The “Android Paradox” – Google’s bright future at both ends of the market

Update 9 June 2011: What a mess. My original “Google’s bright future at both ends of the market” appeared in Business & Economy as “Android apps will be of low quality”. This is absolutely not what my line of reasoning was in the piece. I have asked B&E to change the title to something more reflective of the content, such as “The Android Paradox” as soon as possible. Since the other articles in this cover story also have negative titles, maybe B&E are gunning for Google? Who knows. Anyway, my original text is blow…
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Following on my piece on the new rules of the Mobile OS ecosystem for Business & Economy, Steven Philip Warner, a Senior Editor with Planman Media, interviewed me about the future of Android. Our discussion appears in the current issue of Business & Economy (link on the way…)

Steven Philip Warner: According to new data (released in February 2011) by research firm IHS, the Android Market saw revenue grow by 861.5% year-over-year from 2009 to 2010, but the actual dollar figures are tiny compared to all the other major app stores. For instance, revenue grew from $11 million in 2009 to $102 million in 2010. By comparison, the Apple App Store saw 131.9% growth y-o-y jumping to $1.7 billion. More surprisingly, the BlackBerry App World had revenue of $165 million, and the Nokia Ovi store saw revenue of $105 million, both larger than Android despite a much smaller selection of available apps. What do you think Google will do in the near future to increase revenues from Android apps, and could this be at the cost of increased dollars on the user end?

Johnny Ryan: There are two driving factors here: Google is, fundamentally, a search company. The more users of smart phones, even if they do not purchase apps or content via the Android Market, the better for Google. Android users in particular are likely to use Google search and GMail. However, this is not necessarily the case for App developers. The risk is that the Android Market is unable to support a sufficient number of app developers, and that the Android ecosystem will have lower quality apps than its developers.

I call this the “Android Paradox”. Google wants more people using Search, so it needs to keep the number of new smart phone adopters high, and must keep costs down. But at the same time it is preferable that at least some of these new adopters pay for the apps that will keep the Android market attractive to App developers. The solution arises from one of the key strengths of the Android ecosystem: its variation of devices. While Android phones can be cheap, they can also be expensive. New Android smart phones will have graphics acceleration (using Nvidia’s Tegra 2 for example), and these will be aimed at the high end market of users who are more likely to pay.

Steven Philip Warner: Of late there has been some dissatisfaction shown by Google and Android developers over earnings from Android OS. Apparently, Google is “not happy” with the paucity of paid app purchases for the Android platform despite the fact that consumers are activating 300,000 Android handsets each day. This was revealed by Android platform head Eric Chu at the Inside Social Apps event in San Francisco on January 25, 2011. The revelation came a day after Apple’s App Store just passed the 10 billion mark for apps downloaded for the iPhone. Do you see this “low” earnings from apps as a major reason for Google to make the very Android OS a “not free” platform some quarters down the line, something along the lines of the Apple iOS model?

Johnny Ryan: No, and there are two reasons. First, I do not think that Google is like most other companies. I have a feeling that, especially now, under its new CEO, Larry Page, Google is driven at the top by “nerd norms”, a kind of engineers’ ethics. This may not apply across the company, on all decisions, but I think if the question were asked of the founders, “Do we want to close Android and make more money”, the answer would be no.

Second, while there may be tweaking at certain points to push mobile handset manufacturers to conform to minimum standards of devices, Google can not afford to exclude the low price market. A billion more users of smart phones is a plus for Google as the leading search advertising company in the world.

Steven Philip Warner: Paid apps have lagged on Android for a number of reasons. One of them has been inadequate billing options. The company launched carrier billing for T-Mobile two years ago, but it wasn’t until last month that Google added the ability for consumers to pay for Android apps through their AT&T phone plan. The company however plans to improve carrier billing options this year. Do you see this as a move from Google to increasingly monetize its android offerings?

Certainly. As far as I can see This has been in the pipeline for the best part of a year. Last month’s announcement by Google’s Eric Chu of “Direct Carrier Billing” on Sprint in the US (and previously with three Japanese networks (Softbank, KDDI, and NTT DOCOMO)) are an indication that this is a model Google will employ elsewhere.

Steven Philip Warner: How about handset makers like HTC, Samsung, LG, etc, who are constantly launching newer versions of android OS. They have invested so much towards this project. In case one day, Android no longer remains an OPEN & FREE platform, how will these handset makers suffer?

Johnny Ryan: Indeed. And that is another reason why Google will 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 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.

Steven Philip Warner: There are also tablet makers (like Samsung, Sony & Dell) who rely on Android OS. Do you think Google’s intentions to increasingly monetize Android OS will hurt these players as well?

Johnny Ryan: No – were Google to more aggressively pursue monetisation would be good news for Samsung, Sony, Dell etc because tablet manufacturers  target the higher end of the market. These devices are the ones to compete with Apple etc. on an equal hardware footing, equipped with expensive hardware capable of accelerated games and other leisure activities. Users of these devices are far more likely to pay for apps and services than a new adopter of a low cost smart phone.

Steven Philip Warner: Because of its open source nature, Google does not make money from licensing the operating system the way that Microsoft does. If it did at a similar price as Microsoft, it possibly could have made up to $1 billion in 2010 alone (67.23 million units of android devices sold around the world x $15/device) assuming people were willing to actually pay for it. But licensing would also mean that Android OS would probably have powered less devices (based on price elasticity of the handset market, the estimate is around 7% less devices). Do you see Google taking a chance with licensing its OS, especially given that Gartner estimates Android to sell about 1.03 billion handsets between 2011 and 2013, which would translate into more than $15 billion of lost revenues from licensing the OS? If yes, then when should it begin with that? Or should the company remain content with earning money from its two revenue streams: (a) Android app revenue; (b) mobile ad revenue from Android-powered phones?

Johnny Ryan: I do not think it would be easy, nor desirable. I query that 7% figure.

Steven Philip Warner: Your comments on what Google should do next with Android to make more revenues out of it…

Johnny Ryan: I think the introduction of high specification devices will bring a more-likely-to pay user segment to Android. Were I advising Google I would counsel it to capitalise on the Android Paradox. Increase the spectrum between the highest and lowest specification of mobile handset. At the low end of the market Google is capturing new arrivals to the smart phone by working with manufacturers who produce low and medium specification devices. It could invade Apple’s space at the high end of the market by, for example, working on a range of handsets that offer the finest media/gaming experience at a very high price point. The high end of the market may be the secret to keeping the ecosystem attractive to developers, while the low and medium end of the market bring new users to Google’s search advertising.

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