Why is Android so Critical to Google’s and Alphabet’s Growth for the Future?

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Android market share
Android

Alphabet is racing towards $100 billion in annual revenues, with most of that coming from advertising. Though the company has put its hand in several areas such as the Other Bets projects, which have largely remained moon shots so far, and Google Cloud platform, which should start yielding a few years down the road, Alphabet remains dependent on advertising revenues. And it looks like things will remain that way for many years to come.

The good news for Alphabet is that its advertising revenue growth runway is really long, and it can keep feeding the company for many more years. On that note, I’d like to bring Android into the picture because it is a key driver of ad revenues for Alphabet. Let’s take a look at the world’s number one mobile operating system and its user base.

In the mobile operating system world there is Google’s Android, Apple’s iOS and then the rest. Both these companies are firmly in control of the market, and there is very little left for the rest to count as their share.

Android captured 87.5 percent of global smartphone market share in the three months to the end of September, Strategy Analytics said in a report. This means that nearly nine out of 10 smartphones in the world run Google’s OS. Shipments of Android devices hit 328.6 million, up 10.3 percent year-on-year.” – CNBC

Android has so firmly capture the market that it is extremely difficult for an alternate to rise up and challenge them. Android has such a strong ecosystem around it that users hardly need go anywhere else for anything.

If you’re an Android user you’re very likely to be using Google as your default browser/search engine, linking your Gmail account, putting stuff in Google Drive and maybe even setting up Android Pay to play around with. Of course, the majority of users get their apps where? At the Google Play Store. That’s a different part of the ecosystem that’s a very lucrative one as well.

But the real reason that ecosystem is extremely valuable is because it keeps feeding users into the ever-hungry monetization channels that Google has built around Android.

Growth of Android in smartphone operating system market share
Android mobile os market share growth

Android’s market share has actually gone up in the recent years, and there are several factors contributing to this growth. One is obviously the cost factor, which allows Android-based devices to go to market at a much lower price point than Apple’s premium-only smartphones.

A second factor is the Google Play Store, which has most of the apps that a smartphone user will ever need, with more being added every day that cover new technologies like virtual reality, augmented reality and so on.

Yet another factor is the demand for smartphones in emerging markets, where the overall potential for premium phones is not as high as in developed markets. Since third-party manufacturers (OEMs) can easily piggyback on Android and Play Store, they can offer unmatchable prices on the devices themselves. And the result of that is evident in the fact that 9 out of 10 smartphones shipped in Q3 2016 were Android devices.

There’s also another point to remember. Briefly glance through the tables below and then read on.

Smartphone user penetration by country - APAC region
Smartphone user penetration trend in APAC

Smartphone penetration in the APAC region is still at 50%, so there are of plenty of users to be added over the next several years. With literally no competition, and Apple targeting a relatively very small section of the market, Android will be walking away with the bulk of users. Even if they bring in a lower per-user amount in terms of ad revenues, they’ll make up for it in volume. 

Simply put, the more Android users there are, the higher Google’s advertising revenues will be. And that formula is going to be valid for several years, giving Google the time it needs to create other sources of stable (though, perhaps, not comparable) income.

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