Above the Crowd

The Freight Train That Is Android

March 24, 2011:

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“People get ready, there’s a train a comin’”
- The Impressions

From Zacks via Yahoo: Mark Vickery, On Thursday March 24, 2011, 4:58 pm EDT “BlackBerry maker Research In Motion (NasdaqGS: RIMM – News) beat its fiscal 4Q EPS estimates by 2 cents per share, but missed slightly on quarterly revenues and offered guidance well below the current consensus. This has sent RIMM shares down nearly 10% in after-market trading…”

Yesterday, after the market closed, Research in Motion, the makers of the Blackberry device, announced that they would be lowering their current quarter earnings due to lower average sales prices. In a separate announcement, the company proffered that their new tablet will support Android apps, yet the CEO also made it clear that he believes the world is overly focused on the criticality of having a large numbers of applications on your platform. They also suggested that the guidance issue is temporary, and relates mainly to a product cycle not a systematic change in the industry.

Despite all that has been written about Android, as well as its unquestionable early success, the world at large still doesn’t fully appreciate the raw power of this juggernaut. I have written about this in the past in Android or iPhone? Wrong Question, and Google Redefines Disruption: The “Less Than Free” Business Model. But even so, the more I see, the more I wonder if I too may have underestimated the unprecedented market disruption that is Android.

One of Warren Buffet’s most famous quotes is that “In business, I look for economic castles protected by unbreachable ‘moats’.” An “economic castle” is a great business, and the “unbreachable moat” is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle. Here is a great post from the 37signals blog a few years back that walks through several different examples of potential moats.

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework. Because of its clear network effect, and amazing price optimization (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google,AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg’s “Meaning of Open” blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. “In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users.” As Rodney Dangerfield said in Caddyshack, “It looks good on you, though.”

AdWords is an highly respectable castle, and Google would clearly want to put a “unbreachable moat” around it. Warren himself is on record suggesting that Google’s moat is pretty good already. But where could you extend the moat? What are the potential threats to Google’s castle? Basically, any product that stands between the user and Google and has the potential to distract the choice of search destination is a threat. A great example is Firefox. Like many browsers, Firefox has a search bar built into the upper right corner. This leads to a substantial number of Google searches for which Google pays Firefox a handsome fee. From time to time, this fee must be negotiated, and as a result there are constant rumors that Firefox might chose another search engine, like Bing. Other examples include smart-phones and choices made by carriers and/or handset makers. As an example, a few years back, Verizon set the default search box on Blackberry’s to Bing instead of Google. Despite Warren’s faith in Google’s moat, there are ways to move the needle on search share, or at least hurt the economics by demanding more profit share for distribution.

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

Google has organized this defensive play with precision. Carriers and handset makers that use Android are given economics to do so. The Android version of the “AppStore” shares the majority of its economics with the carrier and handset makers. Once again, they are not building a business, they are building a moat (sorry for the repetitiveness, it’s intentional). Because they are “giving away” money to use their product, this creates a rather substantial conundrum for someone trying to extract economic rent for a competitive product in the same market.

This is the part that amazes me the most. I don’t know if a large organized industry has ever faced this fierce a form of competition – someone who is not trying to “win” in the classic sense. They want market share, but they don’t need economics. Imagine if Ford were faced with GM paying people to take Chevrolets? How many would they be able to sell? What if you received $0.10 for every free Pepsi you consumed? Would you still pay $1.50 for a Coke?

The combined market capitalizations of companies that build desktop operating systems, handset operating systems, mapping software (they give this away with Android also!), as well as internal software that helps to differentiate mobile devices is well over $100B, and may be several times that. Yet, there is no economic law that necessitates that these industries remain in their current form. When software was first imagined as a business, it seemed like a miraculous dream. Because the variable costs were zero, you would make near 100% profit on each incremental unit that you sold. Perhaps the resulting counter-force to this is that if someone can afford to build a near equivalent code base, than they can at their option price to marginal cost ($0.00), the very definition of perfect competition.

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here – in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents “perfect competition.”

In Silicon Valley we like to make light of industries that are facing digital disruption such as newspapers, the record industry, and the movie industry, suggesting that their executives “just don’t get it.” Perhaps now we are witnessing the disruption of not just analog businesses, but also formerly interesting digital businesses as well.

John Doerr, once said “The Internet is the greatest legal creation of wealth in history.” Android may be the opposite of that, the greatest legal destruction of wealth in history.

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323 Comments

  1. Eric Kennedy March 24, 2011

    Great post, Bill. Google’s strategy with Android is similar to Microsoft’s with IE in the 90s — protect the core franchise at all costs. The emails and documents that were released as part of the DOJ trial made it crystal clear that Microsoft’s priority was protecting Windows.

    Google free software offerings are built on a base of open source software (Android is Linux and Chrome is inspired by Mozilla), so Microsoft’s free software nightmare is finally coming true. Who knows, maybe this is all Eric Schmidt’s revenge for what Microsoft did to Sun and RIM is just collateral damage?

    While this perfect competition hurts the market cap of some public companies, it changes the ecosystem from a monoculture to something more similar to what we see in nature; there will be a lot of smaller, private companies that can thrive with lower costs and better products from Google and Microsoft. It’s Andy Kessler’s mantra: tech price compression makes new markets viable and creates new wealth as it recycles the old.

    Reply
    • James March 30, 2011

      Wow, I’d never put that much thought into Android. Great article!

      But money is a shell game. There won’t be a destruction of wealth–just another redistribution of it.

      Off topic, I love the format of your pages. What plugin/addon do you use to alternate images at the left and right within your text?

    • bgurley March 30, 2011

      I think its standard wordpress.com.

  2. Iyer March 24, 2011

    Sometimes the moat itself has no relevance because the castle loses its relevance!!

    Reply
    • Santiago Gala March 29, 2011

      > Sometimes the moat itself has no relevance
      > because the castle loses its relevance!!

      +1, It will protect the castle while it is important, but eventually the castle will no longer be well placed…

      Some people are trying to work in this direction using different techniques: Controlling the screen (facebook), specialising (eBay, amazon, …)

      “Video killed the radio star” has been a popular theme for years and years.

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  4. Joseph March 25, 2011

    All this talk for almost no real content? You called Android the freight train but provided no examples or illustrations about how it is good. You went on & on about how ‘teh mighty Googles’ (Intentional typo) are behind Android and how that makes it a force to reckon with.

    Android will go Linux’s way. Both are open & great platforms, in theory at least. But what’s in Android for the hardware manufacturers? Nothing. The market is horribly fragmented and sooner or later the hardware manufacturers will realise that they are better off embracing a standard platform across the industry – Win 7, or develop one internally so they won’t be at the mercy or someone outside outcompeting them. While Google enjoys popularity of Android and controls the software the hardware manufacturers are cutting prices to the bone to stay competitive. How longer before they realise they are playing a sucker’s game?

    Reply
    • bgurley March 25, 2011

      I left this stuff out for reasons of simplicity. I think at “Free” Android only need to be “good enough”. Windows, wasn’t that good either, but it didnt matter.

      Android is already off the launch pad, the numbers will speak for themselves.

    • Joseph March 25, 2011

      Here’s ArsTechnica article basically saying what I already mentioned in my post – http://arstechnica.com/open-source/news/2011/03/android-openness-withering-as-google-withhold-honeycomb-code.ars

      @Bill – Your article made fair points in favour of Android as a platform, but I think omission of the view from other side due to space / time constrain offers only one dimensional view.

  5. Jim Windle March 25, 2011

    Great post. But the picture isn’t appropriate for the unstoppable Android locomotive, its a Pennsylvania Railroad, ie PennCentral, locomotive. 40 years later PennCentral is still one of the biggest bankruptcies in American history.

    Reply
  6. Jeremy Glover March 25, 2011

    I thought it was interesting you didn’t mention some parallels in existing technology markets. Think console gaming and printers. They’re practically giving away the device because it’s more profitable for them in the long-run to do so. Printers are basically free today, but you pay dearly for ink. I think Google’s got the right approach: “Use our OS and we’ll make it easy for you to use all of our AdWords-supported products that make us ridiculous amounts of money.”

    Reply
  7. Gregor March 25, 2011

    Nice post, but I wouldn’t agree that “Google’s aim is defensive not offensive”. There are defensive aspects to what they are doing, but both Android and ChromeOS are driving up web usage and search, in particular. Android will most likely be the primary driver of increasing Internet penetration and usage for the foreseeable future.

