Hard times in hardware

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Google Needs Motorola to Get It Together … FAST

Google (GOOG) has surged 45% in 2013 and shows no sign of slowing down. But if GOOG is going to keep the momentum going, it needs to start seeing some contributions from its Motorola division in a hurry.

goog stock google logoGoogle bought Motorola Mobility in 2012 for $12.5 billion, a sign that GOOG was getting into hardware instead of just playing the mobile game via its popular Android OS and other software. At the time, this was billed as a shot across the bow of top competitor Apple (AAPL), which long had profited from seamless integration of in-house software with hardware it directly manufactured.

But while Android remains a dominant operating system, handily beating iOS from Apple and dwarfing also-rans like BlackBerry (BBRY) and Microsoft (MSFT) that languish with single digits in global market share, GOOG hasn’t been able to find traction with hardware.

This in spite of the company selling deeply discounted tablets and smartphones in order to win over consumers. Consider that the Nexus 7 tablet starts at just $229, much cheaper than the newest iPad mini from Apple that starts at $399 though similar in specs, and on par in price with the new Kindle HDX from Amazon (AMZN).

When you’re competing with Amazon on price — after CEO Jeff Bezos admitted last year that AMZN is selling its Kindles at cost to gain market share — that’s a sure sign of aggressive pricing.

On top of that, there’s now rumblings of a low-cost smartphone from Motorola as the GOOG division looks to gain ground. The new Moto G phone, unveiled this week, will be available for $179 without a wireless service contract — a third of the price of the new “cheap” smartphone from Apple, the iPhone 5C.

This announcement comes on the heels of disappointing Moto X sales. Take this, from a Wall Street Journal report recently:

According to research firm Strategy Analytics, roughly 500,000 Moto X phones were sold in the third quarter, after the phone was released in August. By comparison, Samsung said it sold more than 10 million Galaxy S4 phones within a month of its April release.

Clearly something has to give here. If Google hasn’t been able to capitalize on hardware sales out of the gate and is now racing lower on price, there really is no room for error at Motorola. If GOOG still struggles to sell its hardware even at much lower costs, there will be serious doubts that it will ever be able to sell enough hardware to make the Motorola acquisition pay off.

After all, the potential for many investors has been the massive Android market share, which now tallies about 8 in 10 smartphones worldwide using the Google operating system. If that software dominance can’t translate into even modest device sales, then GOOG better find a way to make Android work for it in other ways … and in a hurry.

Right now, Motorola is not profitable as an independent division of GOOG. That’s not just disappointing for those banking on long-term potential from this deal, but also a bit of a problem considering Google continues to struggle with its core advertising business in the short term.

The bottom line for Google stock investors is that profits and revenue need to keep marching higher, particularly after a big run-up this year despite continued softness in display ads.

Motorola needs to start pulling its own weight soon.

More on Motorola and Google Stock

  • How long will GOOG let Motorola keep burning cash? (The Verge)
  • The latest quarterly figures on smartphone market share show Android is still the dominant OS. (IDC)
  • More details on cheap Motorola phone plans and disappointing Moto X sales. (Digits via WSJ)

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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