Fragmandroid: Google’s mad dash to Microsoftdom

Observing Microsoft’s dilemma against the iPod/iTunes juggernaut a few years ago, Steve Jobs offered this prediction:

The problem is, the PC model doesn’t work in the consumer electronics industry, where you’ve got all these companies and some does one thing and another does another thing. It just doesn’t work. What’s going to happen is that Microsoft is going to have to get into the hardware business of making MP3 players. This year. X-player, or whatever.

Soon Microsoft did get into the hardware business by introducing its own Zune player coupled with its un-licensed PlaysForSure platform, thereby leaving its erstwhile manufacturing partners high and dry. The anti-Apple digital music camp hasn’t recovered since.

Chasing Microsoft

Just as Microsoft leveraged its enormous pile of cash from Windows/Office monopoly to reach into other domains, so did Google with its huge revenue base in search/advertising. In just a few years, Google has put together a breathtaking spread of products that go far beyond search and encroach the Microsoft empire in every possible way, including an OS and business productivity apps:



Microsoft made its money in software. Its forays into hardware have been far more troublesome: its PC peripherals business has been profitable but non-strategic, Xbox a financial drain since its inception, Ultra-Mobile PC and Surface most forgettable, and Zune an unmitigated disaster.

Unlike Microsoft, Google had shied away from hardware until now (except for its lackluster enterprise search appliance). But with the circulating news about its Nexus One smartphone, Google may have decided to complete its ongoing emulation of its archenemy. So let’s assume, as an exercise, that Google will soon sell a branded smartphone direct to consumers. What might its business model be?

Microsoft has been the flag bearer of the “one OS, many hardware manufacturers” approach to product design. While keeping Windows APIs proprietary, Microsoft broadly licensed its OS, thereby fueling the growth of the global PC market. However, as Microsoft’s share of the PC industry profits grew, manufacturers witnessed the commoditization of their hardware in a cut-throat race to differentiate on price.

The failed ‘PC model’

Tied to commodity sales and thus slim profits, PC manufacturers failed to build competencies in hardware and systems innovation. So much so that even the perennially incompetent Microsoft management realized the futility of “one OS, many hardware manufacturers” approach (as we underscored previously) in an internal memo from Steve Ballmer:

In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones—providing choice as we work to create great end-to-end experiences.

If Microsoft learned from the success of iPod and iPhone the centrality of “end-to-end user experience” in consumer products, it looks like Google has learned from Microsoft the perils of letting others own the customer behavior around its revenue base. Mobile search, for example, may have grown some 30% recently, but I’m sure Google has also recognized that 125,000 iPhone apps represent an emerging consumer behavior which obviates traditional browser-based navigation and search in favor of domain specific apps that access data and information in much faster and easier ways. Why go to a web browser, type a search term like it was the 1990s and wade through pages of search results, when you can click a button or flick a gesture to get an efficient answer with a dedicated app? Why suffer through Google-supplied ads when a native app costs next to nothing on the iPhone?

So while the market is still relatively nascent, it looks like Google has decided to do what Microsoft couldn’t successfully pull off: Apple-style vertical integration of hardware, OS, apps and services…direct to customer.

Will Google succeed where Microsoft failed?

Google will have to address a few questions:

• Hardware — Apple, General Magic, WebTV and Danger alumni and current Google VP of Mobile Platforms, Andy (“We’re not making hardware”) Rubin does have hardware experience, Google as a company doesn’t.

  1. So how much of design and production will Google have to outsource if it’s to release multiple devices over time?
  2. Will it rely on a contract-level partner, like Apple does with Foxconn, or will it hand over greater design responsibility to an established handset manufacturer like HTC, or let multiple manufacturers build different models?
  3. Will it have time to organically expand its industrial design competencies or be forced to acquire a design outfit or raid a talent pool like the Palm or Motorola smartphone teams?

• Marketing — Google has terrific global brand recognition among consumers. However, it has no (non-ad) sales force, physical store outlets or consumer electronics retailing experience. It may choose to sell the Nexus solely through an online store or in cooperation with a carrier partner like T-Mobile. Unfortunately, unlocked and unsubsidized smartphone sales in the U.S. has been fairly disastrous. Ask Nokia and Sony. Consumer retail advertising and marketing is nuanced and hard to get right. Ask RIM and Palm.

  1. Where will Google get sufficient marketing and merchandising experience to compete against Apple?
  2. What incentives will there be for its retail partners that competitors can’t match?

• Marketshare — By the time Nexus is sold, it’s likely for Apple to announce an iPhone/iPod touch userbase of 60-70 million. That’s the most profitable segment of the industry with a demonstrated history of purchasing behavior and billions of dollars of investment in devices, peripherals, content, apps and other sticky aspects of the Apple ecosystem. Unless Apple falls behind spectacularly, Google or any other manufacturer will find it extremely difficult to convert those users to their own platform. Ask Palm.

  1. Will Google go after Apple’s lucrative consumer base, remain wedged between Apple and RIM or be content to harvest newcomers to the smartphone sector? Will the latter be large and profitable enough?
  2. They didn’t with the other Android phones, so why would developers first and users later switch from a 60 million strong well-oiled ecosystem to another one starting from scratch?
  3. How will Google demonstrate to developers that it can actually deliver a userbase not just as large as Apple’s but also with comparable purchasing power and history of spending money?
  4. If Google’s after Microsoft Windows Mobile users as it’s often claimed, why would it need to release its own phone?

• Partners — Music labels complain about Apple having too much power and print publishers look for alternatives to Amazon’s dominance.

  1. Why would phone manufacturers and carriers want to adopt the Android platform if its founder and chief driver is directly competing against them, with a first-and-best implementation strategy?
  2. If Nexus is made by HTC, how happy can other manufacturers be?
  3. We don’t have a single significant case of a platform licensor successfully competing against its own licensees. Can Google create a precedent for such an unlikely arrangement?
  4. What will Google do if Microsoft approaches spurned Android partners or those on the fence with improved Win 7 plus financial incentives minus the threat of competition?

