Since its 2004 IPO, Google (GOOG) has done a phenomenal job of diversifying its business by expanding/innovating into new markets. This has kept Google one step ahead of the original dotcom-era tech titans (think Microsoft/Hewlett-Packard/Dell) and put the company in the position it's in today.
Google's business has quietly morphed from desktop based search, to everything about mobile. We're not just talking a couple products and some dually compatible software, Google's gone the whole nine yards. For several years Google has quietly been acquiring and releasing an entire suite of mobile products and services. These range from the Android devices/software, Project Glass, the Nexus line, YouTube and Google Fiber.
Below is an outline of the results.
Android has turned out to be one of Google's smartest acquisitions, and its brightest days are yet to come. With a now dominant share of the global smartphone market and a diversified group of hardware manufacturers pumping out ever improving devices quarter after quarter, Android is ready for its next step. Monetization.
2012 was the year that Android become the world's main mobile operating system, this is big news. In May of 2011 I published an article entitled "Why Google Will Win The Smartphone Battle," which received 100+ comments of candidly harsh criticism from the Seeking Alpha community. Since then Android's global smartphone market share has risen from 31.2% to 69.7% (as of Q4 2012 vs 20.9% for iOS). In that same time period Google has outperformed Apple (AAPL) stock by 20% (+50% vs. +30%). Android's open source format clearly had a meaningful impact with developers and has caught up to speed with the Apple's iOS platform.
In Spring 2012 Google anounced the acquisition of Motorola Mobility, which much like its YouTube purchase, was met with a heavy dose of negativity from the (unfortunately short-sighted) analyst community. I'll admit that initially I was equally confused with the deal, but after rumors began to surface about an X-Phone, Google's plan became a lot clearer.
In Spring 2013 Google is expected to release the X-Phone, a high end Android device that's said to be a direct competitor to the iPhone (specs/pricing). For several reasons this is a very different type of hardware launch than we typically see from Google. Unlike the Nexus 4, Google's latest high-end smartphone that was manufactured by LG, the X-Phone will be done from start to finish within Google (thanks to the Motorola acquisition).
Initial reports of the X-Phone give the impression that this could be a real game changer for handheld smart devices. Hugh Bradley CTO of Telstra reportedly told employees that the X-Phone will be a "real breakthrough, a game changer that will put pressure on Samsung and Apple." That same BGR article where Bradley is quoted goes on to say:
"The X Phone is said to have been in development for a long time and will offer "software features and capabilities that are not available on a Samsung Galaxy smartphone or Apple iPhone." The software will reportedly be very powerful and capable of pulling together Google services "like no other manufacturer has done in the past."
It will be very interesting to see what kind of technology Google unveils with its X-Phone, and how/if at all possible, it could integrate into something like Project Glass. This is something to watch closely going forward, especially at Google's I/O conference in May.
Google's strategy for tablets has been very similar to its approach with smartphones. Just as 2012 was the year Android overtook iOS on smartphones, The New York Times reports 2013 is the year Android will do it on tablets as well.
With a leading marketshare on tablets as well as smartphones Google can continue to keep its grasp on its core search business. Although officially there have no been no plans for an X-Tablet, we may see one soon. With the X-Phone, Google is clearly trying a new strategy to enter Apple's coveted premium device category, the X-Tablet would be the same story.
Remember how big Steve Jobs was on Siri? He even reduced an entire iPhone upgrade to a single letter resulting in the iPhone 4S?
Well Google Now, which was introduced via YouTube in the summer of 2012 is Google's version, and it's arguably much better. Apple's Siri was long seen as a competitor to Google's search business because it meant users wouldn't have to use a traditional search engine.
Google Now is a critical response to Siri, and gives Android users another reason to stay within the Google Search ecosystem. It's hard to conclude whether voice based search will eventually eradicate the need for desktop engines like the Google of today, but either way investors should be glad Google has hedged its bet.
Chrome is a crucial component to Android because it's a major driver of monetization. Users who browse on Chrome must have Google set as their default search. This drives a significant amount of traffic to Google's main website and importantly keeps users within its ecosystem.
By having a top quality browser that can gain market share from Apple (Safari) and Firefox, Google can protect its search business.
Google's booming mobile ad revenue is no secret. ZDNet estimates Google took in about $750 in mobile ad revenue in 2011. In 2012 that jumped 190% to $2.17B. In 2013? Estimates are for almost $4B.
Google's tremendous mobile growth is thanks to the increasingly wide-spread adoption of Android and the monetization that it brings with it. As more people spend more time on Google/Android devices for more things, improving monetization will come from both new and current users.
