Google Play In China Could Be Huge For Google Stock

  • Google plans to re-enter the Chinese market which it exited in 2010 by launching Google Play mobile app platform.
  • Android market share in China has more than tripled since Google exited the market, which should accelerate adoption of the app platform.
  • Google Play and YouTube will become Google's most important growth drivers over the next five years.

Google (NASDAQ:GOOGL) (NASDAQ:GOOG) is reportedly mulling a re-entry into China, and plans to launch Google Play mobile app store in mainland China as early as this fall. Google famously exited China in 2010 after it declined to comply with censorship requirements by the Beijing Government, preferring instead to shut down its Chinese search engine, China.cn. Google though still maintains strong relationships with marketers in the Middle Kingdom. Some Google insiders feel that the company made the wrong move by exiting the country, and the experience of other tech companies such as Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) in China suggest that Google has made the right decision this time around.

China a fertile ground for mobile app stores

Google could not have picked a better time to re-enter China, if Apple’s recent experiences in the country are any indication. While investors are no doubt aware that China has lately become Apple’s fastest-growing market and the second largest in terms of revenue, many perhaps are not aware that Apple’s App Store has been putting up even more impressive numbers. App Annie reported that China leapfrogged the U.S. in terms of volume of downloads from App Store for the first time during the first quarter. App downloads in China grew at a healthy 30% Y/Y clip.

Apple revealed in early August that it had made cumulative payments to app developers to the tune of $33 billion compared to $20 billion a year ago. This implies the platform has seen an impressive 65% Y/Y growth. Apple attributed the strong growth to the robust Chinese mobile market.

So why is App Store’s robust growth a positive sign for Google Play? Because it gives Google a good chance to narrow the huge gap between App Store’s revenue and its own. Google Play has always played second fiddle to App Store in revenue share despite always having the lion’s share of downloads. During the second quarter, Google Play recorded 85% more downloads than App Store but could only manage to pull in half as much revenue.

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Source: App Annie

Both Android OS and iOS have made tremendous progress in the Chinese mobile space over the last couple of years. In January 2010, Android and iOS had a paltry 23% and 12.6% mobile OS market shares, respectively. By July this year, the two had literally managed to almost completely annihilate competing mobile operating systems in China, with Android commanding 73.38% market share while iOS commanded 24.92% share for a staggering combined market share of 98.30%, as per Statista. Android’s market share in urban China is even more impressive clocking in at 79.1%.

The Chinese market has its own peculiar quirks, with one of the most important traits being that the Chinese almost always prefer foreign brands that has a strong presence in the country. The Beijing Government also tends to favor foreign brands with roots in China. Google Play’s absence in China has undoubtedly been making Google miss out on a good growth opportunity for the mobile app store since the Chinese have mainly been buying their mobile apps from the likes of Baidu (NASDAQ:BIDU), Qihoo 360 (NYSE:QIHU), and Tencent (OTC:TECHY).

Establishing a strong presence in China will help Google Play and YouTube to become Google’s top revenue drivers over the next five years. Credit Suisse estimates that Google Play will bring in gross revenue of $5.1 billion during the current year, but will exceed $14 billion by 2020, representing 22.4% CAGR.

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The investment banker estimates the strong growth by Google Play and YouTube will propel Google stock, as the two segment’s revenue contribution to Google’s top line will go from about its current 15% to almost 25% by 2020. Assuming Google Play follows roughly the same trajectory as App Store in China, then the 2020 revenue estimate of $14 billion provided by Credit Suisse could easily exceed $18 billion.

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Bottom Line

Google launching Google Play mobile app store in China looks like a great idea. Android OS already dominates this important market, and will accelerate adoption of the app platform. Google Play and YouTube could turn out to be Google’s most important growth drivers over the next five years and help Google maintain good overall growth even as its core ad revenue growth slows down.

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