Why iOS Is More Valuable to Google Inc. Than Android

By Markets Fool.com


The vast majority of Google's mobile search revenue comes from iOS devices. Source: Google.

Continue Reading Below

When Google bought Android 10 years ago for $50 million, no one would have predicted how valuable the mobile-software company would become. Last year, more than 1 billion Android devices were sold around the world. The operating system dominates the mobile-device market with Apple , coming in second place with just a 15% share of the market, compared with Android's 80% share.

But for the company behind Android, which relies heavily on advertisements to generate revenue, that relatively small percentage share held by Apple is vastly more important to the company than its own operating system. A recent analysis by Goldman Sachs estimates that 75% of Google's mobile search revenue comes from iPhone and iPad users. A New York Times article from late May says iOS users tend to be wealthier and spend much more time on their phones.

Spending more time on mobile and less time on desktops
Apple's importance to Google will only continue to grow stronger as more ad dollars shift to mobile, and the amount of time spent on desktops and laptops declines. Since peaking in 2011, the average amount of time spent by U.S. adults on desktop and laptop computers has declined by 8%. During the same period, time spent on mobile devices has increased 250%.

As these trends continue to take hold, Google stands to lose out on more valuable ad impressions from desktop Web searchers. Additionally, search volume on mobile devices -- for Google, at least -- falls behind that on desktops because of the majority of time spent in apps instead of the Web browser.

The proliferation of Android as a low-cost and well-supported operating system ensures that Google will remain central to the Internet experience for most, even as people spend more time on their mobile devices compared with desktops. However, aside from the $3 billion it took home in Google Play app-store commissions last year, the company is having a hard time monetizing Android users.

Continue Reading Below

It's been well-documented that iPhone and iPad users spend more time and money on their mobile devices, which inherently makes them more valuable for advertisers looking to promote their products. Losing search volume from iOS users would have a negative impact on the average price Google could charge for mobile search ads.

Google could get lost on Safari
Apple's cross-device Web browser currently uses Google as its default search engine. Google pays Apple an estimated $1 billion to $2 billion a year for that privilege, but the current contract between the two companies is reportedly coming to a close soon. Many expect Apple to sign a similar contract with a different search provider, or even introduce a search engine of its own similar to the strategic move it made releasing Apple Maps.

The loss of the Apple contract would strike a big blow to Google. The Goldman Sachs analysis expects just 50% of iOS users to switch back to Google from whatever new default Apple would introduce. That's in line with other analysts' expectations as well.

That means Google would lose approximately half of its search ad revenue but save on the traffic acquisition costs associated with being the default search engine. All said, Google could expect to lose out on about $3 billion in high-margin net revenue if Apple dropped it as the default search engine for iOS. That number would only climb as more ad dollars shift to mobile. For reference, Google generated $66 billion in revenue last year.

The default search engine contract also includes Apple's Safari for OS X, which accounts for about 7% of the global market and 13% of the more valuable U.S. market. OS X also continues to gain share as Mac sales grow in a shrinking market. As a result, if Apple switches its default search engine, it would impact Google's desktop ad business as well.

The biggest problem for Google is that the ability to keep its contract with Apple is largely out of its control. Apple holds all of the leverage in the relationship, and with several other potential partners, Google will have to outshine and outbid all of them.

The article Why iOS Is More Valuable to Google Inc. Than Android originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, 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.