The complexities of the Android eco-system, and its implications

Google’s Android OS for mobile handsets is arguably Apple’s strongest competitor in the marketplace. The most recent numbers from Google are 160k activations daily, which implies a run-rate much bigger than iPhone’s recent quarter of 8.4 MM units.

There is no doubt that Android has been a success, especially in terms of offering consumers more choices. US consumers now have a perhaps overwhelming number of smartphones to choose from, across the major carriers. This is certainly a great development.

What I want to focus on in this post, however, is looking at Android from the eco-system players’ perspective – Google, the handset manufacturers, the carriers, and the app developers. My position is that while Android is full of promise as a platform, some fundamental dynamics of the eco-system will make it very challenging to navigate, especially in terms of financial gains – at the end of the day, these players are in it to profit.

I would like to start by going through each player’s objectives from participating in the Android eco-system. Starting with Google, its objectives are:

  • Gain a permanent foothold in mobile, ensuring Google’s future when the web becomes increasingly mobile-driven
  • strategically, prevent dependence on Apple in mobile, limit its bargaining power
  • Increase traffic to Google properties, most notably search, which will in turn grow Google’s ad revenue
  • Offer users a consistent Google user experience across mobile devices
  • “Lock” users into Gmail, Google Maps, Youtube etc. (think Microsoft shipping IE with Windows)
  • Develop a mobile go-to-market channel for future Google products

In essence, it’s all about Android being the hook which will retain the user in using Google products.

What about the handset manufacturers’ objectives?

  • Develop handsets that rival the iPhone’s value proposition, capture market share in the booming smartphone segment
  • Differentiate from competitors
  • Reduce OS R&D costs

And the carriers:

  • Retain some degree of control in the device, unlike Apple’s terms with AT&T
  • Prevent becoming “dumb pipes, up-sell users on carrier VAS (value-added services) such as mobile video, ring-tones, gaming etc.
  • Reduce Apple’s bargaining power
  • Differentiate from other carriers

There is one thing all players agree on – counter the iPhone; but beyond that, there are some immediate points of tension. As smartphones seem to converge on the single big touch-screen form factor, hardware manufacturers will find it increasingly difficult to differentiate in shape and design. In that sense, HTC / Motorola / Samsung would very much want to tweak the UI or customize the OS, but that would quickly run into conflict with Google’s wish to offer users a consistent experience; and practically speaking, UI may really be too much a core part of the OS for the manufacturers to customize. Hence, manufacturers face the dreaded prospect of following the footsteps of PC manufacturers – low differentiation leads to low profits.

At the same time, carriers and Google’s interests aren’t that well-aligned, either. Google recently shuttered its Nexus One online store, which was hailed to disrupt the status quo of handset distribution by offering a contract free model instead of the typical carrier-subsidized model. Obviously this did not please its carrier partners. On the flip side, carriers perennial fear of becoming “dumb pipes” drove them to loading up Android phones with hard-to-remove bloatware, which consumers generally dislike and probably is making Google cringe – and just serves as more ammo for Apple’s value proposition of a refined experience.

My point here is that the logical implication of these interlocking conflicts is compromise. Google aggressively wants Android to become the de facto mobile OS – so much so that not only is the OS free to manufacturers, Google is also reportedly sharing search revenue with carriers / manufacturers. (Pretty amazing that you can think of this as almost the opposite of Apple’s original iPhone terms, where Apple got a share of AT&T’s revenue.) Manufacturers will get away with deals such as putting a Baidu search box on the phone, which would obviously go against Google’s interests. Carriers will get to keep their finger in the OS.

Sometimes these compromises result in degraded user experience, such as bloatware. Most often, they call into question the financial returns on Android. It would be a very difficult task to model how much incremental revenue Google will generate by owning Android, as opposed to not owning an OS and just receiving mobile search traffic from all devices. Manufacturers will get to ride the smartphone boom for a while, but then will again be hard-pressed for innovation – again, the PC manufacturers come into mind. The biggest winner from all this seems to be the carriers – especially Verizon – they finally have options other than Apple, and they can keep their old business model.

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