The Google Factor

Who could have predicted that a young Silicon Valley company with no expertise in the sector could develop a mobile operating system that would corner half of the global market in just two years? Or that the same company would end up buying once mighty Motorola for $12.5 billion?  Google has successfully pulled off both moves. Its primary goal is to get as many people on mobile phones using its operating system as possible, because the more eyeballs it attracts through Android phones – which by default take users to Google for a search –  the more advertising revenue it will generate.

 Google “saw where the global markets were moving and couldn’t possibly afford to lose out on the smartphone revolution,” says Dario Talmesio, a principal analyst with Informa Telecoms & Media. “The vast majority of Google’s revenues are still coming from display advertising. Having that advertising optimized on what is the most important display market of tomorrow is simply something that they couldn’t have missed and they were quite right to jump in with both feet.”

But the search engine giant’s moves impact far more than its own bottom line. “Google has introduced more competition and more choice for consumers in the smartphone market, increased the importance of the U.S. market in the mobile sector and thirdly, and most importantly, it has pushed down the cost of mobile phone systems,” says Neil Mawston, a mobile industry analyst at technology consultancy Strategy Analytics.

Consider the effect Google has had on mobile operating systems. It took Symbian, a consortium majority controlled by Nokiafor most of its existence, about seven years to gain 64% market share at its peak in 2006. Today Symbian’s market share has plunged to just 17%. Apple has 19%, while Android, the open source mobile operating system developed by Google, has come out of nowhere to grab 49%, according to Strategy Analytics.

“Android has absolutely crushed its competitors,” says Mawston.” Chalk it up to the power of free. “The most important thing Android has achieved is driving down the price of mobile operating systems and mobile platforms,” he says.

 Symbian’s operating system, developed in the 1980s and 1990s and optimized for hardware keypads rather than touch screens, was poised to lose market share in any case, say analysts. And the fact that it charges licensing fees doesn’t help. Ditto for Microsoft, which has been struggling for over a decade to optimize its legacy software for phones and gain a significant toehold in the sector.

 Although Microsoft has made radical changes to its mobile technology it still charges a licensing fee of up to $25 per phone, according to estimates Mawston has gleaned from industry sources. (Microsoft does not make the figure public).

 “Microsoft gets a lot of negative feedback publicly about usability of its legacy systems and its touch screens, but a good portion of why vendors are reluctant to go with Microsoft in the mobile space has been, and is, because of price,” Mawston says.

The computer software giant finds itself in a tough position. Licensing fees for use of Microsoft software on desktop and laptop computers generates huge profit margins for the U.S. computer software giant. If it agrees to reduce licensing fees for mobiles it could have a domino effect.

Nokia, which entered into a joint venture with Microsoft last February, is the only vendor that has managed to bargain down the fees. By cross-licensing some patents and using scale as a bargaining chip, the Finnish phone maker has reportedly reduced the fees it must pay Microsoft to somewhere between $1 and $5, Mawston says.

All the other vendors are looking at profit margins and are trying to figure out how to squeeze down costs as much as possible. Enter Google. “If Microsoft is offering you a good operating system for $10 to $20 a phone and Android is offering you a very good one at zero dollars the choice is easy,” says Mawston.

Google is succeeding not just because its operating system is free but also because of good software programming. It is the only operating system, outside of Apple’s, which offers a great touch screen experience, and it has an excellent set of services to go with it, including Google maps, Google mail and search, say analysts. And then there is the app store. Google reported that 10 billion apps had been downloaded from its app store by December of last year.

“They are building a very strong ecosystem around Android, second only to what Apple are doing,” says Roberta Cozza, principal research analyst at technology consultancy Gartner. “We are forecasting that Google will be on top of the smartphone market for a long time.”

While at first Android was mainly competing with Symbian and Blackberry, in the future, it will be a growing threat to Apple, says Cozza. “It can go head to head with iOS. 2012 will be a battle.”

The purchase of Motorola, which was approved by U.S. and EU regulators in February, will help make it more of a fair fight.

Google is acquiring 17,000 patents with the purchase of Motorola, and these will be important weapons as the battle for dominance in the mobile market increasingly involves lawsuits claiming infringement of patented technology.

In announcing the Motorola acquisition in August, Google chief executive Larry Page said it will "enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies."

It is unclear what plans Google might have for Motorola. Some speculate that it might make use of the hardware maker’s connected home technology. Others, such as Informa Telecoms & Media’s Talmesio, say it would make sense for Google to use Motorola to come up with its own new handsets.

Google’s role in mobile in the future could evolve in different ways, says Gartner’s Cozza  “They bought Motorola for the patents, but we still don’t know what they’re going to do from a hardware perspective,” she says.

It could be very tempting for Google to emulate Apple. “There is no doubt that if you own the hardware you can create a more consistent experience across all your devices and this would be good for Google in future,” says Cozza. At the lower end of the Android devices there is a lot of confusion because there are very good and very bad devices, she says.  “I could see a scenario where Google could use Motorola to make a benchmark device like they have tried to do with Nexus.”

 Google might also try to release some devices at the mid- to low-end just to have a benchmark showing what the Android experience should be at the mid- to low-end. They might also be thinking of doing a benchmark tablet targeting the same area of the market.

“The problem with this is that already some of the vendors were not happy about the Motorola acquisition and this would just anger them more,” says Cozza. “Google will have to be very careful not to alienate the vendors.”

On the other hand, the Windows Phone ecosystem has not proven itself to be successful with consumers yet, so  there are not that many alternatives for the vendors besides working with Google.

“Vendors understand that consumers are happy with the Google ecosystem, and developers are attracted to it,” says Cozza. “Google could find a way to have more control of Android while still allowing vendors to have some differentiation. We’ll see how they do it.”

If history is any guide, Google’s choices are likely to have repercussions across the industry.

Eric Sylvers contributed reporting to this story.

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