Is Android Google's Achilles' heel?
18th Dec 2011 | 10:00
Patent wars, poor tablet sales and customer confusion
Patent wars and app store woes
Just four years ago, the Open Handset Alliance, headed up by Google, released Android, the open source mobile operating system for smartphones (and later tablets).
The first Google phone was the T-Mobile G1.
Since then Android has enjoyed a meteoric rise, gaining popularity in the smartphone market much faster than even Apple's iOS did on its debut. However, that rapid increase in market share isn't the full story.
There are big problems behind the scenes – problems that could turn Android into a poisoned chalice for Google.
The cost of free
First there are the patent wars, which may help its competitors squeeze Android off smartphones and tablets. Major companies like Microsoft, Oracle and Apple are claiming patent disputes against the manufacturers of devices that use the Android operating system.
These disputes are usually so costly to fight, smaller companies will often just agree to pay patent licensing costs to the larger company rather than spend cash confronting it in the courts. This means Android, a free operating system, is suddenly costing the device manufacturer money to use.
Other patent disputes have had an even bigger impact. For example, Apple gained a temporary injunction in August to prevent the Samsung's Galaxy Tab 10.1 from being sold in Europe (albeit temporarily) after Apple claimed the tablet copied the iPad's design and functionality. How long will it be before the patent wars are enough to put manufacturers off Android, particularly if they mean they have to pay for a 'free' OS and may be prevented from selling their devices altogether?
Other Android worries come from consumer complaints about over-complication due to the many different versions of the OS being run by different mobile phone and tablet companies, and how slow some networks and phone companies have been to provide updates.
There's also the lack of quality control on the Android app market, questions about just how 'open' Android's open source OS is, and no sign of any money coming back to Google to cover the costs of development and deployment.
Has Google bitten off more than it can chew? Is the attraction of Android starting to wear thin, and if Google's dream of mobile phone dominance goes bad, could it take the rest of the company down with it?
Trouble in paradise
This should have been Android's year. In many ways, the project appears to be a runaway success: it's gaining market share at an unprecedented rate – 550,000 activations a day – and Android app downloads are matching those of the iPhone.
However, it's clear that there's trouble in paradise. There has been a litany of woes since Android's launch, which taken together could be enough to put consumers and manufacturers off Google's OS. But before we can understand the reason for this, it may be worthwhile asking why Google developed Android in the first place.
Google's involvement in Android started in July 2005 when it bought a company called Android Inc, which was founded in 2003 by Andy Rubin, Rich Miner, Nick Sears and Chris White. Android Inc was a little known company acquired by Google along with a raft of other start-ups.
Not much was known about it before it was purchased; Android Inc worked in secrecy then, revealing only that it was working on mobile software. In that year Google was snapping up a large portfolio of technology start-ups, but Android Inc still seemed a strange purchase for a company that had made its fortune in online search and advertising.
Remember, this was at a time when the major phone manufacturers were primarily Nokia, Sony Ericsson, Motorola, RIM (maker of the BlackBerry) and Samsung. Between them, they had the mobile phone market sewn up, each with a band of loyal followers, so the likelihood of other companies breaking into this market seemed slim.
Microsoft, a firm with a lot of money at its disposal, had tried repeatedly with limited success. It wasn't until 2007 that Apple, which was then best known as a computer manufacturer, blew all that out of the water with the release of the iPhone. Phones suddenly weren't just for calls and texts – they became portable computers, and the worlds of mobile phones and computing were changed forever.
Google had clearly anticipated this, and didn't want to be left behind. If the world of the internet was to be re-housed on the mobile phone, it needed to be part of that market. As such, it had been busy as the driving force behind the Open Handset Alliance, initially a collection of 34 companies, from handset makers and silicon chip producers to app developers, including big names like Dell, HTC, Intel, LG, Motorola, Qualcomm, Samsung, Sony, T-Mobile and Nvidia.
Together they wanted to create open standards for mobile phones, and in November 2007 they announced Android, an open source operating system based on the Linux kernel that anyone could use for free. Any developer could design an app for it, without the restrictions that Apple demanded for its App Store.
Where's the business model?
It sounds like a fine enterprise, but the business model behind Android certainly left some people scratching their heads. As well as giving out the OS for free, when it started out Google didn't take any money from revenue generated by the apps on the Android Market. How, people wondered, was it planning to pay its way?
