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A u t h o r : M i c h e l l e L e

CMITDBISynopsis

ThisdocumentprovidesacriticalanalysisofGooglesmarketpenetrationbusinessstrategyforenteringthemobileSmartphonemarketandidentifiesitsrolewithinitsbusinessecosystems.

Recommendationsarealsoprovidedformaintainingbusinesssuccessbasedontheoriesofopen-

source,industryplatformsandnetworkeffectsofmulti-sidedmarkets.

Fall 2010

GoogleandtheUSSmartphoneMarket

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Introduction

Keepingtruetoitscompanymissiontoorganisetheworldsinformationandmakeit

universallyaccessibleanduseful,theInternetgiantGoogleacquiredstart-upAndroidInc.in

2005withtheaimofextendingitsdigitalservicestoawirelessplatform.Thephilosophy

behindverticallyintegratingintothemobiledevicebusinessbeingthatmorepeoplewillbe

connectedtotheInternet,thusboostingGooglesprimarybusinessofsearch.

TheAndroidoperatingsystemhasenabledGoogletoachieverecordgrowthwithinthe

mobilecomputingmarket.GooglehasmanagedtoovertakemajorplayersAppleandRIMin

theUSmarket,capturingapproximately44%shareandleadingitscompetitorswhomeach

hold26%and24%respectively(http://www.npd.com/press/releases/press_101101.html ).

AlthoughGoogleisnowthebigfishwithintheUSmobilecomputingmarket,thequestionis

whetheritisabletomaintainthisleadership,orwillitbecomecomplacentandrestuponits

laurels?ThesynopsisbelowprovidesacriticalanalysisofGooglescurrentmarketstrategies,

andrecommendationsformaintainingthisleadershipbasedonopen-sourcetheoriesandthoserelatingtoindustryplatforms,multi-sidedmarkets,networkeffectsandbusiness

ecology.CompanyandMarketBackgroundTheUSSmartphonemarketcurrentlyconsistsofafewmajorplayers:OHA(represents

AndroidasitisadministeredbyOpenHandsetAlliance,ledbyGoogle),Apple,RIM,

Microsoftandothers.Thetablebelowidentifiesthevendor,thenumberofmobileOSunits

shippedinQ32010,andthecurrentmarketshareofeachplayer.

U.S.SmartphoneShipmentsbyOSVendor,Q32010 (source:Canalys)

ThefiguresaboveareonlyrepresentativeoftheUSmarket,whichisatthefocusofthis

synopsis,however60%oftheworldspopulationarenowmobilephoneusers

(http://www.zdnet.co.uk/news/mobile-working/2009/03/03/sixty-percent-of-the-world-

uses-mobile-phones-39621541/ ),20%ofwhichareattributedtoSmartphonesales.23%of

worldpopulationareInternetusers,andifMooresLawisanythingtogoby,thesefigures

willincreaseexponentiallyoverthenextdecadeuntilallphonesaleswillprimarilybea

SmartphonewithconsumersbeingconnectedtotheInternetona24-hourbasis.The

opportunitiesformarketcapitalisationandpotentialrevenuestreamsforGoogleandother

playerswithinthisfieldaremind-boggling.HenceitisnosurprisethattheseInternetgiants

arefightingfordominationofamarketconsistingofessentiallytheentireworld.

OSvendorQ32010

unitsshipped

Percent

share

OHA 9.1million 43.6%

Apple 5.5million 26.2%

RIM 5.1million 24.2%

Microsoft 0.6million 3.0%

Others 0.6million 3.0%

TOTAL 20.9million 100%

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VendorscurrentlydeliveringlargequantitiesofAndroiddevicesincludeSamsung,HTC,

Motorola,andSonyMotorola.Therearealsomorefocusedeffortsfromothervendorssuch

asLG,HuaweiandAcer.Open-Source

TheAndroidOSProjectevolvedasaresultofGooglesacquisitionofAndroidInc.Androidis

nowaparticipantofOHA,aninitiativecurrentlyledbyGoogle.Byallowingvendorsfree

accesstotheAndroidOSsourcecodewheretheyareabletomakecustomisationsas

desired,itcouldbearguedthatGoogleispursuinganopen-sourcemarketpenetration

strategywithitsAndroidoperatingsystem.

