Google's Next Opportunity Could Spell Serious Competition for Facebook on Mobile

As I mulled over Google's (GOOG) Q2 earnings a few weeks ago I couldn't help but think that Google is still missing a huge opportunity:  helping more developers get discovered on the Google play store.

Ask any mobile app developer today what their biggest problem is and they will probably say two things:

1.  Make more money on Android
2.  Get their app discovered on the Play store

Apps have become big business for Google.  Android's +Sundar Pichai claimed that it had paid out over $5 billion to developers over the past 12 months.  Some back-of-the-envelope analysis coupled with folks I spoke with estimate that the play store will pull in between 3.5 - 4 billion dollars this year in topline revenue.  Not bad.

Impressive numbers but in reality - Google is still scratching the surface.

When it comes to discovery on Android the solution basically boils down to one thing: Facebook (FB). Every single developer I talk to, including those in our portfolio here at Signia Venture Partners, will tell you that Facebook is the biggest, most important and most expensive source of app installs they have.

The problem with Facebook ads though is that as Facebook's targeting and quality has improved, larger players like King.com (KING), Supercell, Machine Zone, Zynga (ZNGA) and others have gobbled up inventory driving up the cost of installs to levels that simply exceed the Lifetime Value of Users (LTV) for most developers. While the cost per install on Facebook today is somewhere between $3-$4 per install, in September of last year, for example, one of our companies saw CPI go north of $5 which simply wasn't sustainable for their business model.  In fact, according to data released by Superdata, between 2012 to December 2013 the CPI has gone from $1.30 to $4.36; an increase of 288%!

(source: Superdata)

The solution: the industry needs more sources of quality inventory to help bring down prices.  But while some industry watchers think Twitter (TWTR) might have the solution it's actually Google that's sitting on a goldmine: the Play store itself.

Before I joined Google in 2011, I ran marketing for a venture-backed alternative app store called GetJar (acquired this year by Sungy Mobile: GOMO).  GetJar provided an alternative to then Android market by allowing developers to distribute apps to consumers via its mobile web store.  So how did it make money?  Through advertising on the app store itself.  GetJar has an ad-based solution where it allowed developers to bid for actual placement across the store.  Developers could bid for installs by OS, handset and country and a high enough bid coupled with the apps quality score would get them featured in one of several listings either on the home page or across one of the other pages in the store (these appeared in the store as a "sponsored" listings - see below).  If a consumer then clicked on the ad and installed the app, the developer would pay GetJar the value of its bid.

(Source: GetJar homepage on mobile)

The whole model functions much like say... Adwords actually.  So imagine if Google actually added an advertising solution to the play store itself allowing developers to bid for visibility and installs directly on the store front?  What could the economics look like on the revenue side?

For starters, at GetJar about 8% of our downloads were monetizable (back in 2011) - that is we were able to get paid for those installs.  Now GetJar didn't have Google play's scale so lets say Play is only able to sell 4% of their installs. If we assume play downloads are somewhere around 2.9 billion per month (45% more downloads than IOS which is roughly tracking at 2b / month according to Statista) then we're talking about 116M downloads per month.  If we take the median CPI for Android downloads globally according to +Chartboost of around $1.10 then we're talking a high margin ads business worth an additional $1.5B a year in revenue.  Better yet, the cost side of running this business would probably be small for Google.  The existing sales team and ad ops team that currently sells Admob and other mobile search inventory would probably manage this business and 100% of the traffic comes from the store itself (so no traffic acquisition cost (TAC).

More importantly, everybody gains from this.  Developers gain a new, lower cost traffic source for their installs.  Consumers win by discovering new apps / games and other content promoted by the content owners that they might not find otherwise and Google unlocks an additional high growth, high profit revenue stream.

