Google’s Android One Platform About More Than Just Phones

Google announced the launch of its Android One platform on Monday, September 15, targeting the low-end smartphone segment in emerging markets. While newly launched phones are currently available in India, the company plans to roll them out to other developing countries such as Indonesia, the Philippines, Bangladesh, Nepal, Pakistan and Sri Lanka in the coming months. The wide launch strategy signals that the competition in the smartphone industry in emerging countries is heating up, albeit at a lower price point. In this note, we explore this offering and Google’s strategy behind the launch.

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Android One Platform For Price Sensitive Users

Google launched the Android One program to offer smartphones at affordable prices to price-conscious users in emerging markets. Unlike developed countries, where smartphone penetration is above 50%, penetration is below 25% in many developing countries. While the adoption of smartphones in developed countries fueled the first wave of global growth, strong demand in emerging markets will drive the next phase. Sales of sub-$200 smartphones are expected to see significant growth in emerging markets.

According to IDC, global smartphone shipments are on the rise and set to surpass the 1.2 billion unit mark this year. In Q2 2014, smartphone sales edged past the 300 million mark with substantial growth in the sub-$200 smartphone category. Additionally, smartphone shipments are forecast to grow to nearly 4 billion by 2018. By launching a line of smartphones that cost around $100, Google has opened the smartphone market to a new segment of lower-income customers who want to own a smartphone with the latest software and apps. According to World Bank, the per capita income in countries targeted by Google is between $1,046 and $4,125.

We believe this launch presents an excellent opportunity for Google to capture market share and strengthen Android’s ecosystem of devices in these developing countries. To capitalize on this opportunity, Google will sell three smartphone manufactured by Micromax, Spice and Karbonn. While the Android One devices are a step up from entry-level phones, these smartphones leverage the use of lower-cost components. Furthermore, each phone has a front (5MP) and rear-facing camera (2MP), dual SIM card slots, a replaceable battery, 1GB of RAM and a 1.3GHz quad-core MediaTek processor.

Google Looks To Expand Search, Play Store Revenue

Google’s business is heavily dependent on the number of users using its search engine. The company leverages its popularity across PCs (65% market share) and mobile devices (over 90% market share) to sell ads. As a result, its PC search ad division makes up 35% of its value, according to our estimates, while its mobile search ad division makes up 29% of the value. Increasingly, people are now browsing the Internet and accessing information through their smartphones. While 1.75 billion people around the world already have a smartphone, the remaining five billion either do not have access to mobile phones or continue to use feature phones.

Over the past few quarters, Google’s revenue growth has slowed down. Much of that can be attributed to pricing pressure on ads and slower growth in search queries across the Internet. The Android One launch is aimed to combat that pressure. If Google were to succeed with the launch and increase users on its Android platform by 20%, not only would that potentially increase search queries, but the sale of apps through its Play Store would also grow. Currently, we project searches per mobile user to increase to 94 per month, and the sale of digital content to grow to $5.6 billion by 2020. However, if searches per mobile were to grow to 120 per month and Play Store revenue to $7 billion by 2020, there would be an upside of about 15% to our $544 price estimate for Google, which is slightly below the current market price.

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