The PC clones of the post-PC era

Since I spend most of my time thinking about what will happen, at the end of each year, rather than looking forward I like to look back to see how wrong I’ve been. The great thing about being wrong is that you learn something. Especially if you use a foundational theory to tie concepts together. Theory building is all about finding anomalies that adjust and improve it.

Fortunately, exactly one year ago, on December 30 2009 I wrote an article asking if Android was disruptive. It turned out to be the right question to ask for 2010.

What have I learned since?

My main argument in late 2009 was aimed at the reaction of the recently launched Nexus One. A product hailed as disruptive to mobile operators. I did not see it that way. In that respect I was right. The distribution juggernaut any phone platform faces stopped the Nexus One dead in its tracks.

I wrote:

Here’s the problem: since mobile broadband is by all accounts not good enough, it cannot be disrupted. Operators are very critical in building out this new mobile computing future and they are investing and will reap rewards. Bitpipe models will only emerge after 4G when there will be ubiquitous high speed networks and competition will shift away from coverage and more to price and convenience of plans.

What is happening instead of operator disruption is that mobile voice which is more than good enough is being disrupted. Businesses built around mobile voice (e.g. handset vendors who have not developed a viable business model around data) will simply evaporate and their profits will condense around entrants who have mobile computing platforms.

So the operators are as strong as ever. But the Android platform lived to fight on, regardless of the Nexus one. And it grew in ways I did not anticipate. I had expected integrated players to maintain a large share because they would be able to improve the product more rapidly than modular vendors (and assuming that the product needed improving).

Google is moving on this opportunity but they are not executing in a way that ensures they control the future platform due to the their being on the wrong side of the modular/integrated dichotomy.

So Android grew but it’s not yet creating profits. It is perhaps laying the foundation for future profits and defending existing profits for Google but it is not yet a big profit center[1]. That is a cause for worry. Disruptors need to be hungry for profits and patient for growth.

I concluded:

Android will disrupt but I expect it will take 10 to 15 years. The life cycle of a new global network generation rollout is about 10 years. We’re in the middle stage of the 3G cycle that traces its beginnings to early this decade. 4G will take another 10 years.

Given what’s happened this year does this forecast still hold?

Mainly yes. I stand by the notion that operators will be in the driver’s seat for a few years to come. However Android has grown in an unexpected way: adoption by unbranded or relatively unknown vendors selling in emerging markets.

The Grey (market) Elephant in the room

Until 2010, it was very difficult to sell a phone without a recognizable brand. This is because brands helped overcome purchase anxiety for those buying a device for the first time. Brands mean trust and the lack of brand meant risk. Those who cannot afford to make purchase mistakes are more likely to lean on brands than the affluent.

But 2010 has seen a shift away from device brand value and more toward platform and function value. This shift was largely unforeseen and is very disruptive.

The fact one in three phones are sold from “other” unbranded vendors like ZTE, Huawei and G’Five is a bombshell. Right now they’re all selling voice products, but I predict that will not last long.

All those vendors are likely to adopt Android and in doing so will explode the low end of the market. They may even crush the branded voice-oriented market.

This growth can be slowed by operators but market forces will be very strong. These devices sell in grey markets and are often unlicensed, unbranded, untaxed and unregulated (and may even be illegal due to the absence of IMEI numbers).

So this is the real wild card for 2011: unbranded devices running Android could be the PC clones of the post-PC era. Will this phenomenon last or will the brands fight back? If they fight, the only weapon they could wield is innovation.

[1] Mobile efforts at Google are generating over $1 billion in revenues per quarter however these efforts include various other assets including AdMob which was acquired for $750 million. Furthermore, the headcount for Android and these other efforts is not small. I’ve heard as many as 3000 people are devoted to Google’s mobile efforts.

  • Ziad Fazel

    Horace, this comment is not for publication but to let you know when you moderate it of the typo in the phrase "The fact one in thee phones are…" should be one in three


  • Rob Scott

    The unbranded providers are certainly growing fast,make that very fast. They have already cracked the $150 price running Android and with "with Google " devices. But having said and seen all that, the sell through rate of branded devices especially Nokia and Blackberry devices in the low and medium end are very very high. Branded devices are selling twice as fast as unbranded devices. This is still an integrated OEMs' fight to lose. That is certainly my take going into 2011. While history does not prove anything, but I think the actuals combined with the roadmaps point to a integrated advantage. But every OEM will have to pull their A game, in both devices and execution. I am betting on a close finish 50:50 integrated vs. fragmented.
    I think you are spot on regarding the disruption once we go fully 4G. But we as carriers are looking at these things, obviously we do not want to end up being dumb pipes. I think you time frame though is too far out, we have already seen prices drop 90% in voice in one year. We think and we are betting on customers wanting and willing to pay for the speed and quality and with Android we can at least share on the revenues, e.g. with carrier billing or even our own stores. But differentiated pricing will be the key and carrier branded devices running Android.

