THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH
Android – Can the “open design”
rearrange the smartphone
ecosystem?
Mini Project – Entrepreneurship and Innovation Strategy
Christopher Vaughan, Siddhartha Gavirneni, Mukund Kulashekaran
10/11/2010
Contents
Why did Google develop the Android? ......................................................................................................... 2
Advertising potential in the mobile market .............................................................................................. 2
Google’s Interest in the Smartphone OS Market...................................................................................... 3
The Smartphone OS Ecosystem .................................................................................................................... 4
Google’s Strategy for the ecosystem ............................................................................................................ 7
Is Android’s success sustainable? ............................................................................................................... 11
Endnotes ..................................................................................................................................................... 13
Page 1 of 13
Why did Google develop the Android?
Advertising potential in the mobile market
Google is synonymous with “search” today and close to 97% of its $23 billion revenue comes
from search-related advertisements. Google not only revolutionized the search technology
when it introduced Google search, but also developed a strong monetization strategy to
capture the value from the traffic it was bringing to its site and to its partners. The growth of
Google was primarily driven by the increase in the internet traffic in the last decade, and with
mobile internet now starting to grow, Google has been moving quickly in the last few years to
establish a foothold in the wireless data traffic market.
Though mobile advertising was small in 2005 when Google bought Android (~$100 million), it
has been growing at a brisk pace and today it is valued at $16 billion at a worldwide level1.
The mobile market has caught most advertisers’ attention due to three key reasons:
1. There are more mobile phones than PCs: the penetration rate of mobile phones has
been increasing exponentially. 86% of the US population (age 13+) owns a mobile
device. In the EU5, the penetration numbers are equally high: 89% in the UK, 88% in
Italy, 87% in France, 85% percent in Spain, and 65% in Germany2.
2. Mobile phones provide a great platform for targeted advertising based on location and
purchasing habits.
3. Finally, mobile phones have a unique convergent position which combines voice,
internet and media.
The other trend that has enabled featured advertisements has been the growth of the so called
“smartphones” that have provided users with a great platform to access the internet and also
feature-rich content through applications. Smartphone sales have been growing steadily at a
rate of 13% when the rest of the market is stagnating in most developed nations. In another
decade, the majority of phones sold are expected to be smartphones.
Page 2 of 13
Google’s Interest in the Smartphone OS Market
The data presented above shows the high potential of the smartphone market. Google had
multiple options to play in this market. The question that must be asked is the reason for
Google’s decison to make its own operating system (OS) rather than simply developing
applications for smartphones (like Google Maps, Youtube, Gmail, Chrome, etc.) that can be
used on any handset.
The evolution of the OS for the PC market can provide some clues. Prior to Microsoft, Apple’s
Mac platform, though superior in technology, focused on a completely “closed” environment
where outside hardware/programs could not connect easily. Microsoft developed an “open
platform” compatible with most hardware and software (not completely open, but most thirdparty developers could create compatible programs by following some simple rules). This
concept was an immediate success due to its widespread adoption.
The mobile platform was in a similar state - Apple had its iOS platform that was completely
closed, and developers had to go through Apple to get a piece of the market; Nokia, through its
Symbian OS, was the market leader with about 50% of the OS market in 2008. This was a closed
platform that was not only cumbersome for developers but also restricted outside
applications3. Furthermore, mobile carriers and handset manufactures controlled the
applications that users could download and use.
Though Google could develop great applications for the smartphone and internet market, the
adoption of these applications depended heavily on the handset producers and carriers. Apple’s
iPhone, iTunes, AppStore, and Safari became the major source of data traffic in the USA and
other developed markets. Therefore, for Google to play a meaningful role in this market, it had
to get to the center of it, and hence, it decided to buy Android (an open-source platform for
mobile phones) from Android’s founders Andy Rubin and Chris White in 2005.
The aspirations of Google through Android are captured well by this statement from Miner
(Founding member of Android, and now part of Google’s team):
“We really want to see Android adopted by a very large percentage of mobile handset,
especially ones that are more feature-rich handsets. The goal is that there are a billion-plus
mobile phones sold every year and Google would like to see the majority of those being a very
powerful and great phone, [with a] connected data experience, and be very open. That’s the
reason we’re making this investment.”4
Google ventured into the smartphone OS market to set a common standard for application
development across various handset manufacturers and carriers. This would enable developers
to create applications that are compatible with any handset and also open up the market for
Page 3 of 13
plug and play capabilities. Furthermore, Google could bundle its own browser (Chrome) and
other applications to capture a big chunk of the mobile traffic through its applications. This, in
turn, would enable Google to sell more advertisements.