• Fragmentation — With Chrome/WebKit browsers and Chrome/Android OSes Google has certainly presented a confusing platform strategy.

  1. If Nexus runs on open-source Android, what makes it so superior to other Android phones?
  2. If it’s the UI, why wouldn’t all or most of the enticing parts of it be copied by others?
  3. If it’s the tightly integrated Google apps/services, wouldn’t Google be seen as favoring itself at the expense of its own developers?
  4. If it’s the hardware, where did Google get such expertise and how long could it keep such differentiation?
  5. If proprietary Google apps/services dominate Nexus, will it still be seen as ‘open’ by developers?
  6. If Nexus is so different to be so attractive, wouldn’t it by definition further stratify the Android platform into an incompatibility mess for developers?

• Focus — One of the principal factors in Microsoft’s decline has been its incessant search for the next profitable market, however far afield it may be from its core competencies. Google has its own share of moribund products, like Orkut, Google Checkout, Google Base, Knol, Google Answers, Google Catalogs, Jaiku, Dodgeball, etc. Nothing is wrong with experimentation, of course, but such fast paced diversification always brings a measure of dispersion of top-level management focus. People have already started complaining about deterioration of Google’s core search competency. Given the growth of non-algorithmic, social network derived way-finding, it’s not impossible for Google to be blindsided by peripheral attacks to its own core business.

  1. Does Google have a management team and sufficient corporate focus to sustain a profitable direct-to-consumer hardware merchandising strategy?
  2. If profit is not the primary driver of Nexus and it comes to be perceived as a loss leader to Google’s search/ad business, will developers and other third parties take the risk of devoting resources to it?

• Financials — In terms of impact to its bottom line, Nexus may be Google’s biggest bet yet on its brand equity. If Nexus doesn’t do well, a 20% trim to its marketcap would not be unthinkable.

  1. In order to deny market dominance to Sony, Microsoft poured cash into Xbox development for years, having little to show for it in profits. Will Google be a better smartphone manufacturer and retailer than Microsoft was with Xbox?
  2. Apple has very shrewdly used its market share, cash, as well as inventory management and component pricing knowledge from selling iPods to both lower its production costs and deny comparable advantages to its iPhone competitors. Does Google have institutional expertise to match that?
  3. Is Google planning to subsidize Nexus sales with hard cash or ad revenue shares to gain marketshare? For how long and at what risk to its balance sheet?
  4. If Nexus falls short, will Google’s top management and share price be punished for having lost perhaps its greatest asset, the aura of invincibility?

An unlikely Christmas gift?

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.

Of course, Google doesn’t think it’s Microsoft and could surprise everyone with a brilliant plan to bypass these hurdles. Or by alienating its own partners and further fragmenting its Android platform, it could inadvertently resuscitate Microsoft’s mobile business as an alternative, if the lights are still on in Redmond.

75 thoughts on “Fragmandroid: Google’s mad dash to Microsoftdom

  1. It’s a year later and this is still a superb piece. The market (especially the emerging asian markets) will soon be flooded with “no-name” android phones that can compete only on price, and sold to people who can’t or won’t spend money on apps. Apple will get the money and the valuable customers.

    The “high-end” Android-based phones will be sold by the big carriers with a contract, and then the actual cost of the phone is only a fraction of the cost of ownership, minimizing any price advantage.

    Maintaining Android without the offsetting “cash-cowness” of it will become a larger and larger burden on Google, and eventually they will feel that pain and cut back.

  2. Well, NEXUS sure was a dud. But Andriod at large probably cost Apple a million iPhone sales. Google is more and more seeming to be clumbsy. More and more aggressive too and not in a good way. That can’t be a good combination. I used to root for google but now I really beleive they are causing more harm than good in the way of advancing technology.
    What is with google scanning all this copyrighted content lately and then making the owners fight to keep their rights to it. And what’s with this private Internet I hear they are building and their grand plan to subvert as much of the Internet traffic as they can through it. The Internet shouldn’t belong to any one entity because whoever owns it also sets the value of everything on it. For Google this means adspace will be valued highest, then, whatever the reason that brought you to the Internet and next to their Ads… it’s value has to be something less than that. And with Internet ads going for fractions of a penny it can’t be worth much. The implications of being locked up in a world like that needs to be explored.
    So at first I disagreed with you Kontra. But lately I am seeing things differently. Yes, Google seems to have learned much from MS, and seem to be carrying the tradition on to new heights. A mad dash, as you say.

  3. @Cadillac88, I completely agree.

    What puzzles me is that Google felt it necessary to have two brands on the phone, theirs and HTC. Whose phone is this anyway? Who answers customer support and supplies the warranty and return address?

    If this is truly a Google product, who made it is irrelevant. There are many ODM’s and I know Nokia and Sony Ericsson have used ODMs for some of their products. But they never advertise the fact.

    It looks like Google is conflicted. On the one hand they want to “move the ball forward” by fronting a phone, yet they somehow don’t want to be in the hardware business.

    Are they trying to be half pregnant?

  4. So here is something to think about. If Google’s core competency is search and ads then why did they find themselves so far in mobile left field that they needed to buy AdMob to be significant? I can see Apple needing to buy Quattro being they are completely new to that game and would need to start from scratch otherwise. And what’s with this still insisting ‘Google is not in the hardware business’ even after yesterday’s NEXUS announcement. Is Google just providing an excuse for itself to preserve the aura of invulnerability? So if NEXUS turns out to have low volumes they can fall back and say ‘we’re not about hardware so, whatever’. When you walk, and talk, and look like a duck – well, then you know what Google – you are in the hardware business. Google can keep up that sort of BS for only so long. They are hiding something other than whether or not they are in hardware.

    • So far there has been no penalty for Google. They likely feel manufacturers (other than RIM, Apple and Palm) have no other alternative, assuming Symbian, WinMo, etc, have no appeal/future, which is exactly how Microsoft felt after they gained initial traction: Apple, Novell, IBM, etc were not credible alternatives.