Fromaprivate-collectivemodelperspective(VonHippelandVonKrogh,2003),theprivate

lossincurredbyGoogleasaresultoffreelyrevealingitssoftwaremaybeperceivedaslow

sincetheAndroidplatformissignificantlydifferentiatedfromthoseonthemarket.For

example,itisinstarkcontrasttoApplesskimmingstrategywheretheIphoneiOSproduct

offeringisbasedonexclusivityandpremiumpricing.DuetotheAndroidsopen-sourcenature,vendorsareabletoofferarangeofAndroiddeviceswithdifferencesin

functionalitiesandprice.ThusGoogleisabletowidelypenetratethemarket,reachingmore

price-sensitivesegments,andcounteractitslowerprofitmarginsthroughcapturingahigher

shareofthemarket.

Googlespursuitofalargercustomerbaseatthecostofhigherprofitmarginsperunitisalso

advisableasthemorepeoplewithAndroidessentiallytranslatestomorepeopleusingthe

plethoraofGoogleappsandtheInternet,whichiswhereGooglesrealbusinessis.Thegains

inrevenuefromcomplementarymarketsofsearchandonlineadvertisingwillmorethan

offsetanylossesGooglemayincurthroughlowerpricing.Asoneanalystatresearchoutfit

IDCsimplyputsitWirelessisthenewfrontierinsearch(http://www.businessweek.com/technology/content/aug2005/tc20050817_0949_tc024.ht

m).

BenefitsthatmaybederivedfromGooglesopen-sourcestrategyinclude:

Ahigherqualityproductduetoexpertcontributorscollaborativelyimprovingthecode,andthereportofbugsbyusers.TheCoverityScan2010OpenSourceIntegrity

ReportidentifiedtheaveragedefectdensityfortheAndroidkernelat0.47defects

per1000linesofcode,halfthenumberexpected( http://blog.coverity.com/open-

source/launch-of-the-coverity-scan-2010-open-source-integrity-report/ ).

Increasedmarketsharethroughhighuseradoptionratesduetopositivenetworkeffects.Theseeffectsarediscussedinmoredetailinsubsequentsections.

Sustainedcompetitiveadvantagethroughcontinuedinnovationasaresultoftheopen-sourcemodel.

Thecreationofacommunity,OHA,willsimultaneouslypromotebrandequity,reputationanddevelopmentproductivity.

Lowerproductdevelopmentcoststhancompetitors,aseachAndroidvendorisresponsiblefortheirownproductdifferentiationcosts.

However,Googleshouldalsobewaryofthedisadvantagesassociatedwithopen-source,

andimplementsuitablepreventativeorminimisationmeasurestooffsettherisksinvolved:

ItisimportanttomanagecustomisationamongstdisparatephonemakerstoensurethattheAndroiddoesnotfragmentintotoomanydifferentversionsthatareincompatiblewitheachother.Googlehasimplementedpreventativemeasuresin

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theformofacompatibilitytestsuitecontainingasetofrulesthatmustbemetin

orderforamanufacturertocarrytheAndroidbrand.

OpendisclosureofthesourcecodealsomakestheAndroidplatformvulnerabletorisksofadoptionbycompetitors.HoweverGooglemaybeabletomitigatethese

risksthroughitshighbrandequity,sheersize,andthecontinualinnovationinherent

totheopen-sourcemodel. RiskofhackerstotheAndroidplatformisalsohigher.

AlthoughAndroidisbasedonanopen-sourceplatform,Googlestillmaintainsasignificant

amountofcontrolviaitscompatibilitysuite.Thismaybeviewednegativelybysome

vendors,forexample,VerizononeofthelargestmobilecarriersintheUShaschosennotto

participateintheOHAandisrumouredtobedroppingtheNexusOnefromitsproduct

range.HenceitisessentialthatGooglefindabalancebetweenmaintainingtheintegrityof

itsopen-sourceimageandprotectingthequalityofitsAndroidplatformfrom

fragmentation.

Platforms,Multi-SidedMarketsandNetworkEffectsTheAndroidSmartphonecanbeperceivedasanindustryplatformthatactsasa

technologicalfoundationuponwhichanarrayoffirmswithinthebusinessecosystem,i.e.

phonemakersandappdevelopers,areabletodevelopcomplementaryproductsand

services.Asanindustryplatform,theAndroideffectivelysolvesabusinessproblemformany

firmsinthemobilephonemarketasitprovidesmanufacturerssuchasMotorolaand

Samsungwiththetooltoofferadifferentiatedproductthatcancompeteviablyagainst

ApplesIphoneandRIMsBlackberry.

