The Google I/O keynote on May 28th 2015, confirmed a thought that I have had for a long while.
On April 3rd 2013, I wrote a post (in Japanese) titled “Predicting Android’s Change Of Direction: Thoughts from Andy Rubin’s Demotion” (「Androidの方向転換予想：Andy Rubin氏の降格を受けて」). In that post, I argued the following;
- Andy Rubin considered Android to be very valuable in and of itself. For him, it was important to make Android the best that it could be. This meant being better than iOS.
- Larry Page is not very interested in Android itself. His interest is in Google’s cloud services, and Android is only one of many initiatives to maximise their user base.
- Hence Android’s market share itself is not important, nor is controlling Android an imperative. Even if iOS, Firefox OS or Tizen expanded their market share, that would not be a problem as long as they used Google’s services.
- Android does not need to be the best smartphone OS.
From this, I predicted that Android would stop trying to copy iOS in the attempt to get iOS users to switch. Instead, Android would probably focus on the low-end in order to expand the use of smartphones in markets where iOS would not have a strong presence.
The 2015 Google I/O keynote strongly suggests that this indeed has been their strategy ever since. The signals that I observed were;
- Android M itself (excluding the cloud services that would also be available on iOS), no longer adds major features that would give it an advantage over iOS.
- The announced Photo service is also available on iOS from day one. Now on Tap which is not feasible on iOS which is why there isn’t an iOS version.
- The improvements on offline connectivity are geared towards countries where Internet connectivity is unreliable or expensive compared to the average income.
Google itself mentioned that Android M is mainly about fixing bugs and annoyances in Lollipop, and if that is to be believed, then the next version of Android coming out in 2016 should have many more features. However, since I am now more confident of my reading of Google’s strategic imperatives, I am pretty sure that this will not be the case. I predict that the 2016 version of Android will also not have any major new features.
In short, I am now sure that Google no longer intends to compete with iOS with Android. Essentially, they are giving up the high-end smartphone market to Apple and they are cool with that. Instead, Google sees Android as a vehicle to spread their services to market segments that iOS cannot penetrate.
How will this strategy fare in the future?
This strategy is sound if Google’s sole objective is to learn about what people are doing. However, from a financial standpoint, there are many risks. By far the largest risk is, what if Apple is successful in distancing itself from Google? What if Apple somehow succeeds in significantly reducing the number of Google searches performed on iOS?
There are several dark shadows on the horizon in this regard.
- Google search may no longer be the default search engine on Safari. (link)
- The vast majority (75%) of mobile search ad revenue comes from iOS (from Goldman Sachs)
- Apple has been working to reduce iOS’s search reliance on Google, and the ability to display Wikipedia search results in Spotlight have reduced Google clicks(9to5mac).
It seems that either these reports are false, are insignificant, or simply that Google’s management is oblivious to these threats.
Either way, Google’s strategy makes it financially vulnerable due to an over dependence on iOS. Since Google still lacks a strong alternative revenue source to search ads, anything that causes it to lose this revenue will significantly slow the company’s growth. The only way to mitigate this risk would have been to attempt to capture the high-end smartphone market in collaboration with Samsung. This is very much to opposite of what Google’s actions suggest.
In conclusion
I am now quite sure that Google’s management gave up on the high-end smartphone market at the time when Andy Rubin was demoted on March, 2013. The past two years has seen Google focus on the low-end smartphone market, while deemphasising high-end features, and even fighting with the vendor that dominates high-end Android phones.
2015 is the year when we might see this strategy backfire. There are multiple reports that suggest that Apple will more aggressively distance itself from Google, and that this will have a significant impact on Google’s growth.
Importantly, by neglecting the high-end smartphone market, Google has burnt the bridges and has no backup strategy if this is indeed what happens.
Naofumi Kagami 
I agree with your opinion.
Africa, China and India have large “low end smartphone market” and google’s strategy to provide free cloud service ( like photo storage service) will cause huge expense where they do not have good advertise business.
Google need a strategy that will bring revenue rather than PC/mobile search.