    BTW Rosenberg’s “Open Manifesto”, makes this point, which is that it is often more profitable for companies to grow an industry, in this case the one that enables and accelerates web usage, than purely focus on taking share within an industry.

    Reply
  8. Healy Jones March 25, 2011

    Tremendous post. There is a lot to digest in here.

    I don’t agree with everything you are suggesting. But my disagreements are pretty modest.

    1) I think this is more offensive than it first appears. Google is attacking the crown jewels of the two biggest potential competitors to their search franchise – MSFT with the Chrome OS and Apple with Andriod. Giving away a competitive product clearly undercuts the biggest competition’s cash cows.

    2) I’m not sure this is entirely good for consumers. Here is why – Google is discouraging innovation in these areas by startups because potential new companies know they can’t compete with the price of free. Consumers are getting something pretty decent, but the end products really aren’t all that great yet. However, people who want to have real business models where they charge for a better solution will have a very hard time both a) justifying entering the market and b) my second point is harder to articulate, but there have been other products (Wave, etc) that Google releases with minimal support, medium UI and way too much fanfare. When these products fail, consumers decide “hey, all other products in this category must stink, therefore I’ll never pay nor will I try another” and startups/VCs say “hey, Google failed, and they were giving it away, so this entire category is not worth pursuing.” So, basically, I think the consumer can get hurt by Google doing something without really committing to making a business out of it.

    Reply
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  11. Kevin R. Winegardner March 25, 2011

    Nice write up Bill. I agree with your insights. So far Google’s innovations have been textbook examples of the best of free market capitalism in action. What will be interesting to watch for if it isn’t occurring already is whether or not they shift (as many large entities seem to), to a mercantile model to maintain their position into the future. I am watching for either legislation or regulation in the future that would ostensibly protect the public/consumer, but in reality just be erecting barriers of entry to potential competitors…

    Reply
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  13. John Kemp March 25, 2011

    Bill,

    Thanks for the excellent post.

    Most of what you say is very accurate. However, I’m not sure that Google is driving us to “perfect competition” – I believe that they are setting the price in many markets (for example, map data will be roughly-speaking free), and that no-one else can do that (which as I understand it would violate the conditions for “perfect competition”)

    Secondly, software hasn’t succeeded as a standalone product type (name the software-only companies have *ever* been profitable at all — there are few). Software exists profitably only in other products (phones, internet services, washing machines and so on). So what does it really mean for software itself to now be free, since it has only ever in exceptional cases made profit on its own anyway?

    As you say, we are clearly witnessing disruption of formerly interesting digital businesses though – and not just “software” (how about map/location data for example?)

    Reply
    • bgurley March 25, 2011

      You my be right. Huge market share gives you optionality on new businesses. Facebook wasn’t created with a business model in mind.

  14. stevegurley March 25, 2011

    Great post.

    Reply
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  16. Tim Ogilvie March 25, 2011

    Great post. Totally spot on on their strategy and how well it’s playing out.

    The distinction that I’d draw is that search isn’t shaping up to be the only revenue stream for mobile carriers. Apps appear likely to be a larger piece of the puzzle. And on this front, Android’s strength (free & open) appears to be a major weakness as well.

    On slide 46 of Mary Meeker’s mobile think-piece, she lays out that Apple’s iOS is converting users to paid apps at a 5X rate.

    http://www.slideshare.net/kleinerperkins/kpcb-top-10-mobile-trends-feb-2011

    Developers will build apps for the platforms that make them the most money. And combining market share with conversion rates, Android isn’t in the running.

    I’m sure that will change, but it needs to happen fast before carriers realize that $0.10 + a free Pepsi is actually costing them lots of $$.

    Reply
    • Allen Cross March 25, 2011

      Meeker’s ’5x’ figure — and her ‘Apple converts better, developers will follow’ argument, generally – is skewed by old data. Fact is, once Apple saw (or, more correctly, was shown) the profit potential in delivering 3rd-party applications, they did an excellent job of planning & executing the necessary infrastructure. Of course, it helped greatly to merely adapt the iTunes Store paradigm to this new enterprise. Perhaps due to the ‘free’ nature of their Android business plan, Google seems to have misjudged the need to take the lead in app marketing, laying a proper groundwork for others to use. As a result, it’s been only recently that Android has achieved near-parity with iPhone in all of the critical metrics necessary for App Store success.

      In 2010, several factors withheld Android users from buying more apps. Android Market offered neither sales in non-US currencies nor a conversion utility to facilitate purchases, plus some foreign carriers/operators actively prevented access to Android Market. Also, Google has yet to release public APIs for in-app purchases. Add to these Google’s lack – at the time – of ‘Books’ and ‘Music’ stores (the latter of which should be coming on-line in a few months) and the somewhat chancy state of Android hardware. It wasn’t until mid-2010 that demanding games could stored & run on more than a few Android phones — that’s when the OEMS began adding more RAM at almost the same time that Google added SD file-storage to the basic OS.

      So, Apple’s higher conversion-rate was not merely a reflection of Apple fanboyism, nor of the legendary Jobsian ‘Distortion Field’ magic. Similarly, it doesn’t prove that Apple fans are wealthy hedonists, while Android users are cheapskates or some kind of ‘Information Wants To Be Free!’ hippie socialists. No, most of the effect can be explained in simple terms using empirical evidence. For whatever reason(s), Google & their ODM partners did not fully appreciate the benefits of 3rd-party applications. They neglected just about every aspect of app sales for 2+ years, thus giving iPhone a significant headstart in that sector. But that’s over, now. Given Android’s phenomenal sales, more and more new apps will come out on that platform first. Likewise, it’s just a matter of time before every iOS developer starts working on Android projects.

      Bottom line: Google IO 2011 didn’t sell out in <1 hour just for the possibility of free phones.

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  19. Jeremy Wacksman March 25, 2011

    Great Post, Bill.

    “the consumer is not harmed here – in fact far from it.”

    A free Android enables OEMs and carriers to further subsidize handsets, getting these powerful computers into people’s pockets at lower prices. Great for consumers.

    However, doesn’t ending up with a platform duopoly enable further concentration of carrier power, as the only viable hardware choices become Apple or a slew of un-differentiated Android SKUs, available on high margin contract terms?

    As Android relegates manufacturers to 2nd class citizens, we are already starting to see carriers re-assert their control of the OS.

    Reply
    • RS March 25, 2011

      Two commments, having worked at both a carrier and an OEM:

      Apple: control everything – retail, pricing, marketing, app store, user experience, etc. They won’t be bending to any carrier demands anytime soon. Why? Massive consumer pull – unless Apple loses its appeal to end consumers, the carriers, not Apple will be bending. Carriers have no choice, you can’t overstate the impact of the iPhone in the mobile industry.

      Android: OEMs, and carriers, desperate to lower costs and compete with Apple have effectively committed suicide with Android. Short term, carriers fight the iPhone, get some control over UI, get some revenue, but most of all, get the OEMs to fight each other on price (think CLV) – after all, their goal is to (1) reduce churn due to the iPhone and (2) get as many people on data plans as possible – Android making that happen. For carriers, these drives up short term economics, but bit by bit, Google chips away at differentiation, and ultimately the “subsidy drug” US consumers are focused on. Google is dancing a fine line here, but at some point, carriers become as hooked on Android as they are on the iPhone and Google is the one calling the shots.

      For OEMs, in a rush to lower OpEx costs, and again, compete with iPhone, love Android. But again, Google chips away at their differentiation (Nexus, Honeycomb launches, lead devices, etc.) Eventually, there is little difference and it’s PC beige boxes 2.0

      For both OEMs and carriers, there is life, but margins decline, lower the barriers for consumers (great for Google, not great for everyone else). There are dozens of Chinese (and Korean OEMs more than happy to jump right in to hit short term sales targets).

      Net net, Google is a runaway train, that but completely changing the economics of the value chain and thanks to the iPhone and short term earnings targets, hook carriers and OEMs, only later to disintermediate them – classic PC platform game.

    • bgurley March 25, 2011

      Very well said.

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  23. Will March 25, 2011

    “This is the part that amazes me the most. I don’t know if a large organized industry has ever faced this fierce a form of competition – someone who is not trying to “win” in the classic sense. They want market share, but they don’t need economics.”

