A Series of Tech.pinions

Spectrum: The Wheels of the FCC Grind Slowly

Remember back at CES in January when Federal communications Commission Chairman Julius Genachowski announced a plan to free 195 MHz of spectrum in the 5 gigahertz band for expanded Wi-Fi? I hope you we’re planning on using it anytime soon.

As outlined by wireless guru Steven Crowley, it’s going to be at least 2015 before the new unlicensed spectrum becomes available. The FCC has put a Notice of Proposed Rule Making (FCC-speak for its snail-paced official decision-making process) on the agenda for its Feb. 20 meeting.

One problem is that the FCC shared responsibility for spectrum allocation with the Commerce Dept.’s National Technical Information Administration–and NTIA doesn’t seem terribly enthusiastic about the idea and certainly is in no rush to implement it. The big complication is that federal government radars and ground-to-air communications systems operate in the 5 GHz band, and any new Wi-Fi uses will have to protect those operations. A preliminary NTIA report of spectrum allocation warns of interference risks and concludes “that further analysis will be required to determine whether and how the identified risk factors can be mitigated through, for example, the promulgation of new safeguards in addition to the FCC’s existing requirements.” That report is not due until the end of 2014, and then it is anyone’s guess how long it will take for whatever safeguards are recommended to be implemented.

Another threat to the additional Wi-Fi spectrum comes from, of all places, the auto industry. Once of the proposed new Wi-Fi channels is adjacent to spectrum allocated for Dedicated Short-Range Communications, a very promising technology that can be used by cars to communicate with each others and with roadside sensors. The Intelligent Transportation Society of America has written to Genachowski warning of possible interference with DSRC and asking for further study before the expansion of Wi-Fi is approved.

Nobody ever said this spectrum stuff was easy.

Spectrum: Multiplication Beats Addition

Martin Cooper recalls the days of mobile radio-telephones before cellular service:

You’d have one station in a city and you could conduct in that city 12 phone calls at one time. During the busy hour, the probability of connecting, of getting a dial tone, was about 10%. Of course, the reason was a city with 12 channels could support perhaps 50 people with reasonable service. They put 1,000 people on it. So the service was abominable.

The solution had been developing for a long time before Cooper made the first cellular call in 1973. Back in 1947, engineers at Bell Labs came up with a scheme for using relatively low-powered transmitters to serve hexagonal cells. With some care and cleverness in assigning channels, the same spectrum could be reused, provided the cells were far enough apart. Over time, AT&T developed the technology that allowed a call to stay connected as a mobile phone moved from one cell to another and Motorola created the mobile handsets. An industry and a new way of life was born.

The sort of subdivision that made the cell phone possible will also enable a vast expansions of the amount of data that wireless networks can carry without a commensurate increase in wireless spectrum. Get ready for heterogeneous networks, or hetnets, that will use a variety of techniques to chop up spectrum and space into smaller chunks that will allow for greater reuse.Get ready for heterogeneous networks, or hetnets, that will use a variety of technologies to boost data capacity.

Wi-Fi handoff will be a key part of the hetnet. It’s being used that way today, albeit in a somewhat random and uncoordinated way. Nearly all Wi-Fi-capable mobile devices are designed to switch to Wi-Fi for data whenever it is available. One big problem, is that the device has only a vague idea of what available means. This works fine when I come home and my devices automatically connect to the network, whose password is in memory. My iPhone connects automatically to AT&T hotspots and my iPad does the same for Verizon.

Many other networks, however, require a login. Sometimes it’s a password that you can enter and it will be remembered from then on. Sometimes its a popup page that just wants you to agree to terms and conditions. And sometimes it’s a page that require a username, a password, and often a credit card number for payment. While these methods vary int he annoyance they cause, all are a serious impediment to a seamless handoff. Even worse, is that your device will try to use a Wi-Fi network to which you haven’t connected, either because you lack a password or don’t care to pay. Sometimes you have to manually turn Wi-Fi off to get your phone or tablet to work properly.

Change is coming, through a technology known as Passpoint or Access Point 2.0. This will allow truly seamless handoffs between cellular and Wi-Fi (and perhaps, in the future, white space) networks, which the device itself providing authentication. The standards are nearing final ratification, Once that happens, says Doug Lodder, vice president for business development of hotpot provider Boingo, “the carriers will run it through their labs and will negotiate roaming agreements. It’s starting to roll out, but we won’t see widespread availability until 2014.”