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WSJ somewhat touching on what you (and Ben Bajarin) predicted, the potential decline of high-end Android. (the “Samsung misjudged S6 Edge demand is a red herring IMO) http://www.wsj.com/articles/apples-share-of-smartphone-industrys-profits-soars-to-92-1436727458
I think one point that has been made on occasion but hasn’t sunk in for most is that the difference between a $600 and a $200 expenditure on a smartphone is not as big an obstacle as may seem when it’s framed as “3x more expensive” or “hundreds of dollars more.”
For most people, a smartphone is the one purchase they spend the most time with in their entire lives. Many people probably spend more time “with” their phone (using or at least having/checking/being aware of) than in their own home or in their car, and those cost 20-1000x the delta in smartphone prices. People in most of the world spend orders of magnitude more on food, clothes, cable, phone/data bill, entertainment etc. both combined and for most of them even as a single category. e.g. in the US a typical cellphone plan is $600-1000+/yr. Another way to think about it is for the average person keeping a phone for 2.5 years, the $400 delta is $160/yr. or 43 cents/day. That’s the cost of a cup of coffee if you make it at home, let alone the 10x tons of people spend at Starbucks ever day.
So I think we’re seeing that even if cheap Android phones are better than they used to be, a much larger swath of people than many thought are both able and willing to spend essentially pocket change per day to get The Best for the one purchase they spend the most time in their lives with.
This also speaks to the Aspirational angle. There is hardly any other significant category where you can buy The Best for $160/yr. You can hardly buy the best sneakers for that much, let alone the best Shoes. The best food (even one dinner for 2), the best flight (even coach, forget about business or first), the best suit, the best TV, best coffeemaker… other than very minor things it’s hard to think of another category where you can truly buy the best for that much. And of course with a phone there is the status of showing it off for years to come.
Viewing it in this way helps me understand the reports from rural China and other places with groups with relatively low disposable income still have an eye toward joining the iPhone family.
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I understand your viewpoint, but living through the Japanese bubble period, I do have huge concerns over how the Chinese people are spending their money. In a nutshell, as far as I can tell, the Chinese aspirational spending tendency closely resembles Japan in the 1980s (I was still a teenager then so I don’t really know the details, but it sure feels like it). It’s very “bubbly”, which we used to call it a few years after we got over the shock. The Japanese clearly spent beyond what their paycheque would normally allow because a) banks would blindly lend them that money and b) we believed that we had to get on the boat (be as frivolous as our peers), or we would miss out.
Although I do think that the iPhone is a bit different because, unlike a lot of other luxury stuff that we gobbled up in the 1980s and the Chinese are doing now, the iPhone is actually worth what it costs. It’s not just a frivolous item, but it’s also something that gets the job done. It’s also not too expensive compared to luxury bags, suits and dresses, cars, bars, golf club memberships, wines, paintings and all the stupid things that the Japanese wasted their money on.
So my current thinking is that I don’t really think it’s a good idea just yet to try to rationalise how the Chinese are spending. It is very likely to be hugely affected by a bubble that looks like it will at least deflate (if not burst) in the next five years, likely sooner. At the same time, I don’t see Apple as necessarily being the hardest hit. Apple will surely be hit, but there are tons of other goods that will be hit far worse.
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Agree on China. (and re: bubbles, exactly, e.g. in the US the savings rate is super low, so people did and do buy everything from houses to cars beyond their means, so yes a phone is a tiny factor in that spending)
I was referring much more broadly though, China was just one example. Whether it’s Russia, Turkey, Italy, or even the US and UK, handset price is not a huge barrier for a very large % of the population.
As a corollary I saw discussed somewhere, analysts wonder how Apple can keep growing. Will they ideate another iPhone-sized hit product? Will they make a “cheap” phone for the “next billion”? Of course not, the answer is much simpler than that. Their plan is simply to increase their market share, slowly but surely, across the world wherever people want what the iPhone offers enough. Going from 35% share in the US and UK to 50%, from 10% in Italy to 25%, from 5% in Spain to 15%, from “0%” in China to 30%.
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Yes I totally agree on that.
I like to think that there are two types of company. One that tries hard to create new value. The other that tries hard to destroy value. Apple is the former. Google (outside search) and Amazon are generally the latter.
