Just a day or two after describing the extreme undervaluation of Google shares on CNBC, Google releases its cloud storage platform -Google Drive [6]. For those who may not comprehend the significance of this move, Google has now entered (with both feet planted firmly on the ground) the enterprise, SMB and consumer cloud business in a profound way that it has never done before.
Before Drive, Google was arguably the most prolific cloud computing company for the masses and making inroads towards the enterprise. Now, with 16 TB plans, it plans are literally deadly to the competition and clearly show that this is no mere online ad agency and/or search company. The key to Google's dominance in cloud computing and the SMB/enterprise space is its massively successful mobile initiative. Wait! I'm getting ahead of myself. Let's take this from the beginning...
Google is known as the world's larges and most successful internet search engine. As a result of it's massive search reach, it has enabled automated, DIY web advertising, a business from which it derives most of its revenues and profits. This automated advertising model is low cost, high volume, high margin - a combination made in investor heaven. Of course, nothing lasts forever, and although the business and its margins are still growing at a healthy clip (see Google 1Q 2012 Earnings Update [7]), nothing lasts forever. Google's astute management is well aware of that and branched out into mobile heavily about 5 years ago with its successful, yet oft misunderstood Android buisiness model as referenced by the piece I penned two years ago (yes, this business model and opportunity was obvious and evident two years ago) - Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space [8]:
Many commenters are lamenting on the fact that Google is not making money on Android sales since the OS is given away for close to free while Apple is making $250 per handset sold. Those who are looking at it from this perspective are missing the forest due to that big fat tree that is in their way! Yes, Apple is making a killing on its iPhone sales, and it would be difficult to attempt to catch them with a fat margined product. They have managed to produce both margin and volume and have wrapped it up with extreme customer loyalty. What the armchair pundits are missing is the power of reach. Google is developing massive reach, and developing it ridiculously quickly. A byproduct of this reach is the commoditization of the smart phone platform which will probably cut the fat margined business model off at its knees. That is not to say that Apple will be cut off at the knees, but they will have to alter their business model for the competitor-less margin that they enjoyed for the last three years will no longer be a given. It also means that anyone else reaching for the crown (including Apple) will have to spend more upfront to gain less per unit sold. This actually benefits Google, for they are not in the hardware race, yet they benefit from each and every handset, tablet, desktop and automotive unit sold. Google is trying to become the new Microsoft!
In the meantime, Google ramps up the potential to push software as a cloud service, downloadable software and interactive, activity/context sensitive rich media ads and services to hundreds of millions of new users. This opens up a phenomenal opportunity for Google, and it appears as if many are missing the point because Google (wisely) decided not monetize it immediately, but to let it gestate and grow. Do you remember 15 years ago when many felt the same about search and the fact that Google wasn’t making any money providing search (pre-advertising)? Now this is not to say that Google is going to win the Smart Phone Wars, although at this point Google looks like the number one contender (IMO, Apple, Google and Microsoft are the ones to look out for).
Google now derives approximately $2.5 billion in annual revenue from mobile advertising, and that is from nearly all platforms, not just its market dominating Android platform. Remember, Google is not longer a simple ad company though. Mobile searches have quadrupled [9] in the last year, for many items one in seven searches are now mobile. Approximately 71 percent of smartphone users that see TV, press or online ad, do a mobile search [10]. This puts a significant amount of power in the hands of those companies that can control the mobile platform.
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Many mobile Web users are mobile-only [13], i.e. they do not, or very rarely use a desktop, laptop or tablet to access the Web. Even in the US 25 percent of mobile Web users are mobile-only.
Popular media would have one believe that the mobile opportunity is in mobile apps, and indeed, over 300,000 mobile apps [14] have been developed in three years. The site mobithinking.com [15] states apps have been downloaded 10.9 billion times, but demand for download mobile apps is expected to peak in 2013 [16]. The most used mobile apps [16] in the US are games; news; maps; social networking and music. Facebook,Google Mapsand The Weather Channel (TWC) are the kings here. Mobithinking.com [15] compendium research asserts the average download price of a mobile app is falling rapidly [17] on all vendor app stores, except Android. And 1 in 4 mobile apps once downloaded are never used again [18].