  5. “MS had small balls there too.”

    Perhaps of some use as a caliper, we now have MS paying Verizon some unannounced amount of money to have Bing set up as their default (and only) search on their very controlled access phones. Balls? Or just bullying?

    • I trust Verizon about as much as I trust MS. I think these are birds of a feather – it certainly is a bit more than just pushy.

  6. Google already has a one way ticket into the hardware market – accidental or not. The first clue was Danger. Then Android. Now hardware tests. Why go down that road if not to go all the way?  Moto and Sony and HTC aren’t totally dense. But what else can they do? They cant trust MS. And now Google might be a setup.  Moto and Sony in particular are really vulnerable. They both give away buckets of cash to even get anyone to buy one of their phones.

    Google partners (not just andriod handset makers – there are others that might not come to mind right away) must be anticipating the pain in the back the playsforsure partners received. I mean ms didn’t just enter the mp3 market. They also made sure playsforsure was dead and so killed the partners and then killed them again to eliminate residual competition. That was deliberate enough. By treading what by all appearances seems to be the same path as ms, bridges are already burning. There will be a backlash.

    What if Google wannabe apple beaters are holed up in some top secret zone? Like Apple was.  Except everytime they pop up for air thinking they have the iPhone killer, Apple has already delivered what was supposed to be there next big Apple killer idea? Back down they go further behind. Not an unthinkable possibility.   

    Maybe they have something spectacular, maybe not. Either was their hastily put together Android community is on high alert.  So is Apple, Verizon, and just about everyone else. 
    Apple bet the farm on iPhone and pulled it off. Partly helped by a totally out to lunch bunch inhabiting the mobile space that were completely surprised by Apple’s tour de force. 
    (Kontra discussed that months ago. Apple has balls alright)

    Danger was the only exception.

    MS made a bet with Pink but didnt have to bet the whole farm. Small balls. Look back on Zune and you find Toshiba pretty much gave them all their stranded gigabeat inventory for starters. MS had small balls there too.  
    I think Google has bet the farm though. But you need more than balls here. You need brains too. And the timing, if recent mobile history is any indication, has to be spot on. Make that dead on. Google might be a tad off on the last requirement.   

    • So far Google’s expenditure on Android and Nexus have been fairly negligible compared to, for example, what it took Apple to create and establish the iPhone. I think we’ll know about Google’s commitment to both Android as a platform and Nexus as a product line when they begin to crank up the necessary spending on advertising, marketing, merchandising, upgrades, partner deals, etc., here and abroad.

    • While motorola was busy launching ROKR Apple was deep in iPhone development. I think NEXUS is kinda the same. As you say, we’ll need to wait a while longer. But NEXUS is not going to be their serious effort.

  7. I think it’s actually much simpler than what Contra lays out here, but I agree with him completely.

    Google has zero hardware, OS, retail, consumer, development or even deep application chops while Apple has deep talent and experience and a huge ecosystem in all these areas.

    Google is simply out of it’s league here and as time goes on, that will become more and more apparent. Just look at the latest. Droid comes with Android 2.0, but Droid Eris, which came out a after Droid, comes with Andriod 1.6 and Sony new flagship phone, coming out next year also comes with Android 1.6. That’s not how you drive a “platform” forwards. It’s silly at best and deeply flawed at worst.

    I’m not even sure Google would know a “platform” or “ecosystem” if it hit them over the head.

  8. I don’t think Nexus One is the mythical Google Phone. I think it is just the T-Mobile Droid. It has T-Mobile instead of Verizon, Android 2.1 instead of 2.0, and it’s named after the robots from Blade Runner instead of the robots from Star Wars. It’s not only yawn-inducing, it’s a full-on sleeping pill.

    Google said the Nexus One test inside Google is all about dogfooding. The simplest conclusion you can draw from that is they are testing Google Android 2.1, not a Google Phone. I don’t see anything that warrants a more complicated explanation.

    If there ever is a Google Phone, I think it will run Chrome and the advantage will be a cheaper phone and lower monthly bill because it will only require a 4G data connection and no voice plan, because calls will be over IP. And Google gets to make as much advertising dollars off you as an iPhone user, who already has the Unix core and WebKit HTML5 browser from Chrome. Google bought Android before the iPhone shipped, before HTML5 became a reality. They iPhone-ized Android by putting in multitouch and WebKit, but ultimately, I think it is their OS 9 and Chrome is their OS X.

  9. So what should Google do? Given that Apple could at any time bump Google search/maps/youtube as privileged apps off the iPhone, what recourse would Google have if Apple was also the dominant smartphone player (in the same way that Microsoft was the dominant PC player and bumped Netscape off its desktop)?

    The path Google has chosen is a free Android OS, hardware partners, additional Google Android apps (that may or may not have been offered to iPhone), and now possibly a Google branded handset.

    Has Google gone too far and is now actually providing a cause for Apple to bump its search/apps off the iPhone? Or does Google have to go further now and bet that Apple won’t retaliate since Apple is not yet dominant?

    Intriguing strategic business thinking…

    • I should also add that Google buying Admob is another step it’s taken to ensure it stays on the iPhone.

    • Until the frontal assault, Apple had little reason to steer its business away from Google and thus Google should have had no reason to worry. Now Google looks like to have declared war. We’ll see if that was smart.

  10. I am not sure why Google is going around ruining perfectly fine partnerships..

    1) They have pissed of Apple, whom I doubt is going to be leaving Google Search in Safari (iPhone and Mac) for too much longer. They are probably going to replace Google Maps, but leave Youtube around (since its an XBox like money drain, and a lawsuit magnet). If they hand it over to Bing, or Yahoo, that is 3-4% browser based search marketshare lost on PC, and over 60% on smartphones.

