Has Google Already Lost the Mobile War?
Tim Nash - 2010.06.24
In the WWDC keynote, Steve Jobs gave figures that are crucial for keeping developers and attracting advertisers - 150 million iTunes accounts and, from some time this month, 100 million iOS devices ( iPhones, iPod touches, and iPads). When the $1 billion already distributed to developers is added in, not many who are interested in making money will be leaving the App Store.
Google lives off advertising, and with the new iOS developer terms, its AdMob acquisition won't have access to any user data to do with the iPhone, iPad, and iPod touch or any future iOS devices without Apple's and the user's permission. Without data and analytics to offer, why would advertisers choose AdMob or Google instead of iAd or one of the smaller independent networks?
With AdMob currently gaining two-thirds of its revenue from iOS devices, in hindsight Google clearly overpaid by at least several hundred million dollars, which may be why Apple introduced the new developer terms after the transaction was finalized. Last November, AdMob was rapidly heading for $100m revenue per year, according to Jim Goetz of Sequoia Capital, an AdMob board member, in a TechCrunch interview.
The real prize for Google, though, was getting its hands on all that user data so it could sell really targeted ads to any interested company. Keeping AdMob out of Apple's hands must have seemed like a bonus. After all, Apple doesn't know what to do with this kind of valuable data, and Google is the "no evil" company, so no-one would mind if they harvested it. Right?
Now Google has to face the future without any access to the data advertisers want from those 100 million iOS devices.
Search Engine Competition
Google is still there as the default search engine for the Internet, but adding MIcrosoft's Bing as an option has put Google on notice. To emphasize that, Bing was the default for the WWDC iPhone 4 launch. As soon as Apple wants, Steve Jobs can stand up at a keynote and say that Bing is better, and every year 100 million or more iOS devices and the new version of Mac OS X will ship with Bing as the new default. That would also give cover to Microsoft to feature Bing more prominently in Windows.
Some users will switch back to Google, but most won't bother if Bing delivers a good first page of search results. In the short term, all Apple has to lose is Google marketing dollars, and it would be surprising if Microsoft wasn't willing to pay at least the same amount for the visibility and the gain in market share. In the long term, Apple will gain if Microsoft becomes a true competitor to Google in search, as it gives one more option and weakens Google.
With Internet search, Google established a monopoly and a great way of making money, from AdWords. It indexes the Web and tweaks the algorithm to try to keep the searches relevant, but the huge problem is no-one wants 7 million results from a simple search, especially on a mobile device. This is why the search market will fracture. Much will be location based, the market that Yellow Pages used to dominate and that AdMob will be largely excluded from on iOS; some will be on brand name, with a business-supplied app; some will just need Wikipedia; and only some will need a Google type search across the whole of the Internet. If this new search model also moves on to PCs, Google will have real problems - there won't be enough advertising from its share of the search pie to grow the company at current rates.
Going Beyond Search
So Google really needs to find a new business where it can extend its ad revenue. At first glance that looks like Android. It's doing well in the US, has plenty of partners (both carriers and cellphone makers), and strong developer support, with over 70,000 apps. While the main competition is BlackBerries on Verizon and Sprint, Android will do well with consumers, especially if the Verizon two-for-one deals continue and the iPhone doesn't come to Verizon. Verizon though, has accelerated the roll out of the LTE network, which will support iPhone, so Android has at most two years in that walled garden before it is exposed to real competition.
Business is another story. Few companies will want to risk data from their employees' cellphone usage flowing to Google and others for analysis and possible sale to competitors. Indeed, such is the enthusiasm for Android that Motorola and Sprint will be launching a rugged cellphone based on the poorly reviewed Windows Mobile 6.5. So Verizon and Sprint have to hope that Microsoft, RIM, or HP (the new owner of Palm's WebOS) comes up with a real iOS competitor.
Outside the USA
Even so, the major problem lies outside of the USA.
The Chinese carriers will be using Android, but after Google's publicized withdrawal from the market, is the Chinese government really going to allow Google access to private data from millions of cellphones rather than keep it for government or carrier use?
In Europe, data privacy is much more of an issue than in the USA, and Google illegally collecting unencrypted data while photographing for StreetView will lead to prosecutions and fines. This gives the authorities an excuse to rein in Google, with the side benefit of making Nokia more competitive.
With all the networks being GSM, iPhone being multicarrier in most countries, and Android yet to show it can successfully compete with iPhone on a carrier supporting both, Europe looks like a market where Android will be an also ran, as its Q1 sales were one-third of the increase in iPhone sales. And if Apple persuades Foxconn to shift some of the production (it is said to be moving out of China, to one of the lower cost countries in the EU), it will be easy for the EU to stay on Apple's side. For politicians. manufacturing means jobs.
