With the desktop PC receding as the primary hardware for connecting users to the web, many equations are changing. For Google Inc. (GOOG), which has dominated the search market on the desktop platform for awhile now, this could be regarded as a threat to its leadership position. All leading market research points to the fact that mobile platforms will overtake the PC over the next few years. Evidence of this is the already higher growth rates for mobile computing devices and cell phones.
Google’s competition for search market share primarily comes from Microsoft Corp. (MSFT) and Yahoo Inc. (YHOO), although local companies such as Baidu (BIDU) in China add to the competition. A new entrant in the space is Apple Inc. (AAPL), which has recently made investments and initiated data collection actions that indicate its growing interest.
In the mobile connected hardware market, which includes devices such as cell phones, notebooks, netbooks and other mobile Internet products, the primary players with most of the recent success include Apple, Research in Motion (RIMM) and Hewlett Packard Co. (HPQ). Nokia Corp. (NOK) is also a big contender, although the company is currently going through a bad stretch.
The thing that enables the hardware to operate and connect to the Internet is software, especially the operating systems (OS) of the devices that were created by Apple, Research in Motion, Microsoft, Symbian and now Google. Therefore, control of the operating system market is one way of getting to the search market and this is the strategy Google is currently employing.
Google has taken all possible measures to increase Android-based devices and it now appears that Android will outgrow all other contemporary operating systems both in the U.S. and abroad.
The company also has its own cell phone (Nexus One) and is planning an Android-based netbook to be manufactured by Acer. However, these devices are more likely to be used to show off Google’s software and we don’t expect the company to focus on hardware sales. There are two reasons for this. First, selling hardware is a deviation from Google’s core competency and second, Google’s ad serving business is much more profitable.
So instead Google continues to focus on search, having acquired AdMob recently to bolster its mobile search expertise. It also continues to introduce faster and better versions of Android that could attract more buyers. Now if Google attempts to pre-install the new Chrome browser on Android devices, it could more easily direct users to its search and other web services.
Additionally, in line with an EU ruling in December 2009, Microsoft will have to offer users a choice of browsers, which is another opportunity for Google to offer its new Chrome browser.
While Google’s execution has been extremely good, the company has also had its share of negative publicity. Therefore, although we are increasingly positive about its prospects, we are reiterating our Neutral rating and short term Hold recommendation, which is the equivalent of a Zacks #3 Rank.