This Google Opportunity Could Spell Serious Competition For Facebook

| About: Alphabet Inc. (GOOG)
This article is now exclusive for PRO subscribers.


Discovery of apps continues to be a serious challenge on the Google Play Store.

With over 1.5M apps, finding the right content is becoming a chore for users.

The soaring cost of installs sold by Facebook is pricing many developers out of the market.

Given its ads business, Google could easily build a $1bln+ business by inserting ads into the Play Store.

As I mulled over Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Q2 earnings a few weeks ago, I couldn't help but think that Google is still missing a huge opportunity: helping more developers get discovered on the Google Play Store.

Ask any mobile app developer today what their biggest problem is and they will probably say two things:

1. Make more money on Android

2. Get their app discovered on the Play Store

Apps have become big business for Google. Android's Sundar Pichai claimed that it had paid out over $5 billion to developers over the past 12 months. Some back-of-the-envelope analysis coupled with folks I spoke with estimate that the Play Store will pull in between $3.5 billion-$4 billion dollars this year in topline revenue. Not bad.

Impressive numbers, but in reality, Google is still scratching the surface.

When it comes to discovery on Android, the solution basically boils down to one thing: Facebook (NASDAQ:FB). Every single developer I talk to, including those in our portfolio here at Signia Venture Partners, will tell you that Facebook is the biggest, most important and most expensive source of app installs they have.

The problem with Facebook ads though is that as Facebook's targeting and quality has improved, larger players like (BATS:KING), Supercell, Machine Zone, Zynga (NASDAQ:ZNGA) and others have gobbled up inventory, driving up the cost of installs to levels that simply exceed the Lifetime Value of Users (LTV) for most developers. While the cost per install on Facebook today is somewhere between $3-$4 per install, in September of last year, for example, one of our companies saw CPI go north of $5, which simply wasn't sustainable for their business model. In fact, according to data released by Superdata, between 2012 to December 2013, the CPI has gone from $1.30 to $4.36; an increase of 288%!

(Source: Superdata)

The solution: the industry needs more sources of quality inventory to help bring down prices. But while some industry watchers think Twitter (NYSE:TWTR) might have the solution, it's actually Google that's sitting on a goldmine: the Play Store itself.

Before I joined Google in 2011, I ran marketing for a venture-backed alternative app store called GetJar (acquired this year by Sungy Mobile (NASDAQ:GOMO)). GetJar provided an alternative to the Android market by allowing developers to distribute apps to consumers via its mobile web store. So how did it make money? Through advertising on the app store itself. GetJar has an ad-based solution where it allowed developers to bid for actual placement across the store. Developers could bid for installs by OS, handset and country and a high enough bid coupled with the app's quality score would get them featured in one of several listings either on the home page or across one of the other pages in the store (these appeared in the store as a "sponsored" listings -- see below). If a consumer then clicked on the ad and installed the app, the developer would pay GetJar the value of its bid.

(Source: GetJar homepage on mobile)

The whole model functions much like say... Adwords actually. So imagine if Google actually added an advertising solution to the Play Store to allow developers to bid for visibility and installs directly on the storefront? What could the economics look like on the revenue side?

For starters, at GetJar about 8% of our downloads were paid (back in 2011). Now GetJar didn't have Google Play's scale so let's say Play is only able to sell 4% of their installs. If we assume Play downloads are somewhere around 2.9 billion per month (45% more downloads than iOS, which is roughly tracking at 2b/month, according to Statista), then we're talking about 116M downloads per month. If we take the median CPI for Android downloads globally, according to Chartboost of around $1.10, then we're talking a high margin ads business worth an additional $1.5B a year in revenue. Better yet, the cost side of running this business would probably be small for Google. The existing sales team and ad ops team that currently sells Admob and other mobile search inventory could probably manage this business, and 100% of the traffic comes from the store itself (so no traffic acquisition cost (TAC)).

More importantly, everybody gains from this. Developers gain a new, lower-cost traffic source for their installs. They would also have better tracking and attribution of their installs since these would happen directly on Google's servers (removing the need for third party reporting and tracking). Consumers win by discovering new apps/games and other content promoted by the content owners that they might not find otherwise, and Google unlocks an additional high growth, high profit revenue stream.

The only possible losers -- Facebook, Twitter and nearly every other app install service / ad network out there (Millennial Media (NYSE:MM), Chartboost, Fiksu etc.).

So what could Google be waiting for? Well there are a number of reasons why they haven't taken this on. First, it's a question of focus. Google Play has been scaling at an incredible rate and has also been very busy continuously launching new verticals internationally. Books, Movies and Music continue to expand abroad and this is surely taking up a lot of their resources. They are also constantly working on improving payments and stability for users, which requires resources if they are going to keep users happy. Second, there could be anti-competitive reasons. It's well known that over 90% of their business is from games. These same game developers acquire traffic from many different sources. Launching an ads business might be good for developers and users, but it would negatively affect folks like Chartboost, Fiksu, Twitter and even Facebook. This could be seen badly by regulators, and those affected would likely cry foul. Finally, there is always going to be the user to keep in mind. Users might react badly to ads being injected into the storefront. Likewise, they might think Google is using their data to promote certain apps to them which, though it might provide more relevant content to users, would have privacy zealots running to man the barricades.

So Google has to tread carefully if they consider inserting ads into the Play Store. That said, given the natural consumer and developer need, I think it's more a question of "when" not "if" Google plans to launch a service like this. The opportunity is simply too obvious to be missed.

Disclosure: The author is long GOOG, FB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I was previously marketing director for Google Play. Prior to that, I was CMO at GetJar (part of GOMO).