TheAndroidcanalsobeperceivedasamulti-sidedmarket,bothonaphysicalanddigital

level,asitfacilitatestransactionsbetweenseveralgroupsofusersondifferentsidesoftheplatform.Fromaphysicalperspective,Androidbringstogetherthefollowinggroups:

1. Phonemanufacturers(e.g.Samsung)2. Mobilecarriers(e.g.AT&T);and3. Endconsumers

Fromadigitalperspective,itfacilitatestransactionsbetween:

1. Androidapplicationdevelopers2. Onlineadvertisers;and3. Endusers.

However,itisnotsimplyamulti-sidedmarketasitalsofacilitatesinnovationinnewproducts,technologiesandservices.Hence,itcanbesuggestedthatGoogleplaysakeystone

rolewithinitsbusinessecosystem,anditssuccessthussofarcanbeattributedtoitsability

tocapturepositivecross-andsame-sidenetworkeffects.

Googlesopen-sourcemarketpenetrationstrategyhasenabledittomoreeasilycapture

positivecross-sidenetworkeffectsasproliferationofAndroiddevicesranginginprice

throughoutthemarketresultedinalargernumberofendcustomershavingaccessandthe

abilitytopurchaseanAndroidproduct.Thehigherthedemandforaproduct,themore

attractedmobilecarriersandmanufacturerswillbetotheplatform.Similarly,fromthe

digitalperspective,alargerbaseofuserswithaccesstotheInternetviaAndroidwillattract

ahighernumberofAndroidapplicationdevelopersandadvertisers.GooglehelpsfacilitatethistransactionbyensuringtheprocessofapprovinganAndroidapplicationismoreeasily

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achievablethancompetitorssuchasApple.Thiswillresultinahighernumberof

applicationsavailablefortheAndroidplatform,thusattractingmoreusersinthisvirtuous

cycle.

TheAndroidplatformisalsosubjecttopositivesame-sidenetworkeffects,althoughtoa

slighterdegreethanthosedescribedabove.MoreuserswillbeattractedtotheAndroidplatformasthenumberofusersincreaseeitherthroughrecommendationsbyfriendsand

familyorthedesiretobeinwiththecrowd.

HowevertherearealsonegativenetworkeffectsinherenttotheAndroidplatformthat

Googleneedstobeawareofandmanageeffectivelytoensureitssuccess.Frombotha

physicalanddigitalperspective,ahighernumberofmobilecarriers,phonemanufacturers,

applicationdevelopersandonlineadvertisersresultinhigherlevelsofcompetitionfor

existingplayers.Thistranslatestolowerprofitability,asmoreresourcesmustbeinjectedto

attractattentionfromalimitedcustomerbasewithdiminishingreturns.Theimplicationfor

GoogleistheneedtomanagethebalancebetweenproliferationofitsAndroidproduct,and

hencelargermarketforitssearchandonlineadvertisingbusiness,andtheriskofmarketsaturationwhereitsusergroupswillturntoanotherplatformfromaninabilitytooffer

substantiallydifferentiatedproductsandthusmakeaprofit.Googlehastriedtomitigate

theserisksthroughitsopen-sourcephilosophybyallowingmanufacturerstocustomisethe

Androidproductanddeliveruniqueproductofferings.

Negativesame-andcross-sideeffectsalsoexistforendusersoftheAndroidplatform.The

moreuserwithaccesstoanopen-sourceplatformsuchasAndroid,thehighertheriskof

hackers.Also,moreadvertisersmaybeidealfromGooglesperspective,howeverusersmay

becomeannoyedwiththenumberofadsdisplayedandswitchtoacompetingplatformwith

lessclutter.AgainGoogleneedstoachieveabalancebetweenincreasingitsprofitsfrom

advertisingrevenueanddeliveringaproductthatsufficientlysatisfiesitsendusergroup.ThismaybeidentifiedasthemostcriticaldependencytoGooglesbusiness.

Fromaphysicalplatformview,Googlecanbeseentosubsidisethephonemanufacturer

groupastheAndroidplatformismadeavailableforfreeandGoogledoesnotmakerevenue

fromthistransaction.Inthiscase,endcustomersandmobilecarrierscanbeviewedasthe

moneysidesasconsumersarequalitysensitiveinthisrespectandgenerallywillingtopay

foraccesstotheservicesprovidedaSmartphone.Asdemandincreasesmobilecarrierswill

bewillingtopurchaseproductsfromamanufacturertomeetcustomerorders.

