Feb 032015

Source: Google

Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) reported fourth quarter results last Thursday. As a Google shareholder, I was itching to see how one competitive change might have affected the earnings results.

The popular Web browser, Firefox, produced by the Mozilla Foundation and its army of volunteers, has been using Google as its default search tool for ages. That changed in November, when Mozilla announced a five-year partnership with Yahoo!.

That agreement changed the default Firefox search engine for most users in the U.S. Firefox users who had actively chosen to get search results from Google or any other search engine were not affected by this change, but moving away from system defaults is actually quite rare.

So when a browser with a respectable 12% market share decides to switch up its default anything, the change can potentially move mountains of cash. In a recent report, StatCounter says that Google market share in the U.S. search market fell from 79.3% to 75.2% year-over-year.

And the change was sudden — Google saw half of its U.S. share loss in December. These results coincide with another StatCounter tidbit: On the first day after Firefox released a version featuring its new partner, Yahoo! Search instantly tripled in popularity compared to the previous version of the browser. The new default stole a little bit of action from Bing and others, but Google was the main victim.

Source: StatCounter

So, did Firefox affect financial results at Google? 

Google management is the least likely to enlighten curious investors on this topic. During the earnings call, one analyst tried to shine some light on the Firefox situation, but Google CFO Patrick Pichette refused to budge:

You’ve all heard the announcements about Mozilla. We don’t comment on the details of any of our partnerships that we have. Having said that, we continue to do two things that really matter: One is, our users continue to actually go in, if they love Google, they will continue to find Google, whichever platform, whichever browser, and that’s really what we’ve focused on doing.

And then the second piece is, the way to win this is in the long term, right? It’s very simple. You just make wonderful products. And when you make wonderful products that are magical, people will find them.

That’s the strategy that we’re using. We’ve never commented on any of our deals, so we won’t comment on Mozilla either.

In plain English, the company will not comment on the Firefox deal on principle, but it does not matter as long as the search experience keeps customers happy — nothing to see here, move along.

I was told there would be no math!
Okay, so let’s do our own homework instead.

Losing 2.1% of its market share in the all-important U.S. market for one month should reduce paid clicks by about 0.7% for the quarter. That should lead to somewhat disappointing revenues, causing Google to miss analyst estimates on the top line.

However, paid clicks rose 14% year-over-year, including a 25% gain on company-owned sites, such as the core search service. If there was a weak spot in the revenue stream, it would be an 11% decrease in sales through advertising networks that show ads on third-party sites.

All told, adjusted sales rose 7% year-over-year to $14.5 billion. Analysts had been expecting $14.8 billion, making for a 2% revenue miss.

The company did not attribute the miss to lost market share, Firefox, or anything else. Instead, management explained that “strong currency headwinds” made a difference in this quarter.

Currency exchange effects accounted for $468 million of net lost sales, more than the sales miss compared to Wall Street estimates above. The Firefox switch was likely nothing more than a rounding error in an otherwise strong quarter.

At the moment, Google is working hard to clean out irrelevant results from its search pages. That is making a bigger impact on click volumes than anything Mozilla might do.

“Our clean-up efforts have resulted in fewer clicks, but also higher cost per click,” Pichette said. “It’s a mix of these two things that give you this revenue that’s been very strong in sites this quarter, so never look at them in isolation.”

Did Firefox move the needle at all?
Google shares fell 0.6% when Mozilla announced its new partnership, and they took another hit when StatCounter and others started reporting on the impact on the search market. This fourth quarter report made it clear the Firefox move had no real effect on the business.

Looking ahead, I expect the market share breakdown to normalize when numbers for January start coming in, as Firefox users start moving back to their preferred search service once again. Remember that Google has achieved its search market domination even in the wake of Microsoft Internet Explorer running Bing as the default search engine. That browser still accounts for about 40% of all Web traffic (Get 10000 free hits) today and was even larger in the past.

All evidence points to the breakup with Firefox as nothing but a blip on the radar for Google and its shareholders. It was a nice run as the default Firefox search engine, but in the end, it does not really matter.

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