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Android: "A Slow Road to the Chop House"?



August 23, 2011 – Comments (3) | RELATED TICKERS: GOOGL , AAPL , MSI

Board: Apple

Author: Goofyhoofy

I've been wondering about Android. Period. Full stop. This is a post I've written three times before, and it's never come out. Maybe 4th time is the charm.

When Google first announced, then deployed it, I bought the reasoning that they had to do something like that, because allowing Apple control of the mobile marketplace would be strategically shortsighted for Google's core business.

Traditional search is maturing, but the fastest growing component of search is mobile, and there are tremendous financial opportunities tied to it which don't come with Google's worldwide search platform. (Think "local restaurants". Local pubs in Pittsburgh aren't likely to buy search keys so they have to pay when somebody in Seattle happens to type in a relevant phrase. But they are if the search operator guarantees them that the search comes from within 10 miles of their location. Now take nearly every local business in existence, multiply by...)

So it seemed to make sense. Apple might one day decide to switch the default search to Bing, and oops, Google is semi-hosed. Or Apple might start its own. Or start charging Google a "platform fee" or whatever. Enter Android, the open software for mobile, which Google makes available free - and doesn't even demand you use Google as the default, although that is clearly the intention. (Probably an antitrust concern voiced by some lawyer somewhere.)

But we've seen the weakness, as well as the strength of that model. While it begets many more choices than the unitary approach of the iPhone, it also means lots of different OEMs making lots of different uses, which means less stability, faster obsolescence, configurations which don't work with many apps, consumer confusion and the like. Not to mention "no profits." Still, it's hard to argue with a market share which has come from way behind to overtake iOS in the phone space in just months.

That said, Android is a cash drain for Google. They have to support it, they have to improve it, they have to deal with customer issues, they have to port it to tablets, they have to... and all of that takes time, attention and money. OK, OK, I know they have more money than God. More than Ben Bernacke, even, but it's still money and it's a drain. More than that, they're now enmeshed in a series of patent infringement suits up and down the line, from Apple to Sun, and those take even more money, time, and attention. As more appear, as they certainly will, does Google promise OEMs to stand in the way should they be found infringing, or are all 40 or 50 licensees on their own? More time, attention, money.

So there's lots of talk about how this Google/Motorola deal is about the patents, and I am sure that's true. I saw a statistic somewhere that showed how many patents relating to mobile each of the majors had, and while a couple had over 1,000 and Apple was in the mid-hundreds, Google barely made the chart. Of course not all patents are created equal, but if you have almost none, you are playing a very weak hand, even if you have some good ones (and it occurs to me that the basic patents are probably better than the later refinements, on the whole, and Google got into the game long after "basic" went to press.)

Anyway, even though the reaction from Android OEMs was overwhelmingly positive, I wonder if Google's play isn't something quite different than those guys are expecting. As this article points out, Apple makes more from hardware than Google makes from "search", and having had Eric Schmmidt on Apple's board opens up a whole realm of speculation. Specifically, he watched the model of vertical integration work (spectacularly), and he's watched the stumbling - and cash drain - of the open source model work, but not so profitably at all. He's also doubtless aware of the troubles of other hardware manufacturers who are trying to cobble together someone else's software into an integrated platform with, shall I say, less than stunning results.

Here's an interesting factoid: Google has "highly proprietary source code" in Android that even its best customers don't get access to according to court documents (including Motorola, which is in suit against Microsoft). Does it seem likely that they will own a hardware manufacturer and not give preferred access to itself to the disadvantage of others? "Oh, we're just testing this model before we release it to everybody" will convince people for about five minutes - or so Microsoft hopes. And if they don't, what is their advantage as a manufacturer? How do you vertically integrate without involving your hardware and software teams first? Do you let the Samsung guys in the room at the same time? I think not.

Andy Rubin, Google SVP and Android founder, says in a Wall Street Journal profile that the business will be "separate." Others who talked to Journal staffers report "People close to the deal said one of Google's motivations was its desire to design devices, not just the software that powers them, thus giving it the sort of influence that rival Apple enjoys with its iPhone and iPad."

(Rubin's company famously designed the software for T-mobile's Sidekick, and commissioned the hardware as well. That's vertical integration as close as can be replicated without owning a hardware manufacturer.) The market turned against vertical integration in the 80's, and allowed Microsoft to push "improvements" across a base of ever thinner margined hardware. The trend these days is to ever tighter integration up the vertical chain, and while the patents are important, I will not be surprised to find a few years from now that there are Apple phones, Google phones, and a plethora of small manufacturers offering some smattering of Microsoft, Android, or perhaps a later offshoot of WebOS or RIM flavored software inside the box. (I won't expect to see "Android" phones, because how can they brand their phone "Android" and expect other OEM's to brand theirs "Acer Stream, with Android inside.")

I don't think the Motorola Microsoft deal is strictly about patents. And Android OEMs may find out just a while down the road that they have been shepherded into a box canyon from which there is no escape as Google introduces ever better instruments using the latest and greatest, and the once proud Android partners are left with "almost as good software" for their offerings. That's a slow road to the chop house, and as we're seeing, that conveyor belt is already moving.

3 Comments – Post Your Own

#1) On August 23, 2011 at 12:33 PM, NajdorfSicilian (99.85) wrote:

Nice post.

I'd add that 'basic' patents are valid for just as long as the 'me-too' patents, or 17 years. We've had mobile telephony for a lot longer than that, heck, I saw WallSt in the theatre...

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#2) On August 23, 2011 at 12:55 PM, constructive (99.95) wrote:

"That said, Android is a cash drain for Google."

Google probably would not have bought Motorola unless they intended to continue using that brand.  (It would have been far cheaper to cross license the patents.)  So Google branded phones are unlikely.

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#3) On August 23, 2011 at 2:00 PM, PSU69 (91.41) wrote:

After reading In the Plex, I have a better understanding of the Google growth curve and maturity processes. As a GOOG stock holder and an APPL stock holder, I enjoy learning about both sides of the aisle. Nokia clearly has their hands full wrestling with both of them.

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