    2) They have pissed of Firefox, and if they switch to a different default search engine, that could be another 10 or so percent of marketshare lost

    3) They have their hands in EVERYTHING. People were already concerned about them owning all their data, and over and above that Eric Schmidt goes and makes silly comments about people should not be expecting privacy.

  11. I don’t really see why handset-makers would be pissed at Google. The problem with Zune and PlaysForSure is that the two are not compatible. Is there anything preventing Motorola or anyone else from building an Android-phone that is as good or better than the Nexus? The OS is available to all for free, so that’s not the problem. Google does not have access to some magic-hardware that is not available to others.

    • All non-iPhone vendors are competing for the same dollar. If Google is successful, it simply means fewer available dollars for others. If Google isn’t successful, then the whole Android brand suffers greatly, thereby impacting every other player in that camp.

    • Sure, but I don’t really see any difference in Motorola competing with Google than (for example) Motorola competing with HTC. Hell, Nokia was competing with lots of other phone-makers, while they were all partners in Symbian.

      Yes, Google is the creator of the OS. But the OS is free, anyone can use it for free. So there’s no financial benefit as such (if Google sold the OS, they would be at an advantage, since they would just be moving money from one of their pockets to another).

      I think Google would enter the hardware-business because HTC, Motorola and others have shown themselves to be incapable of designing a phone worth a damn. Sure, Droid is full of features, but features are not enough.

      It seems to me that Nexus is an attempt to increase Androids overall market-share, as opposed to it being an attempt at killing other Android-using companies. If those other companies are harmed, then they have themselves to blame.

    • Motorola doesn’t know how to write a smartphone OS which is presumably why they are using Android to begin with. Google does.

      Now the creator of Moto’s OS is teaming up with Moto’s direct competitor (HTC in this case) to compete against Moto. How’s that desirable from Moto’s perspective?

      Further, Moto’s (new) competitor (Google) obviously knows how exactly they want to advance both the OS and the core apps and services way before Moto gets to know them, at each iteration.

      So now Moto is at an innovation/planning timeline disadvantage. Remember, also while Android is free, what makes the platform distinct and competitive — Google apps and services on it — are proprietary.

      To the extent that Moto takes Android and ‘forks’ it, they’d be fragmenting the market, which remains as an obvious issue not just for others but eventually for Moto too.

      In the end, Google’s Nexus proposition is for every other Android vendor to be satisfied with the leftovers from whichever subcontractor Google decides to bed with.

  12. On many fronts, Apple is winning the phone game and all of the players are playing catch-up. Then you have the App-eco system and it’s lights out… all of this with Apple making it look easy. Steve came out in January 2007 and made humble goals public (“… just 1%”) for the following year. Nailed it with a two million cushion. It’s looked like a cakewalk since.

    The problem with these handset people is this: they’re not only competing against the iPhone 3GS, their competing and right soon, the iPhone to be announced in June 2010 and the one in June of 2011. The Palm Pre really had no shot. They had one bullet in the chamber to hit their mark.

    What I wonder about Google and their phone is the same thing that I wondered about the Pre: “WHAT IF?”

    What if… the Nexus is really popular and a threat to the momentum that the iPhone has blazing? What if… the Nexus is very good. How fast will Apple jettison their current blueprint of an upcoming phone and instead leapfrog that and introduce the iPhone they planned for later down the road, say the one planned for mid-2011. They’re working on details now. It would mean probably a lot of R&D time and money wasted in the short term, but certainly worth it in the long run.

    And it certainly will be worth it to Apple’s customers.

    Steve Jobs once told the makers of Segway (and I’m paraphrasing) “You’ve only got one chance to do this right. Mess it up, even slightly, and your customer will never trust you again.” That’s why their new products are generally very well received… they consider every possibility before the product hits the market.

    Google has a shot. I look for forward to the duel.

    • James Gowan Says:

      “On many fronts, Apple is winning the phone game and all of the players are playing catch-up. Then you have the App-eco system and it’s lights out… all of this with Apple making it look easy.”

      Right in so many ways. Every other platform is still trying to catch up to some things the iPhone app store had on day one.

      But it’s a very weak ecosystem, that has a lot of apps. The Android ecosystem is significantly stronger, it’s market application is significantly better, etc.

  13. Part of the problem with this analysis is the implicit assumption that only Apple can deliver the best smartphone experience.

    Who else is meant to compete? Obviously Google is diversifying from it’s core, Microsoft’s platform strategy also has weaknesses, pure hardware makers can’t compete on the end-to-end experience. Palm can’t get the momentum by itself because of Apple’s lead and iPod factor, Android/WinMo can only get momentum by playing the opposite to Apple’s sole provider model, but if they do they lose end-to-end control, and they suffer from fragmentation, or if they want this control they compete with their partners and licensees.

    So we’re left with only Apple, all hail the new, supremely placed overlords, lets hope Steve treats us not too terribly!

    My point is that of course anyone who competes is going to be at a disadvantage if you analyse it from the perspective of how well the iPhone is currently doing, because Apple truly was the confluence of all the right bits at the right time, and dominate the current business model and have a mighty marketshare lead with aid from the iPod.

    But looking to the future, can anyone compete? They are obviously going to have to do something different. Something that leverages an advantage that Apple doesn’t have. Google seems like exactly the company to do this.

    Forget that Google is a search company. They’re an Internet Scalability company. They can leverage the data aspects of the phone to play to their strength.

    Google voice, VOIP, search, total integration with online services, pure data service, etc. The iPhone is the PC of mobile, Google wants to be the Internet of mobile. There are dangers everywhere with this strategy, cannibalization of partners (but I’d argue the fact that Android is open is at least partially a counter to this), diversification from their core, potential brand damage, overreaching, monopoly and privacy implications.

    But if not Google, who? Microsoft perhaps, but they face all the same problems, and would presumably have to compete by doing what Google is trying, where do they succeed in this analysis in comparison to Google.

    • “Part of the problem with this analysis is the implicit assumption that only Apple can deliver the best smartphone experience.”

      Is that really so unreasonable an assumption? Which other company has demonstrated the ability to deliver a great consumer experience? You’d need competence in interface design, media management, cloud computing, device manufacturing, marketing, high quality standards and long-term thinking, at the very least. Other companies have demonstrated one or two or several of these, but not all, at least not yet.

      The success of the iPhone is largely the result of the success (and lessons learned) the iTunes (Music) Store — the infrastructure involved in managing millions of user accounts with billions of transactions and terabytes of data is no small feat — which is itself largely the result of the success (and lessons learned) of producing the iPod, which is itself largely the success of developing OS X, etc.

      Apple takes small steps, develops expertise and competence in new areas first on a small scale, and then leverages each to dominate a new market — utterly the antithesis of the current Google and MS scattershot “see what sticks” approach. It’s taken 10 methodical years to do, which the author mentioned in his article, which time competitors don’t have. So implying that no one else is in a position to deliver a great smartphone experience (which is not to say that no one else can, ever — don’t misunderstand me) seems entirely reasonable.

    • good points…just to add…a metric that can be used to show the iphone’s dominance. iphone’s marketshare of total US smartphones outstanding is 25% vs. iphone’s disproportionate 55% share of mobile traffic. That said, Droid has 1 million smartphone users out of 36m total SP users yet they have, according to the same admob report, 20+% of SP traffic.

      After those two users, the share of mobile usage vs. share of phones outstanding becomes fractional (i.e. RIM has 50% phone share, but 15% mobile usage share…0.3x vs. 2x for aapl and 20x (~!) for android.

    • BTW, people keep forgetting it but Apple does run one of the largest and certainly one of the most profitable online operations in iTunes media/app stores. (Without having to label anything ‘beta’. :)

  14. I think you know you are over stating, exagerating, or deliberately mis understanding what is happening.

    “Microsoft management realized the futility of “one OS, many hardware manufacturers” approach (as we underscored previously) in an internal memo from Steve Ballmer:

    In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones—providing choice as we work to create great end-to-end experiences.”

    total mischaracterization of what he said. He announced the single strength Apple has, and a good counter strategy. Nothing Microsoft does is futile, it just doesn’t have to succeed everywhere. It will dominate PC’s indefinitely, and everything it does relates to that.

    The Nexus makes a fantastic reference build. Just as the Google Ion did, and the ADP.

    The XBOX is clearly a success. Microsoft could have milked that a lot more, but it instead made a market share play. And now how many people will be paying for XBOX live for the rest of their lives? It’s a valuable demographic too.

    HTC will make any phone, for any one, if it has a reasonable chance of success. I don’t actually see what the blogosphere sees new in the Nexus.

    • 1.
      Re: Ballmer’s remarks, wrong on 3 counts. First, the author didn’t mischaracterize him; you gave him too much credit. What Ballmer announced is misleading and irresponsible at best and grossly incompetent at worst.

      Second, Apple has more than a “single strength”. Do I even need to explain this, or is it already plainly self-evident to any unbiased observer? Just in case: vertical integration, marketing, software design, hardware design, 3rd party vendor relationships, retail operations, supply chain management… I could go on.

      Third, Ballmer didn’t announce anything like a “good counter strategy”, he announced the impossible: there’s no such thing as trade-offs without compromise, that makes them compromise by definition. That is, any strategic choice involves trade-offs: either you can adopt the “narrow and complete” experience that Apple, RIM, Palm, et al. have adopted that requires tight control at the expense of market share, OR you can adopt MS’s license model that offers the potential for broad market penetration but sacrifice the end user experience because it requires 3rd party vendors with differing priorities to execute competently. You can’t have both, which is what Ballmer said they just decided to do. It’s like saying, “Customers are preferring our competitor’s white device over our black one. So we have decided today to produce a device that is both black and not-black.”

      I know what you meant by “the XBOX is clearly a success” — that it has positioned itself well as the principal rival of Sony, the market’s previously established player, and it has seen respectable sales. Most people unfamiliar with the matter would probably agree. But surely you know the truth, and I don’t know on what planet a device that has, to date, done nothing much more than lose $6 billion (anybody know the exact figure?) and fail at a Microsoft-reported hardware rate north of 50%, could be considered a success. Products must be developed, manufactured and sold for a profit for at least a little while before we can call them marginally a success, let alone clearly one. Can we at least agree on that last point?

    • Nathan Says:

      “single strength”. Do I even need to explain this, or is it already plainly self-evident to any unbiased observer? Just in case: vertical integration, marketing, software design, hardware design, 3rd party vendor relationships, retail operations, supply chain management… I could go on.”

      All of those follow from it’s single strength. And said strength is the opposite of google’s. Bringing it back to the article, Apple does Hardware and Software, that is it’s strength. It’s poor at writing software for other peoples hardware.

      Google is good at writing software for other peoples hardware. It is a good idea for them to make reference hardware like the Nexus, but their hardware would just be a vehicle for the Android platform. It would be used to push the whole platform forward.

    • “All of those follow from it’s single strength. And said strength is the opposite of google’s.”

      Forgive me — I’m really not trying to be dense or difficult, but this just doesn’t make any sense to me at all. You’re saying that each of the strengths of Apple that I mentioned (and that you appear to agree with) are outcomes of their “single strength” in integrated hardware/software development? As in, Apple’s ability to market well (Think Different, Switch, Get a Mac), manage supply chains (always make sure to have enough product to sell without outages and to negotiate ever cheaper components), Web design (company site, store, plus iTunes Store), user interface design (OS X, iPhone, pro apps) and retail sales operations (dozens of highly profitable storefronts around the world) — and others I could mention — all stem from their offering a “narrow but complete” experience of integrated hardware/software?

      If so, what about Palm and RIM? They offer the same “narrow but complete” experience, but demonstrate few of these other strengths that Apple has? I can’t be the only one not to understand this statement.

    • Not trying to be obtuse, but what exactly is ‘reference hardware’?

      Something that doesn’t do well in the marketplace?

  15. Google must have woke up somewhere along the way and had an epifany of sorts. For everyone else, ad/search revenue would be icing on their cakes. For example Apple has hardware revenue as their cake. They must sense that Apple is thinking about topping their cake with some icing. Let’s see, where can we get some icing? Can search/ads be far off for any of the mobile players? Is google involed with that? Lots of trouble ahead for google I think. In the mobile space google has discovered it has the icing but no cake. Search/ads is really all they have. The only explantion is that they have already been forced to take really tough action and have been preparing for that they now see as enevitable – to enter hardware in Mobile at least. Probably desk top can’t be far off.
    Kontra – you must be right.
    1 – they must stop or at least slow Apple down. Someone in your comments said google has shown desperation. I shrugged that off at first but maybe there are. I think I can, I think I can… They NEED to believe they can stop Apple.
    2 – they are very disturbed by Apple’s sucess. The time for drastic measures is much closer than anticipated a few years ago when they first began preparing for entry into hardware.
    3 Arrogant – not with an 800lb Apple Gorilla in the mix to take on. But they must maintain an distinct air of confidance.
    Desktop search must be less complicated than mobile.

  16. Googles, man in the middle, ad revenue strategy will be commoditized!

    Too clever by half! Google is flying high right now. It was the most clever of all the first movers at arbitraging the resale value of their search gateway captive eyeballs to advertisers by leveraging the value of their very excellent search service to web surfers. Google gives nothing to users for free. They are paid at windfall profit levels by the advertisers. Like all other high margin middle man arbitraging operations, it is just a matter of time before the forces at each end point of the arbitrage value chain start looking at ways to commoditize and eliminate the high margins extracted by that monopoly middle man. The web offers so many possible partnering pathways by which to accomplish this dethroning. The most obvious is a direct payment from advertisers directly to the every eye balls that are willing to put up with the ads in order to receive something for free. That something for free, could be content/services like books, magazines, newspapers, music, movies, search, maps, online apps from Google, Microsoft or others. That something for free, could also be extended to even more appealing things like free wireless data plans or subsidized/free mobile devices paid directly to those, end user eye balls, by the advertisers for tolerating ads embedded into all manner of services/webpages in exchange for said freebies. Now if device sellers like Apple, Dell, HP, Nokia, Motorola and other could guaranty the delivery of those ads via hardware lockdown methods that eliminate ad blockers…you get the picture. What if customers don’t want those annoying ads? It is the customers choice! Just pay a lump sum to the device middle man, this lump sum then replaces the embedded ad revenue that perviously supported your free content/services/hardware and the ads are then striped out by the lockdown-hardware. The lump sum payments from end users can then be divvied up to the content/service/hardware providers as a replacement for the lost ad revenue, with the pay outs to the content/service/hardware providers being based on content consumption logs. All content/service/hardware can then be subsidized/free or paid, at the consumer’s option! Everybody wins, the content/service/hardware providers get paid for their goods via a proportional centralized payment schema, the advertisers get willing end users with guaranteed ad delivery and the end users get a full range of choices from fully paid to fully ad subsidized content/services/hardware. Now I think it is worth noting that Apple has, of late, taken out patents on just such hardware/software ad delivery lockdown technologies and is building out a very large server farm facility. Coincidence, maybe, but I thing Not!

  17. I disagree with the idea that Google is really “diversifying” or seeking new revenue platforms. No matter what the software or device look like, Google’s strategy is the same: monetize with efficiency and using the numbers. To me Google’s long term strategy, mission statement if you will, is simple and far reaching – give people access to Google anytime, anywhere, on any device, through any interface. Google wants to be the first contact of your interaction with the rest of the world, so they can leverage their expertise in search and input interpretation to present you with ads. Google is the ultimate Matrix. Gates wanted a PC on every desktop. Google wants Google in every person’s hands, in front of every pair of eyes before you focus on want to see, and transferring your every call. So the smartphone and netbook plans are inevitable, but I think the success of the iPhone and App Store surprised even Google, and the pressure is on to take the 90% commodity new device market, knowing Apple will always own the lucrative 10%. To that end I think Google will do whatever it takes to appeal to customers and appease manufacturers, because as you pointed out, the only other company that can subvert the Google experience is Apple, and I get the feeling that in 5 years the Mac platform will extend from iTunes to everything you need to do online, from its own search to maps, and Google apps, like the Chrome browser, are merely nice options but not necessarily the main attraction on a Mac device after that. Google knows it must win that commodity 90% in the next personal computing market in the next 5 years.

    • Yes, but that’s exactly the rationale Microsoft used to justify ‘diversification’: go into any territory, spend any amount, undercut any competitor and give away any product so long as its two revenue generators Windows and Office reigned supreme. Switch search and advertising above and you got Google.

      The kink here is that at the current rate Apple already has about a third of the smartphone market, likely to grow up to 40% in share and closer to 50% in profits in the next couple of years.

      If Nexus was not a smartphone, but was designed to capture that 90% you’re referring to, it’d be easier to understand. As it is, it looks to be yet another high-end smartphone, smack in the middle of Apple’s territory. That part is harder to explain.

    • I’m still having trouble w/ the microsft parallel — RE: “the rationale Microsoft used to justify ‘diversification’: go into any territory, spend any amount, undercut any competitor and give away any product so long as its two revenue generators Windows and Office reigned supreme”

      i find this a little hard to swallow — MSN/BING;Xbox;Zune – were indeed squandered attempts at “diversification” – away from their cash cows.

      but google isn’t diversifying away from its cash cow…it is using different tools to drive users towards its cash cows

    • I think the parallel here between Google and Microsoft really only boils down to this – in separate decades, a market dominant giant recognized Apple as the most dangerous long-term rival. Each of the big 3 has its own distinct DNA and historic cultural opportunity. Until recently Microsoft’s thinking is still very limited to the a discrete box – Windows phone, Zune, XBox. Google seems to be more fluid – their “product” is not limited to the traditional H/W or S/W but services with a innocuous interface that’ll plug-into and run on anything – Google bar on IE, PicasaWeb in iPhoto.

