The Google Revenue Equation

A discussion I had in a class has inspired me to write this post.

A couple of days ago, my Professor asked a intriguing question: “Do you think Nexus One is able to overtake the iPhone?” Immediately, the body language of my peers suggests a definite no.

It isn’t hard to explain why. Some said that the sheer number of iPhone apps are enough to kill, while some said that Google doesn’t have the ability to market a physical product.

While it is true that Google is trying to get a significant part of the pie in the mobile phone industry, it is not for the mere profit of  selling phones. Google is not in the business of selling phones, it is in the business of selling ads.

And that explains the “Google Revenue Equation.”

I have taken this term from Ben Parr, who has written a beautiful piece about it.

In a nutshell, the Google Revenue Equation is simply:

Revenue = Time Spent On Web

Yes, Google’s business model relies heavily on advertising; and more time spent on the web means more exposure to Google ads. Whatever it owns, acquires and creates are all geared toward making us spend more time on the web. Reality is, almost all websites in the world are hosting Google Ads.

Google has probably predicted long ago that mobile would be the next big thing. Not only has it introduced the Nexus One, it has also acquired AdMob for $750 million. Serving mobile ads makes perfect sense. The more time you spend on mobile web and apps, the more money Google makes. Whether Nexus One can turn a profit isn’t the issue, the key is to get people to go mobile.

In Q4 2009, android phones accounted for 27% of Smartphone mobile ad impressions in the U.S. The growth is looking good and is expected to leap with the launch of Nexus One.