Google (NASDAQ:GOOG) Chrome has seen a meteoric rise in popularity since its initial release in late 2008. From 2008 to the present day, Chrome has seen its market share rise from a drop over 1% in 2008 to an average estimation of 24.9% in the most recent market data available. This rise in popularity has allowed it to seriously challenge Microsoft's (NASDAQ:MSFT) Internet Explorer (IE) brand for the top spot on browser usage worldwide. Google has gotten so excited about Chrome's success that in its Q2 2011 conference call it named Chrome as one of the four main business it will place a heavy focus on -- Google identified the other three as Search, Youtube, and Android (for more on the Android strategy read my article here, and for the Youtube strategy see here, don't worry only shameless plug in this article).
As a Google investor I find myself asking what does Google get from dedicating so many resources to this project? It gives away the browser for free, so what economic advantage do shareholders see from this project? In this article I will examine this issue. I will analyze Google executives' stated reasons for putting so many arrows behind Chrome, and try to draw from these statements how Chrome could affect Google's future earnings both as a stand-alone project and as a part of its more overarching strategy
Google's Stated Reasons For Chrome
Since Chrome's introduction in September of 2008, Google's stated goal for Chrome has been to increase the performance of browsers by raising the level of speed at which they operate. This party line has been echoed by Sergey Brin, Larry Page and Eric Schmidt, both in official quarterly conference calls, and in more informal sessions.
I haven't done too much research on the success of this strategy, but I do know that IE8 used to render JS extremely slowly, but the new IE9, and soon even newer IE10, run JS extremely quickly. So now that Google has finished with its stated goal, we can wish it congratulations and go home, right? Wrong. Despite its stated goals, Google either from the start, or as things moved along, has elevated Chrome to a much higher level of importance, seeing that its adoption remained critical to the overall health of the company. In the next two sections I will examine both how the Chrome strategy has now integrated with Google's overarching goals, and as a stand-alone product.
Chrome As An Overarching Strategy
Google has an extremely ambitious overarching strategy, simply put, Google wants you to use its services at all times, and its Chrome browser helps ensure that actually happens. The "sign in feature" on Google Chrome truly speaks to this goal. The sign in feature allows you to sign in and have all of your bookmarks sync between different places/devices where you use Chrome. For example, if you install Chrome on your work computer and home laptop, any changes/bookmarks you make on your office or work computer will show up on the other computer automatically. While I don't see the great benefit of this feature, it definitely has a "cool factor" to it, which encourages users to use Google Chrome. Once a user logs into Chrome, Google then gains two distinct advantages:
- It can track your search histories allowing it to collect better data on you, thereby increasing the accuracy of its search results, and more importantly the level of targeting for its ads.
- It assures you use other Google products -- Gmail, Docs (now Google Drive), Appstore (now Google Play) -- thereby giving it added revenue from your usage of those products (more on that to come) and an increased possibility of using its search engine over that of its competitors. The increased possibility lies in the fact that both instinctively you will use Google search, while using say Gmail, but also because Google search will sync much more fluidly with a Google product as opposed to say, a Microsoft product.
Going a little deeper Chrome has introduced Google not only as a search company, but also as a software provider. And luckily for Google it has picked the piece of software that most users use most frequently. Now that users use Chrome, which forms the centerpiece of its computing experience, Google can take its strategy a step further, and make Chrome into its own operating system (OS) to compete with Microsoft. As most readers know the company has made such a push, and though it didn't gain much traction, we now understand Google's strategy in the first place. Put a bit differently, in the Windows model, Windows OS formed the platform of the computing experience with software built on top of it, thus allowing Microsoft to control your whole computing experience -- driving you to more of its products and services. Google seeks to shift the focus completely, and force you to use Chrome as an OS, make that the platform on top of which engineers build all products and services. It will then have the distinct advantage of owning the ecosystem giving it easier access to drive users to its products and services, making it and shareholders more money.
Google's Products and Services
Google now has a wide range of products and services that fall under the Chrome heading -- Maps, Play, News, Gmail, Drive and Calendar, just to name a few. By shifting the focus away from Windows and into Chrome, the company hopes to get users hooked onto its new products, giving it a double benefit. Firstly, it can charge fees to certain users for using these products, and secondly, it can ensure that users keep on helping it print money by driving them to use Google search. In order to understand these benefits I will dig a little deeply into understanding the exact revenue benefits Google realizes from its products other than search, and into the exact mechanics that Google uses to drive users from its "other services" and into search.
Revenue Benefits From Products Other Than Search
Google does not currently generate that much revenue from Google apps -- about 1.5% of total revenue, or about $50mm. Given that, we still must consider that growth opportunity for Google in this space. By shifting the focus away from Windows as an operating platform, and more toward Chrome as the operating platform, Google can further shift the focus away from Microsoft Office, and into Google Apps. In the most recent quarter, Microsoft earned $5.8b in revenue, and $3.7b in operating profit from their office division, giving us a sense of Google's growth opportunity in this arena.
