In the smartphone market, Google's (GOOG) Android is king of the hill, no doubt about it: a recent report by Gartner puts Android's market share at an astonishing 72.4%. But is it really useful to have the best-selling product of the moment if you're not able to monetize it properly?
The user-engaging problem
First of all, a little bit of data: until the end of 2011, 200m Android handsets had been activated. By June of this year, 900,000 Android phones were being activated each day; by September of this year, that figure grew to 1,300,000: Android is growing faster than iOS. Not only this: a little bit of math tells us that there are more Android phones than all iOS devices combined. So how come that IBM just told us that Apple's (AAPL) iOS led the Thanksgiving online shopping by 3.36 to 1 versus Android? Shouldn't it be the opposite?
Turns out, Android users are much less inclined to use their platform to do shopping online, or to pay for virtual goods like apps and music. The reasons, to me, are quite simple, and mainly derive from the fact that the high majority of Android devices still run on Android Gingerbread, a two year old OS, but most of-all, the extremely high majority is made up of low-end phones. This means two things:
- Most Android users are not inclined to spend on apps and music because the openness of the OS allows them to save money by getting content from other sources.
- Most Android users do not surf the web at all on their handsets (and therefore do not support Google's ads business), because it is difficult to do so on a low-powered phone with an old OS and a crappy interface.
This leaves Google with a huge customer-base, though, which does not serve its purposes.
The revenue problem
From the recent Oracle-Google dispute, we learnt that Google earned $500m from Android since its inception to the end of 2011. If we look at what Larry Page told analysts during an October 2011 conference call, we'll find out that in the same period the total revenues deriving from mobile were $2.5b. If we take out the $.5b earned thanks to Android, an astonishing 75%, or $2B, remains unjustified by Android revenues: that's what iOS brought in the same period: 4 times as much.
So all these Android devices and nobody making money on them? Actually there's somebody making a ton of money on Android, but you bet that's not Google. If we take a look at Samsung's (SSNLF.PK) latest financial reports, we can clearly see how the adoption of Android as their main mobile OS signed the beginning of an astonishing surge in revenues (and profits), until the recent record profit, achieved thanks to the Galaxy phones, which all run on Google's Android.
Samsung's success, therefore, relies heavily on Android, but it doesn't redistribute the profits to Google itself. Just a month ago, while Samsung profits were rocketing, Google gave that mid-day dismal earnings release, which will be long remembered.
The Apple problem
iOS accounts for a huge part of the profits Google brings in from mobile. Problem is, Apple is making its best efforts to oust Google's presence completely from its platform. Maps are already gone, even though that led to a plethora of critiques, and there's no sign they're coming back soon. How much will it take for Apple to also find an alternative to Google search in Safari? Maybe years, but can really Google afford to take that risk?
Android has not revealed itself, until now, as a big enough source of profits for Google. At the same time, it caused the rage of Apple, which accused Google of blatantly copying iOS and which is now trying to oust Google's presence from iOS itself. (Something that could be Google's worst nightmare in a world where the user experience is heavily shifting towards mobile.)
Until Google finds a way to better monetize Android, or to wipe out the risk of being ousted from iOS, the stock remains a risky bet on the ability the company has to make profits from an environment which is revealing itself as more difficult to squeeze money from than the PC ecosystem did.
Disclosure: I am long AAPL.