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What's an Android user worth?

Excluding Motorola, Google’s gross margins have dropped for six out of the last nine quarters. They peaked at 65.8% in early 2011 but have now dropped to 60.4%. Including the drag from Motorola they are down to 57%.

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Gross margins include the effect of price, volume and direct costs of sales. Although sales have grown (see graph below), the pricing Google has been able to obtain (CPC) has fallen. The cause is unknown but there is a strong correlation between the growth in their mobile channel. For their part, management cites mobile as having an effect in reducing CPC though they caution that it’s one of many factors.

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The elephant in the room is indeed the effect of 900 million activated Android devices (with 1.5 million added each day.) These nominal billion devices are a new channel that could be said to have doubled Google’s addressable market in only the last three years. The effect of this doubling is perhaps partly underlying the top line growth shown above.

How can we test this?

I placed Google’s performance alongside Microsoft’s for a reason. Since Microsoft has had precisely zero benefit from any new mobile channels, and since its software is broadly tied to business spending (as is Google’s), we can consider Microsoft as a control in what baseline non-mobile growth could be. From Q2 2010 to the present (the Android epoch), Microsoft’s consolidated revenues grew by 24% (31% if we exclude Windows).  In contrast, Google’s advertising revenues (excluding Motorola and licensing) have increased by a more robust 83%.

So it’s possible that mobile contributed to top line growth. The effect could be 50% over three years. The downside is of course that this comes from a doubling of the channel. The new channel is therefore half as engaging. In terms for bottom line, the effect would be seen as more subdued growth. Overall, income increased 32% for a nominal doubling of usage.

Not that there’s anything wrong with that.

Expansion of user base usually comes with lower engagement and margins. I demonstrated the same effect with the vast expansion of iTunes customers.

The only difference seems to be that markets reward Google’s margin dilution but punish Apple’s.

Put another way, hypothetically, as she spends slightly less, the market value for an Apple user is disappearing while as he spends a lot less, the value placed on a Google user is increasing.

  • markrogo

    Rightly or wrongly, the market is assuming that the Apple user base is going to disappear under the Android juggernaut. A sub-20% global share seems too tenuous a position to run with, which I believe explains the low-cost iPhone momentum.

    Apple also chooses to make money in weird ways (iCloud storage pricing is completely out of whack) and yet downplays opportunities to talk up iTunes/App Store revenue growth — the recurring, long-term stuff they ought to be focused on that would encourage them to build the above-mentioned user base.

    • Kizedek

      And to compound the issue, the market is wrongly assuming that Google’s ad-serving business model approach is the best way to monetize the new mobile phenomenon just as it was on desktop. That not only does Google have the users, but it also has the method.

      That has yet to be seen or proven. In fact there are indications that this is not the case. This article points to the greater dilution of an Android user’s value as userbase broadens, than the dilution of an iTunes user’s value.

      The more personal nature and culture of mobile may result in a backlash against ads. They are certainly less effective when they are in your face and keeping you from focusing on a task on a smaller screen. Richer experience is the key.

      I was reading a piece by Marco Arment this morning in which he reacts to the notion that ads are where it’s at when it comes to monetizing apps. He pointed out that, though we tolerate ads on both high quality and low quality websites, we tend to think that ads in an app indicate a low quality, cheap, crappy, unfriendly app whose developer doesn’t give a rip.

      Just as quality content and the incumbent TV industry is ripe for disruption in terms of how production is funded and value is assigned, the same is true of mobile apps and services. If I were Google, one of its investors, or Wallstreet, I wouldn’t count my chickens too soon.

      Google is going down a certain road with mobile — the same road they have always known. They are making assumptions about their users and customers and this is distasteful. Other roads might be evident if someone read the signs.

      • obarthelemy

        I think you’re assuming Google are Apple-like and want to control all that happens with their platform. They don’t. Google just want an opportunity to push their ads and fill up their databases, and are perfectly happy with OEMs, devs,… tackling specific “jobs to be done”. If Android weren’t there and Google had to eke a living off iOS and WinPhone, their task would be much harder, and their position much weaker, especially with both Apple and MS signalling they too want the Ad action.

        Now that they’ve established Android, the one assumption they’re making is that they’ll always find a way to monetize their access and tracking.

        I’m not sure how “distasteful” is relevant, or even applies. I find Apple’s quixotic claim to rule over anything their customers can buy, do, see on their devices more distasteful, for example.

      • r.d

        So you are saying not only
        Apple should allow its competitors to
        copy designs, Patents, Business processes
        but also let them free pass to their platform.

        Just like Google has done to Amazon and WP8.

      • JohnDoey

        Google still makes more money from iOS and always has. They are not eking out a living on iOS. When iOS shipped, the Google CEO was on the Apple board and Google had many services prominently featured on iPhone. The opportunity cost of killing that with Android’s iPhone cloning kit is still being measured.

      • obarthelemy

        What makes you so sure Apple wouldn’t have made a play to replace Google’s services as they are doing now, even with their inferior services ?
        And, Android is not an iPhone cloning kit. Windows Phone (LG Prada…) and Palm were there way before Apple.

      • Kizedek

        No, in the context of the discussion, I am just assuming Google want to make money like everyone else, and that Wallstreet is awarding them for something (though for for the life of me I can’t see what). No, I certainly don’t think Google wants to control everything that happens with *their* platform (if only); I think their ambitions go far beyond that; I think they consider the internet “their platform”. That’s the problem.

        What I like to assume is that as a consumer I am consciously paying what is a fair price for something I choose, and which I believe has value to me — a device, a service, convenience, whatever.

        Instead, I am not sure what I am paying in terms of my privacy to Google, whether I choose to pay or not, nor do I know what they are doing with my privacy. Apple is quite transparent, Google is not. You may not like Apple, but we know what we are getting and we know what we are paying; and most customers are satisfied.

        For some reason you think Apple is out to swindle you out of cold hard cash with style over substance. That’s demonstrably false (millions choose to exchange their money for something they perceive to be of value as a tool). It’s a pretty simple transaction. It may not be right for you, but there is provable value there in pretty objective terms (according to studies and certainly according to customer satisfaction).

        But, for some reason you think Google is altruistic; and that there is *no* cost to something that is “free”, and that there are *no* implications to doing what you like with anything and everything. Nice philosophy, and good luck with it; but the end of that story has already been written. You have been sold the semblance of control over the harsh realities of life (but it’s more like living in the matrix).

        So, yes, it is distasteful that Google pokes its nose into everything that is done online. Apple’s quixotic claim to rule over anything their customers can buy, do, see on their devices more distasteful?

        I can SEE the internet just fine! Trouble is, Google is watching me see what I see whether I use opt out settings or not (what arrogance)! No, I really don’t like Google’s quixotic claim over everything on the internet and how they arbitrate everything I see and do (since all my work is online). We are beginning to find it difficult to trust anything that comes to us through the internet. As many have said, the user is the product.

        You are certainly free not to give Apple your money. Unfortunately, I am not really free not to benefit Google in some way; at least it gets increasingly complex and unclear how to avoid them.

      • Walt French

        @obarthelemy:disqus said, “I think you’re assuming Google are Apple-like and want to control all that happens with their platform. They don’t.”

        I, for one, have no such thoughts, and think that since there is overwhelming contrary evidence of Google attempting to “control” skins, updates, app availability, 3rd-party stores, etc, as to make your claim a strawman that is irrelevant to the actual control Google has, and its effect on the industry.

        Google has consistently required that OEMs include Google tools and default links in the OHA (official Anrdoid-with-a-®) products. The more open AOSP distro has not been used, to my knowledge, by any OHA member, so really is not relevant to their freedom except as it was originally described, as a safety valve to guarantee that every OEM needn’t worry about sunk costs of Android development being wasted.

