The Hole in Android and Google’s Double Pony Problem

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:China

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.

Senator Blowhard – Still At It

image It takes an exceptional act of shamelessness to rise above the general level of shamelessness in Washington DC and merit comment, but noted antennae expert and Senate Finance Committee member Charles Schumer’s decision to weigh in on iPhone 4 reception issues breaks through the noise.  Clearly this takes precedence over less pressing issues like cleaning up the multi-hundred billion dollar and growing double black hole of Fannie Mae and Freddie Mac.  I for one look forward to Senate hearings on the matter.  No doubt a several thousand page “antennae reform and signal stimulus” bill will follow.

Not to endorse Senator Shakedown’s grandstanding, but I do think Apple’s reality distortion field has worn off and everyone knows it except Apple.  Dave Winer nails it.  Companies are always the last to internalize they’re not the plucky little upstart any more and public expectations have changed.

Our runner-up in inanity emanating today is the New York Times’ apparently un-ironic call for the government to manage Google’s search algorithm.  Fortunately, this has been comprehensively addressed by Danny Sullivan.

Must Have Software: Google Analytics Opt-Out

Google Analytics can track individual Internet users across millions and millions of web sites.  Google has quietly rolled out a browser add-on for Chrome, Firefox, Internet Explorer and Safari that prevents information about an individual web site visit from being sent to Google.  Presumably this was done in response to regulatory scrutiny somewhere in the world as Google does not lightly deprive itself of any information about your Internet activity.

A good start but we still need:

  • The add-on to be distributed through the various browsers’ integrated add-on catalogs and not just buried on the Google site.
  • Google needs to provide the add-on for other browsers as well.  At minimum, they need to support all the browsers they put on stage for marketing purposes (e.g. Opera)
  • Google should build it into Chrome and turn it on by default (note that Chrome still has a bunch of other privacy issues)
  • We need a similar add-on for opting out of AdSense which has a comparable tracking ability.

Notes from the Super Heavyweight Bout

Google v. Microsoft

A few observations on the super heavyweight, no-holds-barred, ultimate cage match between Google and Microsoft.  Some of these have been rattling around in my head for a while so please excuse my inability to embrace the real-time “what are you thinking (or eating) this instant” Twitter aesthetic.

Google’s Soft Landing

Google’s Q4 and Q1 performance was brilliant.  Amidst an imploding economy, they managed to ramp revenue and cut costs.  They increased monetization (let no screen space go without an ad…), slashed capex, deferred datacenter build-outs, slowed headcount growth to almost nothing, trimmed employee perks (while repricing options) and whacked a bunch of services that were going nowhere (all but killing the 20% time myth in the process).

There was always a question about Google’s management chops and how they would perform when push came to shove.  The question appears to have been answered and the new CFO seems to be getting most of the credit.

Microsoft spent the better part of a decade on its odyssey from shrimp to weenies, slowly squeezing costs as growth slowed, and still had a lot to clean up after the dot com implosion.  Doing this kind of deceleration in less than a year is very impressive.  While the claim that search advertising is immune from macroeconomics has been put to a rest, Google will outperform amidst the ongoing (and likely protracted) “global economic crisis”.

Microsoft Windows Live MSN Kumo Yahoo Search

While Google shows it has knobs that do in fact go beyond 10, Microsoft continues to play rope-a-dope in search, with an ever diminishing quantity of rope.  (Microsoft watchers should understand that When We Were Kings is a SteveB favorite).

Despite new management at Yahoo, the company still seems infected with Paralysis Yahoois, so the inevitable combination of Microsoft and Yahoo search drags on and on.

Hopefully Microsoft has more in the cupboard here than just a new name.

Windows 7

I have only played with the public beta, but it looks very good.  It even runs nicely on my much-despised Sony laptop, which was unusable with Sony’s craplets and Vista. 

And it should be good, given three years to put Vista on a diet and add some user interface chrome (all for the better, especially fixing the wireless UI which I find to be the single most annoying aspect of Vista).  In many ways, Windows 7 is Vista Service Pack 7.  The biggest competitor for Windows is always the previous version of Windows, so the recent “Vistaster” will be a boon.

In the last month I’ve heard from people seeing more recent builds there are still a fair number of bugs to fix, but it is going out hell or high water.  Microsoft is very anxious to put Vista behind them.  Figure a street date two months after it releases to manufacturing, so it could be in stores on new PCs as soon as July.

I think the product will be an unambiguous critical success from a product perspective.  But the big question is not the product but its impact on the business.  Microsoft has a very tough pricing decision ahead of it for Windows 7 on netbooks which are the only bright spot in an otherwise dismal PC market.

