Piper: Android to become billion dollar business in 2011February 8, 2011: 11:55 AM ET
It is all in the accounting.
When you have two separate internal businesses, mobile and advertising, who do you give credit to when money is made in mobile advertising? Do you give full credit to the mobile business and take the revenue out of the advertising wing? Or, do you split it up between the two with some arbitrary percentage allotted to each? Google (GOOG) and its analysts are stuck in that conundrum.
To that end, Piper Jaffay's Gene Munster thinks they've worked out some sort of basis for allotting money to their mobile operating system and has assigned Android a dollar amount per Android phone of $5.90 this year and $9.85 next year.
We believe Android could provide over $1 billion in revenue from advertising to Google in 2012. We believe that Android generated $5.90 per user in mobile advertising in 2010 and expect ARPU to increase to $9.85 in 2012. In comparison, Google search generated $18.85 per user and Google advertising in total generated $25.77. Additionally, we expect Google's revamped Android Market will enable users to download apps on Android more easily and could increase monetization per user from in-app advertising over the next two years. We maintain our Overweight rating on GOOG.
Will/would Google make that much money from a Symbian phone or iOS device that also used Google services? Google CEO Eric Schmidt has said they do make significant money on competing platforms on numerous occasions. However, if those phones were feature phones or Windows Mobile phones, Google wouldn't likely make as much per device.
However, Munster thinks that Eric Schmidt's hypothesis of monetizing $10/user/year is rapidly approaching...
We believe Google is well on its way to having users pay $10 a year via advertising on Android. Based on Google's quoted $1 billion mobile run rate (mobile advertising), we believe Google generated $850 million in total on mobile in 2010.
Even approaching $10, the average revenue per user (ARPU) for mobile devices is still significantly below a desktop OS user's (see graph above), according to Piper's research.
As we noted, we believe Google's ARPU on Android was $5.90 in 2010. We believe Google's average revenue per search user was $18.85 in 2010 and average revenue per user for Google's advertising businesses in total was $25.77 in 2010
Piper notes that with the recent improvements to the Android Market, especially in-app purchases, Google stands to make more money directly from apps. Google is more focused, and will continue to see more revenue from in-app advertising, which it heavily invested in with its $600 million Admob purchase.
But, back to the accounting of the Android OS:
To me, Android is still a defensive play. Apple (AAPL) was clearly planning on getting into mobile advertising when it made an offer to buy Admob. While Apple's advertising ramp-up is slow in comparison to Google's, it is clear that Apple is in ads for the long haul. Microsoft (MSFT) clearly has its own Bing ambitions. Google simply couldn't concede the mobile advertising market to its competition. That is why Android exists.
So, it may make more sense to characterize Google's mobile OS as a feature or an enabler of its advertising empire, something of a platform to make sure people continue to use its services without being blocked by competitors.
On the other hand, shareholders want to see a return on the Android investments, so figures like these exist. There you go.