Android’s Relentless Surge
by Mark W. Hibben
Google’s Android Activations Reach 850K per Day
Since I first started following the War for Mobile Internet Supremacy (WMIS) being fought between Apple, Google, and Microsoft, I have believed that market share was key to victory. Not market share in the sense of who is selling the most units at any given time, but market share in the broader sense of who has the majority of the installed user base. The population of users for a given platform represents an enormous source of revenue from the sale of digital content of all types, advertising, and future hardware purchases for the company operating the platform. For several quarters, Google has been the sales leader in the activation rate for its Android devices, easily outpacing Apple. Before long, Google may have the largest installed base of users as well. This will be a critical tipping point in the WMIS that, once reached, may make a significant challenge to Google’s dominance all but impossible.
Mobile Device Population Growth
As in past earning seasons, I have updated my Mobile Device Population Growth chart to reflect the latest data published by Apple and Google. As near as I can tell, there is no significant population of Windows Phone devices. This chart plots not device activations or sales, but the growth of the worldwide population of devices in use, assuming that some fraction (usually about 10 % of new device sales) are retired. Despite putting on a growth spurt in iPhone sales in the fourth quarter of 2011, Apple has not been able to match Android’s device activation rate, and the gap between the Android and iOS populations continues to close.
At the conference call, it was announced that the Android device activation rate was “over 850 thousand/day”. This may sound like a definitive statement, but in the past, it’s been difficult to turn the activation rate number into a reliable estimate of total activated devices or current device population. (Was that a peak activation rate or an average activation rate for the quarter?) In the chart, I plot the announced activation rates (on a quarterly basis), but I don’t actually use them to estimate device population. Instead, I integrate a linear activation rate model (shown plotted in purple), in which the activation rate for the quarter is 803 K. In the past, I found this gave better agreement with total activation numbers, when Google happened to announce them. The model estimate for activation is 330 M devices, with a current population of 302 M. As usual, I’ve derived the iOS population estimate from Apple’s published quarterly shipment numbers for a total iOS device population of 332 M. In contrast to Google’s announced activation rate of 850K/day, Apple shipped an average of 557K iOS devices per day in the most recent quarter.
Given that Google started with nothing in Q1 2011 while the iOS device population had a nearly 100 M unit head start, Google’s progress with Android is truly impressive, and a credit to it’s very intelligently thought out business strategy. As I pointed out before, Google’s approach is very akin to Microsoft’s PC OS approach that so thoroughly trounced Apple in the 80’s and 90’s: recruit a large base of manufacturers, provide guidance and the OS, and let the manufacturers turn the product into a commodity. Google’s added twist is that it doesn’t even bother licensing the OS, relying instead on the advertising revenues created by the platform devices. I had a sense in November that Google would ultimately triumph, but I still can’t quite bring myself to declare a victor. Google has yet to overtake Apple in device population, and there are wild cards such as Windows 8 and rumored Apple products that might yet foil Google’s ambition.
And then there is Google’s management, which seems capable of seizing defeat from the jaws of victory. Their latest machination, in the form of two-for-one stock split in which shares are matched with a new class of non-voting shares, is a case in point. Given how well the company is doing, it seems oddly defensive, and the founders, Larry Page and Sergey Brin, were quite up front about their concern to retain undisturbed control of the company as they endeavor to execute long term (3-5 year) strategies. I can’t help feeling that they’re planning something that will either be unpopular or frightening to investors. Whatever they have up their sleeves will likely affect earnings negatively in the near term. Although this is pure speculation, here are a couple of really scary things they could do:
1) Dismantle Motorola Mobility. Upon closing the sale, Google sells off MMI’s physical assets and licenses MMI’s IP to its Android partners. Unlikely, but it would explain the lack of outcry from Android manufacturers.
2) Take Android private. After a couple of years of extolling the virtues of open source, Google throws in the towel and admits they can’t really develop a mobile OS competitive with iOS unless they take firm and complete control of it, as well as licensing it in order to defray ongoing development costs. Also, unlikely, but as we shall see later when I examine this quarter’s financials, there is some indication that Google isn’t getting the revenue from Android that they need.
Revenue and Cost Model Updates
As explained in Android Profitability, Revisited, Google revenues directly depend on the number of devices that can host Google ads and sites. These devices include desktop and laptop personal computers (PCs independent of OS), and mobile devices. I currently only count iOS and Android mobile devices since other mobile devices such as Symbian phones offer very limited browsing capability, and the number of Windows 7 Phone devices appears to be negligible. The average revenue Google obtains per device is currently estimated to be US$ 4.88 per quarter. This estimate is applied to all devices regardless of type, even though there probably is some variation by type. The model estimated revenue is just the average revenue per device multiplied by the total population of devices (PC, iOS, Android) for a given quarter. As can be seen in the chart below, this “flat rate” revenue model gives very good agreement with Google’s revenue actuals.
Google’s Revenue Cost, which includes Traffic Acquisition Cost, is directly proportional to revenue, and therefore revenue costs for PC and mobile devices should also be proportional to the respective revenues.
Using this approach to model Google’s other major cost categories such as G&A, Sales and Marketing, Research and Development has been more problematic. These categories are less tightly linked to revenue and inherently more discretionary.
In the past I’ve made the argument that if Google are “living within their means”, then these cost categories should scale with revenue and therefore device population, and this appears to be true as a long term trend, although quarter to quarter variations remain, subject to Google management decisions regarding “investments” in future business.
Last quarter’s hiring binge appears to have abated, and this is reflected in the G&A cost for the latest quarter.
Another sign that Google management are reining in costs is in the area of Sales and Marketing, which has long diverged from the model prediction.
Research and Development costs underwent a major curtailment last quarter, but have now begun to re-converge to the model prediction.
Like revenue, Income from Operations steeply declined this quarter, and this is the basis for my speculation that Mobile Device income may not be covering Android development costs. As usual, Google provides no detailed breakout of costs for products such as Android, so it’s difficult to say what the cause of the income drop is. Most of the cost categories are at or below the model estimates, so the problem isn’t profligate spending by Google’s management, unlike some past quarters.
Here the problem really is just pressure on revenues. Two possible sources are
1) Competitive pressure from Microsoft in search, leading to lower revenues for all platforms.
2) The assumption that all devices yield about the same quarterly income is simply not accurate, and mobile devices may not be yielding advertising revenue commensurate with PCs.
Winning the War for Mobile Internet Supremacy
Although Google is winning the market (sales) share battle, and appears on the verge of winning the population share battle, I still have doubts about whether Google is on a sustainable trajectory. Google lacks the financial resources of Apple and is being pressured by both Apple and Microsoft. So far, Apple has ceded the low cost end of the mobile device market in their “quest for best”. There are rumors of a smaller, lower cost iPad, now that Jobs is no longer around to veto it. If Apple wanted to field a stable of lower cost tablets and phones, they have the financial resources to simply starve Google out. Fighting dirty was never Apple’s style, before, but this may change. The WMIS is, after all, a battle for survival.