The attempt to create a common standard was not new. However, such attempts were not a
big success. Therefore, Google had a huge challenge – not in terms of technology, but in terms
of bringing together key stakeholders with diverse profit motives. The stakeholders included
the carriers who controlled handset sales in most markets, the handset manufacturers who
controlled the adoption of the OS, the chipset manufactures who made the hardware for the
handset manufacturers, and above all, the end consumers.
The Smartphone OS Ecosystem
The key players in the ecosystem in which smartphone operating systems operate are shown in
Figure 1.
Figure 1: Key players in the Smartphone OS Ecosystem
The players in the ecosystem interact closely with each other, which make the system sensitive
to even slight changes in anyone player’s behavior. Furthermore, the players can be categorized
Page 4 of 13
into co-innovators and adopters. However, some players fall into both categories as shown in
Figure 1. Figure 2 shows the relationship and the flow of the adoption chain in the ecosystem.
Handset and Component Manufacturers:
These players are highly inter-dependent. New technologies continuously give rise to both new
components and new features for existing components. These changes, in turn, help the
handset manufactures in bringing out smartphones with new features to increase their
competitiveness in this highly competitive market. For example, the accelerometer component
which detects the position of the device to automatically change the screen layout was soon
adopted by all major smartphone manufacturers. These players have a symbiotic relationship
with the OS. Hardware capabilities drive the enhancements in the OS and vice-versa.
Figure-2: Co-Innovators and flow of adoption in the smartphone OS ecosystem
Carriers:
Carriers like T-Mobile and AT&T, in addition to providing the backbone network for mobile
communication, also form part of the distribution channel in selling handsets. They play a major
Page 5 of 13
role as co-innovators and bring technologies like 3G and 4G to the market. This technology
dictates the OS and handset capabilities.
In recent years, the average revenue per user (ARPU) for voice has been decreasing, while the
ARPU for wireless data has been increasing.5 This increased the push for smartphones which
drastically increased wireless data traffic.
Retailers:
There are two types of retailers – those operated by carriers, and independent retailers. In the
USA, most phones were sold through the carriers. These retail markets are used by carriers to
attract customers and then retain them through contractual agreements. The independent
retailers sell smartphones at higher prices than the carriers (as they are not bundled with the
contract) and typically sell smartphones that are not available through carriers. They play a
critical role in bringing handsets to the market when handset manufacturers cannot find a deal
with carriers.
Application Providers and Independent Developers:
Before Android was introduced, application developers depended on the software
development kit (SDK) provided by the OS provider (Apple, Symbian, etc.). Furthermore,
independent developers had to cater to the requirements of the carriers, and follow the rules
placed by the OS provider, thus increasing their development time and adding cost of
development (as each application had to be made compatible to different OS standards)
Many companies develop their own applications as a marketing tool – for example, Orbitz’s
mobile application for searching flights and rental cars. Other companies started using
applications to promote new ventures and businesses – for example, point-of-sale applications
to be used in retail stores. Smartphones now play a major role in marketing and business
development for such organizations. All application providers typically pay a royalty fee to the
OS provider (like Apple or Microsoft), unless the OS is open-source (like LiMo).
Application Stores:
The advent of applications and smartphones saw the rise of three types of online stores for the
distribution of applications: the stores owned by carriers; the stores owned by the OS
providers; and third-party stores. Carriers used their own application stores to direct traffic to
their websites and thus collected subscriber and usage information. OS providers like Apple had
complete control on their application stores and would keep part of the revenues. Third-party
stores were aggregators of free applications and applications that they would develop. There
were very few third-party stores before Android entered the market.
Advertisers:
The use of data services on smartphones attracted many advertisers. They advertise through
applications, through mobile-enabled webpages, and through the application store websites.
Page 6 of 13
These players had the potential to be a significant source of revenue for all other players in the
ecosystem.
Users:
The end users can be categorized as individual users and corporate users. Both of these users
were driving the increase in wireless data traffic. However, the handset and OS capability
requirements were different. Individual users valued design, usability, and variety in
applications. On the other hand, corporate users valued seamless integration with corporate
systems like Microsoft Exchange. End users are price takers and have weak bargaining power as
consumers – whether it be carrier plans or handsets.