Small cells. Traditional cell antennas, mounted on towers or other structures, typically serve a radius of from several kilometers to several hundred meters, depending mostly on the height of the tower. Small cells, also known as microcells, picocells, and femtocells, serve ranges from a couple hundred meters down to a few tens of meters. Home femtocells are designed to provide connectivity to otherwise unserved places and connect to the network through a residential broadband connection. But other small cells are a fully managed part of a cellular network, intended to multiply the use of spectrum by chopping areas into very small cells.

You can’t just plop small cells down in areas already covered by standard cell service, at least not using the same frequencies. The Federal Communications commission is proposing that the shared 3500megahertz band be dedicated to small-cell use. Higher frequency signals have shorter range and less ability to penetrate obstructions than the 700 to 2100 megahertz signals typically used for wireless data, making them well suited to small cells.

Small cells, and a related technology known as distributed antenna systems (DAS) have the advantage of making it much easier to provide good coverage inside buildings. As Cooper says, “It’s kind of an anomaly that if you think about it, most of our cellular conversations are in buildings and in offices, because that’s where we spend most of our time. But all the stations that provide services, almost all of them are outside. It’s kind of backwards.” Whereas small cells use multiple miniature access points, not unlike a Wi-Fi network, DAS splits the signal of a single base station among multiple antennas, each serving a small region. “You have smaller pipes, but fewer people attached to each pipe,” says Boingo’s Lodder. A single DAS array can also carry signals for several cellular networks.

Smart antennas. Cellular communication is a broadcast service. A single cell antenna covers, typically a 120° sector of its cell. But smart antenna technology makes it possible to focus that beam and steer the signal to a recipient, allowing closer reuse of spectrum. There has been a lot of research on smart antennas, but limited deployment in the field. A versions, called multi-input, multi-output (MIMO) is used with Wi-Fi and LTE, but the purpose has been more to extend range than to increase spectrum reuse. Smart antennas are one more tool in the engineering toolbox that can allow us to move a lot more data on the spectrum we have.

More wireless data spectrum is always welcome and the growth of demand for bandwidth probably cannot be met entirely within existing spectrum allocations, But new spectrum is getting harder and harder to find and the politics of prying it loose are exhausting and not terribly productive. Our best hope for meeting demand is to do more with what we have. And, fortunately, there is a great deal more that can be done.

Spectrum: Sharing Nicely Can Go a Long Way

Sharing has been part of U.S. spectrum policy from the beginning. When the government started handing out AM radio licenses in the 1920s and 30s, a relative handful of stations were assigned “clear channels” that they did not share with any other broadcaster in North America. There were allowed to operate at up to 50 kW and on nights when the atmospheric conditions were right, could be heard hundreds of miles from their transmitters. The rest of the stations got just a local monopoly on their frequencies. This worked fine in daytime, but some broadcasters had to shut down as soon as the sun set to avoid interfering with neighbors.

Still, the model for spectrum use in the U.S. and the rest of the world has been exclusivity. If you had a license, whether you were a TV station, a taxicab company, or a wireless phone operator, no one else within range to interfere was allowed to operate on your patch of spectrum. This worked fine as long as spectrum was relatively plentiful, But as noted in the earlier articles int his series, demand for wireless bandwidth is rising fast and we have run out of spectrum to assign. The tendency has been to view spectrum allocation as a zero-sum game: Anyone’s gain had to be someone else’s loss.

But this may well be a self-defeating process. If every megahertz of bandwidth assigned to wireless data has to be pried from the hands on an incumbent, it’s going to be a very slow and painful process. As the President’s Council of Advisors on Science & Technology (PCAST) put it: ”

PCAST finds that clearing and reallocation of Federal spectrum is not a sustainable basis for spectrum policy due to the high cost, lengthy time to implement, and disruption to the Federal mission. Further, although some have proclaimed that clearing and reallocation will result in significant net revenue to the government, we do not anticipate that will be the case for Federal spectrum.

The saving grace is that much of the spectrum currently assigned is not used very intensively. Some, for example, is assigned nationwide, but used in only specific locations. The government reserves a chunk of spectrum in the 3550 megahertz band for radar use, but it is generally used only in locations along the Atlantic and Pacific coasts. One approach to freeing this spectrum for wireless use would be to set up large coastal exclusion zones and issue wireless data licenses for the middle of the country. Unfortunately, this would exclude the most densely populated parts of the country. A better approach, endorsed by the and being actively pursued by the Federal Communications Commission is to take advantage of advances in technology to allow much finer grained sharing by allowing wireless data operations where the spectrum is not being used for rader. There are two possible “smart radio” approaches: One is to have a mobile device check its location against a database and operate on those frequencies only in areas known to be safe. Another is to actively seek out the radar signals and back off if they are detected. The 3500 MHz shared spectrum is likely to be used primarily for small cells, and idea I will explore in the next installment of this series.With those who hold spectrum fighting hard not to give it up, sharing must play a key role in meeting growing demand.

