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's Problem
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.
Android's Future
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. 
