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  • The Battle to Destroy Android

    July 13th, 2011

    It's pretty clear that when Google hired that team of Android OS developers in 2005, they targeted Microsoft as the main competition. Google and Microsoft have been engaged in a virtual battle to the death over search, and acquiring a startup that created a smartphone platform would give Google more ammunition to compete.

    But how things have changed.

    Today, Microsoft's mobile platform is stuck at the rear of the train, behind fading Research In Motion. Microsoft is struggling to gain more traction out of Windows Phone 7 by tossing billions of dollars the way of Nokia to sell smartphones featuring that OS. But nothing is guaranteed. As it is, Nokia has fared poorly in the smartphone game, and adopting a platform that is far from a proven success may be the wrong way to go. Besides, what are the other Microsoft licensees going to think, since they have to pay for the rights? Where are their bribes?

    But it may surprise you to know that Microsoft may actually earn more money from the sale of Android OS gear than Google. You see, Google's profits come from targeted ads. You click on an ad in a Google search window or app, and the advertiser pays Google. The actual OS is licensed free of charge, though it appears that Google is adding conditions to reduce the fragmentation that results from hardware makers and wireless companies embedding their own custom themes and bundled software. But Microsoft has asserted the rights to certain patents used by the Google OS, and handset makers are paying them for each unit sold.

    So from the standpoint of the bottom line, Microsoft profits whether you buy a Windows smartphone, or an Android smartphone. But Google really targets Apple as their main competition, and few dispute the fact that Android's look and feel is very much inspired by the iOS. But Apple hasn't sued Google for patent violations. Instead, they've gone after Android smartphone makers, mainly HTC and Samsung.

    However, Google is nonetheless suffering the wrath of Oracle, which has filed claims alleging infringement of the rights to the Java platform that's part and parcel of the Android OS. I suppose some cynics might remind us that Oracle CEO Larry Ellison is a pal of Apple CEO Steve Jobs, and that may have influenced this lawsuit. But it does appear the lawsuit is strictly an effort to assert intellectual property rights. If victorious, Oracle stands to receive huge paychecks from Google. In passing you have to wonder how expensive Android would have to be before Google would just abandon the platform and leave their licensees to fend for themselves. It's not that the Google Market, their imitation of the App Store, has demonstrated much potential as a profit machine.

    Another potential issue confronting Google is the fallout from the recent auction to buy up the rights for thousands of patents owned by Nortel, a Canadian telecom company that's in bankruptcy. Apple staked a consortium of companies that bid $4.5 billion to acquire those patents, but what strange bedfellows? This group included not just Apple, but Microsoft, Research in Motion, EMC Corp, Ericsson and Sony Corp.

    The big losers were Google and Intel.

    These patents, numbering 6,000, cover a wide range of mobile phone technologies, including 4G. Now that the courts in the U.S. and Canada have approved the transaction, expected to close this fall, it would turn the victors into gatekeepers that will be able to collect royalties from the losers and other companies that are using the technologies covered by those patents. And that includes Google. So once again, Google and Android licensees might all be required to write huge checks to continue to support the platform.

    This is not a trivial issue either, even though Google has pretty deep pockets. One reason that handset makers have embraced Android is because it's free, although paying Microsoft a check for every handset sold has to sting. But if those checks had to be written for perhaps much larger amounts, there's a point where it wouildn't make any sense from a monetary standpoint to continue to develop Android. Sure, Google could go the Microsoft route and charge for the Android license, but they will find far fewer takers.

    Who benefits?

    Well, if Android goes away, the iOS will have far more room to grow, if Apple can build enough product. But Apple's competitors would certainly seek out a viable alternative, and Windows Phone 7 might be a default choice, even though the public has yet to embrace Microsoft's mobile platform. That would leave such companies as HTC, Motorola and Samsung in a pickle. I suppose they could consider returning to separate platform development, but that choice is not going to be viable from a sales standpoint.

    In the end, if Google wants to save Android, they might have to sit down and attempt to negotiate reasonable financial deals with the various patent holders, and hope that ad sales would be sufficient to cover those expenses.

    It's not that I want to see a viable mobile platform die because of arcane intellectual property issues, but this is a cutthroat business. Right now, Apple and several large unlikely partners have collectively placed themselves in the driver's seat. I wonder how it's all going to play out.



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    3 Responses to “The Battle to Destroy Android”

    1. Joseph Futral says:

      It is unclear how many of the patents actually directly affect Google vs their hardware making partners. So far, with the Apple patents it seems to primarily be hardware implementation that violates their patents, not the OS itself. Otherwise Apple would be going after Google, like Oracle.

      And at what point is paying for Android (although not necessarily a fee to Google, but to MS and potentially others) a losing model compared to WP7 fees? Android is a far stronger market than WP7 at this point. On the hardware side, I can't see making a WP7 phone any less expensive than building an Android phone. Odds are the patent licenses are similar if not the same since feature sets are probably comparable.

      In other words, what is the value proposition of making an Android phone vs a WP7? Unless Android is succeeding simply as a default alternative to BB and Apple and being an Android phone has no inherent value and consumers really don't care, it still doesn't make sense to drop Android as a handset maker even if it cost more to make future Android phones than it does now.

      Joe

    2. AlfieJr says:

      Google brazenly entered the market with Android OS by asserting all its tech was "open" and nobody had to be paid any license fee for any part of it.

      they probably knew even then that was BS, but figured it they could get away with it for some years, drag out the inevitable legal proceedings, establish their market position, and then eventually cut deals for licensing that the OEM's, not Google, would have to pay.

      which is exactly how things are turning out, isn't it?

      eventually those license fees will probably add up to $30+ for every Android product. So consumers will pay $50 more than they would otherwise (prices normally fall over time).

      the only sticky part is who pays how much for the 100+ million Android devices already sold. we're talking a few $billion here.

    3. Walt French says:

      People who are partisan one way or another are happy to click on your “Battle to Destroy…” linkbait.

      Those of us who just want to see which way the industry is going will ignore it. The real issue, from our perspective, is that the cheaper something is, the more it will sell. If Google and its OEMs can get away with selling Android phones at a $25/set discount, their customers will get a better deal and Google will get their eyeballs to rent to advertisers.

      If not, the costs of various licenses will cut into either the carriers' or OEMs' or Google's profits. There's plenty of pad at the carriers who want to have a mix of sets, so that's the likely give point. Some of the OEMs are losing money and none are highly profitable; if they have to bear the cost they seem likely to pass them on and suffer lower sales. And while Google has lots of money, it's hard to see them subsidizing their OEMs $25 each on a couple hundred million sets per year; that'd be $5 billion a year, rich even for them.

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