A Closer Look At Google’s Dual Mobile OS Strategy

Google (NASDAQ:GOOG), backed by its search engine prowess, is the leading advertisement company in the world. Google’s advertisement revenue contributed 94% to its total revenues in 2012. With 97% search ad market share, Google leads in mobile search ads revenue sector.

The primary reason for this dominance is the widely popular Android OS for smartphones which had 48% share in ad impressions for 2012. ^[1] However, tablets are gaining traction in mobile devices and are logging in higher web traffic. ^[2] Moreover, as cloud computing gains momentum, tablets with strong web based OS will play bigger part in determining market share for mobile search ads vertical.

In light of this, Google has adopted a dual OS strategy for developing a strong mobile platform. We believe this is a good move on Google’s part as it will lead to stabilization of market share and drive its mobile search ads revenue.

See our complete analysis of Google here

Android Continues To Drive Mobile Search Ads Revenue From Smartphones

Google’s mobile search ads division is the second largest division for the company and makes up approximately 32% of its total value. Google, with 97% market share, is the most dominant player in the mobile search ads space. The primary reason for this dominance is its flagship Android OS, which has witnessed excellent adoption and penetration in the smartphone space.  Android held nearly 70% market share for smart phones in Q4 2012 and will be a key driver for Google’s mobile search ad revenue in the short-term.

Tablets To Improve Revenue per Search For Mobile Ads

Gartner has projected that worldwide mobile ad revenue will exceed $11 billion in 2013, and the growth rate for ad revenue will be over 400% during 2011-2016. ^[3] Tablets are an integral part of mobile device space and are gaining traction. According to Jumptap, web traffic from tablets has grown more than smartphones. Web traffic on tablets increased from 7% in 2011 to 18% in 2012 at smartphone’s web traffic expense, which declined from 79% to 78%. Jumptap also projects tablet’s market share to grow to 29% of total mobile internet consumption by cannibalize smartphone’s market share. ^[4] Moreover, according to Adobe’s latest digital index, tablet users last year spent 54% more time on online shopping than a smartphone user and 19% more than a desktop/PC user. ^[5]

Android, with 41% share of impression, lags Apple’s iOS in the tablet vertical. Slow adoption of Android on tablets and the rise of cloud computing has forced Google to expedite the development of Chrome OS for tablets. While Android OS depends on native apps specifically developed for the device and reside locally on it, Chrome OS relies on a browser to access application built for the web through cloud computing. Google’s Chrome OS will become a key driver for its mobile ad revenue in the future as tablets continue to gain popularity. Tablet users spend more money online, and therefore advertisements on tablets are likely to garner higher RPM’s because they could lead to higher value sales.

We project revenue per search on mobile device to grow from $7.12 per 1000 searches to $10 due to the favorable change in mix of impression resulting from higher traffic on tablets

While Apple’s iOS has a head start with the iPad as a native OS platform, Google’s push for Chrome OS is widely recognized as a move to gain traction in the emerging web OS for tablets. Google successfully launched touch enabled Chrome OS for tablets, which has lent credence to Google’s mobile OS platform as an alternative to Windows 8 for accessing cloud enabled applications.

Android and Chrome’s users are more likely to use Google search over using another OS, which could translate to better mobile search ads revenue for Google. This is especially relevant when competing OS’s such as Windows 8 or iOS use their own search engines on tablets and have access to better cloud services.

We believe that Chrome OS and Android could converge in the future leading to a powerful mobile platform which can be easily monetized across different technologies and mobile devices. We project that Google’s mobile search market share will stabilize at 95% for our forecast period.

We currently have a $737 price estimate for Google, which is approximately 10% below the current market price.

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1. Smart Device Ad Impressions Rose, February 22 2013, www.marketingcharts.com [↩]
2. Tablets trump smartphones in global website traffic, March 6 2013, blogs.adobe.com [↩]
3. Gartner Worldwide Mobile Advertising Revenue, January 17 2013, www.gartner.com [↩]
4. Tablet share to increase at smartphones’ expense, March 6 2013, www.marketingcharts.com [↩]
5. Tablets users outspend smartphones users, March 6 2013, blogs.adobe.com [↩]