The only possible losers - Facebook (FB), Twitter and nearly every other app install service / ad network out there.  So what is Google waiting for? Well there are a number of reasons why they haven't taken this on.  First, it's a question of focus.  Google has been scaling at an incredible rate and has also been very busy continuously launching new verticals internationally.  Books, Movies and Music continue to expand abroad and this is surely taking up a lot of their resources.  They are also constantly working on improving payments and stability for users which requires resources if they are going to keep users happy.  Second, their could be anti-competitive reasons.  It's well known that over 90% of their business is from games.  These same game developers acquire traffic from many different sources.  Launching an ads business might be good for developers and users but it would negatively affect folks like Chartboost, Fiksu, Twitter and even Facebook.  This could be seen badly by regulators and those affected would likely cry foul.  Finally, there is always going to be the user to keep in mind.  Users might react badly to ads being injected into the store front.  Likewise, they might think Google is using their data to promote certain apps to them which, though it might be welcome by some users, would have privacy zealots running to man the barricades.

So Google must have its reasons for not launching this type of a service to date.  However, given the natural consumer and developer need I think it's more a question of "when" not "if" Google plans to launch a service like this.  The opportunity is simply too obvious to be missed.

The Smartphone Wars are Over: The War for Share of Time Has Begun

Watching the Google IO keynote today was a bit like watching a steamroller: the stats just kept coming and Android's unstoppable march continued.

While by some measure Android's global smartphone share is near or above 80% here were another set of jaw-dropping stats shared by Android / Chrome head +Sundar Pichai

1 billion 30 day active users on Android devices.  315M devices shipped running Android in Q4 2013 and 62% of tablets shipped in 2013 were running Android.

The last stat will surprise some who thought iPad still continued to have a safe lead in tablets (though they still do in terms of tablet-specific content).  When coupled with a surging number of OEM's embracing Android , the increase in computing power and the drop in customer retail prices Android saw a particular surge in developing countries in Asia where cheap Android tablets can now be had for under $60.  More importantly, Sundar shared that over $5 billion had been paid out to developers in the past 12 months - a 2.5x increase over 2012.

Some will argue Apple still wins where it counts: profit per device (or actually the fact that they are nearly the only OEM to be profitable save for Samsung) and the overall revenue of the App store and the fact that Apple's out payments to developers is probably x2 Android's.

So what?

Google isn't in the hardware business and -with the exception of Nexus / Chromebooks - never really has been.  Nexus were always considered reference devices.  A signpost to OEM partners of how to best implement Android on their devices and a showcase for Google's services.  Programs like Nexus were even eventually rolled out to other OEM's who developed limited edition stock Android versions of their flagship devices given how popular Nexus devices were among developers.  Today Android took another step forward with Android One, a Nexus like program to standardize the experience of Android to lower-end devices in the market.  A first OEM, Micromax, has already announced a sub $100 device using One targeting developing markets. As for Chromebooks, they continue to dominate online sales of laptops (as seen on Amazon) and as Google Docs now advance to allow for actual editing of Office docs on mobile devices (announced yesterday), they will make more inroads in schools and enterprises.

The truth is that the smartphone wars are over.  Google's strategy of providing an open and free OS and rallying the Open Handset Alliance to one standard (however fragmented at times) has worked beautifully.  Every subsequent generation of Android has not only been better then the last but also gained more share more quickly than it's predecessor.  Kit Kat (Android 4.4) now commands 13.6% share of Android devices according to Google while devices running Android 4.0 or higher now account for nearly 85% of all active Android devices globally.  It's important to caveat here that this data doesn't include data from China since Chinese Android devices typically don't carry Google's suite of services and don't check into their servers but still  - the reduction in fragmentation compared to two years ago has been enormous.

So where does Google go from here?  They take a page from the Cola wars of the 80's - 90's.  Back in the days when I worked at Pepsi, when Coke realized they weren't going to gain much more share of the Cola market globally what did they do?  They went for share of stomach.  They looked for ways they could provide more of their products to users as part of their overall diet not just in terms of their carbonated soda consumption.  So if you're Android / Google what's the strategy?

I call it Share of Time.

