The flaws to Google’s Android strategy

Kyle Baxter has written an excellent post dissecting Google’s Android strategy. On the whole I agree with most of his analyses, but I would like to point out what I see to be flaws in the strategy. I don’t claim ownership to all of the following; a lot of it was covered in the “Strategy for IT Firm” MBA course I took last semester at the Haas School of Business, UC Berkeley.

It’s true that Google has a strategy of commoditizing adjacent markets to turn them into ad-based businesses, which falls into its sweet spot. Many of Google’s most successful products besides its core search are of this nature: email, maps etc. GIving away Android for free is certainly commoditizing the mobile handset market: of the 300k daily activation number which Google touts, people speculate a large portion are what analysts traditionally call “unbranded” or “other” phones. In general this conforms to Google’s strategy; however, the flaw here is that in my view Android is disrupting other branded manufacturers like Nokia / Samsung / Motorola far more than it is challenging Apple and iOS devices. In other words, it may appear that Android is mainly a counter to the iPhone, but in reality it is killing Apple’s main branded competitors.

Allow me to expand on this point, because it probably appears counter-intuitive. Before Android powered smartphones hit the market, Apple was certainly in a league of its own with the iPhone. While it was rapidly capturing share of device profits (the famous 5% unit volume – 40% profit share charts), the incumbent device brands – Nokia et al. – still had the comfortable mid to low end market volumes, which would give them time to develop competing OSes. Now along comes Android, which, while it gave them a quick boost in terms of time to market of credible iOS challenger devices, also opened the floodgates to a whole range of unbranded competitors. These new comers – Huawei, ZTE etc. – play the same volume game as Nokia / Samsung et al. And we know so far Samsung / Motorola have not drastically reversed their financial performance thanks to Android – so what’s the next possible scenario? Would it be possible they continue to slip in unit volume, and be weakened further at the onslaught of the Android clones?

At the same time, I think Apple is sufficiently differentiated from the unbranded players  in terms of value propositions (very different consumer segments), so the Android clones do not pose a significant threat to Apple.

The flaw here is that Google did not limit who could use Android – a complete lack of platform control. If Google’s strategy does indeed include undermining Apple, it should have limited Android to a handful of brands, so they could compete effectively with Apple. Furthermore, I would also argue that Apple’s primary issue currently is not Android, but its own supply chain and distribution restrictions (e.g. AT&T exclusivity). The big fanfare of Android activation numbers have done little to stop iPhone stockouts all over the world – in China where the iPhone 4 is obscenely priced, supply is still tight. Admittedly I don’t have conclusive data on iPhone supply constraints – but if we take this assumption as true (and there are certainly indicators and proxies in favor of this), it would show that Android has done very little to halt Apple, and is causing far more headaches to Samsung etc.

The second fundamental flaw is that going back to the original strategy, carriers still stand in the way of Google’s profit realization, if and when the mobile devices are completely commoditized (the death of Apple and RIM). Mobile network operators have far greater influence over consumers than wireline operators – in most cases, people choose a mobile operator first before choosing a handset (Apple being the prime exception / disruption), whereas you choices over which wireline operator and which computer brand to buy are completely separate decisions. Because mobile operators “own” the consumers, market power dynamics dictate that Google cannot expect to extract substantial profits. I know this sounds abstract, but until Google can demonstrate to operators that “I can make your customers leave you for another operator”, operators could and should squeeze mobile advertising profits out of Google. Again, Google’s lack of control expedites this – Verizon can sign up Bing as the default search on its phones etc, but there also are many other ways to play this profit squeezing game.

Of course, Google could hope for a “Wintel”-like end-game, where they dominate the OS space and split the spoils with the operators; but operators can foreclose that outcome by actively playing one OS off another. I’m sure strategists at the operators are already plotting this out, and I wouldn’t be surprised if Nokia, which has long been an outsider to the US market, is called in by the operators to facilitate a bigger and better OS war.