      Our old metaphors only go so far in this kind of discussion. The “commodity” device in years to come will be more than what the “smartphone” were capable of in the past. Everyone I’ve spoken to put the iPhone in a class by itself, and lump the rest in a group. So I think the business model for the Rest may be limited to the commodity routes. The really interesting questions I think are, can Blackberry survive in this competition, and if not who will eat RIM’s lunch? And when will one weakening brand/platform (Palm?) give way soon to offer Microsoft another chance to get back in the mix?

    • If Microsoft had any brains or balls, they’d adopt Android yesterday. Changes market positions in so many unpredictably delicious ways. Not as if they have so much to lose.

    • I don’t know, Kontra. True, Microsoft does seem to be plenty short on brains lately. But balls they’ve got. That being said, even I would never expect them to sleep with the enemy by adopting Android. However, I was truly expecting them to make a play for Palm at some point – I thought webOS would be perfect for them. That they did not go after Palm, and considering what happened with Danger and their “Pink” project, the true problem is revealed: their corporate ego is too big for them to allow that Windows Mobile is the unmitigated failure that it is. For them to adopt webOS or Sidekick would be to admit that their previous strategy was all it was said to be and less, and they are to arrogant to ever say as much. As you stated, the current management will never be able to lead them out of this morass.

    • But balls they’ve got.

      Only if you have a microscope. :)

      I mean, the time to do something dramatic is now, not 2-3 years from now, after the next version WinMo comes out and is shown to be too little too late.

  18. Prime motive for Google is to have google search on as many devices as possile. So Android has to align to that end. But iPhone is so popular it goes a long way in supporting that end already with tight integration to google and all. Obviously, google’s other motive is to weaken winmo. Problem is handset manufacturers use android to target iPhone. Steve Jobs himself was qouted quite a while back saying he can’t understand this whole google phone thing. If he can’t figure it out then no wonder there are more Q’s than A’s. I can’t believe that google’s intentional target is Apple so there must be more to it.
    MS is far from down and out. They still have amazing profits and don’t seem to be too shy about failing as often as needed to acomplish a goal.
    I don’t know how valuable Apple is to google but google has already alienated Apple for starters, no matter what happens from here on.
    If MS can write search code how hard could it be for Apple? Blindsided indeed. How valuable is google to Apple?

    • For Google to start a frontal assault on Apple has to mean Google is:

      1. convinced of its ability to stop/slow down Apple,
      2. really disturbed by the growth of the iPhone platform to risk so much, or
      3. being recklessly arrogant.

    • It’s quite possible that 2 is true. Apple has put GV on hold. It has rejected Latitude, while having bought Placebase. It supposedly tried to buy AdMob, which is in Google’s ad space. It has bought lala, after there were rumors that Google was interested in web-based music. We don’t know whether Google Navigator has already been offered to iPhone and was put on hold, or whether it never was offered – though Google made a comment that its availability on iPhone was up to Apple. And finally, Apple removed Eric Schmidt as a director (though he had not been involved in iPhone discussions). His removal may have been to satisfy govt concerns on the surface, but it may be that Jobs decided that even the non-iPhone portion of Apple’s business was going to start competing with Google, i.e. in the cloud.

      If Apple ever removes Google search (in Mobile Safari, and Safari), Maps, and YouTube from their prime positions, then we’ll know for sure that a war has been long underway.

  19. 1.) google wave is pre-beta.

    2.)Not sure why you think this is a direct-to consumer ploy. Reuters: “Google Inc will sell a version of its own-branded cellphone for a reduced price to U.S. consumers who agree to a service contract from Deutsche Telekom’s T-Mobile USA, a source familiar with the matter said.”

    • Re: Google Wave: An app that goes out to more than a million users stretches the notion of pre-beta, even for Google.

      Re: D2C: Until Google explains, nobody knows, including Reuters, which is exactly why I postulated above:

      “So let’s assume, as an exercise, that Google will soon sell a branded smartphone direct to consumers.”

  20. To all of those who want more frequent writings form Counternotions, I say this.
    In an ocean of blabber mouthed, say anything report any inane rumor about Apple, this guy speaks only when he has something to say. It is the nature of this blog to my mind, that it has a rare, but very high quality and profound things to say.
    He Counternotions, keep up the quality rather than quantity model, please?

  21. i think you are way off. prior to iphone, nobody used the mobile internet. mobile phone makers were clueless and/or could not care less about getting people onto the mobile internet. if nobody is using the mobile internet nobody is going to be using google. google therefore takes matters into its own hands and develops software that cellphone makers and other software developers can use to make an iphone-like experience, thus driving more eyeballs onto the mobile internet. that’s all google wants. if google ever has any input on hardware, it’s merely to make the navigating/user experience better — b/c they know if the user experience sucks, people won’t use the mobile internet. they don’t want to control anything other than making it easier to launch a mobile web browser and navigate it the same way people have done it for years on terrestrial. google makes ZERO money on android market share/sales. i don’t know why you imply otherwise.

    • Google had two opportunities with HTC and Droid to shape the software and UX of Android phones. WebKit is used by everyone (except MSFT) so it’s not correct to say that smartphones (Nexus is one) aren’t otherwise using mobile internet.

      I fail to see how a Google branded, direct-to-consumer phone changes any of this in some substantial way. Frankly, it should be obvious by now user experience is not one of Google’s core competencies, witness Google Wave.

    • I believe he is talking about the user. have you tried to send an email on any phone not an iphone… its a joke.

    • But since Nexus is a smartphone, we’re not talking about any phone. Email isn’t that bad on other smartphones, especially BlackBerry. Not as good a presentation as on iPhone but not enough to justify releasing a branded phone D2C either, was my point.

