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Tuesday, December 1, 2015

Is Android a double-disaster for Google ?


First, it sucks-in huge dollars. Then, it blesses the maker (and partners) with civil lawsuits and crumbs in the name of revenues. What's wrong with the Android OS?
STEVEN PHILIP WARNER | Issue Dated: June 12, 2011, New Delhi
Tags : cash | android | google | HTC | Motorola | acer | chrome os |

“Cash” 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, 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 ad-revenues, which stood at $1 billion annually (Oct 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). 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.

Google needs a mind-changing note, which can force it to relinquish its suicidal Android pricing & sales strategy. So, 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 dreams.

That Google is turning on the heat comes as a relief. In the past couple of months, it has communicated to major carriers and handset makers that it will not allow any more tweaking of the platform without permission. This will put an end to all problems of fragmentation. 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. Till date, every time Google plans a release of a version of Android, 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). 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? You make HTC a brand again, 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 310.09 million Android handsets will be sold in 2012 – meaning a 49.2% share of the mobile OS market. So, where does the company begin? As Rajan Anandan, MD and VP for Sales & Operations, Google India, says, “We have plans to separate the OS and differentiate Android for tablets and smart phones.” 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.



Google’s very business model defies economics. Setting a price for an OS at zero, and then trying to monetise it later, is not a proven business model. 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 it 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 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. “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. Forget success, even mistakes can be replicated!

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. 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, “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.” The end result is, the current earning from the app market is not enough to 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, and the gap between the two is getting larger every year. 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. Google on the other hand made just $102 million from its Android Market Place – that makes for 0.35% of its revenues.

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, by end-2012, Google would on the highest side have earned $1.13 billion from sales of apps by end-2012. 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/unit as OS licensing fee from day 1, we would be sitting on collection projections of $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. If Android developers can’t make money, they will leave, users will leave, and Google will lose. $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 Mar 2010, HTC was dragged to court by Apple which claimed that HTC's Android powered handsets had infringed on 20 of its patents. In Nov 2010, Microsoft accused Motorola in a US district Court in Washington, that its Android handsets had infringed on 9 of its patents. Even tablet makers are not spared in this game of civil suits. 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. While speaking from Munich, Florian Mueller, 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.” In terms of litigations, 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. Perhaps Google is thinking of laying out a strategy to work its way out of the well once 2013 sets in, and mobile Internet has taken off completely, as Manhattan-based Spencer Wang, Analyst at Credit Suisse says, “Google is in the process of building a comprehensive mobile presence, which would place it at the centre of the mobile Internet ecosystem. Mobile Internet is an incremental opportunity for Google.”

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, is to work on monetising its Android OS. 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 litigations & fragmentations 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 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’ in charge. Question is – which four-letter word will Page finally settle for?

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Issue Dated: Apr 27, 2014