Google's Mobile Advertising Up 2.5x (GOOG, AAPL, MSFT, SSNLF)

When Google Inc. (NASDAQ: GOOG) reported third-quarter earnings last night, CEO Larry Page noted that the company’s mobile advertising revenues are currently running at an annual rate of $2.5 billion, up 2.5x from about a year ago, when then-CEO Eric Schmidt put the annualized rate at $1 billion. Page would not go into any more detail on mobile ads, but $2.5 billion represents about 6% of revenue for a company on track to post revenues for the year near $40 billion. That’s beginning to be meaningful.

The company revealed that 190 million Android-based smartphones have been activated to date, and as that number continues to grow, Google’s platform for serving ads also continues to grow. That’s why Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT) continue to press their patent actions against Google. The recent injunction leveled against Samsung Electronics’ (OTC: SSNLF) Galaxy Tab 10.1 in Australia follows similar cases in Europe.

Recent estimates of the mobile ad spend in the US come in at $1.23 billion, nearly double the 2010 total. As advertisers and mobile ad services get better at targeting mobile ads, especially search ads, that number could rise very quickly. For example, at Ebay UK, sales through mobile devices now amount to 10% of all purchases. Ebay UK sold nearly 2 million items on its mobile platform in August for an average of about one per second.

We’ve noted elsewhere today the relative success of Google compared with traditional publishers that have tried to move more of their revenue-generation online. As far as revenue and profits are concerned, Google operates like a publishing company that lives and dies on advertising sales, not a hardware or software company that depends on sales of a more or less tangible good.

Here’s how Larry Page generalized Google’s approach to the mobile ad market during yesterday’s conference call: “Generally, I found that high usage products will make a lot of money over time for well-managed technology companies and that’s why it’s so important to run these businesses for the long-term.” The trick is to maintain that high usage and grow its relevance for advertisers.

Here’s the next sentence in Page’s comments: “That said, we must never lose faith of the fact that today’s revenues and growth serves the engine that funds all of our future innovation.” What is the “engine” he is referring to here? It’s not the search engine, it’s the advertising engine. Google’s search engine, like its Android operating system, is free. Google “funds” its growth with ad dollars, and growth in the mobile ad market is critical to Google.

Neither Apple nor Microsoft seriously compete with Google yet for those mobile ad dollars. Microsoft’s recent agreements with HTC Corp. and Samsung on patent licensing is raising the cost of Android for those companies from free to about $5/unit. Apple must figure that if it worked for Microsoft, it’ll also work for Apple. Wouldn’t HTC and Samsung and all the other Android smartphone vendors be willing to pay another $5/unit to Apple to avoid more litigation?

What does Google think of the patent lawsuits? Here’s Page again during the conference call Q&A: “[W]e see absolutely no signs if that’s effective and ultimately we think that other companies actions there will alienate their customers and their relationships with other companies.” That’s a bit self-serving, but essentially Google doesn’t appear to be too worried about patent lawsuits. If that’s true, it’s because they must be willing to pay a reasonable amount to maintain the shipping rate of Android-based smartphones.

Google’s third quarter was a boomer, and while the company does not provide guidance, there’s no reason to think that the fourth quarter will be significantly different. EPS for the third quarter beat estimates by almost $1/share, and estimates of $10.01 for the next quarter are sure to rise. Google shares are up nearly 7% at market open today, at $596.16, in a 52-week range of $473.02-$642.96.

Paul Ausick

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