Another form of sharing is utilization of locally unused channels in the large swath of 600-800 MHz spectrum reserved for broadcast television. The FCC hopes to scavange spectrum for Wi-Fi-like unlicensed use in two different way. One, an idea that has been around for several years, is to allow the use of “white spaces”–televisions channels that are unassigned in a given location. The problem is that different channels are free in different places. The FCC is an fairly advanced development of rules for the use white spaces. However, base stations and and devices will be responsible for checking which frequencies they can safely use. White spaces are not likely to do much in the biggest cities, where dense channel assignments leave little spectrum available for sharing. In the end, the most important contribution of white spaces is to provide high speed broadband to rural areas, where TV channel allocations are sparse and good alternatives are few.

A second source of shared spectrum is part of the FCC’s plan to consolidate and sell off unused broadcast spectrum. The analog tuners used for many years in TV sets had a poor ability to reject signals in adjacent channels, so the original channel assignments set up wide “guard bands” to protect signals from interference (these are common throughout spectrum assignments.) New digital tuners are much more precise and the FCC proposes to free TV guard band channels for unlicensed use. Again, exactly which frequencies will be available will vary from market to market.

(A Washington Post story created much excitement around the internet by suggesting that the FCC has a plan to turn this new unlicensed spectrum into a nationwide free Wi-Fi service. The FCC has proposed nothing of the sort. There may be more Wi-Fi-like service available–it would not technically be Wi-Fi and would not work with existing Wi-Fi devices–but it won’t be national and it most likely won’t be free.)

The incumbent carriers continue to prefer exclusive spectrum assignments. It’s the way they are used to operating and besides, their ability to controls lots of bandwidth forms a powerful barrier to entry for potential competitors. They also remain deeply ambivalent about Wi-Fi and unlicensed spectrum schemes, not being quite sure whether they are threats or potential saviors for overcrowded networks. As Joan Marsh, AT&T vice-president, federal regulatory, wrote in response to the PCAST recommendations:

The Report’s core recommendations, however, have generated significant controversy. The Report found that the new norm for spectrum use should be sharing, not exclusive licensing. While we agree that sharing paradigms should be explored as another option for spectrum management, sharing technologies have been long promised but remain largely unproven. The over-eager pursuit of unlicensed sharing models cannot turn a blind eye on the model proven to deliver investment, innovation, and jobs – exclusive licensing. Industry and government alike must continue with the hard work of clearing and licensing under-utilized government spectrum where feasible.

Notwithstanding these misgivings, AT&T, T-Mobile, and Verizon have agreed to cooperate with the Defense Dept. in studying approaches to sharing spectrum in the 1750 MHz band, prime wireless real estate adjacent to frequencies currently used for wireless data. Since no one is willing to part with spectrum they currently hold, one way or another spectrum sharing has to be a key component of any plan to meet growing demand.

Spectrum: Where It Came From, Where It Goes

In the the beginning, wireless spectrum in the U.S. was free. In 1983, the Federal Communications Commission created the first analog cellular networks by assigning two chunks of airwaves in the 800 MHz band. One chunk was reserved for the incumbent local wireline carrier, or Baby Bell as they were then known. This ancient history is important because the leg up that was given to the companies that gradually coalesced into Verizon Wireless and AT&T formed the basis for these carriers’ domination of the U.S. market. The story of spectrum over the past three decades is mostly a tale of the rich getting richer, all the while bemoaning their poverty.

Over time, the government assigned more and more spectrum to wireless voice and (eventually) data. New competitors did arise. Sprint, until then primarily a wireline long-distance operator, created its network out of the 1994 auction of 1900 MHz “personal communications services” spectrum. Wireless phone pioneer Craig McCaw built the Nextel network out of bits and pieces of “special mobile radio” licenses intended for dispatch services. T-Mobile and its predecessors assembled a bunch of smaller carriers using the GSM standard, which was then widely used everywhere but the U.S.

