How much is this car worth to Google ?
There are rumors that the “do no evil” company is working on the driverless car to generate advertisement revenue from drivers. Freed of the constraints of the wheel and navigation, drivers along with their passengers can instead immerse themselves in an online experience and thereby generate significant advertising revenue for Google, the company’s dominant source of income.
Google can increase its value $16 billion by delivering advertisements to the Self Driving Economy in the US, its largest market. This represents only slightly more than 6% of its $230 billion market cap. This is not the driver behind Google’s ambitions. Let’s dispel the myth further below. Though as an aside, if Google did generate this advertising revenue from drivers, the billboard advertising market of 7BN per year would disappear. Who will be looking at billboards when everyone’s eyes shift from looking forward to looking down? Google’s financial opportunity may lie in its ability to provide the navigation services to the Self Driving Economy (a future post).
Under the hood: How long do we spend in cars?
On average, people in the US over 18 are spending 962 hours per year in the car. There are 237 Million people over 18 in the US representing 229 billion hours per year spent in the car. People under 18 also spend time in cars and use internet devices. There are 75 million people under 18, we then subtract out the age range 5 and under and get 54 million. Assuming they spend the same amount of time in cars per year as the over 18, they spend 52 billion hours. Combine these 2 groups and there is a total of 280 billion hours spent in the car per year in the US. I hope you like your seat.
Not all these hours are spent driving since this estimate ncludes passengers. We could estimate average occupancy to calculate driving hours. A reasonable proxy is available for private transport commuters. It is a lonely experience, 76% of commuters are driving alone. Yet commuting only represents about 20% of all miles driven. However, I contend that freeing up the driver also frees up the passengers to consume more online media. Passengers often socialize and help the driver. Furthermore, cars are not currently designed to have a broadband network inside since the driver is driving. A portion of passengers could already be using online devices while in the car yet to err on the high side we will assume that all hours spent in the car (280 billion hours) are now available to consume online media.
How many of these hours might be spent using Google?
Google users spend about 1:54 hours per month on Google. They spend a lot more time on Youtube (a Google property), about 6:52 hours per month. At just under 9 hours per month on Google + Youtube, this represents about 1.2% of all available hours (yes including sleeping). Almost all activities performed by people in their daily life, categorized by the US household survey, can be performed also while in the self driving car i.e. working, sleeping, socializing. A few items cannot be performed such as home chores. Therefore if we back out the time spent on household chores (and caring for others) which could not be performed in the car, we get a slightly higher figure of 1.34%.
I assume that a Google user will allocate this same % of their time to their newly freed up time in the car. A few items will effect this average both up and down such as car sickness (you wouldn’t want to read but you might want to watch more videos), internet access (you can’t always surf/stream so more offline usage), preference of video watching over other leisure activities, faster commuting time will be offset by more time to use google outside the car so it is a wash. I will assume these factors don’t materially change the average usage so I maintain the 1.34%.
Previously, we estimated that people spent 280 billion hours of time in a car per year in the US. This includes people Google users and non Google users. Google has 175 million unique users in the US. This represents 60% of all people over 5 years old (5 years old watch “Charlie bit my finger” and generate ad revenue). Assuming 60% market share and that Google users don’t spend more or less time than the average person in a car, then Google users spend 168 billion hours per year in the car. If they allocate 1.34% to using Google and Youtube this creates an additional 2.3 Billion hours of ad opportunity for Google.
How much value does Google generate per hour in the US per user?
Forbes estimated that Google generated $0.35 per hour for a global user. My estimate for a US user is several times this, around $1.15. This is based on 1st 9 months of 2012 revenues of $15.8bn which annualized is $21bn. The amount of hours per year is approximately 18.4bn broken down into 14.4bn for Youtube (4bn per month remove the 70% outside the US and annualize) plus the 4bn for Google (175million users at 1.9 hours per month annualized). The Google+ usage figures of 12 minutes per day for active users refers to the social networks users usage across all Google properties so we can’t add it or it would be double counting.
The ads in the car would allow for location-based advertisement which could increase the value proposition to suppliers. However, this shift has already started with mobile and tablet location based ads which are priced less (16% in one estimate) than for desktop computers. Therefore, $1.15 per hour is on the high side as the shift continues from desktop to mobile and in-car usage. On this $1.15 per hour in revenue, I assume a 25.7% net income margin. At $0.29 net income per hour per user in a car we take the P/E of 24.19 and estimate that each Google US user hour in the car increases Google’s value by $7.12.
With 2.3bn additional hours per year this results in an increase of $16bn in market cap which is 6.7% of its current market cap of $240bn (fluctuating daily of course).
This considers only the US but other countries spend far less time in their cars, take the UK for instance (the only non-US geography split out in Google’s financial statements) where they spend just over half (54%) of the time someone in the US spends. At ½ the time, and 1/5 the addressable market and assuming same ability to monetize, this would represent 10% of the US additional value.
Conclusion: The extra viewing time on Google properties will generate more value to the company but there could be bigger opportunities. How much value could Google generate providing navigation services to the Self Driving Economy?
 http://www.youtube.com/t/press_statistics – this reconciles closely to comscore’s estimate of 6 hours and 28 minutes for Google properties – http://www.comscore.com/Insights/Press_Releases/2013/1/comScore_Releases_December_2012_U.S._Online_Video_Rankings
 Excludes Motorola revenue
 Again, exclude Motorola