Google's (GOOG 0.92%) Android operating system dominates in China, but the company only owns 2% of the country's search market -- the bread and butter of its operation. This reveals a flaw in Android.
Google gives its Android operating system away for free, because more searches mean more advertising revenue -- at least theoretically. Manufacturers of Android-based devices have seized the opportunity and spread Google's OS like wildfire, capturing nearly 80% of the global market share in smartphone shipments, according to IDC.
Though it's synonymous with online search, Google is really more of a modern advertising company. It gets almost all of its revenue from ads, through services such as Google AdWords, an auction-based advertising program. Google matches ads on a webpage and gets paid either when a user clicks on one of its ads or based on the number of times an ad appears on the Google Network.
The company's business model works great in the U.S., but what about in countries like China that are less receptive to Google's search engine and products? Even though Android accounts for the majority of smartphone sales on the mainland, Google doesn't really make any money from this dominance. Why? Because most Android apps are free, and without Google's ads, there is no revenue from mobile advertising either.
Why is China important?
China is a lucrative market because it maintains the largest online population in the world. China's own search engine, Baidu (BIDU 3.94%), owns over 67% of the Chinese search market as of May. Baidu has another distinct advantage over Google: It has the trust of the Chinese government. The company is no slouch either, and is looking to provide a broad range of goods and services, just like its American counterpart.
Baidu recently introduced Total View for its mapping service. It's a lot like the Chinese version of Google Street View, which doesn't exist in China. The company is also planning on developing "smart televisions," or TVs connected to the Internet, which should compliment its efforts to become the largest online-video platform in China, according to Bloomberg. It also bought out China's largest third-party app store, 91 Wireless, for $1.9 billion back in July, which will further cement its place in China's mobile market.
With Baidu entrenched in its native market and offering comparable services, it is unlikely Google will find a way to monetize Android or gain much advertising revenue in China anytime soon.
Google is still a juggernaut
Even without China's market, Google is still a beast of a company. Here is a look at its impressive growth over the last five years.
Google EPS Diluted (TTM) data by YCharts
The company carries more than $54 billion in cash on its books, with only around $8 billion in debt. A current ratio of over 4 also attests to the company's financial strength and highly liquid balance sheet. But will this strength continue into the future?
Domestic threats
Microsoft (MSFT +1.32%) wants to disrupt Google's U.S. dominance. Microsoft's Bing now accounts for 18% of searches, according to comScore, up from 15.7% a year ago. This pales in comparison to Google's 67% share (which remained static), but Microsoft is aggressively pushing ahead to continue to grow its share.
How will Microsoft accomplish this growth? Maybe by targeting a younger demographic. By offering an ad-free version of Bing for schools, Microsoft may be onto something. As Stefan Weitz, Microsoft's director of search said: "We hope that we demonstrate the quality of Bing to teachers and students and also their parents, and once they see how good it is, we hope to see increased usage outside of schools too."
Microsoft would love to take share from Google moving forward, and this seems like a viable strategy, especially at a time when people are worrying about how companies like Google track their users to target them for display ads.
The bottom line
Google is a rock-solid company, but it needs to diversify its revenue streams. As the situation in China shows, relying solely on ads doesn't always work. There's also the possibility that competitors may one day erode Google's market share domestically as well.
Monetizing Google Fiber may be a step in the right direction. Google offers its Internet service for free in around 12 different markets, but plans to charge for it in the future. Google wants to offer three different price plans, from free to $120 per month, which would provide faster Internet speeds and access to hundreds of Google TV channels in high definition. This may open new revenue streams for the company and help it diversify its business going forward.