        Google’s business model is entirely driven by advertising that it sells and originally Android seems to have been a guard against Microsoft, shackled on the desktop from blocking Google, from locking Google out of mobile. Yes, it continues to succeed as a reminder to Apple that Apple dare not offer a significantly inferior search/map/ad service, but it also, as the iOS7 announcement reminds us, is a reason why Apple should find a second source for its web services, to prevent itself from being frozen out of Google’s best services.

        Anyway, to your point: Google MUST keep its ad links (and the portals that serve more of them, such as Google+) front and center in Android, or risk losing out to deals such as the kinda-amazing Microsoft/Apple deal of last month. Their control there remains absolute.

        How distasteful we find Google’s iron fist is, as you suggest, dependent on one’s personal concerns about the macro effects. My concerns are that a total reliance on ads to finance information providers has driven us to a lowest-common-denominator standard, as TV was before enhanced cable subscriptions funded premium services. So much app development, media and web news/opinion is now unsustainable, dependent on growth in ad revenue that in aggregate, will NOT come for the types of services I favor—people will get fair return on their effort of posting cat videos, while on-the-ground reporters in Syria or legal experts at the EU Competition Commission will not be. Google is not responsible for this shift, but its dominance encourages it.

      • obarthelemy

        Two things:
        – there’s no such thing as “a total reliance on ads to finance information providers”. Like for TV indeed, you’ve got your cheap trashy websites/apps/content that isn’t worth a dime and thus gets funded via ads, and the worthwhile stuff that some people are willing to pay for.
        – Even if there were a total reliance on ads, TV worked that way for a long time, still partly does… it hasn’t always been, and still isn’t *all* junk.

        The equilibrium between paid vs ads-supported in “new media” is probably still in flux, like for all media (TV, press, radio…). I don’t see anything profoundly different that would make that dichotomy unworkable for Mobile. What I find more bothering, again, is that if apps are considered content, walled gardens are a new thing with dangerous long-term consequences. Like a TV set that would need authorization from the manufacturer to play certain channels…

    • FalKirk

      “A sub-20% global share seems too tenuous a position to run with…” – markrogo

      That sub-20% share is over 600 million of the best customers in the world on the most developer desirable platform in the world.

      Most everyone thinks this is a winner-takes-all game where Android – like Microsoft before it – will control 95% of the market – when all of the available evidence says just the opposite.

      iOS is not going away. It’s the strongest platform by any measure save market share. Unfortunately, market share is the only number most pundits ever look at.

      • obarthelemy

        20% is kinda tenous: remember when Adobe switched a lot of their dev efforts away from Mac and to Wintel ?
        As for strongest platform “by any measure”, it is only the strongest platform by revenue per user, and that’s it. It’s lacking in features, lacking in variety, lacking in low-end presence, and high-presence, in rugged markets, in supplier choice, in openness and standards compliance…

      • customersat

        Customer satisfaction. Developer satisfaction.

      • JohnDoey

        Consumer focus. Ease of use. Desirability. Audio/video features. Movie and music and book libraries. Hardware accessory ecosystem. Case ecosystem. Mac/PC integration. Hardware design. Profitability (business health) of the hardware maker.

      • masquisieras

        is strongest in well implemented featured, in homogeneity , in build quality, in app choice, and standards compliance…

      • KillerRabbit

        iOS is strongest at
        – not having viruses
        – not having porn readily available for children
        – not having ads shoved in your face
        – not compiling and reselling your private information to 3rd parties
        – not having poorly thought out UI that changes every time you buy a new device
        – running on superior hardware
        – having free multi-year OS updates
        – having superior app catalog
        – providing incentives for developers (your app won’t be instantly stolen and resold)

        – having the best desktop OS optimized to work well with it

      • Boltar

        Actually I do remember vividly when Adobe shifted their efforts away from Mac. Which is exactly why Apple banned Flash and other non-Apple controlled development platforms, and exactly why they cultivated a fine-grained App market not dominated by any large player with dubious strategic interests. Phones are the ultimate standard-based market in that the standards for interacting with the carriers are available to all comers (FRAND patent lawsuits notwithstanding). Under those conditions sub-20% market share is perfectly sustainable indefinitely; nothing tenuous about it. There’s simply no driving force for complete market control.

      • obarthelemy

        Are you saying that ecosystems don’t matter because all phones can make calls ? I’m not even sure “making calls” is even one of the top ten jobs of smartphones nowadays ?

      • Boltar

        Hardly. But obviously having sub-20% market share doesn’t preclude having the most vibrant app “ecosystem”. Assuming that market share dominance guarantees a superior app market appears to be a bit of a reach.

      • JohnDoey

        No. Apple’s response to Adobe and others taking a go-slow approach to Mac OS X was this:

        – buy a video editor project from Macromedia and turn it into Final Cut and iMovie
        – buy eMagic and turn it into Logic and GarageBand
        – buy a DVD authoring company and turn it into DVD Studio Pro and iDVD
        – buy SoundJam and turn it into iTunes
        – create iPhoto and later, Aperture
        – create Keynote and later, Pages and Numbers

        … in other words they demoted 3rd party software from a necessity to an optional accessory.

        Flash was not included on iOS because iOS runs on ARM and Flash runs on Intel. No other reason is necessary. Adobe failed to get Flash running on ARM even years after iOS first shipped. When iPhone shipped with a 0.4GHz ARM CPU, 480×320 display and no keyboard and mouse, the Adobe Flash system requirements were “2.0GHz Intel CPU, 800×600 display, keyboard, mouse.”

      • JohnDoey

        Adobe did not reduce Mac investment because of market share. It was because of a succession of failed operating system strategies from Apple in the 1990’s that Adobe invested in but saw no return from. Therefore, Adobe (and others) took a go-slow approach to Mac OS X.

        Adobe has always made 40-50% of their money on Macs. They sell more $99 Photoshop Elements on Windows but sell more $4000 Creative Suites on Mac.

        Premiere left the Mac for a time because Adobe could not compete with Final Cut. Same with the Adobe audio software that is not on Mac. It’s not needed on Mac where there are better options.

      • http://www.asymco.com Horace Dediu

        20% share is a billion users. That would make it as tenuous as the 30 year Windows franchise.

      • JohnDoey

        Actually, iOS 6 is the biggest mobile platform by market share. Next comes Android 2.3, and after that, Android 4.1/4.2.

      • FalKirk

        Check and check mate!

    • JohnDoey

      Funny how Apple is both the original and longest-running PC maker when they have pretty much always had 20% or less global share.

      BMW, Rolls Royce, Audi, Mercedes — all less than 20% global market share.

      Lower-cost iPhones follow lower-cost iPads follow lower-cost Intel Macs follow lower-cost iPods. Apple has reduced their prices continuously since 1997 while maintaining high-end design and features. A lower-cost iPhone at this point is par for the course. It does not need to be either investor-driven or competitor-driven. It’s part of the iPod plan of 1) take the high-end and most of the profits, 2) reduce prices and take most of the market.

      • 2001 iPod 4GB — $399
      • 2005 iPod nano 4GB — $199

  • Kristian Iskanius

    Is it possible that the Google growth comes nearly all from iOS-devices and almost zero from actual Android-devices?

    • Ted_T

      If you count the Motorola purchase plus subsequent losses as well as all other Android related costs, that is self evident for Google’s *mobile* growth, as Google has made no money for Android at all.

      • Kristian Iskanius

        No. I mean that the sales of the low end Android-phones is so huge and they are not used in the way at all that benefit Google. I mean nearly zero %. So even though there is 900 million Android-phones only very small % gives Google what it needs and <100% comes from iOS devices where users really use the device in the way that it benefits Google so that they are growing 19% YOY.

      • Kristian Iskanius

        It would be interesting to know what is the ASP of all Android phones all together. That would give perspective how low end phones those are. Androids success is only because Nokia and Elop told that the Symbian will be dead soon. That is why all the manufacturers jumped the ship. Symbian was free so the next thing was to find a free alternative to it.

      • Ted_T

        I don’t see how that can be true: weren’t 90+% of Symbian devices built/sold by Nokia itself? Symbian was never going to be the cross platform OS of the future, no matter what Elop said or did.