    Great post, lots to ponder over. Seems to me that Google is actually not pursuing an entirely “newly invented strategy” – certainly its vigor, persistence, and focus is refreshing and unseen since Bill Gates was at the helms of MSFT dismantling the desktop application industry. (however, that one had a intrinsic economic motives).

    My contention lies in the fact that at some point, when Google gains enough marketshare in search (already there?) does it becomes a “monopoly” and as a result, its practices of using its profits in search to fund the extinction of other adjacent industries (and potential competitors in terms of value chain) can be considered anti-competitive monopolistic behavior? Not only is Google creating a larger moat – which in of itself is not anti-competitive. They are also extinguishing potential competitors (really potential dis-intermediaries) in adjacent spaces that could one day enter the search space iself. Using the moat analogy, as Google is digging trenches, they are burying competitor armies with them at the same time.

    MSFT did this once in the browser space and permanently turned the browser software business to a virtually zero revenue industry. Fearing that browsers will become the new desktop/OS (and 10 years later, its has become real), it gave away IE to make sure netscape (and the nascent browser industry) can never threaten its position in the value chain as the DIRECT OWNER of the user experience. (and other analogies in the telecom space could hold water as well)

    Reply
  24. jyarmis March 25, 2011

    I agree with everything you say…except the issue that there’s no consumer harm. It’s perhaps impossible to quantify but the fact that Google will scorch earth in related markets creates a considerable chilling effect to innovation in those markets. Google’s ability to “play” in adjacent markets where others are trying to create real products and real businesses has and will continue to place constraints on software innovation. Would you fund an innovative startup in a space where Google was “playing”? The threshold for that decision has clearly gone up. What are we not getting because Google doesn’t care about adjacent economics?

    Reply
  25. Jamal March 25, 2011

    >I don’t know if a large organized industry has ever faced this fierce a form of competition – someone who is not trying to “win” in the classic sense. They want market share, but they don’t need economics.<

    Time to dig out your old reports on Netscape.

    Reply
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  29. Mark Sigal March 25, 2011

    Hi Bill,

    Two quickie thoughts on this one. One is that while it is almost taboo to say this (me being an entrepreneur in tech), an unwritten chapter of the Internet “book” is whether the Internet will prove to have been a greater NET creator or destroyer of industry, jobs and wealth.

    Why? When one looks at all of the industries that have been wiped out, and the “surround” that feeds those industries, where jobs and segments are just perpetually gone (whither book stores, record stores, video stores, consumer electronics stores, packaged software, etc.), one wonders just how harmless the brutal, often free, efficiency of the Internet really is.

    Second is that while I am a free market guy so never feel comfortable raising the fair practices question, many sure thought that it was an unfair practice for Microsoft to systematically squeeze the life out of competitors by giving away for free what competitors hoped to sell, all via the same subsidized model.

    Was the consumer harmed? Well, I guess when you look at the richness of the jobs/industry ecosystem surrounding Wintel, you’d say no. When you look at the vanilla homogeneity that Wintel promulgated, you might say yes.

    It’s a paradox is my take, and our industry doesn’t do real well in navigating, let alone making sense of systemic complexity, which explains why it took so long for most to grok the behemoth that Apple was building.

    There’s the greatest irony. Both Apple and Google are prized pupils of the Microsoft Way, albeit each taking different key lessons from the tutelage.

    Cheers,

    Mark

    Reply
    • ASB March 28, 2011

      Mark,

      Good points, but I would argue that what you refer to as “vanilla homogeneity” is in reality the impact of standardized APIs and interfaces. I don’t long for the good ol’ days of every application having to provide its own printer drivers, or providing a completely and distinctly different user interface.

      Some variety is good, but standardization also provides great benefits.

      -ASB

    • Mark Sigal March 28, 2011

      @ASB, to be clear, Apple provides standardized APIs and Interfaces, and it’s hardly a homogenous devices, in part because Apple has concentrated on not just abstracting hardware complexity, but rather exposing it via well-defined APIs and the iOS SDK.

      Similarly, I would argue that the sheer dominance of Microsoft’s packaged software in the primary PC domain of word processing, spreadsheets and presentations, and MS’s tie back to BackOffice, accentuated this trend.

      In other words, I am a huge fan/believer in the Microsoft approach to platform execution, but I believe that the type of platform that they drove was focused around a more narrow definition of the computing universe.

      Cheers,

      Mark

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  33. Tom March 25, 2011

    BBC – thre’s a reason that Sky, Conservatives and others diss it – it’s out to do well in the market, but they’re not out there for a profit.

    Some moats have dual purposes or more (see Apple’s iTunes, App Stores, or Safari (Webkit especially).

    Reply
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  37. Fred March 25, 2011

    Another thought on this:

    “One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here – in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents “perfect competition.””

    In some ways, this reminds of freshman economics class where they talk about monopolies using an example where a grocery store chain moves into small grocery store’s territory. To run the competition out of the market, the chain lowers prices below cost. They can afford to do this because they are making money in other territories. In a way, this is what Google is doing except that instead of geographic territories, it is another consumer market … smart phones.

    Reply
  38. Mike Suarez March 25, 2011

    I guess this STILL seems irrational to some, but YES, we would still pay $1.50 for a Coke if it tastes better. Something free and ubiquitous can certainly be disruptive to things that are cheap and pretty good. But I’ll pay more for an iPhone because it’s better. And Apple’s moat is materially built with iTunes and that purchasing experience. It is also built with their ability to speak to my imagination, which is hard to compete with on price or even feature set. This “Android Juggernaut” is sort of interesting to read about. But what’s more interesting is this stubborn habit of so many consumers asking “which is the best mobile phone in the world?” and then buying the sleek one with the little apple on it. It’s encouraging to see ‘magical’ products revered over products as moats.

    Reply
  39. ubiquitary March 25, 2011

    Awesome post! loved it. but the next question is what can competition do to counter google’s current strategy?

    Reply
    • bgurley March 25, 2011

      That is a legitimate question, and one i don’t think I have an answer to (hence, the post). You can’t afford to start a search business. Yahoo and MSFT are trying that.

    • Rodrigo March 25, 2011

      Isn’t the answer to this in other ways to get in between Google and the user? All the hype about the launch of Color comes to mind. As does FB, Twitter, etc. These can’t build OS platforms to counter android, but they can jam themselves in between that OS (or Google) and the user. FB has probably done the best work of this

    • Andy Fraser March 27, 2011

      To do search better than google, you’d need better algorithms, better hardware/software infrastructure _and_ access to the data on searches. There are a _few_ organizations that could afford the hardware, but I don’t see how they could get the rest.

      To separate google from its users might be easier. The point of the article is that google is defending against that strategy effectively.

    • bgurley March 27, 2011

      This is a great point. Targeting core search might be easier than laying chase to their Moat strategy.

  40. Mark Szpakowski March 25, 2011

    Incisive, but optimizing for free stuff (“free as in beer”) ignores the other free (“as in speech”). The former helps create great fun and brings the drinkers thru the monetization door, enriching the castle, while laying waste to the surround. The latter is more about creating a fertile ecosystem of value cycles rather than one-way value chains. This is the still-submerged implication of the Goldman-Facebook deal, which follows the retro 20th century path of privatizing the wealth generated by 100′s of millions, and preventing them from sharing in it. If this is true, then Zuck/Page/Brin and their castles will become the next-gen Bin Ali/Mubarek/Gaddaffy and their castles.

    Reply
  41. adorno March 25, 2011

    Yes, I’d still pay for Coke. Pepsi sucks

    Reply
  42. Rajil Kapoor March 25, 2011

    great post Bill – you are dead on. Companies are now competing on different bases than profit maximization in certain segments. A great other example is craigslist which is giving away tremendous value while making just enough from a few categories to pay the bills – they aren’t even protecting a castle – they are simply knocking down sand castles like a big kid on a beach : )

    Reply
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  45. Yan March 25, 2011

    I won’t dispute the premise, but perfect market… free.. consumer benefiting looks glossily over the externalities of the system.

    Reply
  46. Nerd Stalker March 25, 2011

    I take the opposite view, I see a long term demise or reduction in the Android mobile os. Your sort of glaze over the option for hardware or network operators to create their own os’s and this is indeed what is happening.