Steve Ballmer certainly didn't get it, and was open about his confusion. Speaking at the Telstra Investor Day conference in Sydney in November 2009, he said: "I don't really understand their strategy. Maybe somebody else does. If I went to my shareholder meeting, my analyst meeting, and said: 'Hey, we've just launched a new product that has no revenue model!' I'm not sure that my investors would take that very well. But that's kind of what Google's telling their investors about Android."
Is Android's business plan as flawed as Ballmer suggests? We put that question to mobile technology specialist Allan Nogee, Research Director for Wireless Technology Group, In-Stat.
"I think that remains to be seen," he told us. "I think if you look back 10 years, Microsoft would also say that its business model was better than Google's on the PC, but if you look today, you would have to question that. Google and Microsoft have little choice on how to move forward when the world around them changes.
They are each sticking with what they know and hoping for the best, but things change. Microsoft won the PC OS wars because PC hardware became a commodity and it was the OS that added value. Then 10 years later, Apple beat Microsoft because of operators subsidising smartphones. You might as well buy a Rolls Royce if it costs the same as the Buick."
This isn't the first time Google's business strategy has confused people, and it won't be the last. With the massive fortune Google has at its disposal, it can afford to take punts on expensive projects – particularly ones that may offer as lucrative a proposition as letting it own the smartphone advertising market.
Google's forays into the world of office tools, email, even video-playing services often look like financial suicide on paper. 'Where is the profit?' most company boards would ask. 'Why are we giving these services away free and not reaping any instant reward?'
But products like Gmail, Google Maps, Google Earth, Google Docs, Google Calendar and YouTube do have long-term value, and with Google's profits from web advertising to prop them up for the foreseeable future, they don't have to be successful straight away.
They also have the benefit of ensuring Google occupies a space a competitor would otherwise take over, with its free offerings generally proving more attractive than paid-for ones. And, of course, each of these services has Google's directed advertising shoehorned into it, meaning there is still some revenue coming back. Not to mention the amount of information the company can collect about individual users.
So why did Google create Android?
Despite this, Google really entered a new area with Android – one that could easily fail. We spoke to Allen Nogee, Research Director of In-Stat's Wireless Technology Group, to ask why Google chose to create Android.
"In the last few years, Apple, Microsoft, Google and Intel have all tried to get heavily into the phone business," he explained, "and if you dig a bit deeper, their motives are all different. So Google is a company that makes its money from advertising, currently mainly from advertising to those that use a desktop or laptop computer.
This is how Google financed the projects that it gives away for free – its revenue from advertising. On a PC, the browser is the gateway to the web, which is why Google, Apple and Microsoft all make browsers and give them away for free.
"Since 2007, with the introduction of the iPhone, the balance of power has started to shift to mobile and Google, like others, is well aware of that. If people no longer use a PC to get to the web and instead use a phone, then Google could be shut out of advertising revenue. It doesn't want that to happen, so this is why Google created Android.
"Even if it gave it to phone manufacturers for free, it would pay for itself in mobile advertising revenue, or so Google hopes. Whether mobile advertising revenue will ever match that of a PC is not yet known, but Google knows that if a phone isn't running its software then it has no control of sending advertising across it, so it had to have a phone plan."
We also put this question to Tim Shepherd, Senior Analyst for technology analysis firm Canalys. He told us:
"Google's activities in the mobile space in general, and with the creation of Android, I believe, need to be understood in the context of its wider business model. It is still a company driven primarily by advertising revenues and as mobile devices bring countless millions more consumers around the world to the web, and as connected services on mobile devices become more a part of our day-to-day lives, Google cannot afford to be anywhere but at the forefront of that trend.
"Android gives Google the opportunity to be relevant and a force on mobile, and to get its services and experiences in front of more consumers who will become increasingly dependent on them. This presents a host of advertising opportunities, with the added benefits mobility brings around contextual relevance to consumers, as well as the potential to diversify into monetising cloud services on mobile. This is a lucrative area, and Google sees it as essential to be more than just present here."