A great example of unintended consequences, netbooks started out as the Taiwanese PC industry’s response to the $100 One Laptop Per Child initiative.  But instead of being sold to kids in developing markets, consumers in developed markets are buying them as cheap second or third PCs.  And all the protestations you hear that they aren’t cannibalizing more expensive PCs are a sure sign they are cannibalizing more expensive PCs.

Moore’s Law has powered the industry for decades: you get twice the processing power for the same price you paid 18 months ago.  But there is a flip side to Moore’s Law (and one Intel in particular has feared for years): you also can have the same processing power as the last generation for half the price.  This is the dynamic driving netbooks which are now 10% of the PC market and the ramp is unbelievable.  Basically 0 million units in 2007, 15 million units in 2008 and a projects 30 million units this year.

Netbooks have had a bigger impact on the Wintel business franchise than all the anti-PC children’s crusades of the last 20 years combined.  Average selling prices of PCs have dropped by about a third due to netbooks.  Both Intel and Microsoft have chosen to eat their own young rather than let someone else do it, but it has come at a cost.  Intel’s CY-Q4 revenue was down 20% and you really see it in Microsoft’s CY-Q4 and CY-Q1 results.  Windows revenue doesn’t usually decline, much less faster than PC units.  The drop in the premium mix is even more precipitous (double digit hits in both of the last two quarters).  This is an ominous sign of declining pricing power.

Microsoft got its share back in the netbook space in 2008, but did it with sub-$20 copies of Windows XP Home.  So will they price Windows 7 to keep that share or protect revenue?  Starter Edition seems to be dead on arrival (in fact, to go back to a stock soundbite, you can’t spell Starter Edition without the letters D, O and A…), but they can always keep offering the immortal Windows XP if necessary.  Home Premium will protect the revenue, but it is likely to be too expensive for $300 PCs that are on a trajectory to a $100 BOM cost and will face a bunch of even cheaper Linux and Android-based competitors this year.  So the big question is will Microsoft go for units or dollars with Windows 7?

Google and the Enterprise

Google is just not serious here.  The outages and privacy-breaching data spills don’t help.  The economic situation means they have the tailwinds behind them and the shift to the cloud in general, but they just don’t seem to be serious about this business.  Is it a cultural thing where they’re just not willing to do what it takes?  It took Microsoft over 15 years to be able to say they got the enterprise with a lot of motivating/de-motivating beatings along the way.

A possible by-product of the soft landing is that the great Google land grab may be coming to an end.  Google’s window to throw new stuff at the wall and see what sticks could be over.  My guess is we’re seeing a cultural shift that can’t be reversed.  It is tough to dream big dreams and pursue ruthless efficiency.  Google has staked out a very lucrative and high growth franchise that they can very successfully milk for the next decade, but I think we’re less likely to see radical and disruptive thinking from them in the future as they optimize what they’ve got.

certainly benefited from having a long time window and multiple product cycles to invest in new businesses like the enterprise and entertainment.  Google’s window may have been much shorter (and in general I believe Google has followed the Microsoft arc albeit much more compressed.  To prepare for their next act I suggest they “lawyer-up”).  They have a great franchise, but they didn’t build any new franchises during the land grab.  So they’re still fundamentally a one-trick pony.


image Microsoft (market cap $182 billion) is fixated on Google.

Google (market cap $122 billion) is fixated on Facebook.

Facebook (market cap ~$3 billon) is fixated on Twitter.

Who or what is Twitter fixated on? 

Revenue?  Uptime?  Oprah?  Rolling up the $300 billion in market cap chasing them?

Feedburner Under Google: “Dreck”

Another ding for Google’s acquisition track record:

I used to see a decent amount of ad dollar revenue via Feedburner…

Then Google took them over, and its been a total clusterf*&k ever since…

Utterly embarrassingly dreck. How worthless it is? The revenue dropped about 90%. Gee, why aren’t you folks reading TBP clicking on payday loan ads and mortgage broker leads?

Google took a wonderful RSS feeder — and its still an excellent RSS/email feeder — and made it irrelevant. Formerly strewn intelligent, higher end advertising, and completely destroyed it. Customer service is a disaster, the interface blows, Adsense is a pain in the ass — Feedburner has become utterly worthless as an advertising platform. October ads threw off under $500, down 75% from the pre-Google days, despite RSS feeds more than doubling over the past 3 months.

Don’t be evil? How about “Don’t be sucky?”

The Big Picture: Google Destroyed Feedburner