The Korean market is well worth watching too. Samsung manufactures Android and Bada phones as well as LG Android and Windows phones, and they used to divide the cellphone market between them. Yet KT, the second largest carrier, has sold 800,000 iPhones since last November.
iOS vs. Android Markets
When limited access to at least some of these markets is combined with the loss of access to iOS users - people who don't mind paying a premium - Google/AdMob looks like a poor solution for many mobile advertisers, such as those mentioned in the WWDC keynote, who want to sell to better-off customers. While Android has a much smaller paid app market than iOS, any reduction in advertising dollars will reduce the number of active developers as developers tend to go where the dollars go, which is why there has always been so much software written for Windows.
Many have been persuaded by the rapid take-up of Android on Verizon that there is gold there. The lack of stories about small Android developers striking it rich, however, suggests that the size of the Android lode is much smaller than 30% of the iOS lode - where it should be, given the relative numbers of apps available. This is easily understandable, as Android has a much smaller installed base and users only install about two-thirds as many apps as iPhone users.
For Android to be a success for developers, it needs a much stronger paid apps market, as Larva Labs estimates that only $21 million has been paid to developers so far. This weakness was emphasized by Wolfram earning more on sales of The Elements for iPad in the first day than from the past four years of Google ads on periodictable.com. The need is not only for those developers who want to charge a fair price for a premium app and have no ads spoil the experience, but also for the developers who want to charge a small amount and also have an income from ads to support future development.
This kind of part pay/part ad model built the newspaper and magazine businesses, and when it gets established for apps, it will raise the bar for Android and all the mobile platforms.
Android: A Fragmented Market
While Google has largely driven Android development, it has been left to the carriers and manufacturers to choose whether to upgrade cellphones. This has already lead to fragmentation of the market, partly due to the pace of new releases and partly to the lack of desire to support old cellphones when new models need to be sold.
What has made the fragmentation worse are the different User Interfaces, including HTC Sense and Motorola MotoBlur. This makes it more difficult for developers to write outstanding apps that address a large enough market. When they compare the situation to iOS 4, which as a free upgrade will be installed on most of the existing 100 million iOS devices, the temptation will be to keep Android development as an afterthought.
To date, Android's biggest attractions for manufacturers is being free and competitive to iOS, but as there are plenty of patent owners in this area, it won't stay free. Indeed, if Apple continues to refuse to license its patents, manufacturers may find it cheaper and simpler to license Windows Phone 7 from Microsoft and shelter behind its patent portfolio. Few, if any, of the 20 or more manufacturers can be making any money from the current sales of 100,000 per day, and if they leave it in any numbers, Android, despite all its promise, will end up as just another mobile OS.
Can Google Force Apple's Hand?
Can Google use the FTC against Apple to slow its progress or force AdMob back onto iOS? The difficulty is, the only monopoly Apple has is digital music, and when the iTunes Store made DRM-free tracks available, any restrictions disappeared for those prepared to pay the price. Since Apple still makes the best MP3 players, iPod revenue has stayed at roughly the same level, and in many countries Apple has taken even more of the market.
In mobile advertising, Apple/Quattro is much smaller than AdMob, and the smartphone market is much larger than iPhone. The new iOS developer terms don't affect independent ad networks, so even if Apple takes over mobile advertising, it will be through organic growth, which the FTC has always chosen not to regulate, because having a monopoly is not yet illegal.
Unless Nokia follows the IBM strategy with Microsoft - that is, it abandons Symbian and MeeGo and hands over the keys to the feature phone kingdom to Android - Google's best bet seems to be to concentrate on the Cloud and recognize that it doesn't need to control the devices that access it. If Google make its services there compelling for developers to access and add on to, it will continue to have a bright future.
But given the rapid rise of Android, there will be many in the company, particularly the ex-Microsofties, arguing that Google should stay the course. Unfortunately, the current Android strategy has already cost Google a strong ally in Apple, will cost Google easy access to Apple's lucrative customer base, and has driven Apple into looking at more cooperation with Microsoft, Google's biggest rival.
What started out, when Google bought Android, as a sensible defensive strategy against being locked out from the mobile market by Microsoft, has turned into bet-the-company on Android. If it fails to generate enough revenue for developers, they will leave Android as fast as they left Palm OS (PDAs, Treo etc.), and Google could easily end up following a downward spiral similar to Yahoo.
Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.
Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.
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