too.

Joe moneybags's picture

Reggie, no amount of facts and analysis regarding Google will sway the ZH crowd to go long Google.  Unless, of course, Google buys some significant gold miners.

CH1's picture

Google is evil. Buying their stock would be like financing Nazis or commies.

alien-IQ's picture

Yeah, that's it. I'm sure that the fact that Google has become a willing branch of the surveillance state has absolutely nothing to do with people's disdain for them.

What's next for Reggie? Telling us what publicly traded Drone manufacturer we should invest in? Perhaps there's a good prison IPO in the pipeline? Or maybe an up and coming body bag company? After all, if we can make a profit from the stock, can they really be that evil?

Of course, the natural response to this will be that investing has no place taking a moral stance...which is not unlike so many during the Nuremberg Trials defending their actions by saying "I was just doing my job".

CH1's picture

"investing has no place taking a moral stance"...which is not unlike so many during the Nuremberg Trials defending their actions by saying "I was just doing my job".

Well said.

Free markets are good because they are moral, not just because they "work." If you have no morality in your investing, go long wheat, then napalm the plains on a dry weekend.

alien-IQ's picture

Nice to see that your computer is working just fine after THIS earnings report. How fucking convenient.

Pump baby pump. Push that book on the lemmings.

NoDebt's picture

Air travel by jet went from a "marvelous high-tech modern convenience" to being the bus stations of the 20th century.  They're disgusting places you would never want to go if you didn't need to.

I submit that the internet is the virtual bus station of the 21st century.  The marvel of it all has worn off.  Now it feels very much along the lines of a public rest room (plus non-stop advertisement while you're trying to take a dump).

Google is WELL suited to thrive in that type of environment.  They'll be clicking along well after Apple goes down the path that BlackBerry and so many other tech companies have gone before it.

Me?  I only use the www for 3 things- ZeroHedge, some car enthusiast boards I like to frequent and, of course, porn.  Lots of porn.  The rest of it's garbage.


OpenThePodBayDoorHAL's picture

Um good comment about air travel/airports if you're talking about the US. In most other countries of the world where they don't spend all of the national treasure on war and billionaire bankers, airports are amazing places to visit. Try Hong Kong, Singapore, Amsterdam, Bangkok, Kuala Lumpur etc etc etc

earnyermoney's picture

The 12% denial rate are for registered blue hued fascists.

earnyermoney's picture

Google is evil They are the new MicroSucks.

alien-IQ's picture

Reggie doesn't mind evil as long as he makes money from it.

NotApplicable's picture

All I seem to know these days is that Google is ruining the internet, and Android devices will not allow me to address the problems.

1) ZH is unusable on non-PC devices, thanks to ads taking up nearly ALL of the bandwidth, not to mention page space. Three to four page loads are sometimes required to dismiss the ads while retaining the content.

2) I tried recently to use google's image search on my tablet. I had to abandon it, and go to my desktop, as google controls the content within the search results, yet couldn't display the image that I selected. Nor would it allow me to go the the website containing the image.

I find, that thanks to Google ads, I'm using the net less and less, except where I can escape their idiocy while still managing to read the content that I want.

Oh, and 3) No-Script is your friend.

OpenThePodBayDoorHAL's picture

Ad Blocker Plus and Startpage, anonymized search

alien-IQ's picture

Try ad blocker plus. I'm on a Mac and had problems on ZH with the ads until I started using that. Now, no ads AT ALL. It's a beautiful thing.

falak pema's picture

the future interface of man vs machine and those who control the big data systems that control BOTH man AND machine.

We have our priorities all mixed up. Does the tail wag the dog ?

John Law Lives's picture

The following news re. Google really caught my attention today:

"Internet company Google complies with requests for user data 88 percent of the time government asks, according to data released today by Google."


I wonder if user data is ever requested re. members of this site and if it is ever provided.

alien-IQ's picture

Perhaps that's what Reggie loves about them?

derek_vineyard's picture

no-one ever accused reggie of being humble

Winston of Oceania's picture

If you asked rather than just wondered they might answer you. As always trust NO ONE but yourself as even this site could be a trap. I can recall going to a Tea Party rally back in early 09 and watched the sheeple dutifully signing their names to a list of attendees. I called them out on it and they were in fact Republicans, people were pissed and wanted their names off the list. I am certain that those names are now being stored somewhere by the NSA in a big black building filled with servers...

bank guy in Brussels's picture

American judges sometimes order Google and others, to suppress that such an order is given ... And the victim is 'erased' from search, though websites in Europe and elsewhere still stand ... while Google Inc. illegally prevents people worldwide from finding those sites

Google Inc., the CIA-seeded partner of US and Israeli government terror ... with European charges against them

Live Photo: Google Inc. Caught Censoring EU Search Results re US attacks on EU citizens (for USA - CIA) -
Google Internet Censorship - Censure d'Internet par Google - Internet censuur door Google

'Ex-Agent: CIA Seed Money Helped Launch Google', retired intelligence agent Robert David Steele interviewed by Paul Joseph Watson, and speaking of the CIA's Dr Rick Steinheiser and his connections with Google: