counternotions

According to soldiers of the Android Crusade, 2011 is the year Google will crush iOS to declare its inevitable suzerainty over mobile territories.

Let’s meet this week’s crusaders: Seth Weintraub (2011 will be the year Android explodes) and Fred Wilson (The Smartphone Explosion).

Seth is the current commander of the “Google 24/7″ column at Fortune and a former IT manager. ‘Nuff said.

Fred is a VC. His business is mostly about scale, with a portfolio full of companies whose lucrative exits are predicated on having scale for commensurate multiples: Etsy, Zynga, Tumblr, Twitter, Foursquare, Disqus, etc. Unlike angel investors who prefer flipping smaller properties to larger acquirers in a short period at smaller multiples, VCs like Fred’s USV need hits, at least a few big hits to justify significant management fees, bigger funds, longer incubation times and higher expectations. No place for the Apple ecosystem in Fred’s portfolio. Nothing wrong with that, this is America. Neither is there anything wrong with “fearing and loathing” Apple and declaring it “evil” so long as we understand where that angst is coming from.

Fear and loathing in Googlistan

Even though he personally uses Apple products, Fred has no use for Apple as an investor. To him, the Apple ecosystem is not “open” enough for his portfolio companies to reach sufficient scale for lucrative exits. In fact, it wouldn’t be too much of an exaggeration to say Google’s business model for Android Fred prefers is diametrically opposed to Apple’s.

As business models go, there are currently two dominant ones: either people like your product enough to purchase it or they don’t care enough to buy it but will overlook its deficiencies if it’s “free” in exchange for their personal browsing and purchasing info sold to advertisers. The former model is Apple’s, the latter is Google’s.

Apple sells emotional experiences. The price is what users pay to be delighted by Apple’s stream of innovations and to be free of the lowest common denominator burdens and the pervasive harvesting of their personal info.

Google sells eyeballs. To be more precise, the clickstream attached to those eyeballs. Thus scale, indeed dominance, is absolutely crucial to Google’s model.

The weight of scale

Android may be a lackluster clone of iOS in terms of UI and fluidity, but as an economic proposition it’s nothing short of an extension of Google’s desktop/online business model. Google’s model wouldn’t work with something like 20% market share. If a market is highly fractured among smaller players, business models like Google’s that rely on massive scale wouldn’t work well. As with Microsoft’s Win32 API or Office formats, scale is erected to beget inevitability. Inevitability becomes its own marketing engine. Windows had virtually no security architecture by design for so many years, even long after its costly effects became obvious globally, but because it was ubiquitous, thought to be irreplaceable and thus inevitable, it has continued to net Microsoft billions year after year. Likewise, MS Word could get away with some of the most insane formatting problems ever invented by man only because it has so dominated “desktop productivity apps” that it’s become inevitable. If anyone, even Microsoft, were to design a modern word processor today, it sure wouldn’t be Word. And yet everyone else designing a better Word has had a very difficult time of competing with the inevitable. Inevitability is the Kerberos of profitability.

Like Microsoft, Google doesn’t sell best-of-class user experiences to paying customers. It sells their eyeballs to advertisers. The more eyeballs, the better. The most, the best. If it can dominate a market and thus make its products and platforms inevitable, it wouldn’t even have to care about user experience at all. Google Buzz didn’t have to have good user experience because Google management thought if they could just bolt it on top of the very dominant Gmail it would make Buzz…inevitable.

In Fragmandroid: Google’s mad dash to Microsoftdom a year ago, I looked at the undeniable similarities between the two companies’ willingness to raise their paranoia to a level of corporate survival strategy:

During its growth period, Microsoft entered into one risky bet after another, from cable TV to office equipment automation to Dick Tracy watches. It saw threats to its core revenue base from every new development, every new player to come along. And expand and spend it did. It did, mostly because its management thought it could.

So Google too has to be everywhere software could possibly run: wikis, cars, windmills, electric meters, audio ads, location-based services, microblogging, catalogs, print ads, web page layout apps, online answers, social networks…even when, as you may have noticed from the list, it fails to get any traction.

For Google, nearly all of whose profits depend on advertising revenue, dominance expressed as clickstream traffic is the currency. To maintain that dominance the “Don’t Be Evil” company has been willing to go into business in China despite all evidence of rampant human rights violations, get into bed with the worst phone carrier to rape net neutrality, let its “walled backlot” search become a cesspool of SEO swindlers, collect unauthorized data via illegal WiFi mapping all over the globe, risk exposing private email account data in hopes of capturing social graph info by default, favor its own properties in search results in surreptitious ways and so on.

Whether it’s on the desktop, mobile or TV, the ability to sell advertising by maintaining market dominance is everything to Google. But then what’s in it for Google’s Android hardware “partners”?

Bondage

What happens when one company ties its market destiny to another’s rate of innovation? The movie “One OS, Many Partners” that we’ve seen before in Wintel theaters didn’t have a happy ending. Having secured a very fat market dominance, Microsoft displayed an embarrassing level of paternal indifference and inability to innovate.

