Google Inc. has long been considered a dominant player in the device market thanks to its Android software. But the company is now making surprising inroads in another area: app sales.
The Google Play Store, where users of Android devices can download apps, games and movies, has closed the gap in sales against market leader Apple Inc.
"Google Play has grown over the last two years from essentially zero to a level equal to YouTube [also owned by Google] in size, and should contribute $4.4-billion (U.S.) in revenue this year," according to a recent report analysts at Credit Suisse. "We project Google Play will exit 2014 growing 55 per cent; 2014 revenue in the aggregate will have grown 97 per cent versus 2013."
Google doesn't break out Play Store revenue in its earnings reports, but buries that data in "other." A Credit Suisse analysis suggested the first quarter of 2014 saw $1-billion in Play revenue. On Thursday, the company reported $1.6-billion in "other" revenue for the second-quarter, an increase of 55 per cent from $1.04-billion in 2013. For the past six months, "other" earned $3.15-billion, up about a billion dollars from the same period last year.
Over all, Google surpassed most analyst expectations with total quarterly earnings of $15.95-billion, up 22 per cent from a year earlier, with most of the growth coming from the advertising side of the business. The company's share price rose about 1 per cent to $580 in after-hours trading on Nasdaq.
But while Google's app revenue is racing ahead, the Play Store remains the second choice for most software developers thanks to a range of structural challenges: chief among them the fragmentation in device specs, operating system versions and even rival Android app stores.
Google says there are more than a million apps on Google Play, and some 50 billion app downloads were recorded as of 2013, from 190 countries. Android's international reach and localized customization helps it gain new device users, but a profusion of alternative app stores complicates the ways apps promote themselves and earn money. There are more than 200 different app boutiques managed by the likes of Samsung and LG as well as telecom and country specific stores. Still, "most users get their apps from Google itself," according to Brian Blau, research director, consumer technology and markets for Gartner Inc. The second largest Android store is run by Amazon, and together they control maybe 30 per cent of the market.
There's only one Apple App Store (though there are some regional availability issues), which pulled in $10-billion for 2013, "including over $1-billion in December alone," the company reported in January. Apple is expected to show more app revenue growth when it releases its earnings on July 22.
But the story of app revenue is all about games: "Games are the top revenue generators in all app stores, in Play its upwards of 90 per cent," says Mr. Blau. Seven out of the top 10 earners for Android apps are Japanese companies that make games, according to Credit Suisse.
Apps released on Apple's iOS still earn on average three times the revenue, according to analysts, even when the same software is released on Android. "It's not even close," added Andy Smith, president of Toronto-based XMG Studio Inc. Mr. Smith said that until very recently a game release on Android platforms could expect 10 per cent the earnings it would get from Apple.
That forced some developers to ignore Android, but Mr. Smith said that in his experience you need a game to be on both platforms if you want to benefit from social promotion and buzz marketing. "I don't know anyone who's done the math, but we find that a game will make more money on iOS" if you also add an Android version.
Another strange quirk of the Android market is an allergy by users to pay for an app up front, and also a fondness for demanding refunds after downloading. "In Apple, people buy a game and never hit 'refund,'" said Michael Sikorsky, CEO and co-founder of Calgary's Robots and Pencils Inc., which developed the popular Spy Vs. Spy game. "Let's say you get 38,000 units purchased, three get returned. Same number on Android? Half of all sales would be returns, many because of insufficient funds. The average revenue per device is just much lower on Android."
One bright spot, Mr. Blau said, is that Android has a stronger lead in adoption by postsmartphone hardware makers. "When we look at longer-term trends, it's clear that Android [in all its variants] will have a significant place in the wearable and [Internet of Things] IoT ecosystems, and apps will continue to drive engagement with brands and technology-based consumer services."
But does that mean tablet and smartphone apps are a lost cause? "There's too many different human stakeholders and parties to fix it right now," said Mr. Sikorsky, who is an unabashedly Apple-first developer. "It's probably gonna feel the way that it feels for years and years."