How Can Google Monetize Apps?

| About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) Apps currently constitutes less than 1% of the $643 Trefis price estimate for Google’s stock. Google competes with Microsoft (NASDAQ:MSFT) and others in the web-based productivity software market.

Google Apps includes e-mail, calendar, word processing, spreadsheet and collaboration programs. Although the Google Apps user base has grown in the last few years, the overwhelming majority of users don’t pay for the service. We estimate that only 6% of Google Apps users are actually paid users, while the rest use the free version.

Google could attract more paid users by, for example, bundling Apps with its growing library of mobile business apps for the Android smartphone operating system. We see a modest 2% upside to our $643 stock price estimate for Google in the event that the company manages to convert 20% of Google Apps users to the paid version by the end of our forecast period. Our analysis follows below.

Cloud app market growth

Like other so-called cloud applications, Google Apps is accessed over the Internet and hosted by Google’s data centers rather than on the customer’s network. Cloud-based services like Google Apps are growing in popularity because they can provide cost and maintenance savings over traditional software.

We expect the Google Apps user base to increase from 25 million in 2009 to around 140 million by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own Google Apps user forecast and see how it impacts the company’s estimated share value.

According to Gartner, the current paid user base for Google Apps is between between one and two million, or 6% of the current total. Unless Google figures out a strategy to attract more paid users, we expect this percentage to remain constant going forward.

How can Google enlist more paid users?

For one thing, Google could bundle its business-oriented Android based smartphone apps with Google Apps to provide a complete suite of mobile software for businesses. The Android platform currently features more than 700,000 apps, second only to Apple’s (NASDAQ:AAPL) App Store.

Integrating Google Apps with the Android app ecosystem could give Google a significant edge over Microsoft and Apple. Although Microsoft dominates the productivity software market, it only offers a few mobile apps. And although Apple dominates the mobile app market, it has little presence in the enterprise space.

Google could also bundle Apps with future versions of its Nexus One smartphone. Although Nexus One was not received well by consumers, Google might do better by positioning the phone as an app-rich productivity and collaboration device for the business market. This could be cost-effective for enterprises and would also help monetize Google Apps.

Disclosure: No positions