Google today reported a drop in profit and revenue for the third quarter, an unexpected slip that highlighted an online industry still struggling to make money on a growing mobile market.
Google's sagging earnings report followed similarly tough news this week from industry giant Intel and IBM, signaling that the tech sector could be entering a difficult economic phase, according to analysts.
Also reporting soft earnings and revenue today: Microsoft.
"The tech sector is finally feeling the impact of the world-wide recession," said Dan Olds, an analyst with The Gabriel Consulting Group. "It's hit the PC vendors hard, and is now making its way up to the large diversified tech vendors like Intel and IBM. I think that we're going to see a few quarters of weakness moving forward, but there might be some light at the end of the tunnel next year, assuming that some confidence returns to the economy."
Google caught Wall Street by surprise when its third-quarter earnings report was released hours before expected.
The report showed a 20% drop in the company's profits, as total costs rose and advertising prices slid. The news brought on a sell-off of Google shares, dropping the company's stock price by 9% before trading was suspended to halt the stock's slide.
Google, which had been scheduled to post its quarterly earnings report after the close of trading today, reported net revenue of $11.33 billion, missing market expectations of $11.86 billion.
Although quarterly revenue was up 45%, year over year, so were operating expenses, which rose from $3.28 billion a year ago to $4.81 billion in the quarter that ended Sept. 30, according to a report filed with the U.S. Securities and Exchange Commission (SEC).
And despite layoffs earlier this year, Google's recently acquired Motorola Mobility business showed an operating loss of $527 million on revenue of $2.58 billion.
"OK, first Motorola lost a lot of money...and from what I'm hearing, Google has a mobile problem, too," said Olds. "They can't charge as much for a mobile ad or click as they can for a regular one on a browser. Mobile advertising is generating less revenue for all of the players, including Google."
Google isn't alone. Figuring out how to monetize the burgeoning mobile market is a problem that has has plagued Facebook - in a very public way.
In the months leading up to Facebook's initial public offering this past summer, the company admitted in a filing with the SEC that the fast-moving shift from traditional desktop or laptop computers to mobile devices was hurting the company's advertising plan.
Facebook also listed mobile among the company's "risk factors."
"The results today are really underlining how important mobile is for Google going forward, as consumers move away from the PC to phones and tablets to do what they do," said Carolina Milanesi, an analyst with Gartner Inc. "Consumers spend less time on the Internet and more time on their apps, and that plays a role in how we use search and the role that search plays in our lives."
Much will depend on the role Motorola plays in Google's mobile strategy, especially when it comes to search.
"I think this is not something you fix in a quarter," said Milanesi. "It's such a change in the market with the role that search has. Google is soul searching how they're going to monetize in this next phase. How will consumers search? How do they go about serving that need? There's a big opportunity there."
The sluggish global economy also weighs on Google's efforts to correct this financial slip.
"Google isn't in big trouble, but there are limits to growth and limits to the market power that any single company can wield," said Olds. "Plus, we're also still in a serious worldwide recession. Google has managed to grow steadily throughout the recession, but perhaps we're finally seeing lower global economic activity have an effect on the Google juggernaut?"
Patrick Moorhead, an analyst with Moor Insights & Strategy, noted that Google certainly isn't alone. The economy is starting to drag on a lot of tech companies.
"High tech is in a financial funk, on the whole, as evidenced by the downturn in nearly all sectors of the market," he added. "Google can't do anything about the economy, but they can optimize their business around a downturn. They will need to pull back on their operating expenses, which could mean layoffs or less advertising themselves. Google is one of the last companies to reduce R&D spending, so they will need to go after operating expense."
Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, on Google+ or subscribe to Sharon's RSS feed. Her email address is email@example.com.
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