Google's smartphone plans could affect strong Q4

**San Fransisco:**Google Inc’s strong holiday-quarter results may take a backseat to growing concerns about long-term margins after it dives into a fiercely competitive smartphone market through its $12.5 billion acquisition of Motorola Mobility Holdings.

Shares in the Internet search and advertising leader, which reports fourth-quarter results on Thursday, scaled a four-year high of $670.25 this month on expectations it benefited from strong online holiday shopping.

But that enthusiasm cooled after Motorola - the cellphone pioneer that has been lapped by the likes of Apple Inc - warned it will miss Wall Street’s sales expectations in the pivotal holiday quarter. That would mark the second straight quarter that revenue falls short of target.

Investors have been uneasy about Google’s plans to buy Motorola, a deal the companies expect to close early this year. CEO Larry Page has never fully detailed his long-term strategy for the asset other than saying it will be run as a separate company. Analysts say the company fears alienating Samsungand other Motorola rivals that helped its Android platform become the world’s foremost mobile-software system.

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[caption id=“attachment_185915” align=“alignleft” width=“380” caption=“Investors have been uneasy about Google’s plans to buy Motorola, a deal the companies expect to close early this year.AFP”]  [/caption]

“You’ve got this big millstone that’s about to be draped around Google’s neck,” said BGC Partners analyst Colin Gillis.

“Motorola is a low to no-margin business mixing with a higher margin business,” Gillis said.

In the short run, Google remains one of the largest beneficiaries of a rapid migration of shoppers and viewers to the Internet from traditional media.

Online spending in the United States reached a record $35.27 billion from November 1 through December 26, up 15 percent versus the corresponding period last year, research house comScore reported.

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Analysts believe Google’s US search advertising business performed strongly in the last three months of the year, as online retailers and other companies spent heavily to advertise on Google, where two out of every three Internet searches take place.

Europe - Swing Factor

Google, which has beaten Wall Street’s financial targets for five of the last seven quarters, saw its shares jump 6 percent in October after the company’s third-quarter profit and revenue came in well above expectations.

The company’s fourth-quarter net revenue, which excludes fees shared with partner websites, is expected to jump 32 percent to $8.4 billion. Analysts expect Google to report adjusted earnings per share of $10.49, compared with $8.75 in the year-ago period.

A big wildcard is Europe, which analysts estimate accounts for roughly 40 percent of Google’s revenue. With the region grappling with a sovereign debt crisis and the resultant economic uncertainty, many analysts have stuck with conservative fourth-quarter estimates.

“Our checks were suggesting maybe a modest slowdown in growth versus Q3’s growth rate” in Europe, said Aaron Kessler, an analyst at Raymond James. “There’s some room for upside for Google if Europe comes in better than expected.”

Apart from its mobile strategy, Wall Street will be keen to hear co-founder Page address a number of key longer-term questions on Thursday.

The company’s spending growth rate is likely to come under scrutiny. Page, who took the reins as chief executive in April, has aggressively weeded the company of dozens of projects and products, including efforts in renewable energy and healthcare.

By eliminating non-essential projects, Page has sought to “put more wood” behind the key arrows in Google’s quiver. The company has embarked on an acquisition and hiring spree to position itself to take advantage of key trends such as mobile computing and social networking.

Its recently-launched social network, Google+, counts more than 40 million users, representing a promising start as Google tries to catch up with Facebook’s more than 800 million users.

But recent efforts to promote Google+, such as prominently featuring people’s profiles within search results, have triggered criticism that it is unfairly favoring its own services over those of rivals, such as Twitter. A Federal Trade Commission investigation into Google’s business practices was recently expanded to include Google+, a source familiar with the matter told Reuters last week.

What’s mobile’s end game?

Even Android, Google’s free and dominant smartphone operating software, may be the subject of debate. Apple may be catching up, thanks to a new iPhone model released in October. According to a report by industry research firm NPD Group, smartphones running Apple’s iOS accounted for 43 percent of U.S. retail smartphone sales in the months of October and November, versus 26 percent during the third quarter.

Android, by contrast, saw its market share slip from 60 percent to 47 percent during the period, according to NPD, though it still remains the No.1 player.

Google may be counting on Motorola to help the company develop its own line of Android phones and tablet computers, to better compete with Apple’s iPhone and iPad. But that might also anger HTCand other Android users.

“Once this deal closes, there remains a lot of questions,” said Susquehanna Financial Group analyst Herman Leung. “The key question is do you keep the hardware business, and if you do, how does that impact the ecosystem of Android.”

Many analysts believe, however, that Google’s primary motive for acquiring Motorola was to secure its treasure trove of patents: a key asset it can use to defend itself in the increasingly litigious mobile arena.

Still, it’s unclear if Google believes it will have sufficiently built up its patent arsenal with Motorola, or if it will keep shopping for more.

“How much more patent buying (does Google) gear themselves up for?” wondered Leung. “How many more linebackers do you need for Android’s defense?”

Reuters