Who Really Wins From Android’s Success?

Chris Wood, Senior Analyst

Back in April, Google Chairman Eric Schmidt took the stage at the All Things D conference and announced that Android activations had reached approximately 1.5 million per day. And just a couple days ago, Google reported that more than 1 billion Android devices had been activated to date, reflecting an increase of about 400% over the past two years. Not too shabby considering that the first Android-powered phone was sold just five years ago.

But who really wins from this growth in Android use? One thing's for sure: so far it hasn't been Google.

The Guardian ran a story about a year ago claiming that based on figures provided by the search giant as part of a settlement offer with Oracle, it calculated that Android generated less than $550 million in revenues for Google between 2008 and the end of 2011. If that's to be believed, then those revenues would account for just 0.49% of the $112.7 billion the firm took in over that period.

Of course, when trying to impress upon the courts that it didn't do any real damage to Oracle, it was in Google's best interest to minimize the figure presented. Shortly after the Guardian story, Danny Sullivan from Marketing Land released an article challenging the figures, but admitted that "we have no concrete idea of what Android earns until Google provides those figures."

Following its Nokia bid, leaked documents from Microsoft showed just how little money software vendors stand to make in the space: Microsoft brought in only $10 per handset in license fees from its partners, a small fraction of what each copy of Windows brings in. If Google were making nearly the same, that would be obvious in its filings.

Instead, Google is playing the long game, hoping its mobile loss leader Android will bring back so much in search advertising revenue that the investment is paid off many times over. Until that time comes, whatever the "real" numbers are, it's widely known that Google doesn't make a lot of money from Android.

But there is at least one less-prominent company doing quite well on the back of Android's success right now. Here's how.

Global annual sales of Internet devices are expected to more than double over the next four years, from approximately 1.25 billion units to 2.7 billion units. This growth is expected to come almost entirely from smartphones and tablets. And consider that in 2011, for the first time ever, the number of smartphones sold exceeded the number of PCs sold. But in that same year, there were only an estimated 835 million smartphones in use globally, compared to 5.6 billion "dumbphones" (i.e., feature phones). Analysts project that within a few years, the number of mobile Internet devices will dwarf the number of PCs, and that tablet sales alone should overtake PCs within the next five years.

Gartner recently reported that smartphone sales grew 46.5% in the second quarter of 2013 and exceeded feature-phone sales for the first time.

In other words, we're still at the beginning of the dumbphone conversion cycle, and a global revolution in mobile is really just getting started. This revolution is fueling monstrous growth in a less-known market that goes by "MEMS" (micro-electro-mechanical systems).

Back in the mid-1950s, scientists began to investigate whether the same technologies that produced the transistor (revolutionizing the electronics industry) could be applied to sensor technology. The goal was to produce small, rugged sensors to replace the bulky electromechanical sensors of the day—similar to how the transistor had replaced the thermionic valve. With the 1954 discovery of the piezoresistive effect in silicon, which enabled stress in micromechanical structures to be measured by changes in the electrical resistivity of a semiconductor, the birth of MEMS was guaranteed.

Interest in the technology grew throughout the 1960s, and a number of companies commercialized silicon pressure sensors. Advancements in micromachining and silicon processing in the early 1970s then led to what could arguably be called the first true MEMS sensors, which had particular geometries that yielded superior performance. It was not until three decades later, however, that MEMS were small enough, cheap enough, and reliable enough to begin penetrating the consumer market.

Today, the overall MEMS market is fragmented and has an extremely diverse application set comprised of such things as oscillators, microfluidics, compasses, gyroscopes, accelerometers, microphones, and pressure sensors. For our purposes here, we're mostly concerned with MEMS accelerometers and—even more so—MEMS gyroscopes.

MEMS accelerometers have been making cars safer for years by triggering airbags in the event of a crash. But manufacturers of the sensors wanted more: a world filled with gadgets that sense and respond to motion. That's exactly the direction we're going in today. In terms of overall value, the global MEMS market is projected to double from over $10 billion in 2012 to more than $20 billion in 2017.

To get a leg up on the competition, consumer-electronics device manufacturers have been eager to adopt new device functionalities and create compelling interactive experiences, such as the touchscreen and, more recently, motion-based functions.

