Google Inc (NASDAQ:GOOG) management held one of its more opaque earnings conference calls on Jan. 22. All the obligatory financial factoids required by the SEC were there, but not much insight otherwise. Here, what remained unsaid may be as significant as what was said.
It's the Ecosystem
The financial news was mostly good: Google Inc (NASDAQ:GOOG) quarterly revenues (exclusive of Motorola, which wasn't included in Q4 2011) were up a very healthy 22% y/y with GAAP income from operations up 7% (Google only). Conspicuously absent was any mention of metrics I watch closely to gauge the growth of the Android ecosystem: Android activation rate and total Android activations to date.
Google Inc (NASDAQ:GOOG) hasn't been shy about reporting Android activation data in the past, so no news is probably not good news. Last quarter, Google proclaimed a truly impressive 1.3 million/day Android device activation rate with over half a billion total devices activated.
As I pointed out in a previous article, this meant that the total population of Android devices had pulled ahead of Apple Inc. (NASDAQ:AAPL) iOS devices by a large margin. Even assuming that activation rate has fallen off, it probably is still about 1 million/day. In the chart below, I show my current estimates for Android and iOS population growth.
Android device growth probably took a hit due to Apple's gains in US market share in Q4. According to a Kantar WorldPanel survey released in December, iPhone captured 53.3% of the US market in the 12 weeks ending Nov. 25, due largely to the release of iPhone 5. This will probably be only a temporary setback for the Android juggernaut as iPhone 5 sales taper off in the new year.
The mobile device populations provide a platform for Google Inc (NASDAQ:GOOG) advertising, thus contributing to Google's bottom line. In addition, the Android population is a ready market for Google apps and content distributed through Google Play.
The growth of Play is one of the few areas that did receive a little extra color: Play is counted under the “Other” revenue category, which has grown to $ 829 million in Q4 2012, up a whopping 102%. According to Larry Page, most of this growth is due to Play. However, overall cost-per-click, the average fee an advertiser pays to the site hosting the ad, is down approximately 6%, reflecting the higher mix of mobile advertising.
Google Inc (NASDAQ:GOOG) is definitely starting to reap the benefits of its market share expansion strategy for Android. Google has very successfully borrowed from the Microsoft Corporation (NASDAQ:MSFT) playbook: Become the purveyor of the dominant operating system, then team up with manufacturing partners to commoditize the computing platform. Google has gone even further than Microsoft by making the OS available for free, thus forgoing short-term revenue in favor of market share.
When Microsoft Corporation (NASDAQ:MSFT) fans envision Windows Phone doing to Apple iOS what Windows did to Mac OS in the 1980's, they overlook the obvious fact that Google's already been there and done that, to the extent that it could be done. With Windows Phone 8, Microsoft is embarked on more or less the same path as Google Inc (NASDAQ:GOOG), distributing their OS essentially for free: Nokia receives financial support from Microsoft in excess of the OS licensing fees. However, Microsoft has been less successful so far in commoditizing Window Phones, with only Nokia and HTC as manufacturing partners.
This is significant because Windows Phone and Android are competing for essentially the same target audience. Most Android users are Windows PC users, and both groups disdain Apple as a manufacturer of “toys” and Apple customers as technically illiterate “fanboys.” If Windows Phone 8 makes significant market-share headway this year, it will probably come at the expense of Android not Apple.