  • How much (if any) of that $1 billion comes from ad revenue from the iPhone (which I believe Google pays Apple $150 million annually for)

  • "2010 has seen a shift away from device brand value and more toward platform and function value. This shift was largely unforeseen and is very disruptive"
    Really spot on.
    I have sean manu tech commentators wishing they had an android phone with the plain (vanilla) Android OS. If those unbranded manufacturers adopt this approach in 2011, it will be very disruptive indeed to those Brands that depends mostly on android for their survival, such as Motorola.

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  • Tapan Karecha

    You say: "…. and unregulated (and may even be illegal due to the absence of IMEI numbers)."

    This is so true in India (I live here and hence I know) because people just don't care about IMEI. And why should they? When a phone is stolen — neither the operators, nor the law enforcement help find or black list that phone even when the IMEI number of the phone is known.

  • MattF

    There's one thing that I keep colliding with when I try to understand the mobile market– the sheer number of players. The hardware market, for example has, at a minimum, developers, manufacturers, and vendor channels– in some cases, all the same, in other cases all different. Similarly, mobile OSs may (or may not) have different developers and vendors, apps that run on various OS may (or may not) have separate developers, vendors, and/or vendor channels. And both data capacity and data content can each have a pile of buyers and sellers in their stacks, each trying to get their nickel from one other and from the user. And then, mixed in with all this are the broader 'ecosystem' niches.

    It's complicated. And it's not quite right to call this 'fragmentation', since practically all possible combinations of unity and disunity are seen in practice. More like proliferation of many different niche-seekers– and no one knows (yet!) who will survive and who won't.

  • Excellent analysis!
    I've criticized those, mainly TechCrunch and America's FCC, who have foolishly thought that the Android would be disruptive to carriers, opening up competition. You called this one correctly. Similarly, your view re 'unbranded' Android phones seems spot on.

    However, I question the issue re Android and profits. I do think Android will prove profitable. Rather, in my opinion that's missing a larger point. To wit: will Google's mobile profits *ever* be able to replace the cash cow they've created on the (dying) PC side of the equation? I have serious doubts.

    Looking forward to your 2011 posts!

    • newtonrj

      Currently, Google is stuck in a nearly 50/50 split of revenue from US /vs/ Intl. Think of the ad impressions on a global Android adoption of +5b potential users over the tiny USA market. As Android grows, so too will Google's business. It may be that Android is an app widget for ad traffic only. -RJ

      • largefooted

        Exactly, thats Google's game in all of this.

        In less than 2 years, the market will be saturated with low end Android based feature phones. And a majority of them will have Google Search. Android is not meant long term to be just a competitor for iOS. Its meant to take over the low end and give every cell phone built in, defaulted Google Search.

        Interesting thing here is that Google probably profits just as much, or almost as much, from every iPhone sold as every Android sold. Google's APIs power iPhone's search and Map apps, and probably collect data from them just as from Android. Sure they don't have the ad collecting revenue from Ad Mob on iPhone, but because of the successful paid model there is less ad revenue apps on iPhone than Android.

        Android could succeed where so many of Google's other efforts have failed because its goal is to increase the audience for their core business. They clearly have challenges, but Android is meant to be able to cater to the low end mass market.

        I just hope that they continue to push at the high end as well, otherwise those of us who really like to have a file system on our devices are going to have problems in a couple of years.

      • FalKirk

        You assume that Android will be profitable for Google. I do not.

        Android is open. This means that Google products can be stripped from Android and replaced with products made or leased by the manufacturers and the carriers. Further, the manufacturers and the carriers have every economic incentive to do just that in order re-direct revenue from Google to themselves.

        Will the manufacturers and the carriers continue to strip Google services from Android? I think it's inevitable. If Google loses its economic incentive to shepherd Android, will they continue to do so? I doubt it. If Android loses Google as their patron saint, will Android be able to survive and thrive without such guidance? I don't know. But it seems doubtful.

      • largefooted

        I assume that Google will continue to be the strong competitor that they are, and that by expanding the market, they are expanding their potential audience for their core business.

        Sure, they're expanding the potential audience for their competitors as well, but Android is clearly about growing the pie.