        It has to do with the value proposition of non-smartphones going to zero, and feature phone manufacturers jumping on the smartphone bandwagon, while continuing to cater to the same customer demographic as before. Android was the obvious choice for these cheap phones.

      • Kristian Iskanius

        Everybody used the Symbian before iPhone. Samsung, LG, Motorola etc Android became popular only after Elop announced that Symbian will be dead.

      • Tatil_S

        Collapsing Symbian sales must have resulted in higher Android handsets, especially on the cheaper end of the spectrum. It is better to have one competitor (Blackberry) rather than two (BB and Symbian). A more gradual transition to MeeGo might have allowed Nokia to hold on to its Symbian customer base. It is not easy to gauge whether Nokia could have managed to put together a compelling ecosystem around that OS, as its CEO did not think so. For the low end market, I am not sure if music stores, movies, books or even a vast app store is all that important though, so it is difficult to imagine a scenario where it would do worse than it had so far with WP.

      • obarthelemy

        No. Android has way more market share and sales than Symbian ever had, especially in the US.

  • Ted_T

    The only thing the market will be forced to acknowledge vis-a-vis Apple is an acceleration of growth, particularly profit growth.

    That the market doesn’t understand Apple is a cliche by now. I don’t see that changing. The reason I don’t see it changing has nothing to do with Apple itself – nothing it does that should make Wall St. happy like dividends or buybacks will ever work. It has to do with how Wall St. values OTHER companies, and what acknowledging Apple’s value would mean to their valuations.

    Let’s take Amazon for instance. It is a retailer. Well, so is Apple. Indeed Apple is both an online retailer, selling virtual and physical goods, as well as the world’s most successful brick & mortar retailer in terms of profit per square foot. Apple’s retail operation alone is vastly more profitable than all of Amazon. One just needs to go into an Apple store and look at the crowds to see that nothing is changing for the worst. So, given all that, pus Apple’s other “mildly” successful business, how can you possibly justify Amazon’s valuation? Well, you can’t. There is no logic that does or can.

    So if Wall St. starts to acknowledge Apple’s actual worth, they will need to vastly alter their valuations of dozens if not hundreds of other businesses that play in the same markets. They won’t do it. The cognitive dissonance is just too big.

    • obarthelemy

      Except Apple isn’t mainly a retailer. Apple have a retail network selling their own products and a few 3rd-party accessories for those, compared to Amazon which mainly sell others’ products. Apple is an OEM, Amazon is a retailer. Apple’s retail success is 100% dependent on Apple continuing to put out successful products, and they have a rather narrow product line, so the risk is a lot higher than with Amazon, who mainly don’t care if they’re selling Wintel desktops or Android tablets.
      That’s called risk, and Wall Street does take that into account.

      • Tatil_S

        It is a bit funny. If Apple had a wide product line, it probably would end up as profitable as Dell, making it a low risk business. :) Of course, Amazon is the best for those who are afraid that a company may not be able to hold on to its profits, as Amazon does not have any. It is pure potential.

      • Kizedek

        Totally. Nice use of irony.

        Then you have retail consultants coming into mom and pop stores and telling them to cut the cruft and reduce lines and non-selling stock and focus before they go out of business.

        Meanwhile, Amazon sits on huge warehouses where the employees are shown to be virtual slaves just so that it can get a sale. Who doesn’t want to buy something cheaper? and what company can fail to sell at the cheapest when they don’t make any money? It’s a win-win for everyone except Apple, apparently.

      • Tatil_S

        It might be even worse. I’ve had quite a few instances this year where Amazon’s price was not the cheapest by noticeable amounts and those retailers are profitable. Amazon is selling on average at break even (actually at a loss for first party sales), yet unable to match the prices where others are able to make money.

      • JohnDoey

        When I gave up shopping at Amazon, it was surprising how easy they were to replace. A combination of B&H Photo Video and Target covered about 95% of my Amazon purchases and the prices didn’t go up, but the service and satisfaction went way, way up.

        It’s much harder to replace Apple.

        That is the risk with Amazon — users realizing they don’t need them.

      • Tatil_S

        I am curious, why did you stop shopping at Amazon. When I can find the same or similar products at other retailers, I shop there, but I never felt a particular urge to stop shopping at Amazon.

      • Ted_T

        Your comment seems reasonable on the surface, but really isn’t. “Apple’s retail success is 100% dependent on Apple continuing to put out successful products”

        No, actually Apple’s (and Apple retail’s) *growth* is dependent on Apple continuing to put out successful products. Their current level of success is entirely supportable by their current customer base. Those 90+% customer satisfaction numbers Tim Cook keeps reminding us of? They guarantee that Apple customers will keep buying Apple products when the time to replace their devices comes. Satisfied customers don’t jump ship.

        And Apple Stores in the beginning used to be goto place for digital still and video camera shopping as it was the one store where you could spend half an hour taking test shots and getting a feel for them. They could easily go back to being the best possible retailer for any number of non-Apple products.

        Meanwhile, Amazon is a far more risky proposition. Lets forget the most obvious one, that Amazon in its entire existence hasn’t figured out how to make a material profit. Let’s look at where a lot of it’s sales come from: DVDs & CDs. Unfortunately for Amazon those physical media formats are going away, and it is a distant also-ran when it comes to selling movies, TV shows and music in virtual formats.
        ” Amazon, who mainly don’t care if they’re selling Wintel desktops”

        They will care, if only corporate buyers, who don’t shop at Amazon are left buying Wintel desktops, as seems to be happening more and more.

        To sum up, Amazon is way riskier than Apple, and is incapable of turning a profit.

      • JohnDoey

        Well, I had very high customer satisfaction with Apple a few weeks ago and was planning to buy the next iPhone and iPad this fall, but then I saw the iOS 7 introduction and my customer satisfaction cratered and I put off my new device purchases for a year at least and am going to give other vendors a chance at that time as well. And this is my second century of very high customer satisfaction with Apple products and it is as low right now as it has ever been. And that has already stopped all my Apple Store purchases.

        So you can’t take the existing user base for granted. Even if there are no other vendor options, existing users can still hunker down with older gear, XP-style.

        So yes, Apple Stores rest on a foundation of Apple products.

      • Ted_T

        I’d love to hear about your reasoning, perhaps you’ve written about it and can provide a link?

        I am doubious about some of the changes for change’s sake in iOS 7 appearance, but am very excited about some of the upcoming functionality. And clearly the changes in iOS 7 are very much a work in progress, so I don’t have much fear about the final product.

      • obarthelemy

        Your analysis would be true if that 90% customer satisfaction were etched in stone for all eternity. Surprisingly, it isn’t: Apple is at 90% customer satisfaction for the 20% of smartphone customers that already chose Apple. But if Apple keep adding to their features lag vs Android, at least feature-oriented users will start getting antsy. Fashion-oriented users are always a bit flighty. I was very happy with my HTC HD2, the best smartphone I’d ever had by far, but when time came to renew HTC had nothing competitive with the Galaxy Note 1, so in spite of HTC’s perfect satisfaction, I switched.

        Shure, Apple store could becomle the go-to store for cameras, food, clothes… they aren’t though, and I don’t see them focusing on anything but Apple products, ever.

      • Ted_T

        So evidence that they *already* used to focus on 3rd party products fails to convince you that they could possibly ever do so again, and will let their stores go under rather than do something they did successfully in the past?

        You really do have to go to some amazing twists in logic to justify the Apple vs. Amazon valuation dichotomy.

      • DesDizzy

        obarthelemy as a risk professional for over 20 years and looking at business risk from a historical perspective, I would suggest that, despite popular wisdom, the generalist business proposition is more risky than the specialist business proposition. The phrase “jack of all trades, master of none” comes to mind. I think a little research will show that in banking, retailing, manufacturing etc there are many specialists concerns that have been around for hundreds of years, but almost no such generalist concerns with similar longevity.

