Apple and Amazon are demonstrating that paid content and apps are the Internet's "new frontier,"' particularly on mobile devices and in emerging markets. They are driving user payment revenues to an average annual 17 percent growth through 2012 -- more than twice the rate of online advertising revenues, slowing to average annual seven percent gains.
That momentum is prompting more developers and producers to charge fees as consumers demonstrate a willingness to pay for premium products. By 2012, user payments will account for 31 percent of domestic online media revenue while still comprising the lion's share, or 59 percent, of offline media revenue.
That would lessen media's dependence on advertising and on Google, presenting the Internet colossus with its first major "evolution challenge," according to Goldman Sachs analyst James Mitchell.
Because it's not culturally disposed to charging fees and has few billing relationships, Google's online search clout has been limited to free ad-supported arrangements. Google's share of total domestic online revenues could be at risk as user payments begin to match or exceed advertising, Mitchell contends. Google claims more than 30 percent of online ad market and a smaller share of online content apps payments.
But Google appears to be quietly seizing on the trend. TechCrunch founder Michael Arrington noted earlier this week that the standard free Google Apps sign-up page had been replaced by a paid 14-day trial and annual $50 user fee. Shortly afterward, Google officials responded on the blog that it was "experimenting" with landing page layouts and that the standard free version of Google Apps had been restored. "They are trying to get more users to pay by making the Standard version harder to find," Arrington concluded. "The free version of Google Apps is history."
Google's announcement today of its own Chrome Operating System is more evidence that it is laying the ground work for a combination free and paid stand-alone infrastructure, which many in the industry content can't come soon enough. Yankee analyst Joshua Martin is among those arguing that Google needs an ecosystem of linked devices to support what should be a more aggressive push into paid applications and services.
So far, Google has had mixed results tapping its resources and traffic to participate in the burgeoning online content and apps markets, primarily through its YouTube and Android Platform for smart phones and other mobile devices.YouTube sells less than three percent of its video inventory generating roughly $470 million in losses on about $240 million in advertising, which is only one percent of Google's total revenues.
The double-digit growth of Apple's iPhone Apps and Amazon's Kindle, which keenly cater to consumers' interests and use of technology, will easily outstrip YouTube revenues by 2010 despite beinig newer services with less traffic. iTunes could be eight percent of Apple's total revenues in 2009. App Store gross sales could top four percent of Apple's total revenue by 2010, fueled by the new 3G iPhone. Kindle books could comprise 20 percent of Amazon's total book unit sales by 2012 based on its recent huge jump in sales.
Google clearly has been slow to capitalize on consumers' willingness to pay based on their time constraints, attachment to mobile devices and increasing familiarity with usage-based micro payments on smart phones and PDAs even for apps and content available free on the Web or on desktops.
"Unless Google evolves beyond its current success as an aggregator of 'free' content, and away from the reliance of surveying consumers who typically assume all content 'ought' to be 'free," Google's share of the total Internet revenue opportunity may diminish, Mitchell warns.
Still, reversing user psychology from free to paid access is already proving a challenge to online video services and the entire publishing industry. Just how much users will pay for select services will determine the fate and fortune of many players.
With average iPhone or iPod users spending about $3 per month downloading a half dozen apps and generating about $2 per month on incremental Google searches, "Google benefits about half as much in revenue terms from smartphone adoption as App Store services," Mitchell points out. The average Google user in the U.S. generates about $4 in net advertising per month and another $2 per month from smartphone searches that can cannibalize desktop queries.
By comparison, user payments can generate 10 to 30 times more revenue per consumer than the advertiser-supported model, which will encourage more user paid models. A TV series episode may generate 33 times as much revenue per viewer from user payments as from advertising. Movies already generate more than 80 percent of their revenue from user payments such as box office, home video and pay-TV. It is estimated consumers download more than 100 million paid apps per month at an average cost of 50 cent each from Apple's App Store in a lucrative ecosystem supported by iPhones and iPods, and are buying more than three million digital books per month for about $10 per book from Amazon's Kindle store.
Google CEO Eric Schmidt says his "pro-consumer" company will generate other sources of non-advertising revenue from content sites (YouTube, Google News and Google Book Search), its Android mobile application store and from the nascent cloud computing market. But getting there could be anything but free and easy.