With this long term-strategy in mind, we asked Nogee if he thought Google was hoping to make any money from Android at the start. "Google realises that the path from point A to point B isn't always obvious. When it designed its search engine, Google likely never anticipated how much advertising revenue it would get, but 10 years later it looks obvious. It's the same with mobile. Not all the plans are known, but Google knows that if only Microsoft and Apple make phones, it will have little chance of making money.
"Mobile advertising is going to take longer to produce results than PC advertising did," he explained. "I don't think Google planned to make much money on it right away, and it doesn't have to, PC advertising is still paying the bills and will for many years to come.
"The question is after that, can mobile advertising replace all PC advertising? Well, it's likely the amount per phone will be less than per PC that Google will receive. But while there are 1 billion PCs, there are 6 billion phones, and unlike PCs, where many of them never have a human using them directly, every phone is used directly, although not all mobile phones are smartphones."
So there seems to be a necessity for Google to get into the phone market and to control at least a part of it, but how much has it cost it to get this far? What have been the costs of setting up Android in terms of development and advertising? No one knows for sure, except for Google's finance department of course, but everyone agrees that it must be a lot.
Nogee didn't even like to guess: "I'm not sure of the total development costs for Android, but it's considerable." Shepherd had a ballpark figure: "Android development, marketing and related activities have cost tens of billions of dollars, but it is a crucial strategic investment from Google's standpoint."
For any normal company this is an insane amount of money to pay out for something that is hardly bringing in any revenue seven years after it was introduced. Apple, meanwhile, by creating its own ecosystem of tested apps, is bringing in a substantial profit from its operating system, receiving money from each phone and a 30 per cent cut of each app sale.
We asked Allan Nogee of In-Stat why Google seems to be increasing its market share at a very high rate but showing very little return for it, while Apple is raking in the profits.
"There are very different business models going on here," he points out. "Apple makes its money from selling hardware. In fact, Apple makes more profit from each iPhone then almost all other manufacturers. Sell more phones and make lots of money. It's easy to see how the money is rolling in at Apple. With Google, mobile advertising revenue is going to take time to build. Since Google makes money on advertising, just getting a phone in a user's hands doesn't give it any money, but Google hopes to make its money over the long haul with advertising.
"Unfortunately for Google, mobile advertising is a bit immature, so it may take years before large amounts of mobile advertising occur. In fact, since users only keep their smartphones for two years, at least in the US and Europe, Google may not even make its money back on some phones, but longer term, it hopes to.
"It's much like the model for cellular operators," he adds. "It loses money on each phone, with subsidies, but makes the money back in service revenue."
However, Google has been clever in its implementation of Android: it has side-stepped a large cost by leasing out the technology to any mobile phone companies who want to get involved. The cost of creating a handset, publicising it and even distributing it to the public was never borne by Google.
Instead, the phone manufacturers would carry the cost as part of their usual handset release cycle. Google merely provided the operating system. If the phone failed, it wouldn't harm Google financially – unless that manufacturer was so put off by the handset's failure that it turned its back on the Android OS in favour of something else.
This seems like a very clever practice, but it does mean you need to keep the handset manufacturers on your side by remaining an attractive proposition. Android's major competitors seem to have recognised this fact and are starting to pull out the big guns to try to prevent Android's continued market takeover.
However, they aren't training them on Google, but on the suppliers of the handsets. Costly patent cases are cropping up all the time from the likes of Microsoft and Apple against the likes of HTC, Barnes and Noble, Viewsonic and Acer. Each case hinges on the fact that the Android phones issued by these companies are in violation of patents held by Microsoft, Oracle and Apple.
In fact, HTC, Samsung, Viewsonic and Acer have already all agreed to pay Microsoft licences to pay for patent infringements on their Android handsets. This means that while Google gives Android out free to phone manufacturers, they in turn need to pay Microsoft for each Android handset they produce.
HTC reportedly pays Microsoft $5 for each Android device while Acer and Viewsonic are being asked for between $7.50 and $12.50 per device. Amazingly, this means Android is making money for Microsoft each time a phone running the OS is sold, while Google makes nothing.
It's very rare that you get a situation where a direct competitor makes more than you when your product is used. Google's impressive free-to-use OS is suddenly not as attractive once there are costs attached to it.
