Android is on fire and Gartner predicts it will be the number two mobile operating system worldwide this year, surpassing Apple and RIMM, but behind the seemingly immortal Symbian. Google embraced the ubiquity strategy and it is working. But they’re getting a free pass on whether it makes money on the assumption that Android handset volume will eventually drive material search queries, advertising revenue and pull other attached services. Unfortunately, there is a big hole in that Android business strategy, shaped roughly like this:
Google’s self-immolation of its China presence means they won’t see much mobile (or any) search revenue in China, the world’s largest mobile market (and home to the largest number of Internet users). Google’s mobile search share in China dropped by 30% in the second quarter and they’ve already fallen to third place (bonus points: who is second?). Android stalwart Motorola is using Baidu and Bing on its phones in China plus there are a variety of efforts by Chinese operators and handset vendors that fork Android. Forking sidesteps the remaining Android constraints altogether and of course provides complete discretion for what services are integrated. So you can cut Android’s expected revenue per unit by roughly 20% just based on China.
And where China goes, others may follow in decoupling Android from Google search. In countries with strong domestic search engines like Russia and South Korea, it may be a simple matter of consumer preference. The more dirigisme (I’ll just note it is a French word) may not be able to resist the opportunity to play with search defaults. And in the US, Microsoft is persuading Verizon to use Bing for Android phones with what looks like just cash. There is a real risk of further decoupling of Google search from Android.
Now Google may be content with not monetizing Android due to its other strategic benefits. Android pressures Apple and Microsoft, significantly disrupts the traditional operating system business model (which we may soon see extended to tablets and netbooks, which will be really interesting to watch) and raises the capabilities bar for the mobile web. But settling for non-monetary strategic benefits when the guys you’re outselling are making billions is a little embarrassing (admittedly they’re making it from hardware). I know Google is monetizing Android on the sly around the edges (it turns out Android is not so open and free if you want the latest version and the Skyhook lawsuit suggests some other tying shenanigans) but it is a rounding error from the standpoint of a $25 billion company.
Google is stuck between two Pony problems. The One Trick Pony problem and their need to find another material revenue stream beyond search looks more pressing as both their search share and their revenue growth flatten out. Their heyday window to make hay by building additional businesses while on top of the world seems to be coming to a close (life at the top is getting shorter and shorter – we’ll see how long Facebook lasts in that position. They could peak even before they become a $10 billion revenue company. Deferring the IPO for as long as possible makes a lot of sense for them to maximize their window). Android is one of Google’s better candidates for a revenue stream with lots of zeroes after it, but we are already seeing multiple examples where Google’s revenue link to Android is being severed. This could be described as the My Little Pony problem (a Sun Microsystems reference for those too lazy to click through and parse the obscure video), wherein your free software doesn’t drive significant revenue directly or indirectly, even as others go to the bank on top of your efforts. As Google’s core business matures, they’ll have less and less ability to make grand philanthropic efforts. I suspect we’ll see free become less free and Google dare phone manufacturers to shift platforms once they have started down the Android path.
The good news is neither of these problems are mine to solve.