Google's Mobile Mess In China Has US Repercussions
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The good news: Google's (NASDAQ: GOOG) Android operating system dominates China's smartphone market. The bad news: Google is capturing a small share of China's quickly expanding mobile search market. While Google's problems in China are concerning, the real risk to Mountain View is that China may serve as a competitive blueprint for how to wrestle mobile market share away in the US.
Background: "Don't Be Evil" And China Don't Mix
Google's problems in China began in March of 2010, when the company, unhappy with China's censorship demands, made the decision to route China search queries through its uncensored Hong Kong servers.
Since then, Google's business has come under pressure in China, with cyber attacks on the Google servers, internet portals dropping Google's search engine, and most recently, China's declarations that Android has become too dominant in the Chinese mobile market.
The result of China's pressure? While Android runs 82% of China's smartphones, the company has only a 20% share of the mobile search market. Compare that with the US market, where Android holds a 39% share of the market, but accounts for 82% of mobile search. Baidu (NASDAQ: BIDU) leads in China mobile search, holding a 78% share. The Beijing-based company recently announced quarterly revenues of $431 million, up 39% YOY, with 10% of revenues generated from the company's mobile business.
China: The Blueprint for Mobile Search Competitors
Chinese OEMs take advantage of Android's open-source design to remove access to Google search in their smartphones. In addition, Android apps in China are being modified by developers to remove the Google search engine.
This fact has not gone unnoticed by Google's competitors, or by Google, which detailed the risk in its 2012 10-K filling with the SEC:
While Google clearly has a strong grip on the US mobile search market, change in the mobile market is quick - In two short years, Apple's app store reached 200,000 apps. Samsung's global smartphone market share went from 4% to 29% - This brisk evolution in mobile hardware and apps risks the quick development of an alternative to Google's mobile search products.
A summary of some of the efforts that have been made, or are currently underway, to eat into Google's mobile search pie:
Facebook's (NASDAQ: FB) Home, a suite of Android applications, was an effort to put the company's social-networking features on users' home and lock screens. The strategy for Home was to place Facebook "a layer above" Google apps, as a way to capture advertising and search revenue. Home, however, has been a failure, with low adoption rates and poor user reviews. That said, Facebook Home has shown the extent to which a competitor can bypass Google by "hijacking" an Android phone's UI. Whether a "homepage skin" can be created that drives widespread adoption, however, remains to be seen.
Apple's (NASDAQ: AAPL) Siri voice assistant provides hands-free search on the company's iPhone. But more importantly, Siri decides what search engine or app is used to fulfill a search request. One of the more notable announcements at the recent Apple's WWDC was that Microsoft's Bing will be the default search engine for Siri in iOS 7, to be released this fall. The terms of Apple and Microsoft's agreement aren't known, but it is clear that Apple hopes to loosen Google's current monopoly on mobile search.
Siri search requests for navigation also default to Apple Maps. Because mapping provides a great way to serve mobile advertising, Apple now has the opportunity to expand its iAd service into local businesses. Whether the company's efforts can overcome initial consumer backlash over Apple Maps, however, remains to be seen.
As a leading aggregator of local business reviews, Yelp (NYSE: YELP) sells advertising alongside its information and recommendations for restaurants, hotels, bars and nightclubs. A partnership with Apple makes Yelp the default search engine for all entertainment- related searches on Siri. Yelps' review information attached to Apple's mapping app, provides a seamless solution for business search, selection and directions -- and a great platform for generating mobile ad revenues.
Samsung recently announced its first developers conference to be held in San Francisco. As the leading Android OEM, the South Korean company has a clear incentives to use its market dominance, like Apple, to capture a share of mobile search revenue. While information on Samsung's mobile search plans is lacking, Google investors would be wise to follow the news coming out of Samsung's developer conference carefully.
The Foolish Bottom Line
With an 82% share of US mobile search, Google stands to be the primary beneficiary of the rapid growth in mobile search and advertising. However, the lessons from China provide insight into the risks in mobile search that are faced by the Gorilla of Mountain View. Foolish investors holding Google stock need to track any inroads being made by OEMs and app developers to encroach upon Google's mobile search share.
Bill Shamblin owns shares of Yelp, Apple, and Google. The Motley Fool recommends Apple, Baidu, Facebook, and Google. The Motley Fool owns shares of Apple, Baidu, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!