Google – From Russia with love.

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Google has a plan B if it loses to the regulators.

• The Russian antitrust regulator has given Google a month to change its software licensing practises following being found guilty of abusing its dominant position in Android.
• The area of contention in the Mobile Application Distribution Agreement (MADA) that all of Google’s partners must sign before they can use Google’s services in their products.
• The critical issue here is Google Play which is Google’s version of the Apple App Store which in many markets is demanded by users looking to buy an Android device.
• This demand from users has given Google the power to require its partners to pre-install Google ecosystem services alongside Google Play and to display them in a prominent position on the home screen.
• This has given Google effective control of Android meaning that it has been able to reduce handset makers to commodities while at the same time earning $7bn in revenues from Android devices in 2014A.
• This has been the source of much discontent from Google’s competitors such as Yandex which see themselves and consumers as being unfairly disadvantaged.
• This issue is also under investigation by the EU but this demand from the Russian regulator could bring the issue to a head.
• Google has yet to respond to the finding by the Russian regulator as the demand comes only two weeks after Russia issued its report finding Google guilty of market abuse.
• The regulator is demanding an end to the requirement to pre-install Google services alongside Google Play as well as end to the restriction on pre-installing competing apps.
• Although the user can easily download any apps that he wants, history has shown that pre-installed apps have a very large advantage over those that have to be downloaded when it comes to discovery and usage.
• Google has already been reducing the number of apps that are required to be installed but I note that these are the ones that are the least successful.
• Hence, removing them will have very little if any impact on Google’s ability to track and monetise usage within its apps.
• If Google is forced by regulators in Russia, EU and other territories to completely unbundle Google Play from the rest of the ecosystem, this could be very damaging to Google.
• However, there are two things that I think will keep Google strong when it comes to earning revenues from Android.
  • First. Many of its services are very popular and widely used.
  • Hence, no longer having them preinstalled may simply move users to download them resulting in no net change in usage.
  • Second. Google’s latest innovation “Now on Tap” enables contextual Google Now searches from wherever the user is on the device.
  • This means that Google will have hooks into the Digital Life services and apps that it does not own.
  • Consequently it will be able to learn what users are doing regardless of whether the user is using a Google service or not.
  • Consequently, Now on Tap may offer Google a way to continue growing its revenues from Android devices even if it is forced by regulators to stop bundling its apps with Google Play.
• Google has already responded to the EU’s allegations and I think that it will fight vigorously against all of the claims of unfair competition being levelled at it.
• Hence, I think that there is quite a long way to go in this battle but it appears that Google is lining up a plan B in case it loses to the regulators.
• The outlook for Google’s revenue growth from Android still looks good but the recent rally in the shares leaves me looking at Google as being fairly valued.
• I continue to prefer Microsoft.