Google Inc: Getting Serious About Games

The search giant is starting to get into the app revenue game, but has a while to go before before catching its iRival.

Jun 24, 2014 at 3:30PM

While not exactly an Achilles' heel, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Play has only performed marginally well. Despite having more mobile devices running its Android OS than anyone on the planet, Google Play is an extremely popular, but not very profitable part of the Google empire. Based on sheer volume, Google Play is the hands-down winner. Last year, Android devices accounted for about 75% of all app downloads, compared to rival Apple's (NASDAQ:AAPL) 18%.

As for the relative newcomer to the app download wars, Facebook, it's just now getting serious about apps and isn't more than a blip on the radar. But before Google fans chalk up a win over Apple and Facebook, there's the little matter of translating all those apps to revenue. And so far, Apple is head-and-shoulders above Google, generating nearly eight times the app revenue in 2013. But don't celebrate too soon iFans, the app winds are beginning to shift in Google's direction.

What's done, is done
Last year is well behind us, but 2013 does provide some context as Google and Apple battled for app developers, and the revenues that followed. Despite its paltry 18% of all mobile app downloads in 2013, Apple generated $10 billion in annual revenue, compared to Google's $1.3 billion. Google's app revenues are estimates, as it doesn't break out app revenue as a separate line item.

Less fragmented mobile operating systems, better pay, and Google's perceived security concerns, all played a part in driving Apple's commanding position in app revenue. But looking back, it was the last half of 2013 when we began to see positive signs pointing in Google's direction, and it appears that trend is continuing into this year.

Let the gaming wars begin
Google's emphasis on incenting developer's to add to its long list of app downloads is beginning to pay off. As of June of this year, Google Play now boasts 1.5 million apps -- a 60% jump in the past year. But, Google Play has always offered a ton of alternatives, the key is to monetize it, as Apple has accomplished with its App Store.

For Google proponents, this is where the app story begins to get good. As alluded to earlier, the number of downloads on Google Play is unmatched, and now it appears revenues are beginning to follow suit. According to recent industry research, Google Play revenues have jumped two-and-a-half times in the past year. And that could be just the beginning as Google Play picks up steam.

Based on Google's first quarter, it would appear that the increase in app revenues suggested by industry pundits is on the mark. Again, Google doesn't post app revenues directly, but it's generally considered to fall into its "Other Revenues" silo. Last quarter, Google enjoyed a 48% jump in other revenues compared to 2013's Q1, up to $1.55 billion. Assuming a decent portion of Google's $6 billion annual run-rate for other revenues is app-related, that's a significant improvement compared to last year.

Not surprisingly, games are leading the resurgence in Google Play revenues, and most are free games that are generating in-app revenues. In other words, the vast majority of downloads on Google Play are of the free variety, but "incent" gamers purchase items to enhance the experience. Of all Google Play revenues, 90% are thanks to gamers, and 98% of those are freebies.

Significantly more entertainment, social media, and communication apps are being downloaded, too. Those trends bode well for app up-start Facebook, who recently hosted its F8 app developer's conference to help light a fire under its own app revenues.

Final Foolish thoughts
There are several reasons developers have made Apple's App Store so successful financially -- simplicity and a non-fragmented base of OS users are two that come to mind -- but what it really boils down to is iOS apps have historically made developers more money.

But Google is inching up the app revenue chain by doing more than just offering a laundry list of alternatives, both it and its developers are beginning to reap the financial rewards. With $10 billion in app revenues in 2013, Apple will likely hold a commanding lead for a while. But Google is quickly getting in the game.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.

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