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Interesting analysis suggests Android is a net negative for Google, but investors do not realize it yet


Interesting analysis suggests Android is a net negative for Google, but investors do not realize it yet

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An interesting analysis by Sal Marvasti from Technoor Consulting posted on Seeking Alpha suggests Google is not doing half as well from Android as could be expected from the dominant position of the OS in the marketplace.
Google owns desktop search, and also seemingly owns the mobile market.  While investors are very happy about this situation, Marvasti argues compared to Microsoft Google is in a pretty bad situation.
Google’s revenue stream in the main remains ads, be they on mobile or desktop. It does not earn direct revenue from device sales, and most apps on Google Play are free. Distimo estimates Apple generates $5.4m a day in app sales for the top 200 grossing iPhone and iPad apps while  Google Play,only generates $679,000 for the 200 top-grossing apps on Google Play, or about 12% of Apple’s revenue. Running the store likely costs a lot more than that.
In terms of generated search ad income, the mobile web usage per Android handset is much less than that per iPhone, suggesting Google makes more from each iPhone user than each Android user, in a similar way to how Google made their money from Windows desktop users. With Google’s products much in demand still on Windows and Windows Phone, it makes Google’s refusal to develop for the platforms rather unwise.
This is highlighted by a third point – each additional Android user is likely already a Google user on the desktop, and encouraging them to use Google on their Android phone instead of their Windows desktop simply means downsizing their revenue from desktop ad dollars to mobile pennies.
On the other hand, given Microsoft’s small search business, it is much more likely each new Windows Phone user is also a new Bing user, potentially taking revenue away from Google’s search earnings.
Sal also notes Google’s growth is slowing, while Microsoft’s search business is growing steadily at over 10% year on year since 2010, and that Windows Phones are much better monetized than Android, due to license fees from the OS and a more cohesive ecosystem and device portfolio.  In fact Microsoft even earns patent license fees From Android while Google does not.
He also argues that Android’s strength is in the low-end of the market, and that it is in fact losing market share there to RIM and cheap Nokia Asha handsets, which were surprise hits in  2012, cutting Android’s market share from 50% of new phones in 2011 to just under 40% in 2012.
In many ways Google is in a bizarre catch 22 situation – the more their phones are adopted and used, the more they cost to support via Google Play and other services, the less they earn from desktop ads, and the less they feel they need to serve other platforms, which would have earned them money without all the support costs associated with Android. The pyrrhic victory will ultimately end up burning Google’s cash flow.
He concludes:
If you own Google vs. Microsoft (MSFT), based on the mobile operating systems, we think you should take a closer look at your choice. Google is a faster growing business, heading for significant headwind; Amazon rip-off of Android, fracturing of the ecosystem and lack of a proper business plan for Android. Meanwhile, Microsoft already dominates the living room with Xbox, has entered mobile strongly (WP8) and can only grow in internet ad revenue. We agree with the IDC projections, where Android is predicted to lose 10% share over the next 3 years. The loss of 10% share is not a disaster for Google, particularly as it does not derive much revenue from Android. However, a gain of 10% in mobile share for WP8 is a boon to Bing.
Furthermore, we like the segmented market approach that Microsoft is taking with Windows Phone, keeping apps compatible via virtual software technology implemented on two different operating systems (WP7 and WP8). Microsoft is our long term (24 Month) pick from these companies. As Nokia’s partner their Online Business Division will benefit in a variety of ways as mobile penetration of WP8 increases.
Google investors should realize they are now dealing with slower growth and higher risk in the form of large Android expenditure with no clear return and continued risks from absorbing Motorola’s handset business.

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