Google, which isn't actually involved in the patent cases (except when it hands patents over to help it counter-sue those suing it, as it did with HTC against Apple in September), isn't happy about it. In August David Drummond, Google's Chief Legal Officer, described the patent cases as "a hostile, organised campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents."
Drummond also said, "Patents were meant to encourage innovation, but lately they are being used as a weapon to stop it."
Microsoft, of course, disagrees. Brad Smith, Microsoft's General Counsel, told the New York Times in October that, "Patent-licensing regimes allow companies to build on the shoulders of others. They allow companies to use technology and ideas, after paying reasonable fees. They can spend resources on new ideas instead of trying to figure out ways to invent around the work done by others. In that way, patent-licensing is pro-innovation."
Patent licensing isn't new; in fact, most handset manufacturers have to pay fees to other companies already. The first licences to be paid are for the radio technology for cellular communications. Here, companies like Qualcomm, leaders in these technology fields, can receive up to $20 for each smartphone produced.
Then there are the patent licences for media systems, which allow handsets to use the technologies for playing video and music. These cost between $3 and $5 a smartphone. Add the cost of an unexpected $5 to $12.50 patent licensing fee and handset manufacturers' profit margins can be cut considerably.
Litigation, Googorola and forks
Other Android devices have suffered even heavier blows due to litigation, and have been taken off the shelves completely. In August this year, Apple gained a temporary injunction to ban Samsung's Galaxy Tab 10.1 from being sold in Europe.
The sales ban may be lifted now while investigations continue (except in Germany), but the injunction banning the sale of the tablet fell right in the middle of its launch – no doubt costing the company a lot of money in lost sales and colouring the viability of the tablet in the eyes of the consumer. Who wants to buy a tablet which could be discontinued by a court case at any moment?
Each time a manufacturer finds itself in an untenable position from these patent legal cases, it is less likely that it will look to Android an OS it will use in the future. It's obvious that unless Android is placed on a more secure legal footing, smaller manufacturers are going to be put off by the possibility of suddenly being asked to pay for it, or even being shut down for using it.
This seems to be happening already, with HTC, a major player in the uptake of Android handsets, announcing its intention to buy its own OS.
In response to these patent cases, and in the hope of protecting the Android-using phone makers, Google may have inadvertently put another nail in its own coffin. Google announced its plans to buy Motorola Mobility for $12.5 billion (£8bn) in August. In doing so, it will acquire 17,000-plus current and 7,500 pending patents, all of which would help provide Google and its partners with protection against those who want to sue them for patent infringement.
However, as well as the patents, Google has acquired Motorola's manufacturing arm, meaning it could easily create its own phones and tablets. Rumours soon spread that Google was planning to wall off its open source operating system and start producing handsets itself. At the very least it would make sense for Google to favour Motorola when it came to seeing pre-release Android code, giving it the insider view that only preferred partners like HTC have had before.
Google was quick to reassure manufacturers, with Andy Rubin saying in a statement that: "Our vision for Android is unchanged, and Google remains committed to Android as an open platform and a vibrant open-source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."
But there is little question that a seed of doubt will be sown into the minds of manufacturers when considering whether Android should be part of their long-term strategy. There's another sting in the tail too – the acquisition is being investigated by the Department of Justice due to antitrust concerns. Although this is likely to just be a formality, if it is upheld and the sale is blocked, it could throw Google and Android into more hot water.
We asked Allen Nogee of In-Stat whether buying Motorola Mobility meant Google has shot itself in the foot by possibly putting other companies off using Android. "No, I think the opposite," he says. "The problem was that Apple and Microsoft and others sued the Android manufacturers because that is where the money is. This has been hard and expensive on these manufacturers, and Google could just sit and watch. They wouldn't generally sue Google because it wasn't making anything. These IBM and Motorola patents will help Google fend off these lawsuits.
"There is some fear that if Motorola makes phones it will scare off the other manufacturers, but I don't think that is the case. If they don't make Android phones, what will they make? The Android business is too lucrative."
Tim Shepherd of Canalys agrees: "The Motorola acquisition has certainly caused its other device vendor partners to consider their strategies and level of exposure to the whims of Google. But ultimately, Android has too much potential and momentum right now for there to be serious risk of major defections, helped too by limited and similarly unattractive alternatives.