But through auctions and acquisitions, the biggest carriers managed to get even bigger. The last major wireless spectrum auction was the 2007 sale of television bandwidth that had been freed by completion of the transition to digital TV broadcasting. To the surprise of just about no one, the overwhelming winners in the sales were Verizon and AT&T, which have been using the spectrum in the 700 MHz band to build out their fourth-generation LTE networks.

The problem we now face is that after 30 years of freeing bandwidth for mobile data use, we’ve pretty much run out of spectrum that can be reassigned without a major fight. The only sale on the horizon is an additional 100 MHz of TV bandwidth. But among many other complexities, availability of this spectrum will require some stations to give up their licenses (in exchange for a share of the proceeds from the auction) and others to move to new frequencies to create usable blocks of contiguous spectrum. The convoluted process mandated by Congress means that the sales won;t begin until 2014 (at the earliest) and are likely to yield a good bit less than 100 MHz in many parts of the country.The problem we now face is that after 30 years of freeing bandwidth for mobile data use, we’ve pretty much run out of spectrum that can be reassigned without a major fight.

In the absence of new allocations coming down the pike, Verizon and AT&T have been bulking up on spectrum through mergers and acquisitions. AT&T failed to convince Justice Dept. anti-trusters that its need for spectrum justified its proposed 2011 acquisition of T-Mobile. It announced on Jan. 22 that it intends to acquire the remainder of regional carrier Alltel, the bulk of which was bought by Verizon in 2008. Verizon is buying the spectrum of a consortium of cable companies, which once had dreams of building their own wireless networks.

The incumbent wireless carriers insist that the system is header for crisis without additional bandwidth and the the best, and perhaps only, way to get it is by selling them the rights to spectrum currently held by others. In a post on a the AT&T public policy blog, Joan Marsh, vice-president, federal regulatory, responded to a recommendation that sharing spectrum with federal agencies might be a good way to increase capacity, saying:

The Report [of the President’s Council of Advisors on Science & Technology] found that the new norm for spectrum use should be sharing, not exclusive licensing. While we agree that sharing paradigms should be explored as another option for spectrum management, sharing technologies have been long promised but remain largely unproven. The over-eager pursuit of unlicensed sharing models cannot turn a blind eye on the model proven to deliver investment, innovation, and jobs–exclusive licensing. Industry and government alike must continue with the hard work of clearing and licensing under-utilized government spectrum where feasible.

John Marinho, vice-president of technology and cyber security for CTIA-The Wireless Association, which speaks for the wireless incumbents, wrote:

Trust me, the carriers are deploying and using every single technology and “trick” they can to try to solve the looming spectrum crisis in the near-term, but nothing will solve the problem like more spectrum. Claude Shannon proved that there are practical limits to how much bandwidth capacity is available from a limited amount of spectrum. One has to look no further than the father of information theory to realize that the solution is more spectrum.

I’ll have more to say about Shannon’s laws and its implications for wireless networks in future installments, but the truth is that there are lots of techniques for expanding the capacity of wireless networks that have yet to be deployed in any serious way. Martin Cooper, who built the first cellphone for Motorola before there was a network to use it on, says: “I can tell you that the way not to create more spectrum is to redistribute it. And that is what the government is proposing to do now, take it away from some people and give it to others. That’s not going to do it.”

The next articles in this series will explore some better ways.

Spectrum: The Shortage Is a Crisis, but Not Serious

The late economist Herb Stein used to say that “if something cannot go on forever, it will stop.”

A profound economic truth lies behind that seeming flip statement. The world is forever on the verge of running out of vital commodities–oil, food, water, and many more–but somehow we never do. In the worst case, as a commodity grows scarce, its price rises and demand shrinks. The real world, however, human ingenuity triumphs over shortages. We find alternatives to whatever we are running out of, or, better, we find ways to use what we have much more efficiently. So it is with the spectrum we need to move ever-growing volumes of wireless data to our proliferating mobile devices.

In the short run, available spectrum is more or less fixed, creating an atmosphere of shortage. The established carriers, especially Verizon Wireless and AT&T, warn of “exponential”* growth in demand and use claims of shortage both to lobby for new allocations of spectrum for wireless data use and to justify data caps and higher rates. Critics argue that while dedicating more spectrum to wireless data is desirable, much can be accomplished through greater efficiency in the use of what we have.

