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Tablet wars ahead in 2012--but it will be Google versus Amazon with Apple on the sidelines counting its profits
01/25/2012 3:02 pm EST
But there’s an increasing wave of opinion that argues these investors are looking at the wrong war. (For my take on Apple’s earnings see my post http://jubakpicks.com/2012/01/25/apple-is-still-a-cheap-stock/ )
Oh, there’s going to be a battle, no doubt about it, but the first combat, this view says, will be between Amazon and Google (GOOG). I know that Amazon’s Kindle runs Google’s Android operating system and that it’s therefore logical to think of the two companies as allies.
It was certainly intended to work out that way, but Google isn’t getting nearly the share of the tablet market for its apps that it thought it would from Amazon. And with other tablet hardware companies set to follow on Amazon’s model, it looks like Google will have to launch its own Android-based tablet or get less of this fast-growing market than it wants.
Here’s the problem from Google’s point of view. Amazon has built the Kindle Fire on Google’s Android operating system but it’s skipped preloading Google applications such as Gmail and Google Maps. Chinese Internet companies such as Baidu (BIDU) and Tencent Holdings (TCEHY in New York or 700.HK in Hong Kong) are following the same strategy. Like Amazon, they’re loading their own apps to turn the tablet into an efficient way to access their on-line stores, but they aren’t loading Google’s own apps. (For example, Dell (DELL) has built a smartphone, the Streak Pro that will be sold in China that uses the Android operating system but which uses Baidu’s programs for search, books, maps, music, and local recommendations.) Facebook is expected to introduce an Android-based smartphone that wouldn’t include Google’s apps in 2012.
And Amazon’s Kindle uses (and tightly controls) its own app store instead of Google’s Android Marketplace.
That’s a huge problem since market research shows that tablet (and smartphone) users don’t surf the Web to perform tasks like finding a restaurant or buying a camera, but instead use an app already resident on the tablet or phone and familiar to the user. In this the tablet market is following the path of the smartphone market. The average smartphone owner uses a mobile app 94 minutes a day compared to 72 minutes a day using a browser to access a website, according to Flurry, a company that tracks app use. That’s a big change from a year ago when time was evenly split between apps and browsers.
This means that even as Amazon’s Kindle and other Android tablets take market share, Google isn’t getting the kind of tablet-traction that translates into ad revenue. That’s a big deal when mobile advertising is projected by Gartner to grow to a $20.6 billion market in 2015 from $3.3 billion in 2010. Google will do an estimated $5.8 billion in revenue from the mobile ad market in 2012, according to Cowen & Co., but less than half of Google’s mobile revenue comes from apps.
Put those economics and trends together with Google’s purchase of Motorola Mobility in August and it seems to point to a Google tablet that would compete, yes, with Apple’s iPad but also and more directly with Amazon’s Kindle. The goal wouldn’t be necessarily to drive the Kindle out of the market, but instead to create a concrete example of why hardware makers would want to build Google’s apps into their tablets rather than going the Amazon route.
Any distraction in the Android world is, of course, good for Apple. And another expensive hardware project isn’t exactly what Google’s bottom line needs right now. But the company may not have a choice.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, Baidu, and Tencent Holdings as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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