Google’s Strategy for the ecosystem
Through its Android operating system, Google set out to alter the connections between key
players in the smartphone ecosystem to encourage adoption of its product. These efforts
focused on encouraging closer collaboration between the stakeholders as well as fostering
creativity in the market. The net result of this was to shape the ecosystem to maximize
Android’s adoption potential in the smartphone market, rather than to exert control over other
players. This is in keeping with its strategy to drive internet traffic on mobile phones through its
search portal.
The primary components of Google’s attempts to influence its ecosystem were the formation of
alliances, the decision to release Android as an open-source platform, and incentives to spur
development of applications. Each of these decisions is analyzed below, including the rationale
for the decision and its effect on the ecosystem. This is shown in Figure 3.
Page 7 of 13
Figure 3: Google’s approach towards the smartphone OS ecosystem
The Open Handset Alliance
In order to make Android a viable option for end users, it needed the support and backing from
several different types of players in the smartphone ecosystem. Thus it was an early priority for
Google to spur these players to adopt Android. To do so, Google focused on the shared benefits
of openness and collaboration Android would allow between the parties in the mobile phone
market. This was formalized in the Open Handset Alliance (OHA), which was announced in
November 2007.6
The Open Handset Alliance comprises mobile carriers, handset manufacturers, chipmakers,
software companies, and commercialization companies. Notable partners include industry
heavyweights such as China Mobile, Vodaphone, HTC, Motorola, Intel, and Texas Instruments.
The alliance has grown from 34 companies at launch to 78 companies today.7 The idea behind
the alliance is that greater openness and collaboration among these parties will lead to faster
innovation and lower costs.
It is important to note, however, how critical Google’s choice of entry into this ecosystem was
to make such an alliance possible. Had Google initially entered this market by developing its
own phone, as some believed it would, Google would have immediately become a competitor
to handset manufacturers and created barriers to widespread adoption of its search services on
other phones. Yet three years later, in January 2010, Google announced that it had in fact
developed its own phone in conjunction with handset manufacturer HTC, called the Nexus One.
Although Google may have thought that building its own phone would allow it to optimize the
Android experience, it also likely recognized how it now made Google a competitor with other
players in its ecosystem. As a result, Google dramatically scaled back its marketing efforts of the
phone, and the initial Nexus One website is now used as a gallery to showcase a variety of
Android phones.8
As a result of Google avoiding competitive behavior, the alliance is able to provide advantages
to almost all of the other stakeholders in the ecosystem. Application developers benefit from
receiving a free, easy-to-use, open-source OS platform on which to build their apps. The readily
available SDK and source code allow developers to optimize their applications to the Android
platform, while maximizing distribution of the OS to the developer community. Similarly,
hardware component providers such as semiconductor manufacturers can build in support for
new hardware functionality into the OS platform. In the past, semiconductor companies might
have been forced to wait for the owners of a proprietary OS to build in functionality into the
platform.
Page 8 of 13
Handset manufacturers, meanwhile, derive several benefits from signing on to the alliance. For
manufacturers who previously had to develop an operating system internally, the ability to
obtain a high-quality, free OS from Google was a considerable economic benefit. Additionally,
manufacturers could now leverage the Google brand and reputation for ease of use when
marketing their phones. Such branding is an important way to make the phones competitive
against Apple’s iPhone, which has enjoyed a very strong brand image among consumers.
Carriers similarly benefit from offering phones with the brand name of Google. Additionally,
given the increasing reliance of carriers on data traffic as a future source of revenue, the
Android’s emphasis on utilizing the internet would make such phones even more appealing to
carriers. In recent years, as iPhone sales have skyrocketed in the U.S. and AT&T is increasingly
associated with the iPhone, Android offers a way for carriers to offer a competing marquee
product. As a result, carriers such as Verizon have strongly promoted its Android lineup as an
alternative to the iPhone.
While all of the players in the alliance derived some benefit from signing onto the Androidfocused alliance, Google was able to significantly reduce co-innovation risk by developing
Android completely by itself. In contrast, LiMo (a competing industry consortium for developing
a Lunix-based operating system) developed its OS collaboratively among its members. 9 Thus,
Android was delivered to the alliance as a finished product and ready for market. By avoiding
the iterative process of having the members of the alliance all contribute to the development of
Android, Google significantly reduced opportunities for its partners to slow the rollout of the
system.
