Google (NASDAQ:GOOG) Glass initiative was first launched in 2011, but it was made available to the general public for beta testing only on May 14th at a princely price of $1500. While the project is still in its early stages, we think that it is worth examining how this offering can be a game changer and money maker for Google. We think that with Google Glass, the company is aiming to capture a bigger share of the mobile local advertising market, which is slated to reach $16 billion in the U.S. by 2018. Additionally, we think that Google aims to gather more high quality data on its users which it can then use to enter and improve a variety of products across its platform. Furthermore, this device will help the company to establish itself in the $30 billion wearable tech industry. In this article, we will explore the upside potential of Google Glass.
Wearable Tech To Revolutionize Hardware Industry
The wearable gadget category is getting populated, with electronics manufacturers like Samsung (OTC:SSNGY) and Apple (NASDAQ:AAPL) having entered or looking to enter the category. Last year, Credit Suisse issued a report that identified wearable technology as ripe for major growth having hit "an inflection point in adoption". From 200,000 in the first half of 2013, wearable sales jumped to 1.6 million in the second half of the year, a 700% increase. Research firm Canalys estimates that the smart band segment will reach 8 million annual shipments in 2014, growing to more than 23 million by 2015 and over 45 million by 2017. This means that the industry is primed for a near five-fold growth from its current market size of $3-5 billion to $30 billion by 2018 on the lower side of the estimate. If wearable eye-wear were to form 30% of the wearable tech industry, which also includes smartwatches and fitness and activity tracking bands apart from smart glasses, its market size can be estimated at $9 billion. We believe that Google will have a first mover advantage, and can get a sizeable chunk of this market, which will meaningfully increase its top line in the future.
Local Ads Opportunity
We believe that one of the key motivating factors for Glass is the opportunity that Google sees in the local advertising market. According to a research firm BIA/Kelsey, total local ad spending was around $133 billion in 2013, and is expected to reach $151 billion by 2017. While this isn't a large growth rate in its totality, the opportunity that Google has in mobile local ad spending is huge as it is expected to increase five folds from $2.9 billion in 2013 to $15.7 billion in 2018.
Through Glass, Google can get a big chunk of local mobile advertising revenues. Google can directly deliver location based ads to a person visually, instead of relying on a person who uses mobile phones to search for a specific service. Advertisements such as this are likely to garner higher RPM's because they could lead to higher conversion-to-sale rates. For example, if a user at a shopping mall wearing the Glass, stares at or searches for a restaurant, Google can quickly analyze the individual's needs and take the opportunity to provide locally targeted ads which can directly sway user decisions.
Additionally, we think that there is a real possibility that mobile local advertising will be more than $16 billion market in the U.S. by 2018. We think that the impact of delivering video ads through glasses can't readily be quantified, and is likely to create upside to BIA/Kelsey's forecasts. If, for example, $30 billion is spent on local mobile advertising in 2018 globally, and Google is able to capture 50% of the market, it would be a $15 billion revenue stream for the company by 2018.
Leveraging Visual Data On User Preferences
Another key impact of Google's Glass initiative is the visual data that the company will gather on its users. The impact of this data is harder to measure since it would impact many Google products, and will likely be used to drive advertising revenues by improving ad targeting for customers across platforms.
For example, if a user spends a day wearing Google Glass, the company will have data on what the user saw and where he/she was. With this data, the company can narrow down to what the user focused on, such as, if a user looks at an Italian restaurant for an extended period of time but doesn't go in, it is highly likely that the user is interested in the cuisine. Google would then be able to use this data to provide the user with a daily deal for an Italian restaurant in the future. This logic can also apply to shopping and traveling, giving Google an opportunity to directly sell products based on users interests. This way Google can expand its information database tremendously.
We currently have a $544 price estimate for Google, which is inline with the current market price.
Disclosure: No Positions