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The Android Monopoly and how to harness it

[Behind Android's stellar success is a love and hate relationship with handset vendors. Android is a critical launchpad for PC-borne OEMs like Dell and Acer, but a short-term life support for mobile vendor incumbents like Sony Ericsson and Motorola. Research Director Andreas Constantinou looks at how OEMs can leverage on virtualisation to get the best of both worlds with Android; the burgeoning app ecosystem, but without Google's lock down of experience differentiation]

VisionMobile blog - The Android Monopoly and how to harness it

From an underdog to ubiquitous manufacturer support, the Android platform has come a long way since its introduction in 2008. Almost every single device vendor (except for Apple and Nokia) has launched Android devices, while Sony Ericsson and Motorola are betting their margins and future on it.  The phenomenal rally behind Android is – in a nutshell – due to 4 factors: the operator demand for a cheaper iPhone, the burgeoning Android developer community, Android’s market readiness (3 months to launch a new handset) and the ability to differentiate on top of the platform.

A monopolist on the rise?
Year after year, Android keeps on surprising industry pundits. Google’s software platform saw 100% quarter-on-quarter increase in the first 3 quarters of 2010. The last quarter of 2010 saw Android go chest-to-chest with Nokia in terms of smartphone shipments, in what CEO Stephen Elop called ‘unbelievable’. With such meteoric rise, analysts are beginning to talk about a potential Android monopoly in the future market of smartphones, contested only by the Nokia-backed Windows Phone.

The Google commoditization endgame
Is Google the biggest benefactor the industry has seen? Not by a long way.

Google runs a hugely successful advertising business and needs to bring as many eyeballs as it can onto its ad network. To this end, Google’s agenda is to commoditise handsets by forcing smartphone prices down (see our analysis on the $100 Android phone) and having its ad network deployed on the broadest possible number of smartphones (via closed apps like GMaps and Gmail).
Moreover, Google’s agenda is to commoditise mobile networks by flattening the mobile termination barriers and removing volume-based price plans that telcos have traditionally built.
At a 10,000 ft level, Google’s strategy is based on deceptively simple microeconomics principle; to drive up the value of its core business (ad network) it needs to commoditise the complements (devices, networks and browsers).

Android as the centre of a 5-sided network

Naturally Google is hermetically closed in all aspects of its core business. The Android Market, GMaps, Gmail, GTalk are ‘closed source’ and the Android trademark is commercially licensed. This means that while Android is open source, Google uses the Android Market and trademark to enforce strict compliance of Android handsets to Google’s CDD and CTS specifications. See our earlier analysis on Android’s hidden control points for how Google runs the show.

So Google is by no means a benevolent benefactor. Like any other company out there, it’s in it for the money; a rationally-driven business of the platform era, out to commoditise the mobile handset business with a free-for-all carrot.

Winners and losers of the Android game
For handset manufacturers, Android is both a blessing and a curse. A blessing because it offers OEMs a low-cost-base, rapid time-to-market platform from which to build differentiated designs. This is manna from heaven for PC-borne assemblers who use Android as the pier from where they can gain firstly a foothold in mobile and secondly global reach.

At the same time it’s a curse; Google’s control of Android compliance means that it deprives OEMs of all points of differentiation: user interface, hardware features and industrial design – except for (you guessed it!) price. Which means that with Google defining the Android experience, there’s little differentiating a Sony Ericsson handset from an Acer handset. With Acer happily operating at 3% profit margins, Android is to Motorola and Sony Ericsson just a short-term life support.

OEM + Android - Winners & Losers

Nokia too evaluated Android before hoping on an strategic partnership with Microsoft on Windows Phone 7. As Stephen Elop said during the press conference with Steve Ballmer, “we assessed Android [...] but the commoditisation risk is very high”. In sight a potential Android monopoly threat operators, too and getting wary of over-supporting Android.

 

 

Best of both worlds
Confronted with Android’s two-faced agenda, major handset vendors have been apparently plotting how can they get the best of both worlds; the burgeoning apps ecosystem but without the Google’s control of the user experience. Three approaches have emerged.

