In this post I want to discuss Google’s expected outcome given its Android strategy. Apple released the iPhone in 2007 and quickly gained leadership in the mobile phone market. Google joined in the Open Handset Alliance, a consortium of leading device manufacturers, wireless carriers and chipset makers, and released Android later the same year to compete with Apple on a more direct footing. Google hoped Android would help it move from the desktop to mobile and allow it to put services in the hands of users where they can be monetized relatively easily.

Google’s Android strategy was providing a unique and positive mobile Internet experience. It bundled application and browser assets with Android to support this user experience: Maps, YouTube and Chrome. It contended that Android would lead the charge in generating new mobile search revenue for Google, which at the time was monetizing search on approximately 200M desktop PCs and Macs[1]. With over 2 billion phones sold annually, the upside was rewarding enough for Google to open-source Android and encourages developers to build applications on the platform.

Google’s mobile vision from 2007-2012 could be stated simply thus: “get all users and businesses in the world to use Google apps and services, encouraging them to spend time on money-making products”. The core of this strategy was the Google platform, which refers to the computer and mobile software and the hardware resources needed to provide services, and hinged on the following key components:

1. Complementary markets: create complementary markets that compete with other mainstream markets such as OS (Android, Chrome OS), Browser (Chrome), Device (Chromebook) and Network (with Google Fiber and Google Wi-fi with Hotspot) ensuring more and more people engage with Google
2. Products: continue to innovate in the area of search products such as AdSense and AdWords.

With Android, Google expected to become the Gateway to the Internet, providing every service an online user could possibly need, and monetize the interaction via search and context-based advertisements.

So how did Google’s mobile strategy fail to achieve Google’s expected outcome? To start with, Google miscalculated how its competitors could adapt Android to suit their needs easily. Consequently, Google’s market power depleted because its strategy failed to anticipate developments in the following two areas of the Android ecosystem:

1. Customization: Android lends itself to easy customization
2. Competition: Samsung’s Android ecosystem and share of wallet

Customization

Android, being a Linux based and open sourced OS could be customized by developers and OEMs. This was done to better suit the device it was used on or to layer an alternative user interface on it. Examples include HTC’s Sense and Samsung’s TouchWiz[2].

Walled Gardens

The situation became difficult for Google when competitors customized Android to make it more difficult to use Google’s services. For example, Baidu is the default search engine on 80% of Android phones in China[3]. Samsung also has its own email client and “Internet” browser, and it also now preloads with Samsung Apps, on the Galaxy S5. These customizations make it highly visible to users because they are loaded on the home screen.

Facebook has done the most damage. The user interface of its app for iOS and Android devices creates a single pervasive entity that makes messaging, advertisement display and search features easy to navigate to and use. These customizations certainly reduce traffic to Google’s core services. Facebook has become a “walled garden” into which Google AdSense cannot penetrate either.

These customizations to Android keep the market power with the developers, Samsung and Facebook in this discussion, and less with Google. Yahoo is also gearing towards this direction with its own strategic investments in building a product portfolio that has been strengthened through the recent acquisitions of Tumblr and Summly.

Competition

Samsung

In Q1 2013, Android produced an operating profit of $5.3B globally and Samsung took 94.7% of this profit (Frist & Sullivan). It is possible for Samsung to “fork” Android leaving Google services completely out of the next version of its phones thus leaving Google at an extraordinary disadvantage.

Apple

Google most likely considers Apple to be the primary threat as a platform sponsor today. Apple has done a great job at controlling the mobile value chain: Network -> Device maker -> Operating System -> App Distribution Store -> Primary App -> Services

Apple has been able to keep innovating and vertically integrate into device components (the glass manufacturer GT Advanced), distribution (Apple Store) as well all these years. The main differentiator for Google has been its search capabilities that Apple could potentially match or exceed with Microsoft’s Bing. Also, what Google makes up in ad money by showing targeted ads, either in-app or in the browser via AdWords or AdSense, Apple is more than able to make up for by charging the carriers an up-front fee per iPhone sold.

Google’s biggest problem with Apple might lie with customer loyalty[4]. 31% of Android customers say they might consider switching to the iPhone giving Apple a stickful of Android users in the process. Clearly, Apple consumers are more loyal to the brand than any other competitor, including Samsung[5].

Value Metrics- A Survey

The metrics of relevance in the Mobile Industry are listed with performance numbers from Google and Apple.

