Google Finally Has a Solution to Its Mobile Ad Problem

By Markets Fool.com

The amount of time smartphone users spend using the mobile web continues to decline. Last year, the average smartphone owner spent just 14% of his time using the mobile web browser, according to Flurry. That's down from 20% in 2013, and that's bad news for Google .

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Google makes most of its revenue through web ads, and it faces much more competition with companies like Facebook and Apple for in-app ads. Now, the company is taking advantage of its position as the app-store owner on nearly every Android device outside of China by applying its original keyword-based advertising product to app searches.

App-install ads work really well
Facebook became a mobile advertising powerhouse on the back of app-install ads -- ad units that take users directly to the download page for an app in the app store. Google also offers app-install ads, but in its search results. As mentioned, just 14% of time spent on mobile is on the web, whereas the average smartphone owner spent 17% of his time on Facebook.

As such, Google's app-install ad inventory is extremely limited, even though it owns the app store. By opening up search results on the Google Play Store to potential advertisers, Google is not only increasing its inventory, it's improving the quality. App-install ads in the Google Play Store ought to sell for a huge premium over Facebook ads.

While Facebook has a huge audience, and that audience spends an outrageous amount of time using its app -- almost half an hour per day according to Flurry -- people don't open Facebook looking for a new app to download. When people are actively looking for a new app, they go to the app store. Developers advertising within the app store are sure to see higher conversions than if they advertised on Facebook.

How big is this opportunity?
Business Insider estimates that app-install ad spend in the United States totaled $3.6 billion last year, and will grow to $4.6 billion this year. By 2019, BI thinks the market could reach $6.8 billion.

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For reference, Google generated $66 billion in revenue last year, so a $4.6 billion industry isn't huge for Google. However, Google's app store generated about $3 billion in net revenue in the last 12 months. Grabbing a significant percentage of the market would certainly strengthen its app-store revenue.

What's more, these ad units ought to carry very high margins for Google. As explained earlier, the conversion rate is likely significantly higher than Google's existing app-install ads, or Facebook's comparable ad units. That leads to higher prices and higher margins. Google is feeling margin pressure from both the shift to mobile advertisements from desktop, as well as increased sales from its app store.

Will Apple follow Google?
It's not a surprise that Google is moving into advertising its app store before Apple. While Apple has an advertising platform, iAd, the vast majority of its revenue comes from device sales. And device sales -- for the most part -- have been performing very well. Google, meanwhile, is much more reliant on advertising, so the move into more advertising is fitting.

Apple has no qualms promoting apps for free in its app store, or moving its own apps up the results on certain keyword searches. The company previously promoted its own iTunes Radio app when users searched for "music," and a search for "maps" or "games" brings up Apple's curated list of favorites at the top of search results.

Apple clearly understands the value of the top spot in app search results, but it doesn't need the slight boost in revenue App Store ads could provide. However, if growth in the App Store starts to slow, we may see Apple elect to allow developers to promote apps.

If Apple chooses to stay out of the market, that's great news for Google, as it means one less competitor for app-install ad dollars.

The article Google Finally Has a Solution to Its Mobile Ad Problem originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.