Saturday, May 22, 2010

An Apple Shareholder's Perspective: Thank you, Google!

This week Federal regulators cleared Google's purchase of AdMob based in part on Apple's recent acquisition of Quattro Wireless. While much is being made of some kind of Apple vs. Google rivalry in the smartphone market, journalists and the media continue to miss the point.
Apple has a fully integrated iPhone OS economic model. Everything from the handset to the OS to the digital store offering commercial content flows through Apple. The company's emerging iAd service further advances Apple's monetization of the handsets the company makes. The popularity of the iPhone and continuing market share gains was pushing Apple towards a precarious perch. The release of the Apple iPad and the aggressive nature of Apple's iPhone OS monetization model was also bringing Apple's influence in its product markets into public view and under scrutiny. Further, Apple's decision to forego Flash integration raised the ire of regulators and heightened concern over Apple's control of the economics in the digital handset market.
Google's combative approach to Apple in the smartphone market has begun to allay concerns about Apple's economic influence and for all of the bravado and tough talk recently from Google it doesn't in any way impact Apple's success. Rather, Google's approach of positioning the Android as a successful competitor to the iPhone will ultimately work more to Apple's favor than it will enrich Google. The more Google focuses attention on its presence in the smartphone market, the easier Apple can maneuver freely to advance its monetization model.
Google has successfully convinced the public there's a competitive market in smartphones that may not exist to the extent Google would have it appear. For all of the adrenaline pumping persuasion, Google is doing Apple a huge favor.
The Android market is fractured among multiple handset makers each vying for sales and market share. While the Android market is wholly dependent on Google, the company will not be able to deliver the economic goods handset makers need to establish a margin-rich presence in the marketplace. For handset makers it's a matter of picking your poison. 
One of the reasons a Verizon deal for the iPhone did not work is because of Verizon's penchant for controlling the branding presence of the customer relationship. AT&T yielded to Apple. The iPhone is preeminent in the relationship with the carrier and the customer. Google, for all of its hard work, will not be able to position the Android in a way that's preeminent in the relationship with the carrier and the customer. It's impossible to accomplish absent being a handset maker in the market and without greater control of the user experience.
The Android user experience will vary by handset, by software version and to some extent by carrier. There's no way for Google to avoid this trap. Commoditization of the Android handset market is a present danger. Without participation in after-purchase revenue streams handset makers are left in the third position in a three-way contest for revenue with Google and the service providers. It's similar to the plight of Windows PC OEMs seeking acceptable margins in a highly competitive market for unit sales. Hardware differentiation is challenging at best with Google branding its OS, carriers continuing to brand their services and seeking to lock in customers to long-term contracts regardless of the underlying handset being sold. Carriers have choices in the handsets they sell and offering an Android product does little for the manufacturer in an increasingly crowded field.
Google's aggressive attacks on Apple in positioning the Android illustrates the inherent weakness in the platform. If Google's approach is to position the Android OS for what it's not (an iPhone), it leaves unanswered the question of what an Android phone is for potential customers. Realistically it's the only practical approach in an environment in which Google can not wholly control the quality of the user experience and must grapple with a hodgepodge of handset makers each seeking to lower costs in competition with one another. Google will spend lavishly on Android advertising and marketing but several questions are left unaddressed. For example, how does Google plan to challenge Apple and RIM in the enterprise market and how does Google plan to compete with the 800 lb. economic gorilla in the room? Microsoft and Google are locked  in an economic war with points of conflagration in each major market in which the two companies compete.
Android has become a smoke and mirrors campaign to obfuscate one otherwise glaring fact. Android is a stop gap as Google works to deliver Chrome. For all of the bravado and tough talk, a one product strategy can't deliver the revenue solution Google needs. Apple's multi-product iPhone OS monetization model is at least two years ahead of what Google can deliver.
In the meantime with Google convincing the media, the public and even regulators the Android presents real competition to Apple, the folks in Cupertino will continue building the company's multi-product monetization model unfettered by perceptions of competitive concerns. 

4 comments:

  1. Fantastic piece!! You out did yourself.

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  2. Put another way: Android is not a brand that consumers can recognize. It never will be because it cannot be a brand.

    Google does not compete for users, it competes for licensees, and those licensees compete for distribution contracts with operators and those operators compete for service revenues.

    Microsoft tried to create a brand around mobile for about 8 years. They re-branded 4 times (Pocket PC, Phone Edition, Windows Mobile, Windows Phone) demonstrating the difficulty in trying to attach a software layer to consumer consciousness.

    iPhone is a brand owned by Apple competing as an integrated whole for users' hearts.

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  3. Asymco:

    You reiterate a good point about branding. Smartphones are a three-way branding contest between the maker, the service provider and, in the case of the Android, Google. Further, the lack of uniform hardware makes for an inconsistent user experience and branding becomes even more problematic.

    Absent a differentiating operating system the multitude of handset makers will put pressure on margins. I don't think Google is in a position to move margins higher for handset makers. In fact, the greater the number of Android handset makers the greater the pressure on margins.

    We have yet to see what Microsoft will debut in the fall in terms of Windows 7 Series handset partners. Google made a mistake in picking a fight with Apple. Google is targeting a fully integrated business model with a hodgepodge of handset makers and service providers. If similarities in market approach are a consideration, Google's most formidable competitor is Microsoft. Google has just opened a multi-front war and added a former ally to its list of combatants.

    In doing so Google has taken the pressure off of Apple by convincing potential regulators and the media the company is offering real competition for the iPhone. Apple gets a break and Google's success in the smartphone market is years from being proven.

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