Can Google Challenge iTunes?

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Google-watchers (NASDAQ:GOOG) have been speculating lately that the search giant could launch a music service that offers song downloads and streaming music as early as the end of this year.

Apple’s (NASDAQ:AAPL) iTunes store is the dominant player in the U.S. online music market with a share of around 70%. Amazon (NASDAQ:AMZN) runs a distant second at around 12%, according to market research firm NPD.

Could a Google music store compete effectively against Apple? Quite possibly yes, and here’s why: Google can use the gigantic grove of user data that it collects from search and YouTube to provide customized music service. Google can also leverage the increasingly popular Android mobile platform to stream music directly to Android-based smartphones. Our analysis follows below.

iTunes Competition Forecast

Apple sold around 2.6 billion songs in 2009. We expect the company’s annual song sales to grow steadily in coming years, reaching about 6.9 billion by the end of the Trefis forecast period.

There could be a downside of 1% to the $337 Trefis price estimate for Apple’s stock if the number of songs sold grows more slowly as a result of competition from Google and other online music stores, reaching four billion by 2016 instead of the 6.9 billion that we currently forecast.

You can drag the trend-line in the chart above to create your own song sales forecast for iTunes and see how it impacts Apple’s stock.

Google’s Double Edge

Google is the overwhelming search market leader, with a share of 65% as of 2009. Google could leverage its search and YouTube data to potentially make better personalized music recommendations than competing services.

Meanwhile, Google’s Android mobile platform is on its way to becoming a more prevalent mobile operating system than Apple’s iOS. According to Gartner research, Android had 17% of the global smartphone market based on unit sales in Q2 2010, versus 14% for iOS.

Google is expected to provide a music streaming service for Android smartphones. Apple will almost certainly provide a similar service to iPhone users, but the growing Android user base could help Google capture a significant chunk of this market.

You can see the complete $643 Trefis Price estimate for Google’s stock here.

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