So where is the opportunity? Commerce and the cloud!!! Again, as sourced from Mobithinking.com [15]:
Mobile payment, NFC, m-commerce, m-ticketing and m-coupons
1) Paying by mobile i.e. m-payments [19] will be worth US$240 billion in 2011 and could be over US$1 trillion by 2015. Purchasing digital goods is the largest segment ahead of physical goods, near-field communications (NFC), m-banking and money transfer. Biggest market today is Japan, but in the future could be China [20].
2) Japan sets the precedent for m-payment [21] 47 million Japanese have adopted tap-and-go phones, but is expected to take off elsewhere as the world adopts NFC [20]. In China alone, there will be 169 million users of tap-and-go payments in 2013.
3) M-commerce [22] is predicted to reach US$119 billion in 2015, Japan remains king. Top m-commerce retailers globally [23] include: Taobao, Amazon and eBay. The US m-commerce [24] market will be US$31 billion by 2016.
• 1 in 8 mobile subscribers will use m-ticketing [25] in 2015 for airline, rail and bus travel, festivals, cinemas and sports events.
Who is at the forefront of NFC enabled mobile hardware? You guessed it, Google. As a matter of fact, Android handsets are the only handsets sold stateside that feature NFC (near field communication) capabilities needed for this new form of mobile commerce. Now that we're discussing it, whose software/firmware financial transaction platform has the biggest headstart, by far? You guessed it again - Google and theirGoogle Wallet [26].
This brings us back to reach. Google's Gmail has approximately 350 million active users! Gmail is now tightly integrated with ALL of Google's cloud services. Thus, if you use one of them, chances are you will be, if not already doing so, using much of the rest of them. 350 million is an impressive number, yet even this impressive number looks to be outdone by the juggernaut that is Android. Asymco.com posed the question, When will Android reach one billion users? [27]
The latest data from Google shows that the Android activation rate is increasing at a relatively steady rate (i.e. acceleration is constant). The data provided so far is in the blue circles below. The green line is the interpolation and extrapolation of that data.
[28]
As the graph is projected forward we get an activation rate of one million per day by mid August of this year. If it continues then we could see 1.5 million per day by end of 2013.
The corresponding number of cumulative activations is shown on the following log chart (with blue circles showing the actual data and the green estimates.)
[29]
The forecast is therefore that Android activations will cross one billion by November 2013.
The following chart compares the growth ramps of the various mobile operating systems indexed from the same starting points (measured in quarters after launch).
[30]
If Android does keep accelerating at the same rate then it will reach a billion users in five years....
These numbers are phenomenal, but what do they mean in the context of Google's share price. Well, this brings us back to Google Drive as an example...
200 GB is consdierably larger than most endusers desktop storage capacity. Assuming in 2013, at a billion users, Google is able to convert 2% to paying consumer retail drive clients (this number is ridiculously conservative as anyone who has used Dropbox [31] can attest) and .03% to SMB/enterprise clients (again, ridiculously conservative).
| Paying Users | Annual Price | Annual Revenue | |
| Retail | 20,000,000 | $ 120 | $ 2,397,600,000 |
| SMB/Enterprise | 3,000,000 | $ 600 | $ 1,799,640,000 |
| $ 4,197,240,000 |
As you can see, Google drive represents an additional $4.2B in revenue alone. This does not in anyway take into consideration the additional network effect revenue knock-ons that will assuredly accrue in Google's favor, ex. Google Docs adoption, Google Voice usage, synergistic Android handset sales, and last but not least higher ad revenue from higher usage as users share files with friends who are not paying subscribers.Add on mobile commerce, and the dozen or so other NEW Google franchises and you can see that valuing this company as a search engine provider is downright foolish.
All paying subscribers should download the Google Q1-2012 Valuation Summary [11], wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade [12].
Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.
Subscription research:
[35]Google Final Report [35] 10/08/2010
[36]An Analysis and Valuation of Google's Android and AdMob [36] 09/27/2010
A couple of bits from our archives...
[44]
The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as valuation for each business line.
[45]
Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.
[46]
Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional) [47]. Click here to subscribe or upgrade [12].