Nintendo's Wii game console made MEMS accelerometer technology somewhat of a household name. The iPhone took the next step, with portrait/landscape orientation and basic motion gaming, which sent production volumes of MEMS accelerometers skyrocketing and competitors scurrying to catch up, copy, and come up with new motion-based functions. MEMS accelerometers are now standard features in smartphones. And the same thing is happening with MEMS gyroscopes. These represent a fresh way for users to interact with their mobile devices, providing a new set of motion-driven commands that bypass certain touchscreen or hard-key commands while promising more reliability than voice commands. MEMS gyroscopes are expected to be the next big thing in smartphones and tablets.

Figures from Yole Développement peg MEMS accelerometer penetration of mobile phones at 37%, while MEMS gyroscope penetration of the handset market is a mere 4%. These figures are projected to climb to 64% and 17% respectively by 2015, as the technology is more widely applied to new mobile devices.

While the 2009 Wii Motion Plus was the first mass-market product to bring MEMS gyroscope technology to light, demand in the smartphone and tablet space comes from such things as the need for improved location awareness in the absence of a wireless signal. Other market drivers include: image stabilization for high-resolution camera phones; augmented reality, 3-D user-interface control, and gesture shortcuts for phones; and superior motion control for immersive gaming. According to IHS iSuppli, record iPhone and iPad sales during Q4 2011 resulted in gyroscopes becoming the top revenue generator in 2011 for the consumer and mobile segment of the MEMS market. The market for gyroscopes was $655 million in 2011, up from $395 million in 2010—an increase of almost 66%—and the market is expected to grow to almost $1.5 billion by 2015.

(To be clear, the opportunity in MEMS gyroscopes is not in discrete components but with gyroscopes that are combined with accelerometers—and often compasses—and integrated on a single chip, to provide 6- or 9-axis motion processing.)

Long story short, most (if not every) new smartphone and tablet made in the coming years will incorporate MEMS gyroscopes. Thus, the growth in mobile becomes the growth in MEMS gyros. And a company that seems poised to benefit from this growth is Sunnyvale, California-based InvenSense (INVN).

InvenSense is a global leader in motion-interface devices that detect and track an object's motion in three-dimensional space. Its devices combine MEMS-based motion sensors (accelerometers, compasses, and gyroscopes) with mixed-signal integrated circuits and proprietary algorithms along with firmware to process and synthesize sensor output for use by software applications via an application-programming interface. Its products distinguish themselves from the competition by their small form factor, high level of integration, superior performance, reliability, and cost effectiveness.

Basically, the company's sensors work with a smartphone or tablet's different applications to support motion-based user interfaces, such as motion-based video games and on-screen menu navigation. For a simple example, let's say you need to answer your phone, but it's too cold outside to take your gloves off. No problem. InvenSense's MEMS-based sensors allow gesture controls, so you can just shake your smartphone to answer it, then shake it again to hang it up.

That's just the bare bones of what the technology is capable of. The company has recently come out with the world's first 9-axis motion-tracking device that combines a 3-axis gyro, a 3-axis accelerometer, and a 3-axis compass. It provides the most accurate tracking of complex user motions yet and enables the most advanced of applications.

Some of this stuff is a little difficult to appreciate when explained in words. To get a better idea of what's going on, check out this video that showcases InvenSense's gyro tech.

According to Investor's Business Daily, InvenSense already provides the motion tracking devices for 70% of Android phones and 90% of motion-sensing Android tablets. And with recent design wins including the Nexus tablets and Galaxy S4, InvenSense's motion-tracking devices are becoming the go-to solution for Android products. Thus, big growth in Android equals big growth for InvenSense.

There are claims from Piper Jaffray and other organizations that InvenSense chips will soon make it into iPhones and iPads, which would be an additional, huge growth opportunity for the company. We're skeptical of this claim, given Apple's penchant for sticking with one supplier and beating it down on price, but a contract win from Apple is not necessary for InvenSense's continued robust growth, since Android remains the 800-pound gorilla when it comes to mobile-platform market share, with more than 50% of the overall market (including 79% of the smartphone market).

To sum up, we live in a mobile world, and InvenSense allows us to take greater advantage of this mobile world by enabling us to dynamically interact with our smartphones and tablets (and our digital cameras, gaming consoles, and even our cordless power tools) through motion-based functions. Remember, however, that not all companies capable of robust growth necessarily make for sound investments. If you'd like to learn our investor's take on InvenSense and dozens of other growth stocks and breakthrough technology pioneers, take Casey Extraordinary Technology for one of our famous risk-free test drives.

Sep 05, 2013
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