"Some vendors might also not want to commit too heavily, for instance, to Windows Phone given Nokia's tight relationship with Microsoft. MeeGo offers limited potential and necessitates considerable work, WebOS could be an acquisition target from HP but for now is not a real option, and few other options are available or practical.
"Google buying Motorola is though not just about patents, although that was surely an attraction. Among other things (including useful set-top-box assets, and so on), Motorola also gives Google an opportunity to produce flagship Android devices that showcase the latest updates and innovation on the platform and encourage other vendors to keep up, hopefully reducing fragmentation.
"Yet in reality, other Android vendors will see little difference to the way Google has worked closely with preferred partners in the past, notably with HTC then Samsung around its Nexus One and Nexus S products."
As shown by Shepherd's comments, the worry over Motorola getting preferential treatment is a real one. It is unlikely that Google's Eric Schmidt's conversation with Salesforce.com CEO Marc Benioff about the Motorola buyout did anything to calm down the handset manufacturers: "We did it for more than just patents," he said. "The Motorola team has some amazing products."
Previous preferred partners have received a real market advantage over other handsets sporting the updated OS. Each time the preferred partner would get access to all the latest builds and technology, allowing them to create a flagship phone, while other phone companies would then have to play catch up after the newest version was unveiled to the rest of the world.
In the past theses have included HTC with the T-Mobile G1 with Android 1.0 (Angel Cake) and then Motorola with the Milestone (or Droid in the US) for Android 2.0 (Eclair), and later with 2.3 (Gingerbread) came the Samsung Nexus S.
Despite Android's attractions in terms of market penetration, phone manufacturers that were hoping to be preferred partners in the future may now be put off. There is a clear competitive disadvantage in always being behind the curve in the technology, with most consumers likely to plump for the flagship model and those appearing a couple of months later unlikely to catch the public's imagination in the same way.
What's more worrying for Google is that even if it does get to buy Motorola Mobility, possibly putting other Android-using device manufacturers' noses out of joint, it may still not have done enough to protect itself in the patent wars.
Allan Nogee certainly doesn't think so, as he told us when we asked if Google had enough patents for itself and its partners to be safe. "Probably not," he told us, "but it doesn't need every patent. It often exchanges patents, so even if it is missing a few, it can exchange these patents for others that the other company may want. Patents are like a form of currency."
We also asked Tim Shepherd how much trouble the patent wars could be for Google, especially now it is entering the handset field itself with the new Motorola acquisition. "The 'patent wars' in the mobile industry have the potential to be hugely frustrating and costly for Google," he said, "which undoubtedly needs to defend the ecosystem it is building, but its best line of defence is to strengthen its own patent portfolio which it looks to be aggressively doing. Expect to see more IP acquisitions from Google in this area as patents increasingly become real currency in the mobile space."
Too many Androids
Despite Andy Rubin's assurance that Motorola will not become the manufacturing arm of Google, it would make sense for Google to bring Android in-house to, dare we say it, make it more like Apple's iOS – as this would end one of the major complaints about Android today; that of fragmentation. This stems from the way Android is distributed.
The open nature of Android means phone and tablet manufacturers and phone networks are allowed to re-skin Android with their own user interfaces to differentiate their device or service from their competitors'. However, this means that when an Android update is released, users usually have a frustrating wait for the device manufacturer/phone network to develop its overlay to work with the new iteration.
In the past, this meant that updates – even ones that closed security loopholes – took months or years to reach the user, or didn't happen at all. This left an array of different Android versions on phones and tablets, all offering differing levels of functionality, and not all supporting every app in the Android Market.
Consumer confusion can be a major problem in the marketplace, and it's one that needs to be overcome to tempt people away from the cosy simplicity of the walled garden offered by the iPhone and iPad. This fragmentation issue is meant to be being dealt with the release of the next version of Android (Ice Cream Sandwich), which will work on both smartphones and tablets, but is it too little too late?
We put this to Tim Shepherd, asking whether the fragmentation between Android systems, with inconsistent app support and different overlays, means Android is now too big for Google to control.
"Android fragmentation takes several forms: device vendor customisations, Android versions, and a growing experience delta between flagship high-end Android devices and aggressively priced, low spec bargain basement products. Perhaps the biggest implication of this is that consumers' application experiences are negatively impacted and developers have to build for the lowest common denominator, or design apps only for particular Android devices.
