IIPM Admission

Friday, June 24, 2011

Is Android a Double-Disaster for Google?

IIPM Prof Arindam Chaudhuri on Dictatorship of the sycophants

First, it Sucks-in Huge Dollars and Time. Then, it Blesses The Maker (and Partners) with Patent Infringement Lawsuits and mere Crumbs in the name of Revenues. The Android Project has Proven a Double-Trouble in Google land. The OS’ free Platform Delivery model and its Over-Dependence on Apps, has clearly turned out a case of “Wasted Potential”. Will Google stop Playing Santa, and prove a Lost-Case-Won? Or will Obstinacy get The Better of Logic?

ash” is a four-letter word which companies love to swear by. “Free” too, is another four-letter word. Only this, consumers love and companies hate. And this admixture of the two four-letter words is what makes for a shotgun wedding across corporate boardrooms and R&D labs. Google Inc’s Android project is the biggest example of such a marriage. Android OS, which has helped many handset and tablet makers live to see the present (like HTC, Motorola and Dell), has earned global fame (read 67.23 million handsets sold in 2010, as per Gartner, accounting for a 22.7% market share). In the process, the OS platform has become powerful. As Gartner estimates, the platform will become the #1 mobile OS by the time this very year ends, with a 38.7% market share. Volumes, yes. But it is turning out to be a “much fame, no gain” recital for Google. Trouble is, Google has little to earn from Android – its “free” and open-source form proving to be a failed Parthian shot for the Mountain View giant. Over $1.5 billion has been burnt in the labs to develop the OS (with millions more being added to developmental costs every year), and the net earnings, six years post-acquisition of the OS maker, don’t seem to be justifying the dollars and the half-a-decade of lab work. Some even argue that Google’s mobile advertising revenue which stood at $1 billion annually (as per an October 2010 report by CNN), makes the Android a cash-cow already. Wrong. During the past 2 years, the Android platform has been able to generate just $243 million for Google. Out of this, only $130 million have been made as Internet ad-revenues (the company’s breadwinner which accounted for 97% of its topline in 2010). In short, Google’s Android OS, despite being the OS platform present on one of every four handsets sold in the world during the past year, accounted for only 6.5% of the total ad-revenues that Google earned through mobility devices. Translation – 93.5% of the earnings from mobile Internet ad-clicks for Google came from non-Android phones. This is a big cause of concern.

It was an obituary which tagged Alfred Nobel a “Merchant of death” that persuaded him to work for peace. Google at the moment, is in need of such a mind-changing note, which can force it to relinquish its suicidal Android pricing & sales strategy. So, with no cynicism about the obsession with which the company has forked out billions to make Android a success amongst handset & tablet-makers who love what is “free”, question is – will we see a price tag on the platform soon? Many doubt it. Problem is, if it does not happen soon, the overwhelming fired-up start story will only lead to a thin (and insufficient) stream to support investments to nurture Google’s mobile dreams.

That Google is turning on the heat comes as a relief. IMarket Share Growth of Android OS by 2012n the past couple of months, it has communicated to major carriers and handset makers that it will not allow any more tweaking of the Android platform without permission. This will help put an end to all forms of fragmentation on the Android platform. It will also solve the problem of many apps on the Android Market Place not being compatible on all Android devices. Though this comes as a shocker to many who were initially both happy and impressed by Google’s benevolence to allow royalty-free usage and fragmentation of the platform, this may just be a warning flare that Google is over and done with the idea of saving others (read HTC, Motorola, Acer and others) billions in R&D costs (that the others would have had to otherwise spend to create their own OS) and be happy with the dimes themselves. Till date, every time Google plans a release of a version of Android (six such versions have been released so far), it shares the initial secret platform with only a particular handset maker and chipmaker first, who then tweak the platform accordingly (Google chose HTC & Qaulcomm for its inaugural Cupcake version, and Nvidia & Motorola for its latest Honeycomb format). This makes it impossible for any handset maker to prepare a platform where all the apps prepare by developers for Android can work hassle-free. This way, it has been estimated that of the 294,738 apps that are available in the market place (as on May 1, 2011), at best 30% can be run hassle-free in all Android handsets. In other words, its very Open Source nature which led to the initial Android wildfire may prove too damaging for its sustained growth due to fragmentation, perhaps even crushing Google’s hopes to make it big in the mobile OS category after the hardware fiasco called Nexus One phone.

Issue is: if you are giving “exclusive rights” to handset makers, why do social service for all the bells and whistles that third party handsets can flaunt? A minimum royalty will not disturb the price elasticity. You make HTC a brand again, and you charge nothing for the very product it is selling. You give Motorola and Acer shots at mobiles & tablets, and you do so ex-gratia. We ask – what moral obligation got Google to give-in to the temptation? Shareholders surely deserve a greater show of capitalism.