1. The Do-it-yourself approach: By virtue of the open source (APL2) license, any handset vendor can take the public Android codebase, branch it, tweak it and deploy it on handsets. China Mobile has commissioned Borqs to develop the oPhone spin-off while Sharp has released handsets based on the Tapas spin-off also for the Chinese market. However, branching Android means that you miss out on the 130,000+ Android apps as Google won’t give you access to their app distribution system – which is ok if you ‘re targeting China, but unacceptable if you ‘re targeting any other region. Moreover, the Google Android codebase moves faster than any other platform (5 new versions within the space of 12 months) meaning that it’s near impossible to maintain feature parity in Android spin-offs – the same reason why Nokia publically regretted forking WebKit in the past. Lack of feature parity means that an Android spin-off would breaks the developer story and stays behind the competition of Android Experience and Partner phones.

2. The virtual machine approach: Myriad announced Alien Dalvik , a solution it claims can run Android apps on non-Android handsets, including on Maemo.  Alien Dalvik is a Java SE virtual machine designed in Zurich and China by the same ex-Esmertec guys who started off the OHA consortium. Myriad has released a demo of Alien which however hides the real issues behind a pure virtual machine approach: the lack of 100% API compatibility and most importantly access to the distribution of 130,000 apps available through Google’s Android Market.

3. The Virtualisation approach: the third and most promising approach is to run a complete replica of the Android platform within an isolated, ‘virtual’ container using mobile virtualisation technology (from Red Bend, OK Labs or VMWare – see our earlier analysis of virtualisation technologies). The virtualisation approach offers a sandboxed, complete version of Android (including the apps ecosystem) which co-habits the same handset as the OEM-specific core UI and applications. Virtualisation technology is mainstream in cloud and enterprise, but applied only in a limited context in mobile to reduce hardware costs or run enterprise micro-environments (the type Barack Obama enjoys in his virtualized BlackBerry cellphone).

The real opportunity with virtualisation is to deliver the best of both worlds for handset OEMs who want to leverage the 130,000+ apps ecosystem, but maintain their own apps experience and signature user interface. A virtualized Android co-inhabiting with the native app experience (think S40, Symbian, QNX, BlackBerry OS 6, Web OS, or Bada) would allow OEMs to resist commoditization while having ample degrees of freedom to differentiate.

The question is: will Google allow OEMs access to the Android Market and the Android trademark when the platform is run within a virtualized shell?

Such an approach would allow Sony Ericsson, Motorola, RIM, HP and the others not to compete against Android and neither to surrender to Android – but to leverage Google’s network effects and harness the Android innovation wave.

Comments welcome as always,

- Andreas
you should follow me on Twitter: @andreascon

  • http://troed.se Troed Sångberg

    With industrial design being one of the main differentiators when selecting from an otherwise equal feature set, wouldn't that create the opportunity for bigger margins as well?

    It seems to be true in other industries with cut throat competition – clothing, cars etc.

  • Jonas Hermansson

    I'm not sure about virtualisation.

    How would an end user use a handset with virtualisation? Wouldn't it always be confusing and cumbersome to move between different environments.

    I agree with Troed that industrial design could be an option for differentiation but also:

    -HW features such as camera(s)

    -superset of APIs adressing a specific vertical

    -gaming

    -enterprise services

    -formfactors

    -unique cloud services

  • Michael

    "Google’s control of Android compliance means that it deprives OEMs of all points of differentiation: user interface"

    Sigh. If only this were true. Sense, TouchWiz, Motoblur: you can all DIAF. I don't want "differentiation". It is not good for me as an end-user. It means updates to my devices are delayed, or missing entirely. It means I have to deal with ugly, buggy replacements for stock android functionality (e.g., the HTC Sense "People" app that replaces the dialer/contacts).

    "Differentiation" like that means, simply, "making Android worse".

  • Jonas Morän

    To me the virtualisation conclusion is completely up side down. My conclusion is; take advantage of the fact that "bread and butter features" are done by Android and build your own "hyper targeted" additions. But make it smart, not to create your own, internal fragmentation! (Differentiation in "phone book design" is waste. Fully agree!)

    The OS and even the eco-system attached to it will seize to be (have already?) differentiators. Android is a blessing for the big old OEMs. True, newcomers that are used to 3% margin will take the bottom layer of the cake, but at least there is now a vehicle to address the icing layer (read challange Apple's margins), which none of them could have done on their own.

  • Vas Rastinen

    Jonas: "My conclusion is; take advantage of the fact that “bread and butter features” are done by Android and build your own “hyper targeted” additions"

    How, pray tell, do you imagine low-margin handset makers to differentiate smartly, when they can't:

    – differentiate with services

    – compete with Google's services

    But can only change icons, launchers and built-in apps and industrial design?