AlthoughGoogledoesnotrecoupmuchrevenuefromthephysicalplatformtransactions,it

isanadvisablestrategyasitdrivesdemandfortheplatform,andresultsinalargercustomerbaseofendusers.Fromadigitalperspective,thistranslatesintoalargesubsidisedgroupof

usersaccessingtheInternetviatheAndroidproduct.Inthiscasethemoneyside,

advertisers,willbewillingtopayGoogleapremiumtoaccessthismarket.Thus,Googles

loss-leaderstrategyinthemobilephonemarketisessentiallyastrategytoboostits

complementaryandprimarybusinesssearchandonlineadvertising.

TheabilitytocapturethesepositivenetworkeffectsimpliesthatGooglewillincurhigher

marginsthatwillenableittoinvestinR&Dandofferlowerpricesincomparisonto

competitorsduetoeconomiesofscale.ThiscompetitiveadvantagewillassistGooglein

maintainingitsmarketleadershipandessentiallyactasahighbarriertoentry,thusresulting

inafewlargeplayersinthemarket.Thisisalreadythecasewiththreemajorplayers,

Google,AppleandRIMandafewsmallerplayersintheUSSmartphonemarket.Thereforeit

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maybesuggestedthatthereisaWinner-take-alldynamictotheplatformasmulti-homing

costsarehigh,networkeffectsarepositiveandstrong,andneithersidesusershavea

strongpreferenceforspecialfeatures.

EcologicalStagewithintheBusinessEcosystem

Googlesimmediatebusinessecosystemwithinthemobilephoneindustrycurrentlyconsists

ofthefollowingplayers:mobilehandsetmakers,mobilecarriers,chipmanufacturers,

applicationdevelopers,advertisersandcustomers.Googlealsoplayersamajorrolein

anotherrelatedbusinessecosystemonlinesearchandadvertising.Withinthisecosystem,

GooglecanbeperceivedasingrainedintheLeadershipstage(Moore,1993).Howeverinthe

mobilecomputingecosystem,itcanbeseenasjustenteringtheLeadershipstagewithinthe

USmarket.

Googlehasalreadyachievedexpansionbyofferingavaluedbusinessconcepttocustomers

andstimulatingdemandforitsAndroidproductthroughanopen-sourcemarketpenetration

strategy.Currently,itisexperiencingstronggrowthandprofitabilitycharacteristicoftheleadershipphase.Googleincurreda11%marketsharegrowthinthelastquartercompared

to1%and-21%bycompetitorsAppleandRIMrespectively

(http://www.pcmag.com/article2/0,2817,2371865,00.asp ).

Googlesbargainingpowermaybeperceivedashighasthereissubstantialcustomer

demandforanAndroidproduct,andhencetheGooglebrand.Henceplayerswithinits

businessecosystemmustrelyonGoogletocontinuemeetingtheirrespectivecustomer

needs.Googlealsoplaysamajorroleinimprovingthehealthofitsoverallecosystem

throughtheprovisionofitsAndroidplatformfromwhichotherorganisationsareabletouse

tobuildtheirowndifferentiatedofferingsofAndroiddevices.TheAndroidAppprogramalso

facilitatesthecreationofnewproductsbythirdpartiesmoreefficient.ThusitcanbeseenthatGoogleoccupiesakeystonerolewithinitsecosystem.

Itsbusinessmodelwillassistinreinforcingthiscentralpositionasconstantinnovationis

encouragedfromitsbaseofcodeandapplicationdevelopersduetotheopen-source

nature.Asstatedbefore,Googleshighmarginswillhelpboostinternalinnovationthrough

increasedresearchanddevelopment.ThusGoogleeffectivelyhasanorganicbusinessmodel

thatiscontinuallyimprovingtheAndroidplatformonapriceandperformancelevel.By

sharingthevaluecreatedtootherparticipantswithintheecosystem,Googlewillbeableto

maintainitspositionasakeystonefirm,thusmakingitdifficultforfuturecompetitorsto

overthrow.

Conclusion

Googlessuccesssofarmaybeattributedtoitsabilitytobetonthemostpromisingnew

technologiessearchandwirelessanddeliverahighlyvaluedpackagebycombiningthe

two.IfGoogleisabletomaintainitssuccessthroughcarefulmanagementofrisksassociated

withopen-sourceandnetworkeffects,andmaintainitspositionaskeystonefirmwithinits

businessecosystems,Androidmayallowittobecometheleadingsearchenginecompany

withinthewinner-takes-allmobilecomputingmarketworldwide.Googlewillfurther

strengthenitsbrandequityandplaceinpopularculturewherepeopletodayreferto

performinganInternetsearchasJustGoogleit!