Google (NASDAQ:GOOG) has announced that it will start offering gift cards that can be used in its Google Play store to buy music, ebooks and apps. The gift cards will only be redeemable in the United States and can be purchased in various stores such as Target (NYSE:TGT), Radioshack (NYSE:RSH) and GameStop (NYSE:GME). The Google Play store is a direct competitor to Apple’s (NASDAQ:AAPL) iTunes store and Amazon’s (NASDAQ:AMZN) Marketplace. It makes money by selling Android apps and other media such as music, movies, books, magazines to customers.
As mentioned above, Google Play directly competes with Apple on the iTunes front. However, Apple has a relatively high market penetration for its iTunes store because of its previous releases of popular products such as the iPod, iPhone and iPad. We think that the gift cards will help Google Play gain traction and help drive its revenues in two ways: (1) by attracting new users and (2) increasing consumption from existing Android users.
(1) Gift cards can attract new users to the platform
We expect the gift card offering to buy apps and other media from the Play store should increase traffic and revenues for Google Play. For customers who have never used the Google Play store before, the gift card will offer a chance to explore the service and buy a few products and, as users become familiar with the store, they might find other products or deals that might entice them to spend more money. In essence, the gift cards are likely to increase traffic to the Google Play store and bring in new customers.
(2) Android users will spend more money
Generally, users that own Apple devices such as the iPhone or the iPod are often gifted iTunes cards by friends and family. Until now, there was no iTunes card alternative on the Android front even though Android holds about 50% market share currently. If we see similar customer behavior and traction on Google Play due to the gift cards, we could see an increase in the amount of money spent on the Google Play store by Android users.
We currently have a $661 price estimate for Google, which is about 2% lower than the current market price.