  • Fedor

    Horace,

    Google’s growth is largely artificial and based on adding so many ads to search pages to make them all ads in many cases. http://blog.tutorspree.com/post/54349646327/death-of-organic-search Also many argue that Google purposefully makes normal results worst than ads so people click on ads. I have seen this myself in many cases where I would see wikipedia and .gov links when I wanted to buy something. Of course ads were 100% correct.

    Google’s problem is the ruined reputation as more and more people see them as greedy and as a company with no morals. Not good for a company that’s trust based. Google might enjoy their market share but Bing is making inroads and if a new company starts search, google is extremely vulnerable since they have sold their user’s trust for a few extra clicks. Word spreads like wildfire….people dont; like to be manipulated and pay-to-play is good for Google only, not users.

    Lastly, most Google users do not know that they clicked on ads, Google masquerades them to look like normal results to increase ad clicks. The problem is that this practice is illegal and FTC just sent a letter to search engines. Studies show that over 50% cannot tell ads from normal results. Imagine how clicks will be effected if all knew what’s an ad and what is not?

    My point is that Google’s growth is not because of extra users, but by over-monetizing them, ethically and unethically. Your revenue might be increased too if you posted a sponsor story–without the “Sponsor” message. But your credibility would dive soon enough.

    • obarthelemy

      When you’re looking to buy something, instead of gathering info on it, try adding “price” to your query, or clicking the “shopping” tab.
      How is Google trust-based ? I use them because they put out good products, be it in search, online apps, or OSes. I don’t trust them anymore than Apple, MS or whomever, ie: not at all.
      As for ads, I recently checked: Bing is as Add-y as Google. Only dukduckgo is better. Ads a clearly marked, rather more clearly than those fake articles in print mags and quite a few ads on web sites (say, Asymco ?) so Google are at least no worse than anybody else.

      • trustme

        I imagine it was called “trust based” because all of their income results from gathering vast databases on their users, something that is true of neither of the other companies you mentioned. Perhaps you don’t see that as requiring trust, but other people do.

      • obarthelemy

        you really think apple and ms, each with their own ad companies, are not also tracking their users as best they can ? source ? or are you relying on truthiness ?

      • trustme

        I didn’t say anything you just pretended I did. Again, for your benefit, only one of these companies makes their entire income from how good they are at this, and is only incentivised to do it better.

        Further, Apple has continuously made moves to restrict what data they and advertisers get access to. End-to-end encryption in iMessage, FaceTime, etc. No third party cookies by default in all their browsers. Moving apps away from using unique identifiers to tie data together across multiple apps and barring them from the store if they do. This isn’t particularly admirable because, again, it’s not a significant income source, but I only see Google moves in the other direction and zero sign they care at all.

      • trustme

        And, of course, we have numerous examples of where Google completely failed to live up to this trust, and no sign they intend to improve. e.g. http://gawker.com/5637234/gcreep-google-engineer-stalked-teens-spied-on-chats

      • obarthelemy

        I see your “someone at google behaved badly” and rise you a “Apple as a corp is one of the worst at privacy”: http://readwrite.com/2013/05/02/apples-privacy-record-sucks-heres-why-you-should-care#awesm=~oc9QhLs7ZrdsGC

      • trustme

        That report is about transparency of policy, not policy. The most secure data is that which a company doesn’t collect, either way.

      • trustme

        To clarify, Apple doesn’t collect iMessage data, so there can be no “someone at Apple behaved badly” for that data, unlike Google IM. Your article isn’t about abuses of privacy, so it’s irrelevant.

      • Fedor

        Google and search engines are a black box, they swear that they offer unbiased results, uninfluenced by money paid.

        What Bing does doesn’t make Google any less guilty. Ads are absolutely not marked clearly, especially for those with older monitors and those that only see 100% ads above the fold. If you see all ads, you cannot compare the background between ads and non-ads, even if you can tell the color difference. This has bee documented and studied many times, regardless of what you say. FTC quoted studies in their letter. http://blogs.wsj.com/digits/2013/06/25/ftc-warns-search-engines-to-better-identify-ads/

      • Kizedek

        You are not familiar with sponsorship-type ads as used here on Asymco?

        I like the ones on DaringFireball (Ads via The Deck). Lower left side of page. I click on those fairly regularly, and no other ads anywhere else on the internet.

      • JohnDoey

        Trusting no one is as bad as trusting everyone. Apple, Google, and Microsoft are radically different companies. Apple’s business model makes them more trustworthy with your data than Google or Microsoft. Apple is directly funded by user satisfaction, including privacy and security satisfaction and their record as the only virus-free system maker reflects that. Viruses are one of the top privacy issues because they gain access to your data within your system. So to throw up your hands and equate Apple, Google, Microsoft on privacy is unreasonable and irrational. Apple has zero viruses, Google has almost all the ARM-based ones, and Microsoft has almost all the Intel based ones.

      • obarthelemy

        They’re not the only virus-free system maker, they are the only one who did specifically instruct the Apple Store staff to refuse to answer enquiries about a malware that was attacking Macs, couple of years back. Yep, sure, extremelly trustworthy…
        Thinking that Apple have no viruses is idiotic, and proves that their denial strategy and utter disregard for user safety and information is working… I guess one can never underestimate an Apple user…

      • Kizedek

        Mmm, kind of like flight attendants will refuse to answer a rush of panicked questions about airline safety at the first hint of turbulence. They will just give you a drink instead. Big deal. It’s not “denial”, it’s proven safety record with billions of satisfied travelers.

        You are conflating desktop and mobile. There is a difference between downloading something dubious from a dubious site (desktop browser, Mac, where there are one or two examples of targeted attack on record), and mobile malware apps in the company store: where every other Android app is unethically using your data at best, vs. signed apps in iTunes which Apple will terminate from all devices the moment it is required.

        So, keep using a system that is known to have serious issues, and denigrate the one that has “perhaps two that have affected maybe 200 people for about 2 days” and been blown out of all proportion because you are dead-set on showing them to be dishonest and untrustworthy. Yeah, that makes sense.

      • obarthelemy

        Well, the question here was about company trustworthiness, and there’s a whole schtick going on here about Apple being an homogenous whole w/o divisions, so I’m not sure how bad behaviour on the desktop side of the business doesn’t also taint the mobile side.

        Also, thanks for making my point for me: almost *all* Android viruses require sideloading, the PlayStore is mostly exempt… so your all sums up quite nicely what I think about the “Android is full of viruses” FUD.

      • Kizedek

        You shifted the focus onto virus and malware in a vain attempt to portray Apple as untrustworthy. The discussion was trust. Now you want to quibble about how prevalent “True Malware” apps really are on Google stores (though you don’t care that there have been maybe two mild cases of malware on iOS and addressed in about 2 days).

        On the trust side: despite your denial and reassurances to the contrary, we still don’t place ANY trust in a SYSTEM whose very creators and developers are the worst abusers around; and whose very business model is to take advantage of its users; and who display complete and utter disregard and laissez-faire for what goes on in, on, through and around their system. I hop you truly enjoy your “freedom”.

      • obarthelemy

        I find Apple’s refusal to acknowledge nor help with malware outbreaks on their systems fully relevant to the issue of trust. I’m funny that way.

      • obarthelemy

        Also, shuuuure, safety concerns and procedures are and should be the same for a throng of people locked up in a flying tin can facing a life-threatening fear, and for piecemeal customers enquiring about computer malware. Because the two situations are so similar. I’ll pass the info on to my dietetician too, coz the guy sure knows how not to spare my feelings….

      • Kizedek

        Ugh, the comparison was not that both are “life-threatening” situations. Nice way to miss the point. The comparison is that non-issues (1 in 1 billion chance of “crashing”, whether that is in an airplane or on a computer) don’t require detailed seminars for every “worried” customer, just reassurance.