Even Microsoft’s biggest partners complained: Acer about lack of proper tablet OS support, Dell about better server support against Linux, HP about media center innovation and nearly everyone about getting burned by the WMP/PlaysForSure/Zune debacle. At the end of its inevitability run, most of the Microsoft “partners” were left holding the bag…of stalled innovation, disappearing margins and market irrelevance. That’s the leitmotiv of the “One OS, Many Partners” screenplay.

It’s a classic dominance play, and Google is perfecting it in its rerun. For years, Google played deaf to complaints from publishers and studios about its copyright violations of their books, news and video. Until, of course, its own operations scaled enough to dominate those distribution channels to then dictate terms to content owners: “You can’t live without our traffic to your website, so let Google commoditize and leverage your properties for next to nothing.” Just like the Wintel hardware manufacturers who had no OS of their own and were thus at the mercy of Microsoft, content providers that stood by and never developed their own digital platforms find themselves now at the mercy of a dominant Google. This inevitability is worth so much more to Google that the several hundred million dollars it has already spent on Android to give it away for “free” remains a rounding error on its balance sheet.

Between Android’s market dominance and overwhelming commoditization of mobile content, stand Apple’s iOS devices and Facebook (and perhaps to a lesser extent Microsoft and Twitter). On these platforms, Google search – the key to dominance and inevitability – is either absent, highly mediated, in decline or mostly obviated. That’s why Google’s most belligerent words and actions have recently been directed towards those two companies. In a reversed mirror-effect, Microsoft used to call open source an anti-capitalist “cancer” then, Google’s Android head likens “un-open” Apple to North Korea today. Google loves to index Facebook social graph data, but won’t let Facebook access Gmail relationship graph – of course, all in the name of “openness”.

One company. One OS. One explosion.

So the Android crusaders will be circling us in 2011, swinging their $85 smartswords to demand our capitulation in a rapture of inevitability. Inevitable like Knoll, Orkut, Froogle, Lively, Health, NoteBook, SideWiki, Answers, Wave, Buzz, Nexus…like an army of 41 shades of blue. No matter. Resistance is futile.

Curiously, even the most successful Android hardware manufacturers like Samsung and HTC are hedging their bets on Google’s mobile platform either with their own OS (Bada) or Microsoft’s (WP7). Why would experienced OEMs hedge their bets on Android if it were so open, so free and so benevolent? Let’s hope they too have seen the “One OS, Many Partners” movie and still remember the OEM extras with un-speaking roles in the “Razor Thin Margins” and “Race to the Bottom” scenes…when everything exploded.

Update: Incidentally, none other than Vic Gundotra, former Microsoft chief evangelist and current Google engineering VP and hit-man for mobile and social, echoes precisely the strategy outlined above that Google has been using: ”It’s an art to create a sense of inevitability,” reports BusinessWeek:

In Silicon Valley, that kind of evangelism usually involves firing insults at the competition. While that hasn’t typically been Google’s style, Gundotra hasn’t shied away. As he says, “It’s an art to create a sense of inevitability.” In a keynote speech at a Google event for developers last year, he even took aim at Steve Jobs and “a draconian future where one man, one company, and one device would be our only choice. … That’s a future we don’t want.”

About 15 years ago, I think it was a Seybold expo in Boston, I was watching a Dell representative demo new PCs to, what looked like from behind, a small group of corporate executives in expensive suits.

Towards the end of the demo one of those executives turned to look around the huge Dell booth and, as luck would have it, saw me a few steps back. He was a former client of mine and someone who could write very big checks for hardware and software acquisition at one of the largest media companies in the world. He came over, with the Dell rep in tow, to chat. Finally, he asked, “What do you think of these Dells?” I don’t quite recall how delicately I put it but my response was something like, “If you don’t care about dealing with a commodity hardware vendor focused on price and an OS provider that neither understands nor cares much about publishing, sure, they are cheaper.”

That was a time when the multitasking Windows NT had begun to siphon off a considerable number of Mac users, even from the erstwhile Apple strongholds in creative industries. Application developers had started to migrate their once Mac-only software to Windows. Then, PCs were considerably cheaper than Macs, but unfortunately Wintel offerings had some some significant deficiencies in design workflow, including font handling, OS-wide color matching, high-res printing, etc.

While Apple did go through very dark times, the mass exodus foretold by the PC camp was never able to deliver a knock-out blow to Macs and Dell soon lost interest in targeting Apple’s creative user base that largely stayed with the beleaguered company. A few years later, Steve Jobs took over Apple and today it’s the third most valuable company in the U.S., over seven times bigger than Dell in market capitalization.

Exodus redux?