The introduction of the X-Phone, and potentially an X-Tablet could add to both Google's top and bottom line as well. But unlike the Nexus/Chromebook devices, the X products could will have higher profit margins. Google is notorious for selling its hardware at very low margin to compete via cost, with the 'X' line this will most likely change. A premium pricing strategy for a premium product could make Google's hardware division increasingly profitable.
If the X-Phone retails for $400-$500 (unsubsidized) and is able to sell 5M units this year (iPhone sells 30-40M units per quarter), it could add $2.5B in revenue. An X-Tablet retailing for $500-$600 (unsubsidized) that sells 2M units in the year (iPad at 15-20M units per quarter), will add another $1B in revenue. Although these are rough initial estimates, the numbers make it clear a successful entrance into hardware could mean big things for both Google's top and bottom line.
If you aren't familiar with Project Glass by now you're already a couple steps behind. Project Glass is an augmented reality product Google has been developing for several years that is scheduled to hit consumer in 2013/2014.
The Google Glasses will be the first in an entirely new category of tech called 'wearable electronics.' As of now there is nothing like Google Glass on the market. There are some apps on both iOS and Android that have a limited amount of augmented reality features, but none compare to what Glass can do.
An article recently published on The Glass View (a Google/Project Glass news site) entitled "Implications of Augmented Reality" gives some excellent insight on the potential of new era smart devices. The article touches on the future of wearable devices and why Project Glass is an inevitable step forward for the evolution of computers. Wearable electronics are clearly the future, and Google is leading the pack in terms of availability for consumers with Glass.
Although Google's fashion sense and practicality can be debated with glass, innovation cannot. This is clearly a project well ahead of its time that showcases how powerful technology will become in the years ahead.
Rumored to cost between $1,000-$1,500 per pair, Glass will undoubtedly be a premium product. Hype has been building in recent months as privileged Google employees are seen sporting the glasses, and YouTube promos continue to be released.
Judging the market size for Project Glass is virtually impossible. Either the product takes off and ushers in a whole new era of smart devices, or it's the next Segway.
As of now, Glass is scheduled for a consumer release in Q4 2013. Google clearly wants to turn the glasses into the next 'it' holiday tech product. And who can blame them? What else has the potential to be, the iPhone5S or 5 Mini?
If Google can pull itself together for a Q4 2013 consumer launch, initial demand will be very high. Google has a strong consumer following and a very powerful name brand. At the minimum there will be a few thousand tech-geeks wanting to snag a pair of Glasses just for history's sake. Even if we assume a conservative public reaction to Glass, it may still have an impact.
Even if Google only delivers 50,000 units of the Glasses at an ASP of $1,000, that would still yield $50M in revenue. That's chump change by Google standards, but if the product catches on, Glass will be a whole other ball game. If we calculate the theoretical demand for Glass as a revolutionary consumer tech product instead (think Walkman, iPod, iPhone, iPad, Windows), the numbers become more meaningful. Even acting as a niche/luxury smart device, Glass could sell 1M units and make up less than 0.5% of the 'smart device' market. At 1M units per year, Glass will generate about $1B in revenue just from hardware sales.
YouTube is in the midst of revolutionizing the distribution of media. Quickly growing from cute cat videos, to a Fortune 500 advertising tool to music video hub and everything in between, YouTube is on the cusp of serious monetization (like several other Google projects) and will be expanding accordingly in 2013.
Here's a look at the 3 trends driving growth for YouTube this year.
Music Streaming Service - Rumors about a YouTube based streaming music service centered around videos, indicate the company is looking to compete directly with Spotify and Pandora. Initial reports in February indicated the service would launch later this year. Although it's unclear what exactly the final product of this will look like, it's encouraging to see Google capitalizing on some of the new nuances that YouTube caters to (independent musicians/music videos).
Paid Subscriptions - In an attempt to steer more of TV advertising towards the internet (and to YouTube specifically), Google is planning to launch a YouTube subscription service this spring. The service would charge users to watch certain channels, presumably the ones with the most views/best content.
More Content = More Users - The numbers say it all.
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It was also recently reported that YouTube receives more than 1 billion unique users per month, approximately 1/7 of the world's population.
It's hard to get exact data on how much revenue YouTube makes, but in 2011 it did about $1.6B. In 2012 estimates were for $2.4B, and in 2013 analysts have predicted YouTube could bring in between $3.2-$3.6B.
For Part 2 of this series which includes sections on Google Fiber, The Cloud, Technicals and Valuation; please click here.