        Yes, people get irrationally worried about all sorts of things, doesn’t matter how serious it is. Listening to YOU, you would think an isolated case of malware on Mac or iOS, *is* life-threatening, and ANY response by Apple is unsatisfactory and constitutes a serious breach of trust. Grow up.

        Since the situation is NOT life-threatening and is just as rare, and since Apple’s “safety” track record *is* comparable to that of an airline which is highly regulated and accountable for every little thing, then the situation equally requires no *convincing* — for as we know, there are some people like you who cannot BE convinced, no matter what. Either you get on the plane or not.

        You are most welcome to drive across the continent instead of fly, which has its own associated costs, hazards and inconveniences despite the flexibility and freedom of planning your route (Android is the car in this analogy). So, off you go, then…

      • obarthelemy

        except tht was not irrational, there *was* malware infecting Macs at the time, with clear symptoms, and an easy diagnostics, which Apple specifically instructed their staff not to perform, to maintain the charade the Apple devices re immune to viruses. Apparently, it worked, at least on some…

      • notavirus

        That wasn’t a virus.

      • obarthelemy

        sorry, malware. which chnges *nothing*

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Google’s products are their users. You are talking about services.

      • obarthelemy

        To me, as an end-user, Google’s products are their services, software, hardware. To shareholders, Google’s products are their dividents and share price.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        It is very simple. google’s products are highly targeted advertisements targeting users of their services.

        You are a user of Google’s services and Google offers you as a product to advertisers.

      • obarthelemy

        Indeed. And yet, when I use Google products, I use their software, devices, and services, not the opportunity they give me to disseminate my personal info and burn ads onto my eyeballs. Very similar to TV networks, which sell time in my brain but rise and fall by the quality of their shows . Could Google be different things to different people ? That would be soo complicated..

    • Walt French

      I was dubious about your “quality” argument until I went online last night to find how to add more visa pages to my passport. Yes, the first 3 links, ads, were highlighted as such. But many of the rest were commercial “facilitators” who, for a fee, offer to put your data into the forms that the State Dept requires. Some of the info was actually misleading—e.g., one link said extra pages are free, but that’s only when getting your first passport or renewing.

      So yes: Google’s commercial orientation helps distance users from the natural providers of a service. (Not that the State Dept made it particularly clear how to find the right page directly, or to determine.)

  • http://www.isophist.com/ Emilio Orione

    Apple is shifting away the 20% of the best more spending users from google services.
    Apple maps, photo sharing and siri are all working against google and music streaming is coming too.
    Some correlation between apple’s change in strategy and google’s revenue should be found.

    • handleym

      Yes and no. I agree with much of what you say, but there is a BIG problem here.

      Around the time of Penryn (about 6 years ago) desktop CPUs hit a wall based on physics/memory latency/customer needs, and since then desktop CPUs have not changed much: substantially improved energy efficiency, a few tens of percent single-threaded performance improvements, quad-cores for those who want them.

      As a consequence of this MS appears to have been lost, unaware of what to do in this new environment.

      We’ve recapitulated the history of 20+ years of desktop computing in about five years of mobile, but we are already close to that same point. We have a year or two more of dramatic improvements — maybe one more spin of the CPU in the transition to 64-bit ARM8, to better memory performance, to 802.11ac and faster flash. Even those will mainly be changes visible only to enthusiasts, not to most buyers (unlike, eg, the clear performance improvements from iPhone1 to 3GS or iPhone4 to iPhone5 transitions).

      Point is, when the hardware excitement goes away (and the easy improvements from Moore’s law), what happens then?

      Apple is better positioned than anyone else (certainly MS, apparently Google) to take advantage of this pause to improve the lives of developers, to rethink what can be done with mobiles, to add (in a coherent long-term fashion) new sensors and HW capabilities. All good.

      BUT there is another side to the future, the server side. Machine learning, big stats, all that entails. Voice recognition, image recognition, translation, emotion detection, pattern recognition (and notification when the patterns change), all that. Google is obviously king here. More to the point, Google GETS this as a conceptual category, a way of thinking, not just as a series of current products, in the same way Apple gets design as a conceptual category. And by the same token, Apple does NOT get machine learning and big stats as a conceptual category. They see it as a few products — Siri, a few parts of Maps, that’s it.

      To the extent that I am worried about Apple’s future, it is here. They have design, HW, UI, developer tools, network engines, server farms, all the tools of the past, covered for the foreseeable future. What they have not shown any strength in (and any interest in acquiring) is the tools of the future. I want to see them hiring some big academic names in big statistics, acquiring a few more firms in machine learning. I want evidence that they understand that this is the essence of the future of computing, every bit as much as graphics (from the first Mac GUI on) were the essence of the past 30 yrs of computing.

      • http://www.isophist.com/ Emilio Orione

        I don’t know. I like to think companies have to focus on actual products, siri is something that works now and it is superior to what google is delivering now in Android phones.

        The future will be made by voice interfaces, but delivering one now is a better way to achieve that than just studying a way of doing it.

        R&D is useful but experience on a real product is essential too.

        For the stall in hardware developing may be, but the moore’s law is still working, but I don’t see innovation in mobile guided by hardware, innovation will come from software.
        iOS 7 is software innovation, siri will be software innovation as it improves, and everything else will come from software.
        Productivity software for mobile as still a long way to go, paper and grid are just the beginning.

      • http://iixn.pl/ majgr

        Voice interface hurts brain, spelling what you want is more brain intensive than pushing some buttons.

      • obarthelemy

        actually, i find the best way to enter data is my Note’s stylus. Very quick and comfortable.

      • JohnDoey

        No, definitely not. There is no CPU wall. The wall is batteries. Period. We will always want more CPU than our batteries can provide.

        What you are seeing on the desktop is a long overdue catch-up on mobility in the CPU’s that is more important than simply doubling in power but still requiring a wall plug. The PowerBook 190 upon which all modern notebooks are based shipped in 1991, around the same time as the first mobile ARM chip debuted in Apple Newton, from which all PDA’s, iPods, and smartphones descend. Yet Intel only started designing for power consumption in the Core generation of CPU’s that shipped in the first Intel Macs in 2006. And Intel themselves will tell you that it took until about 2010 before they finally understood how necessary designing for power actually was. So Intel has essentially had to sacrifice speed increases for many generations to catch-up to their lack of mobility focus. They had to do this because the latest use cases are mobility use cases. More people want a CPU in their pocket than want 16 CPU’s on their desk. Same as more people wanted iPods than wanted higher-fidelity DVD-Audio players.

        On ARM-based systems that already have mobility features and are already designed for low power, yes, CPU and GPU power is doubling every year, and in some cases, more than doubling. On Apple devices, part of this increase goes to increased user responsiveness, and part goes to pushing more and faster pixels, and part goes to asking the device to do more in the background, and part of it goes to using less CPU/GPU to do the same old things in order to save battery life. Going forward, this cycle will continue. We’ll keep asking our phones to do more in the background, to respond even more quickly, and to get even better battery life. The GPU is going to have to jump 4x just to support 4K video output soon. Running a second AirPlay display is already a requirement. Running a display on your wrist 24/7 may soon be a requirement. Monitoring AirDrop just came in. All if this adds to the CPU/GPU requirement.

      • handleym

        So you deny that on the desktop, FOR MOST USERS, current CPU is enough?

        Or you claim simply that on mobile it’s going to be different, that THERE (unlike the desktop) there will be
        (a) no saturation in performance, that the laws of physics will allow for exponential performance forever?
        (b) no saturation in what we want our devices to do ON THE MOBILE?

        You are refusing to engage with the POINT of my comment, which is that, for various reasons, the future of computing will be based on AI-lite (ie machine learning, and most of it running remotely on server farms). Rather than accept the implications of this (and Apple’s lack of preparedness in this space) you take refuge in claiming that the future of mobile will be like the past. Wake up! The future of mobile will not be like the past over the next THREE years, let alone the next twenty years.

      • Kizedek

        I am not too worried about Apple taking on the future.

