Google under attack

I was a big fan of Android, but ever since I got the iPhone 6 Plus with the latest iOS updates, I switched to Apple.  Many have done the same; in the US, Android has been losing market share and is now tied with Apple.

The reason for this market loss is that Google is spreading itself too thin. With  Android they are losing their grip. There are too many forks — such as the Xiaomi, Amazon, Samsung versions — that are not controlled by Google. This translates to a direct loss of stock value.  If you see how analysts value Google and Apple stocks, around 90% of the value of Apple ($650bn) is due to iOS while around 8% of the value of Google ($450bn) is due to Android. And this is the case even though outside the US Android has 82% market share.

But while Android has 81% smartphone market share, Apple with less than 14% has over 80% of the global smartphone market profits. This happens because if you are a $650bn company focused on one product you are likely to beat a $450bn multi-product company.

And then there is the other vulnerability of Google, which is ads. Search-related ads are around 80% of the value of Google. Ads are to Google what iOS is to Apple.

But in ads, Google is under attack from another company: Facebook. Facebook is a $260bn ads-only company that does not allow Google to crawl it. For Google, everything that goes on at Facebook, Instagram, Whatsapp is a black hole.

But Facebook has found another way to make ads work that is not search-based but is instead contextual to whatever you are doing on Facebook. And these ads are extremely well targeted. Facebook allows advertisers to use key demographics such as geography, gender, age, income, occupation — something that Google cannot do. Moreover, Facebook is way ahead of Google in mobile advertising and the fight against ad blockers. A lot of Facebook's revenues comes from promoting apps and other activities that are not tackled well by Google.

So Google is in a bind. On its core product it has a fast growing rival, Facebook, and on its popular yet not-so-money-making product, Android, it is going against a single minded $650bn company with the biggest pile of cash in the world. And on top of that, Google is doing many other projects: loon, driverless cars, life sciences, building fiber optic networks, wifi routers, thermostats, smoke alarms, private label smartphones, youtube,  and the whole "Alphabet."

My worry about Google is that a company that tries to do everything, will lose out to highly focused rivals like Apple and Facebook.   What Google should do is focus on two areas: the first one is search+ads+Android+Chrome+maps+Gmail+photos+YouTube which are all one ad-supported ecosystem; and  then the driverless car, which has the biggest potential to revolutionize transportation.

All the other projects, some of which do have tremendous value potential, Google should spin off into independent companies. Alphabet is a step in this direction.