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Mobile plans and economy to shade Google earnings

Google's core business of selling advertising alongside Web search results appears to be holding up so far against macroeconomic concerns, Eurodebt crisis and US unemployment.



San Francisco: A slumping economy and questions about Google Inc's
smartphone strategy are among the investor concerns that CEO Larry Page
will need to address when the Internet giant reports results on
Thursday.

Google's core business of selling advertising alongside Web search
results appears to be holding up so far against macroeconomic concerns,
including the debt crisis in Europe and high unemployment in the United
States.

But investors have been fretting about the outlook for Google, which
generated 96 percent of its revenue from advertising last year. Its
stock has fallen roughly 13 percent since late July to trade at around
USD 541 on Tuesday.

"Everyone is kind of bracing for another recessionary period, and that
could impact the ad spend in the second half of the year," said Mike
Hickey, an analyst with National Alliance Capital Markets.

Uncertainty about the economy is one of several factors weighing on
shares of the world's No. 1 search engine. Antitrust regulators in the
United States and Europe are investigating Google's business practices,
and the company is spending more money to counter competitive pressure
from the likes of Facebook and Apple Inc.

Since Page took the CEO reins in April, he has made several big bets,
including the launch of the Google+ social network and acquiring mobile
phone maker Motorola Mobility Holdings Inc for USD 12.5 billion.

The Motorola deal, which Google expects to close late this year or early
in 2012, will give Google one of the wireless industry's largest patent
libraries, as well as hardware manufacturing operations that will allow
Google to develop its own line of smartphones.

But the deal has left some analysts scratching their heads, as Google
has no experience in the low-margin hardware business. A move to build
its own phones could jeopardize support for Google's free Android mobile
software from other phone manufacturers such as Samsung and HTC.

Android phones have a greater combined market share than Apple's iPhone.

"We are confused as to why Google didn't simply license or acquire
Motorola's patent portfolio over acquiring the whole company," Morgan
Stanley analyst Scott Devitt wrote in a recent note to investors.

Google fared better than many of its competitors during the 2008
financial crisis and analysts consider search advertising one of the
most effective forms of marketing.

Spending on search advertising in the United States rose 19 percent
year-on-year in the third quarter, according to Efficient Frontier, a
firm that manages large search ad campaigns. Google also won back search
market share in the quarter, after losing ground to Yahoo Inc and
Microsoft Corp, which have a search partnership, during the past couple
of quarters.

Analysts polled by Thomson Reuters I/B/E/S expect Google's third-quarter
net revenue, which excludes fees paid to partner websites, to increase
about 32 percent year-on-year to USD 7.21 billion. The average estimate
calls for Google to earn USD 8.74 per share, excluding certain items, in
the third quarter.

Needham & Co analyst Kerry Rice expects Google to beat Wall Street's
projections in the third quarter, though he notes that investors are
particularly focused on profit.

"Bottom line has become more of an important metric for Google at this
stage. The consistent 20 to 30 percent growth on the top line doesn't
seem to excite people as much as it used to," said Rice.

That means operating expenses will also be in the spotlight. Google,
which has been hiring engineering talent and acquiring companies at a
brisk pace, boosted its operating expenses 52 percent year-on-year in
the first six months of 2011, excluding the cost of its settlement with
the Department of Justice over pharmaceutical industry advertising
practices.

Rice said Google cannot afford to pull back on investments in key
businesses, given the fierce competition in the mobile, social and local
advertising markets.

"Certainly not everything they've done has turned into a pot of gold,"
the analyst said. "But they do have a handful of very good opportunities
that seem to be materializing very nicely."

Google shares were up about 1 percent at USD 542 on Tuesday morning on the Nasdaq.

Bureau Report

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