  22. very thoughtful piece.

    i have to think Google really is NOT going to start selling phones itself. for all the reasons listed. they would be much smarter to offer a “GooglePhone” certification for any/all OEM/telco Android smartphones that comply with a specific set of fully interoperable specs. That would mostly avoid the fragmentation problem that is their biggest longterm issue.

    People are jumping to conclusions that the “Nexus” phone is intended to be sold – by Google. but instead it just may be the non-exclusive prototype for such a Google standard, and then actually sold by TMobile or whoever.

    this would soon force everyone selling Android products to fall in line.

    • Yes, there are a number of far more reasonable scenarios for Google to pursue, as you suggest. (My purpose in this article was to explore the cons of the direct-to-consumer strategy which got everybody in a frenzy.)

  23. Folks, thank you for the kind words. Apparently, it’s been 109 days since my last article. I guess the next one will be when Microsoft introduces its own phone? :)

  24. This is clearly a desperate move for Google. Given that it does not even support the AT&T 3G band, Google may want to look elsewhere to get sales.

    The only explanation I can come up with is to stop the fragmentation in billing, store, APIs and UX that naturally comes when carriers and dev manufacturers want to differentiate and control. Though open source, no one is required to use what Google puts out and we already see variant APIs such as MotoBlur, etc. And we haven’t even gotten to hw variance that will arise e.g RFID payment, 3-axis gyro, etc.

    I think they are mindful of the J2ME fragmentation disaster and are trying to stanch the problem even at incredible expense to the business model. It is a shame.

  25. Agreed, welcome back and with a great piece to boot.
    I think Google is vulnerable on many fronts and like Microsoft, the vulnerability increases with each step taken towards diversity.
    They share the same dinosaur like sloth that has overtaken MS’s core market in desktop ad revenue through all the different channels is just about saturated. The movement away from print publishing to digital media will afford them a short breather as the market adjusts but essentially growth is stagnating. Short of acquiring all ad based companies there is little they can do on that front.
    Add to that the counter notion that you can have services for little cost without all the intrusive ads ~ a la Apple, and suddenly your core market growth goes into reverse.
    I’m sure Google is quite aware of the problem thus the prospect of a Googlephone must seem like a good thing. Considering all the points you state(very well presented by the way), they would appear to be wading into deep deep waters – a place where Apple stands on very long legs.
    Another point to consider. How on earth are they going to compete with Apple when Apple spends so little on development? By this I mean that Apple’s focus is so fierce that the risks have all but been eliminated before the product is released. Apple have the vision, design expertise, production environment and marketing nerve that is all but impossible to reproduce – certainly not in a short space of time.
    It took Apple, with Steve Jobs return, almost 10 years to start pulling ahead of pack by dint of a series of strategic decisions that laid the foundations for all their current success.
    I don’t think Google has 10 years so throwing money at the problem, like Microsoft, is probably their only option and like Microsoft, the main effect will be to negate the efforts of their main rival in their core market. So it’s Google v MS to the death.

  26. Very interesting read.

    I really don’t see how this works out. Competing with your partners? As you said, it doesn’t work out.

    However, where else are 3rd party phone manufacturer’s going to go? Symbian? Windows Mobile? Create own OS?

    This should be quite interesting (succeed, fail or meh) to watch play out.

  27. I like Google search, but when they they 1) got into phones AT ALL 2) chose the “let any idiot play” approach–even Motorola, for godssakes(!) one of the most incompetently managed companies of all time– I KNEW they had “FAIL” written across their foreheads. The only reason we are still even HEARING about Droid is that tech pundit scmucks like to pump their page views and see “horse races” where there is none.

  28. Finally, another post! Thanks.

    I expect a lot of comments from Google fans. Google has been involved in all “major” Android phones and they have all without exception disappointed and failed. I do not expect anything different with this new phone from them.

    Apple has billions of data points from their App Store that I am sure they are mining looking for insight and I think the Placebase and Lala purchases are pertly informed by that, Google has none of that.

    iPhone OS is currently sitting at about 58 million devices, by end of the quarter iPhone OS should have an installed base of +70 million devices and +150,000 apps.

    A lot of catch up for Google to do while pissing off their partners and fragmenting the Android platform…

  29. Just wanted to say that I really appreciate this blog, and that it’s nice to see you posting again after a few months of silence :)

  30. One thing Microsoft could do, is to start competing with IBM and their Analysis initiative. Personally, I think there is a huge market in analyzing business data and draw smart conclusions, but in the end it comes down to how you do it and I’m not sure IBM is the player to do it well. Developing Word processors and Sharepoint servers is just 1990’s. Otherwise, I agree with everything you said about Google.

    • MSFT ties its BI stuff to SQL Server Analysis Services, IBM mostly to its consulting services, even though they bought Cognos and a few other tools. Neither has a vision wider than their current insular approach.

      Also remember data can and will be queried on mobile devices, but they are so far from even thinking about it.

    • I won’t be surprised if Microsoft starts copying Apple’s business model in the next 3 years. Their billions would still enable them to innovate newer and original ideas.

      The only problem with Microsoft, is when you have the same people, same vision&mission, same paradigm over the last few years, it would be really tough for them to reinvent themselves in such a short time needed for the company’s turn-around. In fact, they’re already so comfortable with their position as the cash cow, they keep themselves pleased by repeatedly quoting in the media that “we SELL millions of PCs every year”.

    • I agree w/Kontra. There’s endless speculation about what Microsoft “could” do, if for no other reason than because they have sufficient institutional girth. But the fact of the matter is, they cannot, at least not as currently configured. Microsoft has no corporate “muscle memory” with respect to competing or innovating. They only know how to generate FUD, and when that doesn’t work, there’s always the option of purchasing and digesting a perceived rival (see Danger/Sidekick for the most recent example), or forging dubious “partnerships” with those too big to devour, only to pull the rug out later (ask IBM about that one).

      That they suddenly seem clueless is a testament to the fact that they are no longer the only gorilla in the room. Until stakeholders finally get fed up and demand a management overhaul, don’t expect any sudden epiphanies at the helm of this tanker.

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