Perhaps – and it remains a big question – Google is waiting for the day when the count of Android handsets sold crosses the threshold mark. This could be as early as the first quarter of 2013 (Gartner estimates that more than 310 million Android handsets - 310.09 million - will be sold in 2012, accounting for 49.2% of the mobile OS market). So, where does the company begin? As Rajan Anandan, MD and VP for Sales & Operations, Google India, tells B&E, “We have plans to separate the OS and differentiate Android for tablets and smartphones.” So the plan is set – first create a differentiated Android for the two product categories. Then perhaps try and charge licensing royalty on at least one of them. If Google takes the lower risk path, it will be the tablet wars which will get hotter soon. But it’s easier said than done. Experts doubt whether the world of handset and tablet makers will accept a marriage with a dowry clause. It will be an awkward stage to perform on. Truth is – Google’s very business model defies economics. A price which is too high can be corrected by lowering it. Setting a price for an OS at zero, and then trying to monetise it later, is not a proven business model and is subject to failure. Indeed. And that is another reason why Google may keep Android as it is. There is a historical analogy here. In the early 1990s this is what killed Gopher, an early competitor to the “www”. When the University of Minnesota (that owned Gopher) announced that would charge for its server software, commercial Gopher developers abandoned the service because they did not want to risk working on a platform for which they might some day be subject to fees. Google’s case is not different.

The Android story is a cloud with no silver lining. The case with Google is no different. Even the new OS the company is planning for netbooks, christened the Chrome OS (which again, will be “free”; the first launch of such a netbook will be from Acer later this year), is bound to be a repeat of the Android mistake. Only this time, it may not even find buyers. In our interaction with J. T. Wang, Chairman and CEO of Acer, he tried to challenge our predictions, as he mentioned how Acer is already in a leading position in this open platform tablet market and how these tablets have received numerous praises from the retail channels and telecom operators. But New York-based Sascha Segan, Managing Editor (Mobility) at The PC Magazine, dismisses Wang’s optimism in a flat tone. “Chrome OS is a dead end. It mostly exists because Google wants an OS play on Intel-based laptops, but nobody really knows what to do with it. Chrome OS is a stub. No consumer wants a crippled laptop that requires network access for most functions; that’s been tried and has failed many times,” says Segan to B&E. Forget about success, even mistakes can be replicated. For Google, the margin of error gets bigger and it comes in the form of the Chrome OS – free and far from being a best-selling OS.

Where Google is also going wrong is the app market. All OS and app developers rely on the earnings from the sale of both the OS and their apps. Google at present is earning from only the apps on the Android platform (which as stated earlier, has its own share of problems due to fragmentation). But, for Google, expecting the Android app market to give a fat paycheque is taking a walk to the bank in its dreams. Why? Even when it comes to apps, Android runs a discount show. Says New York-based Fred Krom, Analyst at Goldman Sachs to B&E, “Google collects a 30% share from Android market app purchases, which we believe ends up being low margin, and we estimate at least a 40% share from mobile in-app advertising via AdMob.” The end result is, the current earning from the app market is not enough to even please its developers. Google may carry on with the app project with its massive bank of free cash holding ($34.98 billion as of end-2010), but trouble is – for the developers, sustainability is being questioned. As of date, the annual Android developer income stands at just 6% of Apple iOS developer income, with an annual growth rate which is just 9% higher as compared to iOS’. In other words, the gap between the two is getting larger every year, and this is not good news for Andy’s brainchild. If Google has to record a topline of anywhere in excess of $60 billion (Apple made $65.23 billion in FY2010, while Microsoft earned $62.48 billion – and both rely minimally on their app worlds), it has to think beyond apps. To put this in numbers, let us consider the king of apps – Apple. Sales through Apple’s App Store reached $1.78 billion in 2010. Huge? Actually, this represents just 2.73% of its revenues during the year. Google on the other hand made just $102 million from its Android Market Place (as per a February 2011 report by UK-based research firm IHS) – that makes for 0.35% of its FY2010 revenues. There is another problem with mobile apps – that of “free” being best. [When was the last time you actually purchased an app? And even if you did, how many in your peer group have been regular at downloading “paid” apps? Your answer is our concern.]

