Google's $20 Billion Mobile Phone

Includes: AAPL, GOOG, HTC
by: Trefis

We estimate that Google's (NASDAQ:GOOG) newly launched Nexus One mobile phone business adds $20 billion of value to Google or, in other words, accounts for 9% of Google's stock value. This means that mobile phones is Google's second most valuable business after search - more valuable than Gmail, Google Apps and YouTube.

Although $20 billion may seem high for a business that just launched in January 2010, the precedent set by Apple's (NASDAQ:AAPL) iPhone business suggests that it could be even higher. Apple's stock has more than doubled since it announced the iPhone in early 2007 and we estimate that iPhones constitute about 50% of Apple's value or more than $100 billion.

3 Drivers of Value for Google Phone:

Below are the 3 most important forecasts that determine the value of Google's mobile phone business:

1. Pricing: Expected to decline from $530 at launch to $330 over the forecast period.

The Nexus One is Google's most expensive consumer product to date. We believe that Google will follow the successful iPhone strategy by introducing variants of the Nexus One at different price points over time. (Click charts to enlarge)

Show Google Phone Pricing Forecast Chart
2. Market Share: 0.4% of global mobile phones sold in 2010 or 5 million Nexus Ones sold.
We expect Nexus One market share ramp-up to be slower than what was achieved by the iPhone, which had 2.2% share in the 1.2 billion unit global mobile phone market in 2009 (2.5 years after the iPhone launch). We forecast that the Nexus One will have 3.4% share in the global mobile phone market by the end of the Trefis forecast period, implying about 66 million Nexus Ones sold. In comparison, we believe the iPhone will have 14% share by that time implying 4 iPhones sold for every Nexus One.
We think there are at least three factors that make it hard for the Nexus One to gain wider adoption than the iPhone:
  • The iPhone had a novelty factor that attracted many users initially while Nexus One is following the concept and design bar set by the iPhone
  • iPhone's retail strategy worked very well for Apple and created a successful hype that led to long lines of buyers gathering outside of Apple's stores. Google's retail strategy is not comparable to that of Apple
  • The Android operating system used in the Nexus One has less than one fifth the number of applications available for Apple's iPhone
Show Google Phone Market Share Chart
3. Profit Margin: 43% EBITDA margins in 2010, declining to 15% over the forecast period.
Given the steep price of $530 currently, we estimate that Google will earn a 43% EBITDA margin on its mobile business which factors in costs such as the material costs of the phone, the profit made by HTC (HTC), the manufacturer of the phone, as well as marketing, sales and warranty costs.
Over time, we expect margins to decline as a result of (i) falling prices from a mix of lower priced phones and higher competition (ii) limitations in the number of new features that can be introduced to sustain higher priced and higher margin products.
Show Google Phone EBITDA Margin Chart
In addition to the value from selling Nexus One phones, the success of the Nexus One and Google's Android platform will benefit Google by strengthening its leadership in mobile search. Although monetization from mobile search is not significant today, we believe mobile search could be a big opportunity in the future if monetization improves.
Disclosure: No positions