Google – Toothless in Europe pt. IV.

$25 per unit will shatter what little profitability there is.

• Google is set to change its licensing practices in Europe such that Google apps will be unbundled from both Google Play and Chrome but I suspect that the economic consequences of these options for handset makers are untenable.
• Google is making three changes for devices that are destined to be shipped into the European Economic Area (EEA) to comply with the EU’s ruling earlier this summer (see here).
  • First, Android forks: Device makers will now be able to ship forked versions of Android into the EEA and still be able to make Google Mobile Services (GMS) compliant handsets.
  • Second, Google Mobile Services: Handset makers will be able to install Google Ecosystem Services but will no longer be required to install Google Search or Google Chrome and set them by default.
  • Because Google Search is the main monetisation mechanism for the Google Ecosystem, Google will now charge handset makers a fee to make up for the potential revenue lost from not having Google Search front and centre on the device.
  • I presume that if Google Search and Chrome are installed, then the licence price will remain $0.
  • This is a classic shift that many Internet services and websites have already made which is to give users (handset makers in this case) a choice between monetisation through advertising or monetisation through subscription (see here).
  • I think that this is something we are going to see more and more of in the coming years.
  • Third, Google Search and Chrome: will be available to licence separately.
  • Again, I presume that this licence fee will be $0 given the revenue-generating ability of these services.
  • In fact, I suspect that these licenses will involve a flow of money from Google to the handset makers in the form of Traffic Acquisition Cost (TAC) that Google pays to all its partners that help it generate advertising revenues.
• The big question is, of course, how much will Google have to charge not to feel an impact on its revenues?
• Globally, RFM estimates that in Q2 2018, Google earned $1.62 per Android user per month or $19.38 per year.
• Google’s developer website implies that Google Android Ecosystem are present in the market for up to 5 years with the average being around 2.5-3 years.
• This means to break even, Google would have to charge between $48.50 and $58.20 per device to any handset maker that did not wish to install Google Search and Google Chrome on its Android device that also has Google Services.
• It is worth noting that these are global averages and the US has higher user ARPUs than Europe meaning that this estimate for Europe may be much too high.
• However, even at $25 per unit, this will destroy the already anaemic profitability of Android Handset makers, the vast majority of whom make less than $10 operating profit on every handset they make.
• Consequently, I suspect that given the choice, Android handset makers will continue installing both Google Search and Google Chrome on their Android devices as the alternative would seem to be economic suicide.
• Furthermore, I think it is also far too late in the game in Europe.
• For search, Google is far and away the dominant and best provider of Internet search and paying to not include search when almost all users will download it anyway will seem like a pointless move.
• I think that there is nothing to prevent Google’s continued dominance of Android as the EU remedies make life for Android handset makers even more impossible than it already is.
• Therefore, I think that there will be very few if any, takers for these new options allowing Google to carry on as normal.
• Google Android looks set to remain exactly where it is.