    The hardware manufacturers are now realizing that you need to control everything end to end (like Apple did) and avoid fragmentation. Who is attempting this late in the game? Microsoft, RIM, HP even Motorola is hedging now with another os.

    All this being said I really enjoyed reading your piece and getting your insight.

    All the OEM’s have to do is decide not to play ball with Android and it’s potentially game over.

    Reply
    • bgurley March 25, 2011

      There is zero chance this will work.

    • Allen Cross March 25, 2011

      I agree — ‘not playing ball’ won’t fly.

      For one thing, ODMs can’t afford to slag off Android. Seen HTC’s profits and stock price, lately? It’s all a whole new world for them since they stopped making boxes for Windows Mobile, only. Do you really think Motorola has the guts (or, much less, the spare cash) to stop being the ‘Droid’ company? And don’t even get me started on the pathetic mess that is Windows Phone…

      The only way ODMs could do anything like what you suggest is by collusion. At which point we _would_ see the feds step in. Not to suggest that hedging their bets with some kind of secondary OS plans isn’t a wise move. I think Samsung has the clear lead in this area, with their surprisingly successful Bada phones positioned against Nokia’s mid-priced lines.

      That said, hedging is one thing but going it alone in mobile is a huge risk if not simply a recipe for long-term disaster…just look at RIM and Nokia. They caught corporate pneumonia so fast they were on life-support before they realized what was happening. Meanwhile, let’s recall how none of the vested interests wanted to ‘play ball’ with Apple, either. How’d that turn out?

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  48. Evan March 25, 2011

    You say that Google’s not interested in making a profit on Android, yet both Eric Schmidt and Andy Rubin have said that Android is a net positive for the company.

    Android is most certainly about the money; it was just simply a long-term investment which started paying off last year.

    Reply
  49. Adam Snow March 25, 2011

    I wonder what this implies for Google’s long-term value.

    Basically, Google’s stock has relatively closely followed the S&P for the last couple of years (there have been stretches of separation, but usually a pretty quick re-convergence). If you figure that “all” they do is sell advertising and they are already in pretty much every major online space (and will continue to expand as the online world expands), then their revenue basically follows overall advertising revenue and overall advertising revenue oughta track the market, more or less. So unless Google creates whole new businesses (either finding ways to “monetize” their other products), finds whole new advertising spaces they can dominate to a greater extent, they will continue to move with the market.

    Based on Google’s historical behavior (and what this article points out) all of their new innovations are free and just form a defensive moat, so new profit-generating businesses are unlikely. Incremental innovations in advertising (and the odd quantum leap) are likely to continue, but I doubt if these will be incrmeental profit opporuntities — ad dollars will just move around a bit and Google will claim their fiar share (or not claim them, which would be bad).

    A key point of Buffett’s castle/moat argument is the ability to exercising pricing power and expand margins. Not sure how easy it is for Google to do this — especially if their stance is fundamentally defensive (and they will continue to incur costs for the free products in their moat).

    Makes me think that, while a fascinating company that will continue to shape many corners of IT, Google is not a particularly great long-term investment at this point, despite their strong brand and market position… Until they figure out new ways to make money.

    Reply
    • Andy Fraser March 27, 2011

      In the mid 1990′s I heard Bob Young speak at a local Linux user’s group meeting. He said something like “I want to take a _twenty_ billion dollar operating systems market and turn it into a _five hundred_ million dollar business. (I’ve forgotten Young’s exact numbers, but google finance says Red Hat’s revenue was 0.24 billion last quarter.)

      At $50 per user per year (and free at home), for a good enough product (google docs for business), google could, in time, take over the dominant position in office software for business and make money at it.

    • Adam Snow March 27, 2011

      In theory, yes, Google could charge, and may well… My guess is that we will see a general shift back to slim simple apps (how much of Excel’s feature set do 80-90%+ of users *really* use?) regardless of whether Google leads the charge or not.

      The thing is that it is hard to start charging for something you’ve trained people to expect for free. It’s also hard to see this switch until there is a substantial population of committed users that you won’t turn away by suddenly charging of something, which will take time to build… Likely free of charge.

      Also, if the free tools serve as an extension of your advertising presence, by charging for the tools you will almost certainly shrink your user base somewhat, and then some of the gains from selling the software would be offset by losses in potential ad revenue from the smaller audience.

      That being said, I can easily envision a future of selling “pretty good” proxies for Word, Excel et al for a few bucks, and then plug-ins for specific features (e.g. in line with Excel’s “add-ins” menu) for a few bucks more.

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  51. Nir March 25, 2011

    Very interisting !
    Pinky has finally found a way to rule the world ;)

    Reply
  52. Daniel Callahan March 25, 2011

    An excellent and thoughtful article (and so happy to return to my MC=MP microeconomics curves).

    At a more “macro” level, I wonder where the limits are to Google’s subsidization of heretofore consumer value in the markets represented by these “moats”.

    Perhaps the limits are reached when Google is earning the majority of all online advertistig, and/or when they feel some pain from alternative search providers.

    Reply
  53. Vincent March 25, 2011

    Awesome article!

    Finally someone who can articulate precisely what I have been saying for 2-3 years!
    We can go even further by analysing all the free tools Google are throwing at the users like Gmail, Calendar, ‘Office’, etc…!
    The only thing that matters to Google is to keep users in what I call their “search sphere”.
    So we need to look at them as simple, but expensive to operate, marketing tools, nothing else.
    Brin and Page know that their ranking system is at the end of the road (backlinks!!) and they also know that someone some day can come out of a Cambridge or any uni campus with another search engine build on whatever ranking strategy and do to search what Google did 10 years ago.
    As an insurance against such a technology leap, to keep users in the sphere is key to continuity…

    Well done Bill! (Edit comment)

    Reply
  54. Martin Hill March 26, 2011

    Mark,
    Interesting poostMark,
    Interesting post, but you don’t exactly specify who is getting run over by Android’s locomotive.

    I would argue it is mostly Microsoft who is the main casualty lying in the middle of the tracks waiting for the inevitable. It is Microsoft’s paid-for licensing model that is most affected by Google’s free give-away, and the extremely unenthusiastic take-up of Windows Phone 7 by OEMs demonstrates this. (Whether Nokia’s last-ditch alliance with MS lifts both company’s prospects or just adds fuel to the burning platform remains to be seen.)

    In contrast, Apple’s iOS is a freight train of its own on a different set of tracks playing a completely different game. With Apple making the vast majority of income from hardware sales and an integrated model that commoditises software, but still pays developers handsomely, the Apple locomotive is still far ahead of Android in many regards including in developer revenue, mobile browser marketshare, hardware peripheral marketshare, handset manufacturer profitshare and installed base:

    *App Store Revenue 2009 – 2010* (source: IHS):
    - iOS App Store grew from $769 million to $1.782 billion = $1.013 billion increase
    - Android Marketplace grew from $11 million to $102 million = $91 million increase
    So annual Android developer income is a meagre 6% of iOS with an annual rate of increase only 9% as large as iOS. The gap between the two is 1,000% and getting far larger every year.

    *Advertising income per user* (source: Mobclix)
    Mobclix’s Jan 2011 stats demonstrate that in the Advertising game, iPhone users are far more valuable than Android users.
    In the Games category, the average iPhone user brought in more than double the advertising revenue per month compared to the average Android user, a third more income in the entertainment category and 30% more in the utilities category.
    Even on Google’s home turf – advertising – iOS beats Android.

    ABI Research reports that of the 7.9 billion mobile App downloads that took place in 2010, 5.6 billion of these (71%) went to Apple iOS devices. The current iOS app download rate is 100 million app downloads every 3 days and still accelerating.

    *Unit Sales Q4 2010* (source: Canalys)
    - 32.7 million Android smartphones and tablets (tablets like the Galaxy tab and Dell streak were counted in these numbers because they all have cell phone hardware).
    - 33 million iOS devices (16 million iPhones, 10 million iPod touches, 7 million iPads)
    Note that Android numbers are inflated by inclusion of the Tapas and OMS forks of Android (which aren’t compatible with Android or running Google apps or services) running on millions of Chinese smartphones.