In this an subsequent articles in this series on spectrum, I will examine the claims and look at possible solutions. Perhaps the biggest issue is just what is happening with demand for spectrum. The truth appears to be that it is still growing very quickly, but at a decelerating rate. Cisco’s Visual Networking Index, which has often been criticized for exaggerating the growth rate, indicates this clearly. It shows the growth rate for mobile data slowing from 133% in 2011 to an estimated 78% in 2014. A growth rate of nearly 80% is still staggeringly fast, but the effect of this deceleration is enormous. At a 133% compound annual growth rate, consumption would increase 240-fold over a decade; at 78%, just 60-fold. The difference: More than 100 exabytes of data per month.Stein’s Law: “If something cannot go on forever, it will stop.”

But even if we discount the more breathless and self-serving estimates of growth in wireless data use, it is clear that the amount of spectrum allocated to wireless data will be, at some point in the not too distant future will be inadequate to meet demand, based on today’s technologies. It is also clear that to meet this demand, we must both find additional spectrum and find ways to use it more efficiently. Fortunately, both are eminently doable.

The actions that can be taken to improve the availability of spectrum for data include:

Auctioning spectrum currently used for other purposes. This is the course favored by the incumbent carriers and, to a considerable extent, by Congress and the Federal Communications Commission. The big problem is that it is extremely difficult to get anyone–public or private–who currently holds spectrum to part with it. Legislation passed last year provides for the auction of 100 MHz of unused or under-used television spectrum for data, with the current broadcast licensees sharing in the proceeds. The rules for these “incentive auctions” are extremely complex. No spectrum will actually be sold until next year at the earliest, and it seems unlikely that the amount freed will ever come up to 100 MHz. Prying spectrum from the vast hoard held by government agencies, particularly the Defense Dept., is even more difficult.
Speeding buildout of unused spectrum. Even while complaining of spectrum shortages, the incumbent carriers still have a lot of spectrum in the bank. Neither Verizon nor AT&T has completed the build-out of LTE networks on the 700 MHz-band spectrum they bought in 2007, a Verizon has just acquired considerable additional spectrum in a deal with Comcast and other cable companies. The biggest chunk of barely used spectrum is nationwide coverage at 2.5 GHz held by Clearwire, whose financial woes have allowed only a small portion of the network to be built out. Both Sprint and Dish Networks are bidding for control of Clearwire with the fate of this spectrum in the balance.
Spectrum sharing. A lot of spectrum is assigned to entities, usually government agencies, that sue it only sparingly. For example, Defense Dept. operates a scattering of military radars in the 3.5 GHz band. The FCC is currently implementing a plan that will allow commercial use of this spectrum by devices and base stations specially designed to operate only where and when they will not interfere with the radar.
White spaces. This is a Wi-Fi-like spectrum-sharing variant that operates on unused portions of the television band. Unfortunately, white space is most available in rural areas and scarce in crowded cities where it is really needed. It is most likely to have its main impact as an alternative to wired broadband service in rural areas.
Small cells. The basic principle of cellular communication is that limiting the range of base stations to fairly small areas allows spectrum to be reused, as long as the cells are far enough apart to avoid interference. Cell sizes, which depend on transmit power and the height of the antenna, range from a radius of 30 kilometers in the country to 1 km or less in dense cities. But reuse of spectrum can be increased greatly by using very small cells in the densest areas.
Wi-Fi offload. Unlike other wireless technologies, Wi-Fi operates on spectrum that is free for anyone to use, and Wi-Fi access points serve areas with a radium of 100 m or less. The load on crowded cellular data networks can be reduced greatly if as much traffic as possible is shifted to Wi-Fi, and new technologies are enhancing the ability of this offload to be handled automatically and seamlessly.
Smart antennas. While small cells reduce the radius of coverage, smart antennas can reduce the angle of the sector covered. Current cellular antennas typically cover a 120° sector. Smart antenna technology can allow base stations to beam their transmissions to the devices to which they are connected, again allowing for greater resuse of spectrum.

Most or all of these technologies are going to be needed in combination to deal with the growing demand for wireless data, but the fact is that the spectrum “crisis” is a challenge we can meet with a combination of sound policy and good technology. I’ll be looking at each of these options in more detail in coming articles in this series.

*–Truth in mathematics time. The essential characteristic of exponential growth is that it increases at an ever increasing rate. (For those of you who remember your calculus, all derivatives are positive.) This never happens in the real world, at least not for long, because growth is always constrained by something. As noted below, there is, in fact, evidence that the growth in demand for wireless data is already decelerating.

Why Android Is Winning The Battles But Google Is Losing The War: Part 5

A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

5) Picking Your Battles Is As Important as Winning Them

Recap

“If we are victorious in one more (such) battle…we shall be utterly ruined.” ~ Pyrrhus

Google, inarguably, won the war for the desktop. Their search strategy was brilliant, brilliantly executed and brilliantly successful. But they knew that mobile was the future and they knew that they needed to find a way to extend their business model to embrace mobile or they would eventually be isolated on the desktop with ever decreasing customers and ever decreasing revenues.

Android was Google’s answer to how to monetize mobile. It would serve two purposes. It would transfer Google’s successful desktop search paradigm to mobile devices and it would disrupt the incumbent mobile operators.

DISRUPTION

In the latter, Android was entirely successful. The one-two punch of Apple’s iOS and Google’s Android demolished the then crown princes of mobile computing. Palm is gone. RIM is on its last legs. Nokia is no more than a vassal of Microsoft. Windows Mobile was utterly destroyed, its replacement, Windows Phone 7, has come and gone, and Microsoft is now rebooting the franchise for a third time with Windows Phone 8. Seldom, if ever, has an industry been turned on its head quite so thoroughly and quite so fast.

PROFITS

However, with regard to transferring Google’s desktop search model to mobile, Android has utterly failed. Google search on the desktop is one of the most profitable businesses in the world. Android on mobile is not only virtually profitless but, if your subtract the extraordinary expenditures involved in creating and supporting it, it is almost certainly a net loss for Google.

SEARCH, APPS AND PLATFORM

There are at least three reasons why Android is failing to serve Google’s purposes: search, apps, and platform.

When Google created Android, they didn’t know, and probably couldn’t have known, how ineffective search would be on mobile devices. For a variety of reasons – but mostly due to the small screen size – search simply does not work on mobile devices the way it does on desktop devices.

The popularity – and the peril – of apps was probably another unforeseeable development. In 2006, and long afterwards one could have, and many did, make the argument that web apps were the future. It just didn’t work out that way. Apps have proven to be far more successful than anyone could have predicted. And apps are a direct threat to Google’s search model since they can’t be “crawled” by Google’s search engines and since they entirely bypass Google’s advertising business model.

Yes, search and apps were threats that Google may not have been able to previse, but their real failure was a failure to understand what platform was all about. To be fair, most industry analysts and pundits still, to this day, seem blinded as to what truly makes a platform successful.

Units and Users vs. Dollars and Developers

When it comes to platform everyone is focused on units and users. What they should be focused on is dollars and developers.

A consumer who is willing to spend $100 is 100 times more important to developers, retailers, content providers and advertisers than is a consumer who is only willing to spend $1. More importantly, a consumer who is willing to spend $1 is infinitely more valuable than the consumer who spends nothing. Unit sales and users are important to hardware manufacturers like Samsung and Apple because hardware manufacturers get paid up front when the purchase of the hardware is made. But so far as a platform goes, the consumer who consumes nothing is a non-entity – they might as well not exist.

All that market share that Android has? Toss it out. Start counting again and this time, instead of counting units and users, count the dollars that those users spend. If you do that, suddenly all of Android’s seeming paradoxes quickly dissipate.

— Users who don’t spend money don’t attract developers, retailers, content providers or advertisers.

— Users who don’t buy into the platform have no loyalty to the platform. They’re not customers for life. They’re customers until they get their next mobile device.

— Users who don’t spend money have no network effect. Non-using users are not a boon to a network, they’re the bane of a network.

Why Don’t Android Users Spend More Money?

This all begs the question: “Why don’t Android users spend more money?” I know this is going to be dismaying to read, but I simply don’t know.

I find all the current theories unsatisfying. Many of them are undoubtedly true. And some of them explain some of why Android owners spend less. But none of them – even in concert – fully explain to my satisfaction why Android users spend so very much less.

I think that I could make a pretty good case that Google’s inattentiveness to their platform is the biggest culprit. And even Google seems to be waking up to this fact. Last month they initiated new guidelines for creating tablet optimized apps. Yesterday they modified their legal agreement with developers working on Android apps to specifically prohibit them from any action that could contribute to further fragmentation of the mobile platform.

Will this be enough to increase user spending and purchasing? Who knows. For now we simply have to live with the fact that Android owners do not spend money and the consequences of that fact. The rationale for why it is so will have to wait upon further analysis.

The Trojan Horse

As I discussed, above, Android was terribly disrupting to the mobile device industry. Industry stalwarts such as Palm, RIM, Nokia and Microsoft Windows are either gone or are on the ropes. But Android may have been disruptive to at least one other company too – Google.

There’s no evidence that Android is contributing to Google’s success. On the contrary, Android appears to be cannibalizing Google’s profitable businesses without generating any profits of its own. Android thoroughly destroyed the business models of the previous mobile moguls but it did not stop there. Android has now turned on its creator and it is destroying the value in Google’s advertising business, virtually eating the company up from the inside out.

Picking Your Battles Is As Important as Winning Them

The story of Android is still being written but the story being told by most pundits and industry observers is very different from the one that is actually occurring. Android has won the battle for market share but it is a Pyrrhic victory because it is coming at the expense of Google’s current profits and future prospects.

Like Pyrrhus of old, Google, needs to learn that winning isn’t everything. Picking your battles is as important as winning them because each battle has a cost and some victories come at too high a price. In spite of its perceived success, Android is not serving Google’s interests. Its march needs to be altered else its victories will ultimately prove ruinous to the victor.

Why Android Is Winning The Battles But Google Is Losing The War: Part 4

Series Schedule:

Mon: The Battle for the PC
Tue: The Battle for Mobile Phones Won
Wed: The War for Mobile Phones Lost
Thu: The Battle for Tablets
Fri: Picking Your Battles Is As Important as Winning Them

4) The Battle For Tablets

If Android’s battle for phones is a Pyrrhic victory, Android’s battle for tablets is a flat-out ignominious defeat.

Android’s Strategic Tablet Blunder

The tablet’s larger screen size demands that developers create apps optimized just for its form factor. This makes tablets a seperate platform all its own. Google’s big mistake in tablets was that they either didn’t recognize or refused to acknowledge that fact.

Google just saw tablets as big phones and acted accordingly. Rather than focusing on the creation of tablet optimized apps, Google encouraged their developers to create one-size-fits-all apps. Developers were encouraged to focus on scalability rather than optimization.

Google made their mind set clear by refusing to even establish a separate tablet-optimized classification for their store. While their nearest competitor highlighted the fact that they had 250,000 tablet optimized apps, Google categorically denied that there was any difference at all between phone and tablet apps. The result has mostly been a lot of Android phone apps awkwardly stretched to fit the larger tablet screen. Even big name apps like Twitter and Rdio looked unwieldy on Android tablets.

As recently as June 2012, when the Nexus 7 was introduced, Google Senior Vice President Andy Rubin reaffirmed that Google was sticking with its strategy of encouraging developers to write a single app for both phones and tablets.

“I don’t think there should be apps specific to a tablet…if someone makes an ICS app it’s going to run on phones and it’s going to run on tablets.” ~ Andy Rubin

Google’s policy was focused on the developer, not the consumer. It allowed developers to create apps that worked on more devices, but it did so at the expense of the user experience.

Andy Rubin went on to admit that he was upset that Android tablets weren’t selling. After looking into the reasons, Rubin declared that Google had discovered the reason for the lack of sales. While hardware really mattered on phones, consumers bought into content ecosystems with tablets. Rubin said that Google had lacked some of the ecosystem pieces that were necessary – such as TV shows, movies, magazines, etc. – to make people want to consume on a tablet.

“I think that was the missing piece,” Rubin said.

Do you hear what Rubin was saying? In his mind – and presumably in the mind of all of Google – the reason that Android tablets weren’t selling was because of a lack of compelling CONTENT. Tablet optimized apps never entered into the proposed “solution” to Android’s tablet woes. The Nexus 7 was all about content delivery since – in their minds – it was content, not apps, that was the missing piece.

Finally Google reversed course. On October 18, 2012, Google published a “tablet app quality checklist” on its Android Developer website and began to seriously urge developers to build tablet-optimized apps.Two and a half-years late and 250,000 iOS tablet optimized apps later, Google finally gets it – tablet optimized apps DO matter.

Or do they get it? Google STILL isn’t asking developers to make separate phone and tablet versios of their apps. And they STILL don’t separate phone apps from tablet apps in their store. And when asked why there still aren’t many tablet-sized apps for Android, Director for Android Partnerships, John Lagerling, said:

But before, I’ll be honest and say, yes, there was a lack of tablet apps that supported bigger screen real estate. But I’ll add that, I know we talked about the Cupertino guys, but obviously people who have smartphones are a huge target for us. If you look globally that’s something we worry more about, not so much about competing with other smartphones, but more about, how can we get more people onto the Internet on mobile phones? And that’s a big deal. That’s why low cost is so important.