        A significant amount of the good apps for Android are made by Google. Now, I have no idea how good their translations, or native language Google apps are for China, India and other developing markets, but its those tools that will, long term, make Android a success or a failure. Right now, success in the US and Europe are paying for development, but when the sub $100 smartphones start hitting, thats when Google needs to be out there with excellent apps for developing markets.

        Manufacturers may continue to strip Google Services from the phones, but if Google's local language apps are must have apps, they will be able fight that fight. And maybe they can fight it tell they get a few million new signups. Then those people will be in Google's system, and they will want to take those services with them, even if they switch to a different OS later. Android doesn't have to inspire OS loyalty to be profitable (although it would probably help). The Apps and Services Google offers need to inspire loyalty.

        Like I said, Android is about growing the pie. The Google Apps and Services are about eating the pie.

      • Anonymous

        I agree. Because Android is open (only brand name and Android Market place is technically closed) the OS is inevitably going to be taken by carriers and modified so that search revenue will be re-driected away from Google. I can see for instance that China will see no reason to keep paying Google money so they will have a market place of their own and will have an equivalent of Admobb of their own. Result – Google is ignored and they recieve no revenue.

      • alan

        Google and Apple disagreed about sharing user information in Maps – that's why the iOS Maps app (written by Apple and using Google Maps data) doesn't have all the features (like turn-by-turn) of the Google app – they fought over the licensing of it when iPhone 3G was introduced.

        Google pays Apple something like $100M / year to be the default search engine on iPhone. They do have Admob on some iPhone apps as well. So the net they get from iPhone is unclear though I would guess they break even or some small percentage either way.

      • largefooted

        Google wouldn't pay Apple $100M to break even.

        I know a guy who works for a company that dominates its market and uses the Google Maps API pretty significantly in its main product. In fact, you could say that its use of the API is one of the main reasons it dominates its market the way it does.

        They have an iPhone app out, and it would really be a killer app if it had the Maps API in it so you could use it the way you can on the regular website. But, the price of using the Maps API the way they do in an iOS app was too high to licence, so to use the tool you have to print out a map to use with the iOS app.

        Google doesn't give that away for free, and in the volume you have it on iOS products, that cost would be built into the $100 million figure. I'd say that Google makes at least $50 million in profit from iPhones at an absolute low end, and more likely several times that number.

      • Tom

        Google's revenue split doesn't look like that because they have lower marketshare outside the US, but because of general economic realities. There aren't that many ad dollars to be spent on low-income consumers, and reaching them is only marginally interesting to Google. That's why the iPhone on Verizon (and Sprint and T-Mo) will hurt Android revenue a lot more than Android market share.

  • Iphoned

    Google has failed with every indigenous product sinc search. Some have been shut down, others lack revenue model. With Android we may yet to see the third kind of Google failure. One that comes around to hurt the core business.

    • r00tabega

      Yet they grow their core product and profits.
      It could be that Android's main purpose is to grow their core product offerings (and thus, profits) significantly.

      When they saw the iPhone, they realized it was disruptive, and copied as much as possible to prevent a competing ad network (possibly by Apple, most likely from an 3rd party like AdMob) from destroying their ubiquity (and profit model) of the core (PC) search.

      • Steven Noyes

        Close but I do not think quite right. When Google saw Microsoft with Bing and WinMo with a strong lead in the mobile space, I think Google recognized the MS ad based revenue engine as a threat to Google's future. Remember that just 1.5 to 2 years ago, many Analysts were still predicting MS to get 60-80% market share with Windows Mobile. Go back 3-4 years ago and the numbers were like 85-95%.

        In response to that threat, Google purchased Android so they could get their mits on that advertising revenue. At the time, Google and Apple were strong allies from a business point but Google did not understand just how disruptive the iPhone would be (I am assuming that Google knew about the basic concept and design of the iPhone many months before its release due to Schmidt sitting on the board).

        Personally, I think had Google stayed out of mobile with Android, Apple would have happily let them have the mobile advertising pie and Apple would have been happy with the Hardware side of the pie.

      • r00tabega

        I seriously doubt that Google really believed that Microsoft was capable of deploying a mobile ad network, much less a threat to anyone in mobile… despite being the largest software company in the world, they were stagnating at 20% mobile market share max after 5 years of failed attempts at spreading their windows dominance to handsets.

        No, Android until the iPhone arrived, was a blackberry/treo killer. WinMo wasn't going anywhere fast and anyone who wasn't on the MS gravy-train knew that. Post-iPhone, Google shifted gears fast and spent lots of money on Android because they knew Apple had a hit, and they had a real threat to ward off.