One tries to create products that are better than what anybody else has done before, and convince customers to buy. The other tries to convince customers that those products aren’t really that valuable and that they are overpaying.
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Interesting way to segment. Will think about that.
Slightly off-topic, here’s a question that you may have a thought on. I’ve posed this to some other people but haven’t gotten a convincing response.
How is it that Samsung, by all accounts one of the most ruthless corporations on the planet, was pushed around by Google (e.g. reducing TouchWiz, other limitations to differentiation, etc.)? Did they just do a bad job negotiating? Did they just agree to Google’s demands because they planned very poorly and had no Plan B? Was there political infighting which caused division within Samsung as to how to respond?
I know of course they had no real Plan B, Tizen wasn’t ready if it ever will be, etc. But 2 years ago they were by far the largest Android OEM already and it seems they had enough power to gain more concessions (whatever those may have been).
I kind of wonder if they could have pulled off a reverse-Nokia, that is, if Samsung decided to make Windows Phone devices, would carriers have pushed them to customers, would they have enough clout to raise developer interest in developing Windows Phone apps? I actually think that may have given Microsoft the one shot they needed, so I wonder if MSFT tried to make overtures to Samsung. More pragmatically, I wonder if threatening to take 30% of their volume to Windows Phone would have had any sway with Google.
Perhaps with Andy Rubin but not with Sundar Pichai, per your theory.
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Sorry for the necro, but Samsung had Windows phones (the Ativ line, IIRC), based on their Android flagships’ hardware, for the longest time. Sales were piddly.
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On the topic of value destruction, authors today accusing Amazon of that: http://www.nytimes.com/2015/07/14/technology/accusing-amazon-of-antitrust-violations-authors-and-booksellers-demand-us-inquiry.html
Seems very unlikely this will go anywhere, since current US antitrust viewpoint is only focused on lower prices, nothing else. So they favor monopoly companies that destroy other companies and destroy jobs if they thoretically offer low prices also.
I’m not an economist, but isn’t it healthier for a country overall to have lower unemployment and slightly higher prices, than higher unemployment and slightly lower prices?
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I think that economists are quite confused on what’s healthy for a country 🙂
What I have found enlighting is Clayton Christensen’s recent work on “The Capitalist’s Dilemma” where he discusses innovations that create jobs, innovations that destroy jobs, and innovations that are neutral. He states that although all of these innovations are necessary, the balance is shifting to job destroying innovations, which is harming the economy.
Amazon’s business clearly destroys jobs but that in itself is ok. The problem that I see is that Amazon’s dominance and low prices are hindering the emergence of next wave of online retail startups that could end up creating new value and new jobs.
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Good article- http://finance.yahoo.com/news/with-almost-all-of-its-growth-coming-from-china–should-apple-be-worried–152905340.html
Interestingly makes one of the points I had pondered:
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In addition to a “vast” middle class, “there will remain a vast underclass who cannot afford these things but will want something to show for all their hard work and an Apple product fits the bill,” Schramm said.
Steven Lewis, a China expert at Rice University, agreed. “Even lower income Chinese want trendy Apple products, and given that many young people in urban areas have relatively high amounts of disposable income — they live with parents for free and do not want to buy a car — you can get Chinese of lower income also buying Apple as well,” Lewis says.
——–
Of course also agree with long-term concerns about Chinese government’s influence.
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I really haven’t studied China nor Bubble-era Japan in enough detail to make an informed conclusion.
It’s more of a gut feeling than anything else, but seeing Japan go through the post-bubble trauma, I’m pretty sure that a stock market collapse would strongly affect much more than the population that owns stock.
But having said that, I also know that post-bubble trauma did not affect how much our youth spent on i-mode era feature phones. That’s why I said iPhone sales in China probably won’t be hurt too much. I totally agree with the article that what will be more affected are cars and vacations.
So to summarise what I meant to say, I totally agree to the middle class growth and how that will continue to generate increased revenue for Apple. However, I do have issues with the aspirational angle. Many aspects of the aspiration angle will be severely hurt if the bubble bursts. It’s just that I think the iPhone will be mostly exempt because it’s not just aspirational, but also darn useful, and it’s not really that expensive. Which I think is quite similar to the article that you linked to.
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