And Google IO scored a near perfect 10 on that note.  While Google announced a slew of improvements to Android including a preview of the new OS codenamed "L" the most interesting aspects of IO today for me were two things:

1.  Android's march beyond smartphones / tablets
2.  The accelerating integration of Google Services - especially between Chrome and Android

Keys to the first point were Androidwear, Android TV and Android Auto.  But it's not the fact that three of these initiatives were launched in one day that matters.  It's the way they were launched.  In the valley, one of the jokes among start-ups pitching VC's for money is to say: "Don't pitch a product, pitch a platform.  If it has the word 'platform' in it they're much more likely to invest." This is exactly what Google did yesterday. As opposed to Apple, Google's focus continues to be launching platforms at scale and all three of these initiatives reflected that.  Google's strategy for Wear, TV and Auto is essentially the same as it was for Android for smartphones: build an open, free platform for developers and form an Open Alliance of global partners to help drive the marketing of these services.  More importantly, since all these platforms run on Android, the development of applications and/or extending applications using API's to run from one environment to another is becoming increasingly easy.  Take for example Androidwear.  Google announced that if you have both a wearable and Android smartphone that when you download an app that has a wearable equivalent for your watch that this app will automatically be downloaded to your wearable device.  Better still, it will be automatically updated each time the app receives a new update from the developer.  

What really matters though is the fact you'll be using a whole lot more of Google then you did before.  How often have you had a text message only not to be able to make that call or send an email due to lack of battery?  Or how often have you avoided checking your smartphone in a meeting for fear of being rude?  Now you can use your watch (and be a bit less rude).  On the car side how many of us have hammered our steering wheel at the frustration of expensive but poorly designed in-car GPS systems (my hands remain bruised to this day)? How often have you wished you could just ask your car to play the same playlist that you have on your phone or computer? Or check what movies are playing at a nearby movie theater, buy tickets and navigate to the theatre?  With Android Auto you'll now be able to do just that.

Which brings me to my second point:  the acceleration of integration of Google services across Android.  Nowhere was this more apparent than with Google Now.  Nearly every demo yesterday showed a contextual use of Google Now across each of Google's platforms.  In the case of Android TV the user made a voice search looking for Oscar-nominated movies from 2002 to have a list pop up on the big screen with a list of movies available for purchase through Google play.  In the case of Android Auto the demo featured the user asking for the opening hours of a museum and then navigating to it. Google's strategy here is clear: Google Now is becoming the center of the user's universe to find the information they need while other Google services enable them to act on that search result.  In the meantime, as Google increases the number of touch points it has with us in our daily lives, it learns more about our needs and provides ever better search results and more refined targeting for advertisers based on context.

But Google's integration didn't end with Google Now.  As expected, Android TV will now integrate Chrome's "casting" technology so that users with an Android TV can seamlessly cast the content of their devices directly to their TV's without the need for an external dongle.  Nowhere will this be more interesting than for games.   As the demo showed yesterday, not only does your device become a portable console, but you can even play multi-player games with others across devices.  If you combine this with the sky-rocketing cost of console game development and the fact that the new generation of consoles is still nascent, Microsoft, Sony and Nintendo have cause to worry.

When I was at Google and +Sundar Pichai  took over as head of Android / Chrome one of the things I was most excited about was better integration and cooperation between the two teams.  We began to see the fruits of that collaboration in earnest yesterday.  In L for example, Google showed how open tabs on Android devices now appear more as "cards" along with open apps on the device so that users can more easily flip through their tabs without having to return to the Chrome browser each time.  More importantly, Sundar also showed a demo of Android apps now running on Chromebooks.  This was a natural progression that reflects the reality of app usage.  Users are spending more time on their phones than on their PC's (Chrome usage grew 10x in the past year to over 300M mobile monthly users) and even on phones app usage officially passed mobile web usage in terms of time spent earlier this year.

So in conclusion, Google is really after Share of Time.  They are leveraging their success and formula for Android to move beyond phones / desktops to the other areas of our lives where we spend a significant amount of time: our cars and our living rooms.  By tightly integrating multiple services across ever more daily touch points they are going to be able to understand more about us, provide us more contextual and immediate services while providing advertisers with more precise targeting data.  Even the most ardent critic would be hard pressed not to acknowledge what they pulled off yesterday.  They have the vision for how to use technology to make the world's information more universally accessible.  More importantly, they're executing on it.