Google and Microsoft offer similar pricing plans for their products that compete in this cloud space -- Google starts subscriptions at $5 per user, per month, and Microsoft starts at $6 per user per month. I think most people currently given the choice between these two services would choose Microsoft seeing as it offers a superior product to Google apps for not much more of a price. However, Google has bagged some pretty large clients, according to its official site, Ahold -- the parent company for many large supermarkets, including Stop and Shop -- signed up all 55,000 of its employees to Google apps. Google has also signed up the city of LA, and the GSA (general services administration, a large federal agency) to name a few of its more prominent clients, and according to the update from Larry Page, over 5,000 businesses sign up to Gmail everyday. I take it some of them also sign up for other Google apps and become more full paying customers, but you get the point -- the company has strong velocity in this area.
I assume these companies get a really good deal from Google. Either these companies pay much less than the $5 sticker price, Google gives them access to better apps than the normal Google app suite user has access to, or some other benefit, because otherwise I don't see why a business would use Google apps, which seem far inferior to the Microsoft competition.
However you decide to explain the phenomenon, it seems that Google has really started to gain traction is this area. As I said above, Microsoft made $3.7b last quarter from Office, or just a little more than all of Google's quarterly operating profit of $3.39b in the most recent quarter. Google seems to have put a lot of emphasis on this area, and now we see why. According to Forrester research, the world currently uses around 1.5b PCs, and it expects that number to grow to 2b by 2015. Microsoft Office seems to have somewhere in the range of 90% of the market, or the systems installed on 1.35b computers. If Google could take 10%-15% of the market by 2015, it could have 200-50mm apps customers, and another $1b+ business on its hands.
Last year, Google handled 4.7b search queries per day, and has averaged a 35% increase year over year for the past 3 years. Additionally, it made approximately $10b in profit last year, or about $25mm a day, in which case it made about ½ of a penny per search. Assuming both of those numbers increase -- the amount of searches done on Google, and the amount Google can make off each user, its revenue should increase significantly into the future. Chrome figures very prominently in the strategy to increase both of those numbers.
Amount of Searches
Chrome will increase Google's searches because, even as stupid and simple as this sounds, people downloading Chrome know it's Google's browser, and will probably end up using Chrome. Additionally, IE currently comes pre-installed on all Windows computers, which run Bing as their default search setting, thus taking away from Google's market share. By Google having its own browser, and taking it a step further, by making this browser into an independent platform, it will have the ability to increase the amount of searches it handles, which currently stands at about ⅔ of all searches done daily, with the balance going to Bing. Furthermore, by establishing Chrome OS as a new platform, it shifts the focus away from Microsoft Office products, which integrate nicely in the current Microsoft products. By Google owning the ecosystem, and thus the integration, it can drive users to its search product more easily.
Revenue Per User
As I said above, users can sign in on Google Chrome and have all of their browsing sessions synch with each other from one computer to the next. By you signing in, Google can now collect information on your search habits, which can increase the accuracy of your search results, the accuracy of your ads, the likelihood of you clicking on them, and the money Google can make off you. This ability to collect user data sits as the most central advantage Google has from its Chrome design and strategy. Google has recently seen major downward pressure on its cost-per-click (CPC), and its ability to refine its ads and make them more targeted, should greatly increase revenue going forward.
Google's Chrome strategy tries to touch the user very lightly, as opposed to a forceful shoving down the throat of Google products. Users can opt out of using Google services within Chrome easily, and never have to sign in, thus depriving Google of any revenue from such a user. Google has both legal and practical reasons for engaging in such a strategy, but it could cost Google if it fails to convert these users into more active users of Google products.
As for transitioning Chrome from a browser into a full-fledged platform OS, Google's initially strategy has failed. It did not achieve good numbers on the sales of Chromebooks and users did not feel comfortable with the OS's layout. With that said, Google has made changes to the OS, in order to make it more user friendly, and its successful implementation of this strategy could go a long way in increasing the adoption of Google apps.
Luckily for Google, it does not have to rely on either of these strategies to provide direct sources of income for a long time. Its search-engine gravy train continues to churn out record numbers year after year and quarter after quarter, and can backstop any missteps Google might take in its strategy along the way. However, as a Google shareholder I am pleased to see the company actively trying to improve search in more non-traditional ways, and also attempting to tap into ambitious new sources of possible revenue. Google has both the economic and talent resources to try to make these projects work, and I think will end up seeing long-term financial benefits from its Chrome project, in all its forms, for many years to come.
Disclosure: I am long GOOG.