Google: Winning Customers for Keeps
Feb 5th 2013 6:00PM
Updated Feb 5th 2013 6:50PM
One of the most critical things a company can do once it has won the business of a customer is find a way to keep that individual in its ranks. As a late entrant to the smartphone market relative to its major competitor, Google has adopted an approach that focuses on capturing customers as they upgrade from feature phones to smartphones. Lacking the advantage boasted by Apple , that of having customers that are "locked in" with an ecosystem that has been around for an extended period, Google is still gobbling up global market share and keeping its customers. Given this success, the stock is a buy at current levels.
Strike early, strike often
Unlike its major competitor, Google does not rely on a first-mover advantage. The company came to the smartphone wars after the iPhone was well established, and many scoffed at the ability of Android to mount a meaningful challenge to Apple's dominance. IDC's estimates place the Android global market share at 68.3%, compared to 18.8% for iOS, although Apple did edge out Samsung as the top smartphone manufacturer in the U.S. with 34% in the fourth quarter; Samsung captured 32.3% for the quarter. Of course, Samsung is but one of the various smartphone makes that relies on the Android OS. Google has established its position of global dominance, in large part by owning the cheap end of the market.
That's hardly a revelation. Last November, Raymond James analyst Tavis McCourt pointed out that "there are parts of the world where a smartphone is simply a touch screen with an effective web browser, and in those parts of the world, Android is dominating." This refers to the cheap end of the smartphone market, specifically emerging markets. At the time McCourt's report was released -- the third quarter of last year -- unit sales growth in emerging markets was tracked at 63%. That is a significant margin above the 46% growth rate for the global figures in general during the same period.
Fool Evan Niu points out that in establishing this breadth of influence, Google has lost a measure of control over its OS, which raises its own set of concerns. Still, the company has rapidly grown its market share to become the landslide winner of the war for users. The group of customers that Google has masterfully captured are those that are leaving behind their feature phones, but do not want to pay up for a premium smartphone. The strategy has also given Android huge reach into emerging markets like China.
One area in which Google's growth has begun to show signs of success is app sales. In 2012, the company experienced a sixfold jump in revenues from apps. That places it well behind Apple, which has revenue that's 3.5 times larger and recorded an average of $333 million in sales per month for the second half of last year, but Google is gaining. Even designers are beginning to favor Android or cross-platform efforts.
Keeping an eye on Google's market share, app revenue, and the control the company can maintain over the OS should provide some valuable insights on where Google is going. The stock just hit an all-time high during last Friday's session and looks to have upside remaining. Despite the fact that Google came off of that record high during Monday's session, the stock is still well positioned. Watching carefully should give you an edge worth having.
Apple takes a very different approach to customer retention. During the fourth quarter, research firm IDC places global tablet sales up 75.3% to 52.5 million on a year-over-year basis. For the quarter, Apple maintained a 43.6% market share, helping the company sell a total of 22.9 million units. As the tablet market keeps growing, it represents an important opportunity for Apple -- the chance to get customers locked in on two devices.
The long-term implication is that by growing its overall market presence, Apple well positions itself for extended success. "Once a meaningful amount of content and apps are loaded for most consumers, it becomes extremely difficult to unseat a device user from a particular operating system," says Fool tech analyst Andrew Tonner. Most users do not want to spend the time or money required to transfer and convert significant amounts of content between systems.
None of this is to suggest that there is not significant cross-germination of ideas between the two companies, although none is likely explicit. Google continues to develop the functionality of its ecosystem and the increase in sales revenue from this division is proof. On the other side, rumors of a cheap iPhone continue to percolate cross the blogosphere. Ever since Apple failed to meet sales expectations, the market has been clamoring for Apple to take on Google with cheap options. Whether the challenge is accepted or not, Google continues to grow its base and remains a buy at current levels.
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The article Google: Winning Customers for Keeps originally appeared on Fool.com.Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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