    *Installed base*
    - “There will be an installed base of 140 million Android portable devices, including smartphones and tablets, by the end of 2011″ according to IMS Research.
    - iOS installed base will be at least 250 million by the end of 2011 if current iOS sales rates stay the same.
    However, iOS sales rates have been doubling every year so this figure is enormously conservative. (The iOS installed base as at Dec 2010 = 160 million with the vast majority of those added in the last 2 years)

    With developers making far more money on iOS than Android, with far less piracy, freedom from malware, a company-owned retail chain to die for and a vast 200 million credit-card toting iTunes user base and ecosystem, Apple maintains a significant market advantage over Android that other software publishers and hardware manufacturers lack.

    -Mart

    Reply
    • bgurley March 26, 2011

      You are right, I did not!

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  56. gwern March 26, 2011

    > John Doerr, once said “The Internet is the greatest legal creation of wealth in history.” Android may be the opposite of that, the greatest legal destruction of wealth in history.

    I think I know what you’re trying to say, but as an economist could tell you, moving from imperfect to perfect competition isn’t wealth-destroying, it’s wealth-creating.

    The wealth is still there. It’s just being retained by consumers.

    Reply
    • bgurley March 26, 2011

      Absolutley — I agree with you 100%. I was referring to corproate equity value.

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  59. a9 March 26, 2011

    You say there is no harm to the consumer. But wouldn’t this inflict the same harm as product dumping?
    Flooding the market with product subsidized to zero.
    Creating fewer choices, as anyone competing in the traditional manner needs a new business plan, and the choices left will have to have the same or similar type of business plans.
    Meaning the ouster of the small independent developer who would rely on product sales and leaving only large entities who only create the software to serve ulterior motives.

    Reply
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  61. JD March 26, 2011

    What I love are all the Android lovers who got into the game because of words like “open”.. or because they were anti-Apple “big company” or “controlling” etc.

    Now they have become the very people they once hated… they are the Microsoft fans of the 90s and the Apple fans of today… and they don’t even know it!

    They cheer on Android as though it will save the planet while all along its just lining Google’s pockets.

    So hypocrite on, Fandroids… we understand.

    Reply
  62. Joe McCarthy March 26, 2011

    Interesting analysis, tying together many converging trends and threads in a compelling narrative.

    Right after reading this (via a tweet by @timoreilly), I read Seth Godin’s most recent post, “How Much Can I Get Away With”, in which he poses some alternative questions that seem well aligned with the post here:

    “How much can we afford to give away? How much service can we pile on top of what we’re selling without seeming like we’re out of our minds? How big a portion can we give and still stay in business? How fast can we get this order filled?”

    Reply
  63. Robert Young March 26, 2011

    Alas, along with 99.99% of pundits, you miss the point.

    The Point: what Google did was siphon ads from newspapers by providing a “better” ad channel. Just like the Great Wall and the Maginot Line, Google will, in due time, be replaced by Yet Another Better Ad Channel. I don’t claim to know what that might be, but it is inevitable. All that Google can do is protect itself from the old enemy. It can do nothing, so far based on behaviour, to build that replacement on its own.

    Reply
  64. Scott Dunn March 27, 2011

    For all the naysayers who pooh-pooh this article, remember, Microsoft started this trend. When? How? They gave Internet Explorer away for free.

    As to simple notion of free, without Google, we wouldn’t be seeing Microsoft positively gushing about how Internet Explorer 9 plays so well with open standards. On the other hand, OOXML isn’t exactly an open standard.

    Google has been clear about supporting open standards from the beginning. Their products work the same on more browsers than the cloud from Microsoft.

    The best thing about free is that really good customer service will win every time.

    Reply
  65. scav March 27, 2011

    Interesting view. But it makes no sense to call Android a “destruction of wealth”. Technology is wealth, knowledge is wealth, software is wealth.

    Giving a big pile of wealth away for free may be surprising, but it’s not destruction: it’s redistribution. And redistributing to hundreds of thousands of developers who can now build upon it is arguably stimulating more wealth creation.

    Reply
  66. Jonathan Mcabe March 27, 2011

    I really like this post, but I don’t see how he can end by confidently saying that this doesn’t harm the customer. Of course, the customer gets the “moat software” like Android for free, but only at the cost of a monopoly in the “castle.”

    Reply
    • bgurley March 27, 2011

      I meant the harm point specifically with regards to the mobile OS — not any other activity inside of Google.

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  69. DMA March 27, 2011

    Robert Young has hit the nail on the head.
    This looks like just another disruptor in a long line of them. Granted it’s bigger, but it is simply the next big thing. At the start of the PC market, IBM disrupted things by allowing clones of their machines and a little startup called Microsoft (supplying the OS) did pretty well. IBM did OK too. It spawned an entire software industry on the back of it. Apple controls the entire chain for their products (marketing, hardware, software, manufacturing and so on) but they are only big as long as they guess the next product correctly. They’ve done well so far with iPod, iPad, iPhone and so on. Google builds an eco-system in the way that Apple builds a brand. Once Apple starts guessing the future badly, their business model will dwindle. Same with Google – once their core business is done faster and cheaper by someone else, they’ll be just another shrinking company. The ‘moat’ will remain, but the castle won’t fall, it will simply be joined by estates of castles all doing the same thing. In the IT world businesses flourish, become huge, get unwieldy, and fade to memories (or reasonably profitable consultancy houses with nice government contracts). I wouldn’t worry.

    Reply
  70. Pingback: Disrupting Search, Part 1: Why Google has more in common with General Motors than with Microsoft or Facebook | Collecting Thoughts

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  72. Ethan R. March 28, 2011

    Congrats. I think you are the first person I’ve seen to get Google’s strategy right . . . almost. Search is not their castle. Well targeted online advertising is Google’s castle. What difference does that make? Well, first you have to realize that some of what they are doing is offensive. Gmail, Maps, and Street View are as much a part of their castle as the Search page is. Gmail can target ads based on a huge personalized content base and Maps and Street View can target ads based on location and activity.

    More importantly, when you expand the castle to advertising rather than search you realize that Facebook is standing right in the middle of the Google Castle. Android, Chrome, and Apps are all about tearing down the encroaching walls that Microsoft and Apple are trying to build. But while Google was defending themselves against what appeared to be the largest force arrayed against them (especially given MS and Apple’s deep pockets), Facebook built another castle on the same virtual territory. Google has yet to figure out how to face that challenge. Facebook is even more capable than Google at targeting advertising because FB users tell FB who they trust. Ads for everything from clothes to restaurants to tech gear are going to be more accurate when they are based on what my peer group has already “liked.” Google’s moat building strategy is under intense assault.

    Reply
    • Limey September 20, 2011

      I’d agree with this. Google’s castle is selling ads (96% of revenue). Search is just part of the moat. Similarly, Google monetizes the location and activity stream from all Android users by selling the data to advertisers. Without showing a single mobile ad, Google can generate dollars off Android from that data stream.

      At the same time, Google is absolutely practicing a scorched earth policy by making free (to end users) apps and infrastructure that have non-zero monetary value (and often very high fixed costs, such as Street View) — thereby inhibiting competition. Every time Google expands with a new offering it’s a death-knell for start-ups hoping to get funded in that space. Is Google the largest ever destroyer of value in Silicon Valley?

      It’s interesting to note that Google’s efforts to sell apps to businesses, which follow the more traditional path of actually charging real money for valuable services delivered, has been an abject failure. Google’s cloud apps for businesses generates $100m all-in. It’s like they only know one way to play the game — give away stuff that allows them to generate advertiser revenue from the people who consume that stuff.

  73. Jon T March 28, 2011

    One major problem. Every device manufacturer and every network operator treats each Android device differently. Hence all the problems of creating useful, consistent and reliable user experience. The jury is out on Android, for at least the next 12 months.

    Only Apple has full control over its iOS devices on networks. Which is why it will always be the premium device, and Android will always be the cheap commodity.

    As usual, you get what you pay for.

    Reply
    • Michael March 29, 2011

      This is exactly why Android will fail to capture the market share everyone believes it will. There is no standard look and feel. Even Microsoft got that right at least. But you will never get away from the problems that supporting so many different devices with one OS will be buggy and less secure. Apple has cornered the market on this.

    • Morty April 2, 2011

      Sorry, I couldn’t reply directly to Michael’s comment. When you say “Microsoft got that right at least…” are you talking about their phones? If so, I’ve never touched a Windows 7 phone; you may be right.

