It's official: For the first time, Google's (NASDAQ:GOOG)(NASDAQ:GOOGL) web browser, Google Chrome, has surpassed Microsoft's (NASDAQ:MSFT) Internet Explorer browser as the most popular web browser in the U.S. A report released by Adobe Digital Index analyzing web browser market share has shown that Google Chrome now controls 32% of the combined desktop and mobile browser market, which beats IE's 31% market share.
IE still rules the desktop, however, and Apple's (NASDAQ:AAPL) Safari browser calls the shots in the mobile space.
Weak mobile presence is Microsoft's undoing
IE still holds a comfortable lead in the desktop browser space with a 43.3% market share, thanks mainly to its longtime status as the default desktop web browser for Windows devices. Microsoft was the first company to put out a free browser when companies such as NetScape were charging $5 per copy. It's rumored that Bill Gates feared that computing would become 100% Internet-based and decided to embed the free browser software into every Windows PC. This strategy worked amazingly well, and Internet Explorer spread like bush fire.
But PC users are now increasingly replacing IE with Chrome on their desktops, thus leading to a steady market share decline for Microsoft's web browser. This trend is likely to continue if rumors that Google plans on making Chrome the default browser for all Android devices turn out to be true.
Microsoft's weak mobile presence has been its undoing in the browser wars. Android and iOS control close to 90% of the mobile and tablet market, with Windows controlling just 2%. The same case applies for Firefox. Its lack of a mobile operating system has gradually been pushing it to the fringes of the market.
How do web browsers make money?
Web browsers make money through three main channels: digital ads, search royalties, and indirect revenue from other services. The default search engine on most browsers is almost always Google. This is because Google pays search royalties to companies such as Apple and Mozilla so that it becomes the default search engine for their users. Google pays Apple about $1 billion per year for using Google as the default search engine on iOS devices.
It's estimated that Apple royalties make up close to a third of Google's traffic acquisition costs, or TAC. Google's TAC is growing at an average of 5% per annum. The more that users rely on Chrome, however, the less money Google will have to fork over as royalties to companies that own competing web browsers.
Google is intent on growing its Chrome user base because it's integrated many Google products into its ecosystem, such as Google Plus, Gmail, and Android software. Some of these services are free, but Google charges money for the premium versions. Google makes more than 80% of its revenue from ads, and a larger user base using its services and viewing ads means more money for the company.
Microsoft and Yahoo! struck a 10-year revenue-sharing deal that allows Yahoo! to use Microsoft's Bing search results. Microsoft receives about 12% of the revenue Yahoo! makes from ads displayed alongside search results on the Yahoo! website. Although it's rumored that Yahoo! wants to end the deal and use Google instead, there is no telling when this might happen.
Not a big problem for Microsoft
It's not likely that Microsoft will be too worried about IE fading into oblivion any time soon. There are still plenty of enterprise software programs that only run well with the Internet Explorer browser, which makes it difficult for organizations to switch to a different browser.
Moreover, Microsoft's Windows Phone is gradually gaining traction, and this will give the company a stronger presence in the mobile world. The IDC estimates that the Windows Phone share of mobile OS will grow from 3.9% in fiscal 2014 to 7% in 2018.
Microsoft has also set its eyes on Google's core revenue source -- digital ads. The company is rapidly morphing into one of the top online ad companies. Microsoft's share of the $140.2 billion digital ad market is expected to reach 2.54% in the current fiscal year, surpassing Yahoo!'s share for the first time. Google still dominates the digital ad space with an expected market share of 31.5% in fiscal 2014.
Foolish bottom line
The rapid rise of Chrome as the No.1 web browser in the U.S. is great news for Google since this might help the company control its swelling traffic acquisition costs. The more people use Chrome as their web browser, the less royalties Google will have to pay to companies that own competing web browsers.
Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Yahoo. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Microsoft, and Yahoo. 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.