May 22, 2012

Apple and Android, who is eating who?

Android-and-AppleThe last few years have been a roller-coaster for every company in the mobile phone industry. RIM's once assured dominance in smart phones has imploded. Nokia's dominance with feature phones shrank to nothing. Apple, who introduced a phone years after people started talking about it, was thought to be a joke. Google's introduction of Android spun the economics of the device manufacturers on their heads.

But was it all worth it? Apple is currently winning the profit battle, but how long can their massive growth both in sales and profit continue? Of all the analysis in this industry that I have read over the last few years, none comes close to Horace Dediu from Asymco. His recent series of posts about the value of Android to Google is nothing short of fantastic.

Horace freely admits that he's making a lot of assumptions, many of which seem quite sound, but may be flawed. Still, its a great place to start when you want to break out Android from Google. It also makes for some very intriguing reading:

If we consider that Google pays Apple $9[1] for every iOS device and since Apple sold 156 million iOS devices in 2011 then Apple received $1.4 billion from Google, all of which went to the bottom line.

$1.4 billion from Google to Apple vs. $600 million from Android to Google. Three percent contribution of Google to iPhone profits vs. 5% contribution of Android to Google’s profits.


Lets break that down a bit. We know that Android sells more devices than Apple (at least, for the last few quarters they have). We know that Google makes money off of both Apple and Android devices. If Horace's assumptions are right, Google is making more money off Apple devices than off Android devices, despite there being more Android devices in the marketplace.

So this leads me to an interesting question... was Android worth it to Google? So far, their partners have had to suffer from lawsuits via proxy from Apple, having Microsoft charge royalties to Android partners and then purchasing Motorola, who is losing money by the truckload, to gain a patent portfolio to fight against Apple and Oracle.

But maybe its not all cost. What would have happened if Google had not released Android? Its doubtful that RIM, Nokia or Samsung's platforms could have contended with the iPhone, given that all their proprietary platforms have either faltered or been killed. Apple would likely have faced competition from some other company, likely Microsoft, but would it have been too little too late for Google?

Yes, everyone uses Google for search, but think about how they, Apple and Microsoft have been walking all over one another the last few years. Apple has always had their own hardware and software stack, part of what has allowed them to be so successful with extending that to the mobile phone market. Microsoft has always produced software, but in the last decade has moved more into hardware peripherals and gaming devices plus they have pushed hard into online services, where Google still reigns supreme. Google, initially just a really good search engine, has moved into enterprise software replacement, Microsoft's home turf, and now with the purchase of Motorola, are moving in on Apple aggressively.

With three of the biggest players each making pushes into each other's areas, I begin to wonder if Google didn't have a choice but to make their own mobile platform. Consider for a moment if Microsoft had spent heavily and bought their way into the primary search spot on the iPhone. If no other credible platforms were there except the iPhone, Google would have been effectively locked out of the mobile search market. You have to think that would have been very bad for them.

Or even worse, what if Apple had made a play into the search field? That is far from their strength, but if they were the only smartphone game in town, their profits would likely be even more outrageous than they are right now, so with all that money laying around, why not?

While Google may have made more money in the short term partnering with Apple and not making their own mobile operating system, they would then have their future be at risk if they were to be outbid for Apple's search business. What likely started out as a possible massive new push into a new market now looks to be nothing more than a defensive move in a minimally profitable venture.

That has to hurt.