      But what about the PC market. Are you alleging that every PC gives the same standard look and feel? I guess you could say that in the sense that each PC will commonly have a start menu… but the same is true of Android whether vanilla or with a UI over it. I fail to see your argument when the mobile phone market currently looks like the PC market did in the 80s. Apple had a vastly superior product in the Macintosh. MS-DOS ran on IBM clones that gave, in your words, “the problems of supporting so many devices with one OS…” same with the first (and current) versions of windows.

      Clearly apple products were the premium then, and they are now… but windows won the PC war, and it isn’t inconceivable that Android, for entirely different reasons (but in the same way) will win the mobile OS war. RIM it would seem would go the way of IBM and either fade or reinvent itself.

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  78. Paul Margolis March 29, 2011

    Great piece Bill. Agree that Google has done a great job of being “preemtive” about competition. Microsoft used to do it by crushing the threat when it became a threat. Your point is Google doesn’t wait. These days Microsoft doesn’t even fight after the threat emerges. Why is that?

    Reply
  79. theamberlight March 29, 2011

    Interesting business analogy. Congrats on Freshly Pressed! Loss leaders are what we clll those products in retails…give it away to sell more of something else.

    Reply
  80. James R. Clawson March 29, 2011

    Great commentary on technology and the different mobile applications that have mesmerized the world. Interesting Post!

    Reply
  81. Ompal Singh Ahlawat March 29, 2011

    Neccesity is the mother of invention. No comments.

    Reply
  82. Pingback: Greater Clarity on the Google/Android Business Model | Lab Soft News | Health Care Reality Check

  83. isaac March 29, 2011

    An insightful article that touches on a number of interesting points.

    Something that you’ve overlooked however is any form of monetization outside of ads. While Android is a success by many measures, if you look at Android’s marketplace revenues versus Apple’s app store revenues, this disparity is quite alarming – for a platform with “massive” momentum, Google not only fails to make revenue from it’s services (as you’ve pointed out), but also fails to draw direct revenue for platform content producers in its market. One can argue that direct payment for content isn’t the future, except for Apple seems to be moving in that direction more-or-less successfully.

    As either a content producer or app developer, a model that is both ad supported *and* paid content supported (reinforcing the value of the content and it’s brand/producer) is preferable to giving everything away and reinforcing Google’s inherent operating assertion that the value of any piece of information is only monetized in it’s ability to sell/advertise other products.

    Reply
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  85. T.R.Leigh March 29, 2011

    I dunno, but I tend to disagree with you that Android is so great. It seems like a spin off of something else great…the iPhone platform. Even if they do indeed do it better than Apple, which is arguable, they still got their ideas from Apple…as has just about everyone else.

    Reply
    • Morty April 2, 2011

      Wow… you totally didn’t understand the point of this article. In fact, pretty much each clause of your comment is something the author explicitly said right in the article.

      It’s about the business strategy, not the OSs.

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  87. 4250 March 29, 2011

    Excellent post.
    There’s an interesting point, though – Android
    might be a defensive creation, but it’s got remarkably offensive redults – such as killing symbian, and so on. The closest analogy is the release of IBM PC format in the 80s. Is google trying to establish a monopoly on phones, like Windows on the PC?
    The Ios is a different ball game. I dont think Google can unseat Apple.
    Btw, where is Microsoft?

    Reply
    • Marten April 2, 2011

      “Btw, where is Microsoft?”

      Riding towards sunset. They believed people are ready to pay for software. Well, sooner or later they will notice the misconception.

    • Saulius April 11, 2011

      Apple customers still ready to pay for their software. I don’t think this was something invented by Microsoft.

  88. SaltyBill March 29, 2011

    As much as I love coca-cola… I would make the switch! Same reason I love linux and not @pple (@#$%!).

    Reply
  89. Andy March 30, 2011

    thought provoking

    Reply
  90. Todd Hixon March 30, 2011

    bill, great observations and well distilled. To your point about what if GM gave away Chevys, the auto OEMs actually did this for a while by buying up car rental companies and using them to pump volume (using unrealistic residual value assumptions to ease the financial pain). This worked as a way to keep volume up and amortize fixed cost, but failed when the core business rotted out (the castle crumbled, in your metaphor).

    Reply
    • bgurley March 30, 2011

      Obviously, cars have variable cost.

  91. gervmarkham March 31, 2011

    “Android may be the opposite of that, the greatest legal destruction of wealth in history.”

    How can you destroy wealth by making things? Is wealth “destroyed” when farmers figure out how to grow more food for cheaper, employing fewer people? Or when machines replace people in manual jobs? If so, we’ve been destroying wealth at such a rapid pace over the last 200 years, it’s amazing we have any left.

    If people don’t have to pay for mobile operating systems or mapping software, they’ll spend their money elsewhere, on other things they would like.

    Gerv

    Reply
    • Guru Pitka April 3, 2011

      You are not taking into consideration the long term effect of increase in productivity.

      In the long run if your population doesn’t decline as productivity increases, more people have lesser potential to consume the cheaper outputs.

      Why are people sulking over jobs shipping abroad?

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  99. Marten April 2, 2011

    People have to understand that all digital software sooner or later well be free. It means also that the price of software is 0 $ or 0 €.

    Software ain’t the goal – the goal is what to do with that software. There will be no future for companies like Microsoft.

    Reply
  100. Dan Cornish April 2, 2011

    The next industry that is ripe for destruction is Enterprise Software. We compete against large enterprise players who have to charge large amounts of money.

    Reply
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  103. Curt Wuollet April 2, 2011

    While I’m not crazy about Google playing fast and loose with the Open concept and thus the goodwill of the community, their stronghold must be high and stern and their moat deep, wide and filled with crocodiles to stand a chance against the battering ram of a monopolistic hegemony focusing all of it’s power on breaching the gate. And they must watch the Apple sappers trying to drain the moat as well. Both are more than willing to expend treasures to capture the fortress. Google needs more than virtue and ideals to prevent hearing the gate bell go “bing”.

    Reply
  104. scott April 2, 2011

    People don’t buy Android, hardware makers do. It’s “free” to them, not consumers. It gives handset and tablet makers the ability to screw it up for the consumer in order to meet their own business goals–it’s that kind of freedom, too.

    It’s good technology, but the freedom of it doesn’t impress me. It seems like a great deal for Google and a great deal for its OEM hardware partners, but pretty mediocre for consumers. It will never be better than Apple’s iOS from a consumer standpoint. Of course that doesn’t mean it won’t be successful in terms of marketshare or in meeting Google’s business goals.

    Reply
    • Guru Pitka April 3, 2011

      hahahahahahahaha……… if my memory serves correctly, this is what Steve Jobs said to Bill Gates in 80s; “…our’s is a better product..”. In reply Gates said “you still don’t get it….it doesn’t matter!”

    • Alex G. April 3, 2011

      People do buy Android. Why would you think that Apple is any different than Google + [any random phone vendor] ? They have the same goal in the end, having more market share.

      “It will never be better than Apple’s iOS from a consumer standpoint” – This is a pretty big and subjective statement. I do agree that iOS is more polished in some departments, but it is certainly lacking in others(where Android happens to shine). And its not lacking because its not technically feasible to solve those shortcomings, it is because Apple also has an interest to follow, like any other company on this small little planet(Google, phone vedors etc.) In the end, I am always happy to see more competition…

  105. Alex Daskalov April 2, 2011

    Great article, except maybe for the last line. Any strong disruption can be painted as a destruction of wealth, but often turns out to be the opposite.

    Google’s actions simply pave the way for an economy that is even more service based. Their efforts have made it possible for everyone to have a smartphone they can afford running an OS they didn’t have to pay for with a license that legally forbids any malevolent force from capturing or monetising the underlying vehicle.

    Reply
    • bgurley April 2, 2011

      Totally understand your point Alex. I simply look at the combined market cap of all the handset makers, all the mapping vendors, and companies like RIMM and think — “wow: we are going to see $150B in market cap go away.” That’s huge.

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  107. Curt Wuollet April 2, 2011

    Some interesting if dubious comments. The point about stifling innovation by blocking an apple monopoly is silly, considering that innovation has been at a standstill for decades due to the MS monopoly. And what folks don’t realize is that Android _is_ a success from the consumer standpoint. Even if it grows no larger, it ensures that there is a competitive market, spoiling Apple’s monopoly. I suppose from a business sense, a monopoly is the holy grail, but even though consumers seem to crave monopoly and monopoly pricing, it certainly isn’t in the best interest of either consumers or the indostry.