        First, we don’t know what they are working on and have under wraps. We often don’t know what they have prepared in advance until they launch it. Though we get some hints from patent applications.

        Second, Apple seems quite adept at finding and acquiring the small startups it needs to bring a core team into its fold. Chip designers, Siri, mappers (news this week or so), whatever.

        I do not know all the ins and outs of Google’s capability with data; it must be massive. However, the core infrastructures and technologies seem to be fairly open and commoditized — seems almost anyone can get into scaleable cloud computing with the likes of Amazon cloud services and quickly scale up a viable business from startup to the likes of Twitter.

        And services like Dropbox, which are starting to act as a data platform with their own APIs, are starting to get interesting and show that there is life outside Google.

        I think Apple can recognize directions it needs to push in and acquire small teams of talent along the way, whether they are in California or Tel Aviv. With its resources it can find new people who are seeking capital investment. And we don’t know what their new data-centers are for entirely: maybe more for Siri type stuff than iTunes.

  • melci

    What the market doesn’t seem to take into account is that of those 900 million Android devices sold in the last 5 years, only 568 million of them are actually active from an app perspective compared to around 510 million iOS devices according to Flurry.

    Add to that the fact that iOS users are 50% more active on their devices and 4x bigger spenders on apps, 3x the share web browsing, generate 67% of the in-app ad impressions, etc etc, and Google’s numbers are looking worse and worse by the minute.

  • Google Kills Small Business

    There is nothing more that I would rather
    see than a complete takedown of Google from Search to OS. They are
    very a unethical company and Matt Cutts is a snake oil salesman.

    • someonewhowasntgivenanything

      Yeah and Larry Page is an incompetent Steve Jobs wanna-e.

      Let’s face it Larry, you can’t keep shoving more and more ads down our throats and expect to be the number ONE company. You will never achieve this, your brain is simply too stiff.

      Now go and kill more small businesses because your leadership skills are too weak.

  • Chaka10

    Great post, Horace. I would echo @melci’s comment — the other obvious elephant in the room is the 500+ iOS devices out there. It would be very interesting to see data on how much of Google’s mobile advertising is from iOS vs Android.

  • coool

    Google – where “innovation” means packing the results with more ads.

  • maro

    Horace, it seems you miscalculated gross margin for the last quarter.
    Google division: 5.195bn cost on 13.107bn revenue, so GM should be 60.4%

    • http://www.asymco.com Horace Dediu

      Yup, you’re right. Correcting…

  • Walt French

    Google’s notes specifically note that they are moving all advertisers to their “enhanced”* campaigns, where advertisers are REQUIRED to include tablet exposure even if they just want desktop. (Phone placement seems to be encouraged, but from what I can tell, not absolutely required. Somebody who deals in these matters might comment.)

    These bundles may result in more clicks per campaign, but lower-quality ad exposure overall — there’s only so much “engagement” you can get when you’ve blocked the user entirely from seeing what he wants before he knows which way to head off — and as a result, analysts note the bids for these some-good/some-not-so bundles are lower than for the prime real estate locations.

    I’m sure Google knew this was coming, but it is an inevitability that they dared not let mobile go ad-free or low-value trash only.

    I’ve been on a kick lately, claiming (with only the fuzziest of notions to back me up) that we’re close to “Peak Ad,” the time when more advertising produces no more value to advertisers, because consumers already are aware of ways to spend 500% of their income—more ads won’t produce more spending. Yet our world is moving away from print news & entertainment, so Google’s problem is soon to hit all of us who consume news, etc that is ad-supported: the revenues to produce high-quality product just won’t be there and we’ll need other financing models such as subscription, or to simply do without. (I’m glad this site apparently is funded other than by ads.)

    * Let us briefly praise the NewSpeak that a mandatory requirement “enhances” customers’ satisfaction, and that you “engage” with hucksters touting that they can cut your car insurance rates in half. Clearly, experts in Persuasion and Propaganda.

    • obarthelemy

      I’m guessing “peak Ad” will come around about 5yrs after “peak oil” , which itself has been just around the corner for about 4 decades, depending on which FUDder you chose to listen to.

      My take on it is: we still got time.

      • r.d

        Peak Oil Theory was written for Conventional Oil.
        So Why hasn’t gasoline prices fallen if there is so much
        in US.

        There is another peak which is at $130 price of Oil,
        Economic system goes into recession.
        How are you going to snark that one.

        Obviously, you also don’t believe in Global Warming either.

      • Kizedek

        It’s kind of the opposite scenario:

        Peak Oil: a finite supply of something everyone wants an infinite supply of. We can always use more oil. Price goes up.

        Peak Ads: an infinite supply of something that no-one really wants. We are getting fed up of ads and can only digest so many. Price goes down (see Google’s latest disappointing results).

      • Walt French

        Wikipedia to the rescue:

        M. King Hubbert created and first used the models behind peak oil in 1956 to accurately predict that United States oil production would peak between 1965 and 1971.[3] His logistic model, now called Hubbert peak theory, and its variants have been used to describe and predict the peak and decline of production from regions, and countries,[4]and has also proved useful in other limited-resource production-domains.

        Please understand that I use “Peak Ad” quite a bit more loosely — nothing remotely like the symmetric logistic distribution curve that has ben observed when a given resource is extracted. Rather, that more advertising will produce very little more revenue, due to saturation (or low-hanging fruit having been picked, if you like that metaphor better).

        I do have a parallel concern, in what economists call “externalities,” between the the ad model dominating the web, making micro-payments and other models less competitive, Anthropogenic Climate Change. But that’s even a looser parallel.

    • Relentlessfocus

      The question of ad saturation hasn’t been adequately addressed but sits there like smartphone saturation. I think it was in 2008 or 9 that Steve Jobs said that the smartphone market would be in two phases, first all boats would rise with the tide (his phrase) and then (to mix metaphors) it would be a zero sum game. I believe the same is true for online advertising. Google has benefitted from the shift in advertising from tradional print and TV ads to web based ads, most of which they captured. But the shift from web to mobile is simply moving $ from their right hand to their left though with different rate characteristics. In addition so many companies are now chasing those same ad $. It’s clear that China will not belong to Google and given the current regime in Russia it’s unlikely that Google will be allowed to dominate there.
      The other areas left for Google to conquer, India, Africa and South America are not as lucrative as developed Asia or the West. Further, despite their best efforts Google remains beholden to iOS for a lot of their mobile traffic. even as Google aattempts to build a walled garden inside iOS with interlinked apps, Apple is doing all it can to divert users from Google as witnessed by their maps adventure. As a result I ask the question (similar to Walt’s), how much longer can Google keep growing at double digit rates which their stock price demands. My sense is that this is a slowing roller coaster and that is without even considering the potential disruptive innovation question.

  • Watcher

    I believe there is a fundamental difference in Apple and Google users. The first spend their money, the latter are spent money on. That could explain part of the difference in market reaction.

    And isn’t Bing on mobile too? They have a 3 billion a year online advertising division, I can’t think that amounts to precisely zero mobile benefit.

    • Walt French

      That was an interesting sidelight to the Surface writedown: it was a small fraction as bad as Microsoft’s $6billion blunder in overpaying for aQuantive. Microsoft really has failed in ads.

    • obarthelemy

      How am i not spending money on my Android devices, apps and services ?

      • Watcher

        You are, but that is a very small part of what generates income for Google, as we can see for the tiny sliver of yellow in the “licensing and other revenues”

  • Walt French

    Since I think this topic is quite important to the web at large, let me ask anybody who knows, to reply to questions about how Google accounts for different ad placement.

    I take it that “Google web sites” is any revenue that results when the browser URL shows X.Google.Com, YouTube.Com, etc., and that “Network” revenues are from independent websites such as NYT.Com, that show Google ads.

    Eyeballing the chart, Network revenues have fallen over the past couple of quarters. Unhappy news for Google, to be sure, but also unhappy for those sites that want and even need advertising income. Meanwhile, direct Google revenue is merely increasing at an ever-decreasing rate.

