Google Bulls Still Dreaming of GPhone-Android Money Machine

At long last, the GPhone is here. That's good news for Google bulls, who have been silently praying that one of three possible revenue streams--mobile, video, and/or display--will soon ignite and save the company's growth trajectory.

Will Android turn out to be a money factory? We're skeptical. Google is late to the smartphone game, and there's already some capable competition in the market. How Android mints cash has also yet to be satisfactorily explained (it appears to be part of the $50+ billion mobile advertising market that Eric Schmidt and others keep talking about without providing any details.  Some of that market will just replace PC-based searches, moreover, which won't provide any incremental revenue.)

In any event, one Android bull, Sandeep Aggarwal of Collins Stewart, celebrates the GPhone launch by laying out his case.  For perspective, the $5 billion of revenue he talks about is about 20% of Google's current revenue run-rate:

¡      First Android powered mobile device to be launched on Sep 24th

Our view is that the launch of Android will likely trigger the mobile Internet adoption globally, in turn creating an entire Android ecosystem (30+ technology & mobile co’s) with Google arguably being the largest beneficiary. We think that Android will fully blossom in about 3 years and will likely see a very fast adoption of mobile Internet usage, thus triggering massive mobile initiated search/display ad opportunities for Google. A mobile phone installed base of 3bn vs. 1bn for PCs, 24/7 access to mobile devices by users, known demographic information for mobile users, and location knowledge, make mobile Internet the most lucrative new opportunity for Google since it launched its core search offerings nearly a decade back. We think that by 2011, Android can be a $5bn incremental ad revenue opportunity for Google on a global basis. We reiterate our Buy and $615PT for GOOG.

¡      About Android

Android is a collaborative efforts of 30+ technology and mobile companies to develop a complete & open source mobile platform...

¡      About the first Android powered mobile phone

The first Android mobile phone is expected to be launched on Sep 24th –carrier is T-mobile, manufacturer is HTC of Taiwan, CPU by Qualcomm, software stack by GOOG. 3rd parties can provide/add Android mobile apps.

¡      $5bn in incremental ad opportunities for Google

We think that by ‘11, GOOG will generate $5bn in incremental rev based on our assumptions – 4bn mobile devices installed base and $1.25 in Internet ad revenue per mobile device in installed base (5 paid searches @ $0.25 per paid search/year). For context Google, made $1 in Internet ad revenue per PC in installed base in ‘02 and this number reached $19 in ‘07. Unlike desktops, all mobile phones can not access the Internet and thus we think that the trajectory of Google’s Internet ad revenue curve on the mobile Internet will look less steep than PC based Internet ad revenue.

¡      Implications for the Internet industry

We think that at a time when Microsoft or Yahoo! could not challenge Google’s global domination in search, Google is already jump starting to capture the next big opportunity i.e. mobile Internet monetization, thus creating more challenges for its competitors in the years to come.

We'd like to believe Sandeep on that last point, but we've been waiting 13 years now for real mobile Internet monetization, and we're still not seeing where it's going to come from. The search revenue Sandeep refers to would be at least partially cannibalized from PC search, so Google wouldn't get a pure benefit from it.  What we really have yet to see--which could blow the mobile ad market wide open--is a promising application for geo-targeted advertising.

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