    Reply
  108. Paramendra Bhagat April 2, 2011

    I have also been super bullish on Android. Minus Android (and Chrome) Google was an old company already, but thanks to them it will stay young also through this decade. http://goo.gl/fb/JkFVq

    Reply
  109. lii April 2, 2011

    I have one question that pops to mind : why was Microsoft prevented from including antivirus software in it’s Windows OS by regulators? and why isn’t Google adding mapping software similar to that? I, as a customer would have loved to have free antivirus on my OS. Maybe this will become an issue when Google becomes more dominant.

    Reply
    • Limey September 20, 2011

      There *is* free basic AV in windows — Windows Defender. Six or so years ago, MS started making noises about squeezing out Symantec and McAfee from the client security business, but then discovered how big the moats are around those businesses (the time and cost of collecting all the security intelligence that makes security software effective). MS pulled back its investment and went with the “free basic AV+Firewall” you see in all versions of Windows today. No regulators were ever involved, as MS never dented the market share of Symantec et al.

  110. Daniel Odio April 2, 2011

    Bill, I recently highlighted Android as one of 7 major trends I believe will shape the future of mobile in the next 5 years (and why it’s way bigger than most people think). The other things include APIs, data mashups and social, among other things. You can see the screencast at http://go.DanielOdio.com/waybigger . I’d love your comments — there’s a quote from you about the “Interest Graph” in my screencast.

    DROdio

    Reply
  111. Matt April 2, 2011

    RIM used to be all I ever heard about. Now it seems that they are fading away into the history books. I honestly think that Apple will hold strong in the high-end market. There branding is text-book stuff.

    I see your point about Android being a great way to prevent competition. It looks like its working, especially with all the super-cheap smartphones that are coming out now.

    Reply
  112. speedy goods April 3, 2011

    Google owns the stadium and is giving away the seats.

    The game on the field that we all want to see is internet content.

    Adwords provides the “smart” billboards that users want to see.

    Be carefull to differentiate between users ( fans in the audience) and customers ( people buying billboards ) and consumers ( people buying devices to watch the game.

    Eventualy Google could have a monopoly on billboards by giving away so many free tickets.

    It seems very much like cable companies’ model.

    Android is a cable company. Apps, search, YouTube, navigation, gdocs, gmail, are shows. adwords is exclusive entry to all those eyeballs..

    monopoly?

    Reply
  113. Pingback: Android Is Destroying Everyone, Especially RIM — iPhone Dead In Water | business

  114. scott April 3, 2011

    “Why would you think that Apple is any different than Google + [any random phone vendor] ? They have the same goal in the end, having more market share.”

    Wrong. Apple wants the the high-end, profitable part of the market. Does anyone make money selling PCs besides them? Hardly. Profitshare over marketshare. That’s their plan, same as it’s been for years. They’ll be laughing all the way to the bank while slahsdotters cheer Android marketshare victory.

    The real losers are other handset makers. What future is there for them that can’t be seen in the Dell or HP PC divisions?

    Google may be the mobile Microsoft, but Apple will be the mobile Apple, claiming the profitable portion of the hardware sales.

    Reply
  115. Pingback: Android (continued) | Apple Online

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  118. Al April 4, 2011

    http://techland.time.com/2011/03/14/pwn2own-roundup-apple-fails-google-stays-strong/
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
    Just another reason why Android beats iOS hands down.

    Reply
  119. Eugene April 4, 2011

    Yeah, great play by Google. Google want to sell people ( if you are getting it free you are being sold) and it needed to build the moat when the mobile industry was being re-structured by Apple. They looked an iOS and saw it being about 50% of the market. And although Apple was not hostile then ( it is now) it wanted to protect it’s moat. So it copied the Apple design, took Sun’s code, and faked interest in an App Store to fool developers. They were duely fooled. They are still fooled although the Android market is 4% of the total app store market. ( Apple is 82%),and yet Android still has plenty of apps, however badly the work on the copycat system.

    It’s marketing was brilliant too – making the pseudo-tech heads who were told to support open source rally to Google’s side by decrying Apple as a monopoly ( which it isn’t) and closed , meanwhile Google is a monopoly in the Search space where they dont open code; nor do they open their code for Maps etc. Basically Google’s open source is all take, and very little give. No give of their proprietary market, or IP. Lots of take from Apple’s design, and Sun’s code. However the marketing campaign fooled the kinda idiot who reads techcrunch and endagadget.

    And when the “openness” of Android meant that some manufacturers could replace Google search with Bing, they closed the source. The “open source loving” sheep said nothing. Meanwhile when you log into Android you log into Google servers, as you do when you log into gmail. All subsequent searches are then recorded, and could be sold to anyone, or given to government ( or taken by Government). This dangerous policy does not have the Open fanatics wild with anger, but they weren’t told to think bad thoughts by Google’s marketing department.

    HATE APPLE’S OPENNESS, google tells it’s minions, but ignore our monopoly and closed source in Search. YES, say the idiots.

    Utter brilliant marketing. Virtual mind control. Apple is in the ha-penny place compared.

    Reply
  120. mccurdyca April 4, 2011

    So in the article as to what I understand is Google is protecting itself not on profits but on a position of branding in a diversified set of services in the market

    Reply
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  122. John G. April 4, 2011

    Great article Bill and some very interesting comments as well! Let me share my thoughts about a question that some viewers expressed. How can other platform builders respond to Google’s strategy?

    What you say Bill is that Google is using MS and Apple’s Castles as their own moat: moats are there to defend the castle and not to generate profits. Use others’ castles as your own moat and you drive them out of business by eliminating their profit margins.

    What can platform builders like Apple and MS do? Do the same!! Make Google’s castle your own moat. Isn’t this a very compelling explanation of why Apple is building it’s own server farm and Ad service?

    As another reader said, google’s castle is not search but ads. Ecosystems, services, web apps e.c.t. all can play a similar role to search: increase the value of ads. Think of what we do when we use a web app: we sidestepping search!

    Hence, what Apple can do is “give away” ad opportunities for “free” just like google gives away software for free. Make Google’s castle your own moat…

    Reply
    • John April 8, 2011

      Apple will never give away ad space for “free”.

      Sorry but you’re living in a pipedream.

      Apple’s downfall will be their hubris and greed.

      Google somehow has retained their humility for a behemoth of a company that they are. They prop up web ecosystems and niche communities single-handedly, and without asking for a cent. Their motivations may lay with business strategy, but it is beneficial to all parties involved.

      I would rather have Google as the go-to company, than Apple.

      Apple is more authoritarian big brother than Google ever was or will be.

  123. Pingback: It's Larry Page's Google Now | thechromesource - Google Chrome and Chrome OS News and Forum

  124. TruthInTech April 4, 2011

    this all work until some open sources a good search engine with free ad space…

    Reply
    • bgurley April 4, 2011

      Perhaps. So far, the definition of a good search engine requires massive scale due to the cost of frequent crawling of the web. if you had a way around that, this is if you changed the paradigm, perhaps you would be right. Please, please, please let me know if you see that company!

  125. Pingback: Quickthink » Blog Archive » Thinking about Android as a Moat

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  127. AJ_Retro April 6, 2011

    I agree that Android is a freight train, but only in the way a hammer is a tool. Google’s core business is to get at the data that describes people’s habits using their need to search the vast Internet. The devices people use all leave a little clue to all that; they are all enablers to Google. Desktops are pretty limited when it comes to letting Google get an accurate profile. Mobile computers, on the other hand, are fantastic for getting a little bit more personal. Give away the keys to the devices and Google gets to know the users very well. I am sure advertisers love that.

    It would be even better if people started using computers embedded in their heads–Google can give those away and get at people’s thoughts even before they put them into action. Talk about an Inception moment. They’ll know what we know even before we know it.

    Even better, Google can get right to a person’s core to create an accurate profile…right to their DNA. After all, DNA is just coded information that is truly unique to a person. How much more personal than that can you get?
    I am sure huge databases of profile information tied back to DNA would be fantastic to have. Why wait until someone’s done something and left a trace somewhere to work back to the person?

    That’s right, Android’s potential is huge.

    Facebook is in a similar castle on a different island, except they are using a different strategy. People want to communicate with their friends and trusted associates. Facebook is that cozy, familiar tool. The problem for Facebook is they won’t be controlling the devices and their communication channels that people use to give them that information.