"But it also slows innovation and improvements as Android updates take longer to filter down to users. But the flip side is that this is symptomatic of the fact that Android is a highly versatile and scalable platform, in demand from a wide range of device vendors – not least because they can differentiate their products on the platform – and also by consumers.
"Fragmentation is nothing new to this platform, or the mobile platform space in general. Google has to find ways to manage it better to minimise the associated negatives – it is not too late and we are seeing its efforts in this regard with Ice Cream Sandwich. But it must also be careful not to stifle device vendors' creativity and ability to differentiate by cracking the whip too hard."
A fork in the road
However, Android's fragmentation could go too far for Google's liking, taking it out of the company's control altogether. This process is called forking, and it is common in open source software. When two organisations disagree on how to develop the software in the future, the differences can lead to a split with two paths being taken, and two new products created from the same ancestor.
This process often leads to one of these new products being left by the wayside. This isn't just a possibility – it's already happening. Companies like Amazon and Baidu are already taking the open source Android in a direction Google surely isn't pleased about, replacing Google's apps with their own and hiding all signs of the Android OS from view.
The products are built on top of the basic OS, but all signs of Google have been washed away. For example, Amazon's Kindle Fire, the latest tablet to be offered in the US, is almost unrecognisable as an Android tablet. Not only has it been completely re-skinned with Amazon functionality, including its own apps, there are no Google apps on it at all.
There is a slight positive spin on this for Android, as it means that it can show it isn't taking a monopoly position with Android and so avoid future anti-trust issues, however, this barely makes up for the massive downside. With the Google apps and functionality replaced, the company has no control on what happens on the tablet or smartphone, and this means the whole point of Android – to seize control of the mobile advertising market – is lost.
All those development costs, all that market dominance will be for nothing. Clearly Android has to walk a thin line between owning the mobile market and owning the supposedly open source OS, but once other big players realise there is nothing stopping them making Android's functionality their own, it may be very hard for Google to stop them without going against the ideas behind the Open Handset Alliance.
Too many stores
Further fragmentation can be seen in app stores offered on Android devices. Often, as well as Android Market, there is a store specific to the company behind the device. Some devices even cut out Android Market altogether.
The Kindle Fire is a case in point, as it uses only 'Appstore for Android' – Amazon's US alternative. Here Amazon does something that Google seems unwilling to do – it vets the apps submitted by developers, checking they do what they claim to. Already different pricing structures and deals can be seen between the two app stores, and if this works for Amazon, others will consider similar ventures for themselves, once again taking the control away from Google.
Clearly, if this practice caught on it could cut off a revenue stream that, while currently not very impressive, could build exponentially in the future if Android improved its app store. With all these woes, has Android already had its time in the sun? With no profits expected any time soon, patent wars waged on manufacturers that use it and the OS being used by other companies for their own ends, we asked Allan Nogee if he could imagine a situation where Android would be more trouble than it's worth for Google.
"If mobile advertising revenues don't match those from the PC, that could be a problem," he replied. "This is still an unknown, but Google has no choice, because it knows PC advertising will drop in the eventual mobile world everyone is talking about."
But can he envisage a way that Android could kill Google? "I don't think so. Most of the big costs are likely behind them, so the cost going forward should be less, and you always have to think, what is the alternative? They could pray that PC advertising never drops or continues to grow, but that is a big risk."
Tim Shepherd agrees: "Google is a lot more than just Android. I think it is highly unlikely, but I will say that a substantial reversal of Android's current fortunes over the coming years would leave Google's role in mobile, arguably the most critical future technology space, significantly diminished.
"So, with no choice but to push on with Android, Google has a lot to get right, and a lot of people to fight if it is going to win over the long run. Android may not be about to take Google down at the moment, but it's proving a hard beast to tame and steer. Without strong management and major changes in policy, it's unlikely that Google is going to claim the mobile advertising space it needs to, and in the future, without mobile, Google could be nothing."
Liked this? Then check out Android 4.0: Ice Cream Sandwich review
Sign up for TechRadar's free Week in Tech newsletter
Get the top stories of the week, plus the most popular reviews delivered straight to your inbox. Sign up at http://www.techradar.com/register