Today, if one listens to pundits and geeks, Apple is again at the cusp of an exodus of developers and losing its primacy in the mobile device space. The latest issue is Apple’s management of the App Store. Fifteen years later, the tone is quite different. I don’t ever recall an Apple competitor signing off a diatribe with a “Go screw yourself Apple” in print then. But today I’m not interested in commenting on Adobe’s naked attempt to agitate its developer base to browbeat Apple in public, but in exploring what choices App Store developers currently have beyond Apple’s “walled garden.”

Many of the App Store developers got into creating products for mobile devices precisely because for the very first time in history the iPhone allowed them to bypass the limits, cost and sheer operational lunacy imposed by telecom carriers. In less than a couple of years, Apple created an online distribution monster of 185,000 apps and 3.5 billion downloads. The fact that no other app store clone has been able to even approach that ought to tell developers something about the magnitude of the efficacy of the App Store. The grass isn’t greener elsewhere.

Why not?

Fifteen years ago Dell and Microsoft found out that selling beige boxes on the cheap to Mac users wasn’t as easy as it would appear on a spreadsheet. Beyond cookie-cutter hardware and simple OS services, these users demanded a frictionless ecosystem. Today’s iPhone OS user base is much larger but just as discerning. What they represent, as marketing demographics, is historically unique. Just as Dell now realizes that ‘marketshare-at-any-cost’ is indeed a ruinous business model, it’s not the number of users but the demographics of that user base that counts:

• No other vendor can boast an ecosystem of 100 million devices (from phones to gaming devices to tablets) unified under a single OS, app/media store and a reliable and proven schedule of innovation pipeline.
• No other vendor has ever put together the depth and breath of an ecosystem of music, videos, TV, movies, podcasts, games, apps and soon books, magazines, comics and newspapers like the iTunes store.
• No other vendor can match Apple’s global base of 100 million users with iTunes credit card accounts, with 49% of iPhone users having a college education and 67% earning more than $70,000 a year.
• No other vendor’s user base is as diverse or as engaged: while 3/4 of Android users are male, iPhone OS users are nearly equally divided. iPhone OS devices’ share of browsing traffic is twice the rest of the industry combined. Also iPhone users buy apps at about twice rate of Android users’.
• No other vendor has anything like the iPhone touch. While 78% of iPod touch users are under 25, only 24% of Android users are, and as a Flurry report aptly summarizes:
  

  when today’s young iPod Touch users age by five years, they will already have iTunes accounts, saved personal contacts to their iPod Touch devices, purchased hundreds of apps and songs, and mastered the iPhone OS user interface. This translates into loyalty and switching costs, allowing Apple to seamlessly “graduate” young users from the iPod Touch to the iPhone.

• No other vendor dominates mobile games like Apple now. With over 50,000 games in the App Store, it has 10 and 20 times what Nintendo and Sony offers respectively, and this before Apple’s Game Center has even shipped.
• No other vendor offers the ease of use of a single click “purchase & install” capability as smoothly as Apple. In fact, just finding an online store on other platforms to purchase an app appropriate to one’s device can be a chore.
• No other vendor markets its app store clone as pervasively or obsessively as Apple, by featuring how apps are actually used.
• No other vendor actually makes any significant profit from its app store clone, and when there’s no profit vendors usually lose the incentive to focus on products.
• No other vendor has been as capable of patiently educating its user base to adopt new technologies and usage patterns, like multitouch computing, one-click transactions, in-app purchasing, virtual typing, casual games on phones, etc.

The escape clause

These are among what developers would leave behind if they choose to abandon Apple for uncharted and unproven platforms of other vendors. Users do not follow esoteric open/closed platform politics, they vote with their money for convenience, reliability and value.

In order to become a better garden for developers, it’s not enough for other vendors to offer something that iPhone or iPad doesn’t. They have to match and better Apple’s current iPhone OS driven devices across all fronts. webOS had multitasking but no content. Nokia has market share but no direction or excitement. RIM caters to enterprise but not much else. Motorola still thinks it’s enough to manufacture handsets and leave everything else to ‘partners’ that turn around and stab you in the back. Android may be open but is currently a geek ghetto with nothing to match iTunes store. And, let’s not kid ourselves, Google is there not to ‘help’ but to commoditize hardware manufacturers by funneling them to compete against each other on Google’s platform largely on price.

Apple’s hand

Over the years, it must have been embarrassing for Steve Jobs to swallow his contempt every time he had to invite an executive from Microsoft or Adobe to the stage at a keynote event to explain why their Mac product was behind schedule and inferior to their Windows version.

However, 2010 is not like 1994. Apple has money, mindshare and the hottest platform to no longer having to beg. Today, Apple is more concerned about having to re-live its recent history — getting jerked around by Microsoft or held hostage by Adobe — than what it thinks would be manageable damage by a few developers that may leave its platform. Some may regard that as being arrogant. For Apple it’s the price of being in charge of its own destiny. To capitulate at the height of its newly found vigor would be suicidal. Suicidal Apple is no longer.