Android – Command and control

Google – 10. Handset makers – 0.

• The latest edict from Google requires handset makers who want to implement Google apps to display a “powered by ANDROID” logo on the screen while the device is booting up.
• The latest move by Google has more do to with cementing its control over Android than it does with consumer awareness.
• Android currently ships in 73.5% of all smartphones sold, and runs on 64.5% of all smartphones in the hands of users.
• However, it remains incredibly fragmented as the code is available for free from the open source community meaning that anyone can do what they like to the software before deployment.
• This has created a nightmare for developers as every Android phone is slightly different to the next one meaning that apps behave differently or not at all from one device to the next.
• This is starting to change as Google is moving more and more of the functionality of Android from the open source part to the extra part that it provides to handset makers called Google Mobile Services.
• This part of Android is not open source and in order to get access to the Google Applications and especially Google Play, manufacturers’ devices have to pass testing and agree to certain things.
• The “powered by ANDROID” logo and not messing around with the user interface are typical items that the handset makers have to agree to in order to get access to GMS.
• Many users identify with Android and by putting the Android brand more closely together with GMS, Google can ensure that more devices carry its services.
• This is bad news for the handset makers because they are losing control over the user experience meaning that their ability to differentiate is limited to hardware.
• With hardware becoming more and more of a commodity, Android handset makers are becoming very much like PC manufacturers.
• Every Android handset maker except one is either losing money or is making a low single digit EBIT margin just like PC makers.
• On the other hand Google has been very successful in sucking all of the value out of Android and many are drawing the parallel to Microsoft in its heyday.
• The only real difference is the way in which Google monetises the service that it provides to the users.
• The end result is likely to be the open source piece of Android (AOSP) becomes so small that it is little more than a kernel while GMS becomes the vast majority of the code.
• This will leave Google with a very large ecosystem (800m users by 2017) over which it has complete control and the handset makers with commodity margins.
• Hence Google has a good revenue growth and profitability profile over the next 3-5 years while the handset makers are likely to struggle to keep their heads above water.
• It is pretty clear where one should invest in order to make the most of a position in the Android ecosystem.