An Open-Source Operating System
Google decided to enter the smartphone market by producing an open-source operating
system. That is, the source code underlying the operating system would be publically available
and open to modification as needed. By doing this, Android was positioning itself as a flexible
and open platform which other ecosystem players could readily use as a basis for innovation.
Android’s value, then, lay not being a proprietary system with intellectual property related to
its particular functionality, but rather as a customizable, scalable platform that eases the
burden of other firms in the ecosystem. This approach aligns with Google’s intended strategy of
maximizing its exposure to the mobile phone market in order to drive traffic to its services.
By giving away the Software Development Kit (SDK) for Android, Google challenged the
economics of more established mobile phone OS providers, such as Microsoft and Symbian.
This was initially most relevant to the developers of applications for smartphones. Traditionally,
these developers had to go through an extensive certification process and pay high
membership fees for access to an operating system.10 With Android, these developers could
develop programs for the OS much more easily and cheaply.
Page 9 of 13
Additionally, with an open-source system, Google ceded control of the pre-loaded content on
the phone. In a closed-source system, the OS developer had a high degree of control over which
applications were allowed onto the OS. With Android, these decisions would now be made by
the handset manufacturers and network carriers.
In addition to benefits to developers, the open-source nature of Android could deliver benefits
to handset manufacturers and carriers. At the time, network carriers were demanding greater
branding within the OS on the phones they sold. Carriers also wanted the ability to access the
source code of the OS on their phones so they could fix bugs as they were discovered.11 These
needs could be fulfilled much more easily with Android than a proprietary operating system.
At the same time, developing an open-source OS posed potential challenges. Due to its easily
customizable nature, different developers could modify Android in varying, incompatible ways.
This could lead to a fragmentation of the system into competing versions. This is essentially
what happened to Linux’s first foray into the mobile OS space. In addition, Android’s openness
and attempts to spur application development threatened the “walled garden” model of
network carriers, who had hitherto tightly controlled the applications and revenue streams of
the applications allowed onto their phones. This marked a potential loss of control and revenue
for the carriers.12
Spurring Adoption among Developers
Once Android was ready for market, it faced the challenge of building up an ecosystem of
applications, phones, and carriers to support it so it could compete against entrenched OS
platforms. In particular, Apple’s iPhone user base was growing rapidly and enjoyed an
expanding base of applications offered through its App Store. Thus Google made it a priority to
spur the creation of applications for its system from developers.
The open-source nature of Android was a key benefit to developers, as described above.
Additionally, Google designed Android’s programming language to be easier to use than those
of existing operating systems. Android’s programming was very similar to that used in website
development on PCs. This made the actual programming of applications for Android much
easier. It also broadened the potential base of developers, as programmers who were used to
the PC environment could now easily make the leap to mobile phone applications.
Having an easy-to-use, open-source OS lowered the barriers to entry for developers considering
Android. In order to actually spur the adoption, however, Google launched two Android
Developer Challenges. These competitions, with prizes totaling $10MM, incentivized
developers to begin building Android applications before the base of end users had
materialized.
Page 10 of 13
Is Android’s success sustainable?
In three years, Android has moved from a
0% market share to about a 9.6% market
share in the worldwide smartphone OS
market (as shown by the chart to the
right). If we consider only the US market,
data from The Nielsen Company suggests
that Android overtook iOS (iPhone) as the
largest selling OS in August 201013.
Goldman’s analysts have given a thumps
to Android14 - it expects Google’s profit to
go up because of Android (by almost $1
billion). But Google’s CEO, Eric Schmidt,
and the Goldman report acknowledge that
going forward, scale is the key driver. One of the key reasons identified for the explosive growth
of Android has been Apple’s decision to stay with AT&T15. This largely helped Google get buy-in
from other carriers to push its product. But now, with the news of iPhone4’s CDMA version
being launched in Verizon’s network, the dynamics might change quickly. Hence, going forward,
the key player in the ecosystem’s adoption chain that Google should focus on is the carrier.
Android has gained tremendous momentum and new players are signing up to participate in
the ecosystem that Google has created. The latest news is that Amazon is planning to setup an
application store for the Android platform16. The open platform is continually attracting major
players to concentrate their efforts on Android (iOS still does not let any other player to set up
its own application store). The only weak links are the carriers since their economics have
largely not changed due to Android. In-fact, with the launch of its VOIP service (GTalk and
Google Voice), Google is threatening the voice revenue for carriers.
However, the carriers need Android since there is no other serious competitor against the
iPhone. Therefore, they will not take any drastic steps. But they would always be worried that
Google could one day completely take over their voice business17. Hence, for Android’s
continued adoption, Google needs to increase the incentives for carriers. This would mean
evolving a better model for sharing the advertisement revenue generated through the
smartphone market. So far, Google has never shared any advertisement revenue with
intermediaries. However, unlike the internet, the mobile industry is still strongly controlled by
the carriers, and hence, Google needs to quickly come out with a better model to entice
carriers in promoting Android.
Android has definitely created a wedge in the smartphone OS market in its first round of fight
with the market leaders – iOS and Symbian. Going forward, we need to see if history repeats
Page 11 of 13
itself - will the open-source platform beat the closed platform of Apple? This largely depends on
how and when Apple opens up its ecosystem and also on the steps Google takes to gain
complete support from carriers. Given the size of the market, all major players – Apple, Nokia,
and Google – have space to grow, but it would be interesting to see who finishes in the top.
Given the large backing behind Google at this point in time, we would not be surprised if
Android’s ecosystem surpasses that of other OS ecosystems in terms of size. Profiting from this
venture is a different game – Apple, at this point, captures more value than Google (due to the
built in-charge of the OS in the iPhone price). However, in this game, scale is going to make the
difference. Hence whoever wins the scale game will win the profit game.
The other challenge faced by Android is its fragmentation. Google faces the threat of having
Android forked into different versions by various handset manufacturers. This could lead to
inconsistencies in the platform, thus slowing adoption – the situation currently faced by LiMo, a
Linux based smartphone OS. Google has to reinvigorate its focus on its alliance and try to
dissuade them from fragmenting Android.
Google has been proactive in increasing the size of the Android ecosystem. The use of Android
in Google TV, in Sony’s e-readers, and HP’s netbooks has created an ecosystem beyond the
smartphone market. This will help sustain Android’s current ecosystem through the creation of
applications, which, in turn will fuel Android’s adoption by carriers and end users.
In summary, Google can continue its success with Android by expanding its ecosystem,
strengthening its alliance to prevent fragmentation, and by focusing on providing more value to
carriers.
Page 12 of 13
Endnotes
1
M:Metrics, Common Short Codes: Cracking the Mobile Marketing Code
www.usshortcodes.com/docs/MMetrics_White_Paper.pdf
2
Ibid.
3
Mobile Business: Android and iPhone a know antagonism http://www.slideshare.net/droidcon/20100527-droidconandroidandiphoneaknownantagonismkairannenberg
4
Silverman, A. and C. Wittig, “Google’s Android: Will it Shake Up the Wireless Industry in 2009 and Beyond?”
Stanford Graduate School of Business Case. July 28, 2009;
5
Ibid.
6
Ibid.
7
“Alliance FAQ.” Accessed at: http://www.openhandsetalliance.com/oha_faq.html
8
“Google revamps Nexus One site into Android phone gallery.” CNET. September 30, 2010. Accessed from:
http://www.cnet.com/8301-19736_1-20018202-251.html
9
Silverman, A. and C. Wittig, “Google’s Android: Will it Shake Up the Wireless Industry in 2009 and Beyond?”
Stanford Graduate School of Business Case. July 28, 2009.
10
Ibid.
11
Ibid.
12
Ibid.
13
Android Sales Outpace iPhone in August http://www.clickz.com/clickz/stats/1741423/android-sales-outstripiphone-august
14
Goldman sees profit in Android http://tech.fortune.cnn.com/2010/10/01/goldman-lays-out-googles-androidmoney-making-strategy/
15
Apple Plans to Offer iPhone on Verizon http://www.nytimes.com/2010/10/09/technology/09phone.html
16
Amazon app store for Android confirmed by WSJ http://www.engadget.com/2010/10/07/amazon-app-store-forandroid-confirmed-by-wsj/
17
Goldman sees profit in Android http://tech.fortune.cnn.com/2010/10/01/goldman-lays-out-googles-androidmoney-making-strategy/
Page 13 of 13