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I initiated a series on the possible decline of the Android mobile operating system. One reader asked me to write on the potential impact to Google of such a decline.

According to eMarketer:

Google earned more than half of the $8.8 billion advertisers worldwide spent on mobile internet ads last year …

Google (NASDAQ:GOOG) is the giant of online search. It's main product is searches which it gives for free, in exchange for your eyeballs and all your information. It uses the latter to direct to the former a series of targeted advertising and from this it makes its money - $54 billion (ttm), that is, for a net income (ttm) of $11 billion ($33.42 EPS).

Growth

The figure from eMarketer is $4.6 billion from mobile ads in 2012, or 8.5% of its total income. Mobile revenue is expected to rise this year to $8.9 B, almost double. The 2012 annual revenue was about $50 B. With an average analyst estimate of $60 B for 2013, that means $4.3 B of the $10 B rise - 43% - will be from mobile. Gartner projects for 2016 $24.6 B in mobile ads, with Google at 56%, that would be almost $14 B in revenue. Clearly, this income is important to Google growth.

According to Mobile Marketing Watch, quoting Marin Software

"Google earned $2.5 Billion in mobile revenue in 2011," the report reads, citing the latest data from Cowen and Company. "And by 2016, it's estimated that mobile could drive $20 Billion in revenue for the search giant."

Analysis

While any mobile web browser will encounter Google ads, and many mobile apps that derive their revenue from ads (as opposed to sales of the app itself) also rely on Google's networks to place the ads, a great portion of this figure will come from devices driven by their own Android smartphone and tablet operating system. This for several reasons.

  1. Android developers have trouble selling apps on Android. This is due to the fact that [a] Android users are less likely to pay for apps, and [b] to the thriving underground market for stolen apps.
  2. Other mobile systems will drive users to other search engines and or ad networks. While Android apps may use other ad networks, and iOS and WP8 apps are free to use Google networks, Android users and developers are more likely to use Google. Apple (NASDAQ:AAPL) has its own iAd service, and WP8 by Microsoft (NASDAQ:MSFT) has its own Bing search engine, which is also the default in BlackBerry's (NASDAQ:BBRY) BB10 mobile system.

So, one way or another, Google relies on Android to drive a certain portion of this $12 billion in 2016 revenue.

Apple's iAd service claims 15% of U.S. market share of mobile display ads, vs. Google's 24%. (I could not find figures for global share, although I am sure it is much lower.) AppleInsider reported on IDC data on April 9 of this year, that the ad market is not simple, with several key players. Of course, the $630 Million of U.S. display ads is a small portion of the overall global mobile advertising, which includes other types of promotions - totaling (as mentioned above) to almost $9 Billion. More recently, Apple has announced that it is making iAd easier to use by smaller companies.

The AI article also notes that more and more, users are NOT using traditional searches, but rather are using apps - Yelp, Maps, Facebook (NASDAQ:FB), and store specific apps - to find what they need instead. All this impacts the overall advertising picture.

Both WP8 and BB10 have Bing as the default, and Apple's Siri voice assistant has also switched from using Google search.

Conclusion

It is very difficult to determine how mobile ad revenue will be affected by all these developments. One thing is clear - Android drives a lot of mobile ad business directly to Google. Since the overall system is so complicated, however, it is unclear just how a major decline in Android market share would affect Google mobile ad share.

My projection for 2016 was for Android to fall to 22%. If this were to occur, along with the other issues listed, I think it would be possible that Google's overall mobile ad share might drop by as much as 50%. If the above noted Marin report is correct, then this would shave as much as $10 B from their 2016 revenue. That would be about 17%.

We can see why Google invests so much in Android. It drives a lot of revenue their way that they might otherwise miss.

Disclosure:

I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Effect On Google From Potential Decline Of Android Mobile