1. Revenue generation: The iOS App Store makes $5.1 million in daily revenue, while Google Play brings in $1.1 million per day[6].
2. Monetization strategies: Freemium apps as a business model continue to be very successful for a variety of categories and iOS users tend to make more in-app purchases vs. Android.
3.  Size of the app stores: App Store and Google Play have over 1 million apps although Google Play reached it first in July 2013. The App Store matched that in November 2013[7].
4. App quality: iOS apps were ranked as higher in quality than Android apps, with an average ranking of 68.53 vs. 63.34[8].
5. International markets: China strongly drove iOS App Store growth, with exceptional gains in both downloads and revenue. In terms of downloads Google Play gained more strongly over iOS in the Emerging Markets of Brazil, China and India[9].

Other metrics such as market share, category growth, store approval rates do not add to either company’s differentiated position in a big way.

Recommended Changes in Strategy

Google needs to develop a strategy that mitigates the risk of the Android market further fragmenting and ensures the continued growth of its core advertising business. The following strategy would ensure market power remains with Google.

1. Vertically integrate into operating systems, a range of devices and
2. Manage the end-to-end user experience of an Android device (Marginalize the OS)

This strategy would enable Google to achieve the following goals:

1. Capture market share from leading laptop vendors in the price sensitive and lightweight-use segments
2. Enter new markets globally with help from OEMs and also build partnerships with local retailers
3. Recover the market power it lost when it released Android to the developer market

Vertical Integration

Google’s move into device OS and hardware at the outset looks like a defensive strategy in that Google does not derive significant monetary benefits from the sale of either the OS or the hardware. It has positioned itself at the high end with its Chromebook Pixel and distributes Android freely. By doing so, Google has signaled its intentions of playing ‘platform sponsor’ clearly to other market entrants such as HP, Samsung and Acer.

On the other hand, Google is also playing offense with the introduction of a mobile OS (Android) and a desktop OS (Chrome OS). Hardware manufacturers such as HP, Samsung and Acer carry the Google torch forward by bring their customers newer and sleeker products at much lower price points than the traditional laptop. All this new market energy brings more user activity to Google via interactions these users have with Google apps and services.

This strategy also empowers users with “instant search” by being omnipresent in devices, browsers and laptops. Google has already vertically integrated helping create and distribute the Android, Chrome operating systems, followed by entering into partnerships with OEMs to create the Nexus range of phones and Chromebook devices. Google has created and also entered the laptop complementary market with Pixel, but it has priced it at the high end to not compete with other market entrants such as HP and Samsung.

Marginalize The OS

Google should continue investing in Chrome OS as a browser-based system and make the move to mobile utilizing the synergies between Chrome OS and the Chrome browser. Google can blur the line between the browser and the operating system. It needs to grow the user-based Chrome browser that would handle all user interaction, marginalizing the native operating system. This strategy would directly counter Samsung’s dominance of Android using large-scale customization that block out Google services from the user.

Chrome can also be managed much easier in the market because it is a browser and supports a push-based update mechanism like other browsers do. Updates and new features can be made available faster and hassle-free to users who are always on the go. At this level, Google will match Apple that has been using an iOS push-based update rollout schedule with its devices for years.

Execute!

What is working for Google is that it is still capable of product innovations like Google Glass and the self-driving car, and monetizes over 2 billion views per week with YouTube proving that it can still bring in users to interact with its Platform. Google should continue to execute on the strategies discussed in this Brief if it is to wrest market power away from Apple and Samsung.

[1] “Google ‘Opens’ a New Front in the Mobile Platform Wars”, Frost & Sullivan, 23 Oct 2008

[2] “How do you Solve a Problem like Android?”, Frost & Sullivan, 12 June 2013

[3] Fool “Google has lost control of Android”, http://tinyurl.com/cxfa5r6

[4] “Apple’s iPhone has 89% retention rate…”, Sept. 2011, http://tinyurl.com/pwhjm3s

[5] “Most Valuable Global Brands”, Oct 2013, http://tinyurl.com/m3t3zfo

[6] ReadWrite, http://tinyurl.com/qd8xlsz

[7] Mashable, Oct 2013, http://tinyurl.com/ngv4c9j

[8] ReadWrite, Jan 2013, http://tinyurl.com/p6mf8qc

[9] AppAnnie, Apr 2013