Google's revenue-boosting dual OS strategy
Android dominates the smartphone market but lags Apple's iOS when it comes to tablets. The search-engine giant's new web-based Chrome platform could change that.
- Google's ad sales contributed 94% to its total revenues in 2012. It also leads in mobile search ads, with 97% of the market.
- The reason for this dominance is the widely popular Android operating system (OS) for smartphones, which had a 48% share of ad impressions for 2012 (Marketing Charts). However, tablets are gaining traction as mobile devices and are logging higher web traffic (Digital Marketing Blog).
- In light of this, Google has adopted a dual OS strategy for its mobile platform. We believe this is a good move, as it will stabilize the company's market share and drive its mobile search ads revenue.
Android drives smartphone search ad revenue
Google's mobile search ads division is the second largest division of the company and makes up approximately 32% of its total value. Google, with 97% market share, is the most dominant player in mobile search ads, thanks to its flagship Android OS, which has experienced wide adoption and excellent penetration in the smartphone space. Android held nearly 70% market share for smartphones in the fourth quarter of 2012 and will be a key driver for Google's mobile search ad revenue in the short term.
Tablets will improve mobile ad revenue per search
Gartner has projected that worldwide mobile ad revenue will exceed $11 billion in 2013, and grow at a rate of over 400% from 2011 to 2016. Tablets are now an integral part of the mobile sector and are gaining further traction. According to Jumptap, web traffic from tablets has grown more than smartphones, increasing from 7% in 2011 to 18% in 2012 -- at the expense of smartphone web traffic, which declined from 79% to 78% over the same period.
Jumptap also projects market share for tablets to grow to 29% of total mobile internet consumption by cannibalizing smartphone market share. Moreover, according to Adobe's latest digital index, tablet users last year spent 54% more time shopping online than smartphone users and 19% more than desktop PC users.
However, Google has been playing catch up in the tablet space: With a 41% share of impressions, Android lags Apple's (AAPL) iOS. The slow adoption of Android on tablets and the rise of cloud computing has forced Google to expedite the development of its Chrome OS for tablets. While Android OS depends on native apps specifically developed for the device, Chrome OS relies on a browser to access applications built for the web.
We predict Google's Chrome OS will become a key driver of its mobile ad revenue as tablets continue to gain popularity. As tablet users spend more money online than their smartphone or desktop counterparts, ads displayed on tablets are likely to garner higher RPM's because they could lead to higher-value sales. And because searches by these more favorable tablet users will make up a growing proportion of impressions, we project Google's revenue per search on mobile devices to grow from $7.12 per 1000 searches to $10.
While Apple's iOS has a head start with the iPad as a native OS platform, Google's push for Chrome OS is widely recognized as a move to gain traction in the emerging web OS for tablets. Google successfully launched touch-enabled Chrome OS for tablets, which has lent credence to Google's mobile OS platform as an alternative to Windows 8 for accessing cloud-enabled applications.
Android and Chrome users are more likely than others to use Google search, which could translate to better mobile search ad revenue for Google. This is especially relevant when competing platforms such as Windows 8 or iOS use their own search engines on tablets and have access to better cloud services.
We believe that Chrome OS and Android could converge in the future, leading to a powerful mobile platform which can be easily monetized across different technologies and mobile devices. We project that Google's mobile search market share will stabilize at 95% for our forecast period.
We currently have a $737 price estimate for Google, which is approximately 10% below the current market price.
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