Android Wear – One sided game

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As usual the only beneficiary from changes to Android is Google.

  • Google has launched a new app. on iOS that will allow devices that run Android wear to synchronise and integrate with the iPhone.
  • Many of the core Google Digital Life services that run on iOS will now be available through a paired Android Wear device along with the usual data and fitness functions.
  • Older Android Wear devices will not be supported but LG, Motorola and Huawei devices are already up and running and all future devices will have this capability.
  • From Google’s perspective, this makes complete sense as Google still generates around 50% of its mobile advertising revenues from iOS devices.
  • Hence it is in its interest to ensure that on iOS, its services work seamlessly and offer users as much functionality as possible.
  • However, from a hardware maker’s perspective this added functionality offers very little, if any benefit.
  • One of the only areas left to an Android hardware maker to differentiate is through a cross-device strategy.
  • The idea here is to ensure that all of its devices work as seamlessly as possible with the other device types that it makes.
  • The hope here is that this will encourage a user of one device to have a preference in another device category for the same manufacturer.
  • If user preference can be created then there is scope to increase prices somewhat and make more than a commodity margin.
  • This is one of Samsung’s strategies to keep its margins high after ceding the entirety of the ecosystem to Google (see here).
  • However, by making Android Wear work well with iOS, Google is undermining that strategy and making it even harder for the long suffering device makers to be anything other than commodities.
  • Hence, I think the current outlook of 2-4% EBIT margins for Android devices remains intact and may even come under further pressure as the smartphone market continues to slow down.
  • Samsung is the one exception but I think that its margins (10% – 12%) are driven almost entirely by scale as it outsells its nearest competitor by more than 2 to 1.
  • The net result is that the only real beneficiary from Android remains Google and I fully expect it to continue operating in its own best interests to the detriment of its hardware partners who have nowhere else to go.
  • Google still has huge problems to solve with Android (see here) but even without fixing these issues, Android remains a huge revenue and profit generator for Google.
  • Google has dropped back below what I consider to be fair value but at $618, there is very little upside for shareholders.
  • I would consider Microsoft as a much better place to look.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.