Google (NASDAQ: GOOG) received some good news from comScore on August 1 as the firm’s Android smartphone platform gained market share during the second quarter.  The mobile operating system captured 51.6% of the mobile platform market, a 0.6% increase from the first quarter. Apple’s (NASDAQ: AAPL) iOS also gained share according to comScore with the gains of Google and Apple coming at the expense of Research in Motion (NASDAQ: RIMM) and Microsoft (NASDAQ:MSFT).
While these numbers bode well for Google’s mobile advertising business they don’t spell significant upside to Google’s value. That’s because we’ve already given Google significant credit for what we expect they’ll be able to achieve in the fast growing mobile search market. In fact, we currently estimate that Google’s mobile advertising business accounts for 34% of the $661 Trefis price estimate for Google.
High Mobile Market Share Baked Into Current Estimates
Google does not make money directly by providing the Android platform to consumers. Instead Google makes the Android platform available to smartphone makers in order to promote mobile search on the Google platform. Google’s traditional strength is in monetizing search through contextual advertising and it sees mobile search as one of the largest sources of growth in the search business.
We currently estimate that Google’s global mobile search market share will remain more or less flat at around 95% during our forecast period. You can see this from the forecast chart shown below and modify our forecasts to understand the sensitivity of Google’s value to this parameter.
Mobile Is Significant Source of Value for Google
While Google’s mobile ads segment is not the primary revenue driver today, we expect it to be so going forward as revenue per 1,000 searches on mobile platforms increases from an estimated $7 per 1,000 searches in 2012 to about $10 per 1,000 searches by the end of our forecast period as shown below.
Furthermore, Google will benefit from the expected tremendous growth in smartphone usage. We currently estimate that the number of smartphones in use will increase from nearly 800 million in 2012 to more than 2.5 billion by end of our forecast period.
This growth in smartphone usage will inevitably lead to a surge in the number of Internet searches conducted on mobile devices and the improving mobile monetization rates will create an even more lucrative market for search advertising providers like Google.
Growing Android Market Share Mitigates Google Downside Risk
Since we’ve already factored in very high Google mobile market share (~95%) into our estimates, the latest comScore news provides more downside protection to our views rather than significant upside. One of the primary risks for Google in maintaining mobile search market share is growing prevalence of alternative mobile platforms (iOS, RIM, Windows, Symbian).
If the Android platform had not captured the majority of the mobile phone market, the company would be at the mercy of smartphone providers such as Apple and RIM to make Google the primary search engine on their phones. Consequently, these companies could, at any time, switch the default search engine of their phones away from Google leading to erosion of Google’s share in the mobile search market.
If Apple or RIM were to switch away from Google as their primary search engine and Google’s market share were to fall to 80%, we estimate 5% downside to Google’s value. You can modify our Google mobile market share forecasts further above to see the outcome of different scenarios.
Consequently, we think that growing Android penetration into the smartphone market provides more downside protection than upside potential to our valuation of Google.Notes: