Google’s (NASDAQ:GOOG) Android OS posted another quarter of gains in smartphone market share, which grew to 75% of total shipments during the third quarter, up from 57.5% year-over-year. Apple’s (NASDAQ:AAPL) iOS also gained in Q3, increasing its market share to 14.9% and total shipments 57.3% year-over-year. 
Overall we think that an increase in Android market share bodes well for Google going forward as the firm’s biggest driver of revenue will be mobile advertising. The high market share ensures that a large proportion of searches from mobile phones will be done on Google, and this gives the company an opportunity to grow revenues from other segments such as Motorola and Google Play.
Good News For Mobile Ads
While mobile ad revenues aren’t a big percentage of total search revenues yet, we expect them to grow at a rapid pace over our forecast period. We expect that revenues per 1,000 mobile searches will grow from $7 to $10 by 2019, and that total mobile search revenue will eventually supplant traditional search advertising. We think that our thesis is given more support by the fact that Google’s run-rate for mobile advertising almost quadrupled from $2.5 billion to $8 billion year-over-year during the third quarter. 
Long Term Opportunity for Motorola
Besides mobile advertising, we expect that Android’s dominance in the smartphone will help the company’s Motorola segment. Due to the fact that Google will manufacture its own hardware with Motorola, we think that it could churn out superior phones in relation to its competitors. There are likely to be equipped with more features because Google’s Android engineers will design software specifically for the Motorola hardware.
We think that if Android can maintain its market share during the next few years, Google will see increasing sales of Motorola phones over the long term. Users will have familiarity with an Android phone which make them less likely to switch to a different operating system as they look for higher end new phones. Additionally, as global income increases, many users who are currently buying entry level smartphones, will be more likely to afford the higher end smartphones that Motorola manufactures.
Android Can Drive Google Play Revenues
We think that the wide spread use of Android phones around the world can drive revenue growth for Google Play. As more users get on the Android platform, they are likely to buy their music, games and other media from the Google Play store. If Google Play is able to emulate a small proportion of the success of the iTunes store, which generated $6 billion in 2011, we will see Google Play becoming a material contributor to Google’s revenues.
Bright Outlook for Android
The increase in market share for Google’s Android mobile OS is great news for a company which is facing increasing competition in mobile OS segment. Overall, we think that Google is in a good position with the Android platform, but it needs to continue innovating to stay relevant as new entrants come into an already crowded market. In our opinion, smartphone market share figures will be key to watch over the coming years as they will be a huge determinant of whether or not Google is able to execute its mobile ads strategy.Notes:
- Android Marks Fourth Anniversary since Launch with 75.0% Market Share in Third Quarter, According to IDC, BusinessWire [↩]
- Earnings Call Transcript, Seeking Alpha [↩]