      • asymco

        I'm going to have to endorse Steven on this point. Google entered the mobile OS supplier business in 2005 because of the perceived threat of Windows Mobile. The threat was not necessarily one of direct capture of ad revenue but it was the possible exclusion of Google services though a proprietary, vertical platform. Google depends on distribution and platforms, when not sufficiently "open," can be an obstacle to that distribution.

  • capablanca

    I'll agree that innovation is a weapon, and perhaps the best weapon, for brands to fight back. But does not RIM have another arrow already in its quiver? The ability to provide services over low bandwidth networks and/or with low bandwidth data plans could be a means of successful differentiation for RIM.


  • Paradise Pete

    Android phones will become commodities in much the way PCs running Windows became commodities. Except that Android itself is not the enormous cash cow that Windows has been to Microsoft. Sooner or later Google will feel the pain of developing it.

    In the emerging Asian markets there are a billion cell phones sold without contracts. I can go buy any phone I want and move the SIM card to it. If and when they're all running Android then they can only compete on price and build quality.

    • r00tabega

      Google could make a real threat to Apple if they had a seriously competitive App Store in their Android Market. Such a storefront/app platform would be unstoppable if they would address the issues noted by many of the Android developers (see… )

      Given the way the OHA is structured, I now feel this is impossible since Google doesn't have the level of control Apple does with iOS: they can't arbitrarily dictate standards and allow real competitors to hidden winners like the iPod Touch (i.e., iPhone sans monthly bill… and a first-class iOS client)… OHA has a policy preventing a first-class (Market compliant) device that doesn't line the pockets of the carriers with a phone contract.

  • jp Chicago

    People have learned to live with ads, but Google may already know that ads are dead – we barely notice them on web pages. Cultural tolerance for low quality ads will diminish because people will pay a premium not to have advertising.

    Social networking hurts Google a lot, because it provides a more targeted advertising vector, taking eyes away from Google ads.

    Google's core business, search, is vulnerable to a player like Facebook or Apple, each with the talent and means to build a better mousetrap.

    Google's mobile effort is purely reactionary and defensive, as profits are no where. They decided to forego short term profits to preserve dominance. Web Search as it stands today is not as impressive to the average user as it was in '98.

    New Internet sub platforms will arise on iPad, where users may have everything they need without Google.

    What is most surprising is how current Google strategy does not live up to the ideals of innovation. The way in which it attempted to exploit iOS innovation is shameful. Good engineers, inventors, and designers will avoid Google like the plague.

    The Android demographic as a whole has less disposable income than iOS. T this is a real problem for Google because money follows money.

  • Ajay

    Android's primary purpose was to keep Microsoft's share of mobile market and any resulting services small.

    When Microsoft purchased Sidekick. a phone that came bundled with backend service, Google recognized this as a potential threat in a future market and moved to buy Android.

    Android has been a success in terms of market penetration, though it is sad to see that most of Android's "improvisations" were little more than a cheap copy of iOS.

    How much revenue will Google get from Android is irrelevant. Android provided a legitimate alternative to handset makers and stopped Microsoft in its tracks in mobile space.

    Who now remembers HTC's birth as maker of WinMo only handsets? Such has been Android's success.

    • asymco

      I believe Google purchased Android in August 2005 well before Microsoft purchased Danger in February 2008. I would argue that Microsoft's move was in reaction to the iPhone more than in reaction to Android.

  • Android will turn out to be a sort of Pyrrhic victory, I expect. As you noted here back in August, the phone-makers with the thinnest margins now have a sort of "level playing field" from which to attempt to shave their margins even further. And as you point out here, there's now a flotilla of potential new competitors, who will be disruptive to the prospects of the more established OEMs whether they themselves succeed or not.

    Add to that the pressures toward fragmentation, since every OEM is going to want to distinguish their device from the mass of competing similar devices in some way. Given the very shaky governance model (for lack of a better term) around Android, things couldn't look a lot better for Apple, really.

  • Mark Newton

    Anecdote, subject to commenter ridicule:
    a) ~10% of Android phones are used by techie geeks who want root-level access to every device they own.
    b) ~10% of Android phones are used by 'open systems' advocates who think Android meets that brief.
    c) ~80% of Android phones are used by people who select their handset on price and want free access to apps (whether are ad-supported or pirated).

    Comment on item c):
    The profit being generated by Google from Android is 100% paid for by advertisers who are spending real dollars in order to present their product to a cohort of which 80% are cheapskates or pirates. How long before these advertisers work out that they are fishing in the wrong pond?

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