    Where's is the value added pricing power and margins?

    Care to elaborate?

  • Jonas Morän

    @Vas Ratinen. Absolutely! I'd say OEM's are ill equipped to compete on services. It's not in their DNA. And eventually the consumer won't select their device based on services it brings. They'll like to use the best ones out there; Spotify for music, Netflix for movies&TV, Dropbox for cloud storage…

    So, it's in the hands of the OEM's to find other means of differentiation that is truly valuable to the consumer. What that is is the Billion dollar question. If you ask me I'd say that at least partially it lies within traditional differentiators: Industrial Design, HW innovation & integration etc.

    But I agree it won't be enough to make a quantumn leap, because it's obvious and all will go there.

    What will the Golden Feature be 2012…?!

  • http://visionmobile.com/blog Andreas Constantinou

    @Troed,

    If industrial design alone can secure margins, then why aren't PC manufacturers (-Apple) having differentiated pricing? I think mobile is comparable more to PC than clothing/car examples you mention as mobile is utilitarian (like PC) whereas cars and clothing is more aspirational than utilitarian.

    @Jonas,

    Virtualised cells can be presented through a single menu interface (e.g. widget-like or WP7-like). Clicking an app switches to the virtualisation cell that hosts that app. It's transparent to the user.

    @Michael: agreed that OEM UI differentiation is self-serving. OEMs customise the UI so that they can argue to their operator customers (and the OEM management) that the device offers something above the competition and therefore worth more $cents per handset.

  • Ankur Jalota

    @Andreas Even if an OEM did virtualize Android, and make running Android apps transparent to the user, it wouldn't be – the look-and-feel of an Android app would then be different than the OEM's OS.

  • http://www.openmobileww.com Nachi Junankar

    Andreas, great entry! As you may know, my company OpenMobile is in the business of giving power back to OEM's so they can differentiate at any level they'd like. We think it's an elegant way to handle dellification/commodification.

    Thanks again!

    Nachi

  • http://blog.radvision.com/voipsurvivor Tsahi Levent-Levi

    Andreas,

    I think there are two other approaches as well, each targeting a different decision made by a handset vendor.
    If a handset vendor wants to get out of Google's control, it can use other markets – especially the Amazon one, once it opens up. If the Amazon market will have enough applications in it, it might become a viable alternative to Google's Android Market.
    For handset vendors who still want the Android trademark and Google's Android Market, the differentiation I see today is by moving towards cloud services for their handsets. The leading vendors today are investing heavily in such services – either by inhouse development, acquisitions or placing money on startups in this area.
    Virtualization might be another viable option, but I don't see it materializing in 2011.

    Regards,
    Tsahi

  • Pedro

    "I think mobile is comparable more to PC than clothing/car examples you mention as mobile is utilitarian (like PC) whereas cars and clothing is more aspirational than utilitarian."

    Have to disagree with that one. A mobile phone is like a wristwatch. When you meet friends at a cafe and everyone puts their mobile phone on the table, it's a fashion statement. And in an all-Android world – without other significant differentiators – it's by that metric that a lot of people will choose their device. Case in point: Motorola Razor…

  • http://mobiletopics.wordpress.com Vishruth

    Andreas

    The article is well written with the way you have summarized the overall eco-system.

    I have a few comments:

    1. You have referred to the CDD and CTS specifications of Android. I should say they have eased up some of the hardware requirements in Gingerbread, which will now enable OEMs to make lower cost Android devices. Please see my article related to this at http://mobiletopics.wordpress.com/2011/01/02/ging

    2. This comment is related to the topic of virtualization that you have mentioned. At our company we provide Android software services. As part of these Android services we have also undertaken Android projects on virtualized platforms. One of the big challenges faced is the performance of Android on a virtualized platform. For e.g. the UI response become sluggish. Further, R&D costs increase not-only in creating such a virtualized platform but also maintaining the same. For e.g. various tweaks need to be done in Android to have a decent if not the best performance on a virtualized platform. But as you have mentioned Google makes new Android release every 4 to 6 months. So this becomes so much more harder for an OEM to quickly upgrade to the newer version of Android. Further, it is very important for any OEM to keep their devices updated to the latest release of Android to avoid their customers wrath. So I believe, the virtualized platform will be primarily good to drive down BOM costs targeted specifically at emerging markets.

  • http://stylerzz.blogspot.com/ James

    Well, Android's Monopoly is been succeeded, What will the Golden Feature be 2014???

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