    That latter is of course in sharp contrast to the increasing rate of Android activations. The change in rates would seem to be due to some mix of (a) handsets replacing desktop and tablet activity, which I think would be a tiny effect; and (b) activations shifting from high-value geographies such as the US, to economies that have a quarter or a tenth the per-capita income, and so much lower value per click.

    Those explanations reject other possibilities. While PC sales are down, the base keeps expanding enough that I can’t imagine desktop-based browsing to have fallen. (We’ll have some insight to that soon enough.) The “Enhanced” programs were cited, but are too new to account for the drop over 3 quarters. The European economies are largely terrible, while the UK and US are far from great. But personal consumption has been rising, if too slowly for many, so ad revenues shouldn’t be shrinking. And finally, it’s not credible that half a billion or more new mobile users wouldn’t contribute pretty substantially to mobile ad revenue.

    Finally, a macro observation: if these are more than short-term hiccups (and I think the ARE), might we be in the early stages of a consolidation in a whole host of mobile- and web-based activities? The overwhelming majority of app developers are not making enough money to stay in the business; just as a Venture firm expects busts on 80% or more of his deals, might we see a shakeout in app shops? (That’s an undertone to what I’m reading about the iOS7 transition: Apple is trying to raise the bar so they have much cleaner/slicker apps that, as a semi-intended side effect, will demonstrate the clunkiness of the Other Guys.) And perhaps that shakeout is coming in many bloggers’ and news sources’ financing, as the Peak Ad phenomenon hits home, that their revenues are NOT going to increase from the current hobby levels.

    • Tatil_S

      I am not in advertising business, so take it with a grain of salt: There is a fixed amount of revenue companies are willing to spend on on-line advertising. Some of it is limited by the total advertising budget based on the economy and some of that is based on the perceived effectiveness of advertising online. Therefore, when the supply of pages with banner ads and search results increase, that does not necessarily result in additional revenue.

      Android and iOS has increased the supply of searches and web page views, as users do not have to wait until they get home to run a search or check a news site. In the US, I doubt there has been many people who did not have access to internet before getting a smartphone, so this increase in online activity does not result in more users and the additional disposable income available for shopping that would come from the additional users. Therefore, companies are simply competing for the same amount of consumer spending through a higher number of web pages. Thus, I don’t think it is that strange for price per click to go down. Why should the companies spend more chasing the same income? If my analysis is on the right track, I doubt this is a temporary effect unless the effectiveness of online advertising improves compared to other media.

      In emerging markets, there are users who would not able to go online without smartphones, so the revenue should increase by a greater percentage, but of course such users do not have as much disposable income as the ones in the western world, so the increase may not be worth all that much in absolute terms.

      • http://www.asymco.com Horace Dediu

        This makes a lot of sense. The limit for ad revenues is not the supply of targets but the supply of arrows.

      • obarthelemy

        Not quite: advertisers pay for brain-time. When more users spend time on their smartphones/tablets, ad budgets get shifted to those (assuming equal effectiveness, targeting… both of which probably favor Google over TV/Radio/Print/billboards/In-store).

        Also, total ad spend can be increased by devices. Google’s efforts in developing countries are probably linked to the fact that developing countries are under-advertized-to for lack of infrastructure, including ad infrastructure. Poor chaps.. that’s gotta be fixed !

      • Kizedek

        That’s the problem: people always assumed “equal effectiveness” and thus assumed it was business as usual for Google. That is being shown not to be the case.

        Mobile is simply different than desktop. There is not the same “brain-time” because the focus on tasks, apps and screen real estate is different. There are only so many arrows/pointers that will be tolerated, let alone effective.

        On desktop, I can tolerate banner ads, sidebar ads and other ads all over a webpage, because my focus is divided up between multiple windows if not screens. The ads are less intrusive, and it’s similar to being out on the street.

        Completely different on mobile. I dont want ads in apps, period, certainly not if I have paid for an app. Most of my online work is now done through dedicated apps, with focus on one screen or task at a time. Even. Mobile templates/versions of websites dont allow for much ad space. If i have to dismiss an ad between every screen, then that app or service is going to go.

        This limited opportunity to place ads on mobile doesn’t make them more valuable. There are not suddenly more people looking for more ways to spend more money for a greater part of their day. In fact, people seem to be more consciously spending locally and ethically through recommendations of friends and social networks.

        So, something has to shift to make ads more effective than ever. One idea is to go back to the old ideas of simple sponsorship, affiliate selling or product placement. As i mentioned above, i am quite happy for the writer of a blog that i regularly enjoy to have one focused ad at a time complementary to the topics he writes about, or for services and products he has tried out or used and writes a little piece about. That’s like a social recommendation.

      • Walt French

        Thank you for a helpful reply. Now, riddle me this: how will a company budget next year’s ad spend?

        Standard economic analysis says that the optimal spend is up to the point where the last dollar of spending generates a dollar of incremental revenue. Individual companies won’t necessarily have the decreasing returns-to-scale effects on which that depends, but underneath all the “brand establishment,” competitive jostling and so on, that model ought to work pretty well for any given economy as a whole.

        One of the perceived benefits of Google’s ad services is that many advertisers can very accurately measure response rates and the benefits of an ad. A wedding photographer, for instance, can track inquiries, and how many of those turned into contracts. So many advertisers know very accurately the cost/benefit of more, or fewer ads (higher or lower bids for a given keyword).

        At some point what Horace called a “supply of arrows” is dependent on how much the company wants to supply arrows, i.e., how much benefit the companies get from shooting them… at us.

      • obarthelemy

        That’s true for all advertising, and the standard quote is “half my advertising budget is wasted, if only I knew which half”. Apart from global ad spend, there’s also the question of how big a slice goes to new media, sub-slice to mobile… As people spend more times on their gizmos and less on their TVs, that “mobile” slice is probably bound to increase its share of global ad spend for a while.

      • Tatil_S

        As consumers spend more time online, I am sure the effectiveness of online advertising will keep increasing with respect to the more traditional ones, but overall advertising budgets are limited by the expected sales, which are limited by disposable income of the average target consumer times the number of such consumers. Thus, it is a a zero sum game between different advertising media.

        In any case, the biggest advertising budgets belong to those who are not in a position to track the effectiveness of their ads very accurately. A lot of advertising is to get consumers recall your product when they are in the store, at the bar, at the movie theater or to get you into a car dealer. They try to get consumers exposed to their message a certain number of times in a week. They don’t expect you to click on the ad, just notice it and keep it in the back of your mind. In such an environment, it is difficult to gauge whether a particular audience member went to see that movie because he saw that banner ad on NYT’s website, on a mobile app ad, on a billboard, on TV or simply because his girlfriend wanted to see it.

        If they notice you checking out vacuum cleaners, manufacturers have an incentive to bombard you with ads, but they do not know whether the target consumer has already made the purchase and whether he bought one of theirs or one from a rival without individualized tracking through one network that combines every online and off-line store. Roomba ads followed me weeks after I actually bought one at Costco, so I knew iRobot was wasting its ad budget, but clearly iRobot was not aware of it.

        Even the local advertisers are in the dark to some degree. Your wedding photographer may be able to track whether a potential customer who came through a particular ad has visited the “contact” page, (possible, yet tricky) but when the customer actually makes the call three days later, the tracking between which ad and which customer will be broken. How about a restaurant? Unless it offers printable coupons, it is very difficult to know whether a patron found it due to that particular ad on a particular web page. Even then, I doubt it will be clear whether that person was going to be a customer anyways, but now taking advantage of a discount.

    • Chaka10

      “ad revenues shouldn’t be shrinking”. I don’t think they are, at least not for Google. From Ggogle’s earnings release:

      “Google-owned sites generated revenues of $8.87 billion … represents an 18% increase over second quarter 2012 Google sites revenues of $7.54 billion.