    Apple seems to be in an even better position. Nobody else but them makes the devices, the OS and a lot of the software. It’s good for Google that these guys don’t do search engines. What strong competition they would be.

    Getting back to Android, it still has big problems, especially on the developer side. In the rush to get ahead, Google has forgotten to take care of their developers. Their tools are horrible compared to the ones from Apple and Microsoft. If the professional developers aren’t smelling easy dollars, end users aren’t getting any fantastic apps to keep them happy. Where’s the iTunes for Android? What about GarageBand? How about iWorks? Angry Birds won’t cut it. Apple learned that a superior product won’t get you anywhere if developers have a hard time sharing in the wealth. It’s the reason why they chose NeXTSTEP over BeOS and why they always challenge developers by raising the bar with fantastic apps that they themselves create.
    Google needs to set the bar and keep raising it with great Android apps if they ever hope to have happy, giving users. If they leave that job up to the handset makers, we’ll all have to spend time removing useless, resource sucking apps from our devices before we can use them.

    Reply
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  129. Canuck April 7, 2011

    The moat doesn’t really work – I’d use a different medieval metaphor here.

    Android isn’t a moat because it doesn’t prevent anyone else from starting an ad-supported service, even on Android itself. In fact, Android makes it *easier* to start a mobile ad network, since it provides a single, open point of access for most mobile devices.

    Instead, think of the medieval King of England or France and his barons: each baron has to be powerful enough to supply money and soldiers to the king, but if any one baron becomes too powerful, he might start attacking the other barons or even thinking about becoming king himself. That means it’s a constant balancing act, supporting the weaker barons when necessary, playing powerful barons off against each other, and sending all of them on enough foreign expeditions to keep them busy.

    Google is, obviously, the monarch here, and mobile phone manufacturers and content providers are the barons. Google released Android to strengthen the other barons just enough to balance the growing power of the Dark Earl Jobs, who had tried to capture the whole kingdom (both the throne and the other baronetcies) for himself and become absolute dictator of the mobile world.

    Of course, Google itself could turn into an evil King, but with Android, it’s at least giving the barons the ability to prosper independently rather than trying to seize their lands like Apple did.

    Reply
  130. Pingback: 知名VC:Android就是一辆货车(上) | Tech2IPO

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  133. Andrew Alexander April 8, 2011

    I think you are right on the money with your recent blog post, as far as the facts go. However, your interpretation is that Google’s strategy is smart and positive for the company.

    My interpretation is different from yours:

    1. It is a shame that to protect this economic castle, this much effort has to go into it. I would revalue Google’s business upwards if they were already in a defensible position. In fact, they might already be, but we as humans can not participate in counterfactuals. Who is to say that Google has to do this to keep their search market share? Maybe they could have just been a niche focused company and harvested those rewards. They do have a great competitive advantage in this space as their economies of scale and information are great.

    2. This strategy Google is undertaking is riling up its competitors, most notably Microsoft, who is now doing the same thing to Google that Google does to everybody else. Microsoft, to protect its cash cows, is pouring huge money into search and accepting huge losses to keep the heat on Google. I remember reading that Pepsi and Coke embarked on these mutually destructive competitive campaigns and have finally figured out how to stay out of each other’s hair.

    This is all great for consumers though.

    Reply
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  136. John April 8, 2011

    So according to you, it is okay for iOS to be the sole monopoly?

    Last time I checked, there were several players in this market.

    Android is doing admirably and so you have a problem with this dynamic? If iOS had the same market share and upward trajectory as Android, you would remain mum.

    Apple is more authoritarian big brother than Google ever is and ever will be.

    Reply
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  143. this all work until some open sources a good search engine with free ad space…

    Reply
  144. Rob April 12, 2011

    Although you’ve articulated very well why Google’s business model is successful, your point that “the consumer is not harmed” is dead wrong. Since Google gives most of its services for free, this makes it extremely difficult for competitors. And the lack of competition is the very essence of harming the consumer. If someone someday has an idea for better technology that competes with Google, it will in all likelihood never see the day since there’s no way for the creator to make money…esp if Google can just be a copycat and then give away its version for free, like it did in ripping off the iPhone OS and then giving away Android for free.

    Google is much more dangerous than Microsoft ever was. It’s not a freight train; it’s a nuclear missile.

    Reply
    • goog April 17, 2011

      i fully agree .. google is a monster … in open source disguise ! I hate google more than microsoft now …

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  149. My Job Apps April 17, 2011

    I’m loving the Firefox thing. As the Google powerhouse comes to an end, I’m sure most webmasters out there won’t worry.

    Just like any other corporation, they are only in it for their own sake to help out many other power hungry ventures.

    Reply
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  157. Atif April 25, 2011

    I love Android and I envangelise it, not beacuse I use it, but because its wonderful, that is why I use it. Here is a survey that is so far revealing that Android is leading with 30% of the votes when people were asked, Which mobile platfor do you use?

    http://itsallabouttech.com/2011/04/which-mobile-platform-do-you-use/

    Reply
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  161. Paul May 2, 2011

    Would US arms exports be an analogous example?

    The US gives military hardware away for free (with tied military aid), limiting the development of foreign arms manufacturers and also threats to US economic/political strength, including access to world resources.

    Not near as neat as Android, but a much bigger business…

    Reply
  162. Pingback: Android To Surpass Apple’s App Store In Size By August 2011: Report (Exclusive) | Fred Blauer and Associates Blog

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  166. pk de cville May 29, 2011

    “So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense.”

    Reminds me of Msft giving away IE for free to kill off Netscape. In this case, “No Evil” and “Open” Google is giving away Android to commoditize smart phones. They’ve done the same thing to print news by commoditizing news reports and analysis.

    Google is not afraid of pissing everyone off, but they are motivating powerful organization to reply in kind.

    I see Apple’s iAds as a very direct response to Android. It may not be effective in harming Google, but it wouldn’t be here at all, except for Android’s annoyance.

    Seems we have two freight trains, perhaps three if Microsoft gains some success in mobile. This could get very interesting.

    Reply
  167. Pingback: Android as a moat protecting Google’s (advertising) castle; “advisor-tising” and the Infovalet | The Information Valet Project

  168. dch May 31, 2011

    As much as the consumer benefits now, there is no way to determine weather the actions of Google today will affect the consumer of the future. Google as a company is one of the largest harvesters of private information in the world. They invade the consumer’s private life to exploit their needs, insecurities, and wants. Google is taking away your right to privacy, by tracking your every move on the world wide web.

    Reply
    • seo agencies September 8, 2011

      of course they’ll affect consumers in the future, Google became the goto place for search. So they’ve placed themselves between consumer and every other business/website on the web.

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  173. Nicholas Cumisky June 13, 2011

    freight train of awesome. Where’s the +1 button though..?

    Reply
  174. Pingback: Android To Surpass Apple’s App Store In Size By August 2011: Report (Exclusive) | Fred Blauer and Associates

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  181. KenC June 26, 2011

    So, it would be okay to dump fuel-inefficient clunkers for free, if your goal was to increase gas usage, which is your economic castle?

    Reply
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  196. Karen November 7, 2011

    bottom line, the big companies just keep finding ways to get “bigger”. if as an aside, the consumer, makes out on the deal, while it is a bonus, I don’t think it is the main objective.

    Reply
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  221. JamieA February 19, 2012

    A year later, with Google’s acquisition of Motorola going to happen, it is a good time to re-visit this topic. With the Moto acquisition is Google shifting the role of Android from “moat” to “economic castle”? What does it mean for Droid handset vendors, carriers and consumers?

    Reply
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  245. DAVID SCOTT July 19, 2012

    You have clearly explained how the Google’s business structure works. Great article. I think now Google is not going to follow the defensive way, instead they will follow the offensive way. Now the market share of Google’s Android is growing higher and higher. They are having a store for Android in the name of Google play where everyday apps are downloaded more and more. They also launched Google cloud services. I think soon the profit from Android will surpass Adwords.

    Reply
    • bgurley July 29, 2012

      I agree with this. Great point.

  246. foopiefly September 22, 2012

    Подсказали что нам поможет флуконазол дозировка при молочнице может ли вылечить?

    Reply
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  252. ACM April 20, 2013

    There’s certainly a lot to learn about this subject. I love all the points you made.

    Reply
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