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Most of Google’s revenue and nearly all of its profit comes from search advertising. Display and mobile advertising are becoming interesting, but they’re still far smaller and less profitable than search. Even Android is basically a search play today.Google Apps is a fundamentally different type of business because end-customers are actually paying for it. But how many? Google claims 3 million customers and 30 million end-users for Apps, but the vast majority of those use the free version. In the company’s last earnings report, only $254 million in revenue showed up in the “Other” group that includes Apps (as well as enterprise search). That’s 3% of the company’s total.
So how does Google turn Apps into its next big business? The key is attracting more mid-size businesses, as the free level of Apps tops out at 50 seats. According to Google Apps group product manager Rajen Sheth, who first pitched the idea of Apps to Google leadership back in 2004, here’s what they’re trying to do:
1. Convince businesses to use the cloud for everything. It’s fairly easy to convince overworked IT departments to move e-mail and calendaring to the cloud–they’re more than happy to get rid of the fussy in-house e-mail servers that need to be patched, updated, replaced, and otherwise massaged. Convincing them to use Docs and other services is a harder sell. Yesterday’s announcement of Google Cloud Connect for Microsoft Office is an important step, as it lets companies use their existing investment in Office while introducing them to the collaboration and backup benefits of the cloud.
2. Push interoperability. Rolling out new applications to users is costly. By building a single platform for Apps, then convincing third-party developers to build their own apps for the Google Apps Marketplace, Google hopes to make it a lot easier. Users will be able to access a suite of more than 60 online applications with a single password, and information like contacts lists will be shared across all apps.
3. Count on devices. The rise of smartphones and tablets is helping make the case for cloud computing. Google told me that C-level executives are beginning to bring their iPads into work and using them to access Gmail and Docs, then wondering why they can’t also access applications like expense-reporting in the same way. As executives express interest, IT departments will be forced to follow.
Convincing more businesses to pay for Apps may take some time, but Sheth said that the percentage of paying customers is increasing, and retention rates are 90%. In other words, once businesses are on board, they’re staying on board, which creates a consistent recurring stream of revenue. Eventually, that will show up on the bottom line.