      Google’s partner sites generated revenues of $3.19 billion … represents a 7% increase from second quarter 2012 Google network revenues of $2.98 billion.”

      The issue is concern over “cost per click” declining 6% YOY and 2% QOQ, while total paid clicks increased 23% YOY and 4% QOQ. As I understand it, “clicks” can be thought of as “the Google product”, so this basically is a concern over pricing pressure on Google’s product.

      [EDIT -- I otherwise generally agree with your observations]

  • Quick q

    I thought Microsoft made reasonable amounts from licensing royalties on certain android devices.

  • jbelkin

    Yea, it’s hard to understand why Google is rewarded when they are a one trick pony who have NEVER had a successful second business unit EVER. They are MS in that same sense as MS since 1998 has failed in EVERY consumer venture. Now Google is saddled with Moto – will they write off $11 BILLION like MS? And what people fail to notice is that every mobile view is off the desktop and in a huge percentage of cases, moves users off a browser wheere they might click on a search link to an app from that company and bypassing Google entirely. While it was easy to make fun of Apple maps in the beginning, ultimately it hurts Google who no longer gets hundreds of millions from Apple and Google maps will never again have 95-100% share on an iphone for map searches. Because Google refused to incorporate siri search, they had to create a second map app that now has a meager share on the iphone … and while Apple makes $400 per iphone sold, Google makes $5 for every android phone sold AND every android phone user is another app away from not using the browser. And android is a failure when they ask people to pay for it (tablets, GoogleTV, nexus, etc …) … it is the Win XP of mobile Oses …

    • obarthelemy

      MS: xbox ? also, not “consumer”, but their move from desktop OS to desktop (office) software to servers (OS, databases, sharepoint…) has been quite successful. Windows Mobile (Phone, CE,…) was also quite successful at one time.

      Google: Docs, Gmail, Android, Youtube, Chrome, Maps, are quite successful diversifications from their original search product. Sure all of this is ad-based, but still, those are very different products.

      • bobbyF

        Microsofts Xbox division has lost approximately $3 billion dollars over the lat ten years. Its very doubtful it will ever be able to recover that money in future profits before the market becomes dominated by cheap but powerful ARM based solutions running android/iOS.

  • obarthelemy

    I think some of the main parameters are granularity and risk:
    – if/when an Apple user switches ( and they do switch: the whole idea that there are “XXX users” as if there were a notion of ownership is a bit of a puzzle to me… Political parties and religions can’t achieve ownership of their members, yet consumer electronics companies should be valued by that yardstick? cf RIM, Nokia…), Apple lose the entirety of that user’s revenue stream. When an Android user switches, not so.
    – Momentum seems decidedly one way

    • churn

      Not sure what point you’re trying to make about momentum. Don’t most datapoints currently suggest churn from Android to iOS? From context I would somehow presume you mean the other way. Maybe you have some information to share.

      • obarthelemy
      • Jessica Darko

        I have a chart that shows Apple has %99 market share, and Microsoft has %1 and Google has %0.

        Will you consider it proof if I post it?

      • churn

        This doesn’t show churn, because (and I can’t believe I have to explain this) the market is growing and there are millions of people buying their first smartphone.

      • churn

        And, even more obviously, this would only definitively show churn if the market size was fixed and iOS was declining, not flat.

      • obarthelemy

        And I never talked about churn but about momentum. I can’t believe I got to explain this

      • churn

        Then why did you reply to a comment about churn with an irrelevant chart?

        I have no idea how to interpret “momentum seems decidedly one way” except for in the sense of churn. Both platforms have positive momentum. What were you trying to express with that sentence?

      • obarthelemy

        the chart, the chart, look at the chart…

      • churn

        If you just mean that the smartphone market share of one is increasing and the other isn’t then just say that. They both have expanding bases. Nothing to do with momentum unless you have very weird analogies for mass and velocity.

      • churn

        And, again, what did that have to do with anything in the rest of your comment, which was about switching, rather than acquiring new users.

      • obarthelemy

        Extremely weird analogy: something that moves has momentum, something that doesn’t, hasnt. I know, VERY fancy.

      • churn

        Kind of strange to apply it to a percentage share, though, physically.

        So what did it have to do with switching? I’m dying to know.

    • Kizedek

      Ah, you’re saying that when an Android user “switches”, he may be switching to another Android phone, perhaps just a different brand? Therefore, Google doesn’t lose a revenue stream? (this notion of solidarity among Android users, from Chinese feature phones to samsung Galaxies, is a bit of a puzzle to me, as though “Android” is some kind of grassroots movement of kindred spirits, anti-group yet very groupy, open yet intolerant, cynical yet idealistic, savvy yet unsatisfied…anyhoo)

      Well, if you have been reading, you might notice there is not much of a direct revenue stream for Google to lose. In fact, if an Apple user were to switch, Google would lose out!

      I do have to say that I know one person who switched from Apple. But Apple didn’t quite lose a revenue stream, since he didn’t drop the phone in a bin or put it in a drawer — he passed it on to his wife who was only too happy to use it and carry on with the family iTunes account.

      But, speaking of momentum: when a user switches from Android to iOS (it does happen, you know), what once was of little direct value to Google (as a direct customer rather than just a pair of eyeballs to sell to advertisers) suddenly becomes of greater direct value to Apple and developers and publishers (and even to Google, funnily enough). And this is because Apple tends to *create* value in the industries in which it participates (another fairly regular topic on Asymco).

      This is why apple can survive on 20% market share (to pick up on one of your other comments) — because Apple rakes in billions that weren’t there before! Maybe pundits and Wallstreet will begin to get that one day. This is why it is justified to speak of the Apple userbase as a fairly useful grouping — and, yes, it is a-typical of customer bases, I’ll give you that; as opposed to the widely disparate “Android” user base, which is completely un-useful as a group unless they are trolling technology sites.

      • obarthelemy

        read again what I wrote: I wrote that Google doesn’t lose the *entirety* of the revenue stream.
        In your example, Apple *did* lose an entire revenue stream: if your friend had stayed with Apple, Apple would have had 2 streams, now they got only one. that’s the definition of losing a revenue stream. An entire one.
        As for the “usefulness” (I take it you mean “revenue-generating potential”), you should quickly warn Google and Samsung that they are *not* making billions of Android customers, ‘coz they haven’t noticed.

      • Kizedek

        I’m not sure how you can consider Android users *as a group* that “useful” to Samsung, unless you really are acknowledging the higher rate of dissatisfaction and churn among Android customers (with Samsung as the likely recipient).

        Hey, I represent “revenue-generating-potential” for Samsung, too! Potential don’t mean diddly-squat unless it is backed up. Which is why iOS users represent value for Apple and why they (and not activation numbers) are more “useful” in predicting potential revenue and the future success of the platform.

        As if the Android OEMs aren’t actively contributing to the fragmentation of the Android platform in any case.

      • obarthelemy

        Of course all Android users are useful to all Android OEMs. Read up on Network Effect. They’re a good pool of potential customers, too.

        Fragmentation is only an issue in the eyes of Apple fanbois. I have access to about 10 Android devices right now, all run the same software the same way.

        The shell itself is indeed a bit different, but that’s mainly a consequence of my keeping whatever comes as default on the device, I could put the same one everywhere. Oh, I could also choose whichever icons I want, too, but only Apple users seem to consider that worthy of much attention, let alone dubbing a single set of no-choice icons of dubious artistical/ergonomical value a major part of an OS update. All the hooplah about the new icons in iOS 6 previews was quite funny, on the Android side all we usually get is “Oh, and the icons have been tweaked, too”.

    • Fairhead

      Moronamentum seems decidedly with you; in a one sided way!

  • Jessica Darko

    5,000 android devices in a room on google campus (one for each version of android in the wild.) times 4 minutes to “activate” = 360 activations per device per day = 1.8 million android activations per day.

    GIGO. As long as you’re using garbage vanity metrics, you’re going to get garbage out of your analysis.

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