As of end-2010, there were 74.67 million Android users in the world. Going by how much Google made from apps last year, the average revenue per user (ARPU) translates to $1.37. Even if the ARPU was to grow to the $2 mark over the next two years (which is doubtful, until Google clears the mess created by compatibility issues, that is ailing its world of its apps on all versions of the OS), by end-2012, Google would on the highest side earn $1.13 billion from sales of apps by end-2012 (estimates of 564.63 million Android handsets sold by 2012 as per Gartner; calculation assumes all users to be active). This would still account for just 2.53% of Google’s total revenues for that year (estimated to be $44.24 billion as per Credit Suisse). On the other hand, had Google charged a minimal $15 from licensing of its OS on each handset from day one, (much below the industry standard of $30, and a viable option for handset makers), we would have been sitting on projections of the collections through licence fees, crossing $8.47 billion by 2012, and $29.31 billion by 2015. On the other hand, sales of apps at $2 ARPU would still fall short of the $4 billion mark by 2015. The problem is that if Android developers can’t make money, they will leave, users will leave, and Google will lose. So, low earnings from apps is a concern because Google wants developers to find Android an attractive platform. $29.31 billion by 2015 on one hand, less than $4 billion on the other – what is Google thinking?

Patent infringement allegations and litigation costs are also not giving Android and its social patron Google peaceful dreams. 42 lawsuits in a little more than a year show that there are fundamental problems. Forget Oracle, Microsoft, Apple and the big names of Silicon Valley, even the likes of a company like Bedrock Computer Technologies (an outfit which is inactive as a company at present) took Google to court for patent infringement on a particular technology used in Android’s Linux kernel. As a ruling, Google has been ordered to pay $5 million for IPR violation. Dirtying hands is one thing – forcing others to become a victim, is another. The worst part about Google being dragged to court for all of Android OS’ wrongdoings is that other handset and tablet makers face the music too. In March 2010, HTC was dragged to court by Apple which claimed that the Taiwanese manufacturer had infringed on 20 of its patents related to the user interface, the inner and outer architecture of its Android powered handsets. In November 2010, it was Microsoft’s turn to get famous, when it accused handset-maker Motorola in a US district Court in Washington, that its Android handsets (Droid 2 and Charm) had infringed on 9 of its patents related to syncing emails, contact list, calendar et al. Even tablet makers are not spared in this game of civil suits. In March this year, Microsoft filed another case in the Washington court and in the International Trade Commission against Android OS tablet and e-reader seller Barnes and Nobel (and its device suppliers Foxconn and Inventec) for infringing on its patents. Such cases where Google makes other manufacturers liable is a serious cause of concern if Android (and even the Chrome OS) is to find more manufacturers joining hands. As of date, of the 42 Android-related patent infringement suits, only two of them (Oracle and Skyhook) target Google exclusively. The others name device makers among the defendants – strangely, most of the time, just device makers. While speaking to B&E from Munich, Founder of Foss Patents & an Intellectual Property expert, says, “Google bullies Android device makers and forces them to do what it wants. Copyright issues are a big problem for Google, but a far bigger one for device makers. Indirectly that turns it into a problem for Google because if the IPR situation doesn’t come under control, some device makers may drop Android. Recently there was a rumor that Motorola is developing a mobile OS of its own and that Motorola, which is being sued by Apple, Microsoft and a number of others on its Android OS handsets, could be very concerned over the IPR problems surrounding Android as well as Google’s heavy-handed control over Android.” In terms of litigation costs, since Google itself is rarely sued, the impact on the earnings of device makers will be greater. That however does not mean that for Google, litigation costs will be an easy rock to swallow. [For instance, the Oracle lawsuit could require Google to pay at least $1 billion – 311.5% more than what Android has earned till date!]

But, all is not lost. Not yet. There are some silver linings on the horizon. Perhaps Google is thinking of laying out a strategy to work its way out of the well once 2013 sets in, and mobile Internet (and mobile advertising) has taken off completely, as Manhattan-based Spencer Wang, Analyst at Credit Suisse tells B&E, “Google is in the process of building a comprehensive mobile presence, which would place it (along with Apple) at the centre of the mobile Internet ecosystem. Mobile Internet is an incremental opportunity for Google, as opposed to a risk.”

The company also has to rework some of its old Android OS strategies, while laying the ground for some fresh ones. One of which, is to use Android and become a virtual telco. The other one, of course – which the company is famously secretive about at the moment – is to work on monetising its Android platform. Google is an 800-pound gorilla, and Android so far has gone strong in volumes. It’s the cash box which worries the new CEO Larry Page, with litigation & fragmentation issues only adding to his headache. But Page has to realise that as long as Android is Open Source, matters will not improve. The solution to get rid of this double trouble disaster (of increasing investments and unimpressive payoffs) is to repudiate the dual-doctrine of delighting consumers and loving volumes. Playtime is over in Google-land and ‘nerd’ will not do – it has to be an ‘shareholder-pleasing CEO’ taking charge. And Page has to act fast. Question is – which four-letter word will he finally settle for?

Steven Philip Warner

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