Translation: Smartphones are more important to us than tablets and market share is more important to us than anything.

No wonder Android’s tablet efforts continue to languish.

Android Tablet Sales

So how is that one-size-fits-all, let’s-not-optimize-apps-to-the-tablet strategy working out for Android? The results speak for themselves.

At last report, tablets were just 5.38% of Android’s daily activations. And Nexus 7 sales – although constantly referred to as a “success” in the tech media – have been humble, to say the least.

Mark Mahaney, who follows Google for Citi Research … thinks Google sold about a million units of their tablet (that is made by Asus) and that accounts for about $200 million in revenue.

Ben Schachter of McQuarie Securities agrees and estimates that Nexus 7 sales accounted for probably $150 million to $200 million…in… revenue.

Piper Jaffray’s Gene Muster estimates that Google sold between 800,000 to a million units, while Doug Anmuth of JP Morgan says Google sold about 700,000 units of Nexus 7 tablets.

Asustek CFO David Chang told the WSJ that the company was selling—not just shipping—500,000 units a month initially, when the Nexus 7 launched in July. Figures bumped up to 600,000-700,000 in the following months, and in “this latest month,” Google and Asus have sold close to one million units, said Chang.

Let me put those numbers in perspective.

REVENUES

The Nexus 7 may have made as little as 200 million – in revenue, not profit – in an entire quarter. That’s pathetic.

PROFITS

And we know that Google didn’t make any profits from the sales of the Nexus 7 because they told us so.

“When it gets sold through the Play store, there’s no margin,” Rubin said. “It just basically gets (sold) through.”

UNITS

But revenue and profits really don’t matter in a subsidized model. The concept is to get as many units on the market as possible in order to enhance the opportunities to sell content and advertising. So let’s look at the Nexus 7’s sales numbers.

The Nexus 7’s sales are either as high as 1 million units a month or as low as 1 million, 800,000 or 700,000 units a quarter. And the reason we’re relying on estimates is because Google refuses to release actual sales numbers – which is telling all in itself.

By way of contrast, Apple sold a total of 3 million iPad Minis and iPad 4’s in their first three days of availaility. At its current pace, the Nexus 7 would take between 3 months to 3 quarters to even match, let alone exceed, the number of tablets sold by Apple’s first 3 days of sales.

SUBSIDIZED BUSINESS MODELS THRIVE ON VOLUME

Those sales numbers are bad enough, but for a subsidized product, they’re gawdawful. Remember, the Nexus 7 is being given away at cost. Can you imgagine how many more cars or televisions would be sold if they were being sold at cost? The Nexus 7’s should be selling like crazy, not badly trailing competitive offerings that cost $300 more.

This is a give-away-the-razor, sell-the-blade business model. (See my article entitled: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“). Giving away the razor does not guarantee the sale of the blade but NOT giving away the razor DOES guarantee that the blades won’t be sold. Simiarly, volume sales of Nexus tablets do not guarantee that Google will profit from the sale of content and ads but low volume sales DO guarantee that they will not.

FUTURE SALES

Pundits are opining that the Nexus 7’s lower price will make it a hot selling item for the holiday quarter. And I have no doubt that sales will increase. But if Google was having trouble selling the Nexus 7 when its only competition was the 7 inch Kindle Fire and the 10 inch Apple iPad, then why does anyone seriously think it will do significantly better now that it also has to compete with the Apple iPad Mini and the Microsoft Surface?

Android Irony: Tablets Are Where The Ad Revenue Is

The irony in all of this is that tablets are where the ad revenue is. Android has fought and won the battle for phones but phones don’t produce much ad revenue. Meanwhile, Android has ignored tablets and tablets hold the prize that they were so desperately seeking all along. Like a General who is a great tactician but a poor strategist, Android has won all of the battles that they’ve fought, but they’ve fought all of their battles in the wrong places.

TABLETS ARE MORE VALUABLE

Studies have shown that tablet users are the more valuable consumers for advertisers to reach compared with PC and phone users. Tablet users spend 30 percent more time on sites and have 20 percent higher engagement.

“We found it interesting that tablets also had a smaller percentage of users who adopted ‘do not track’ settings compared to PC users,” Mr. Barnette said. “Mobile had the highest percentage of users who adopt do not track at 60 percent.”

APPLE IS DOMINATING TABLETS

And while tablets are dominating mobile revenues, Apple is dominating tablets.

The iPad accounts for between 91% and 98% of web traffic for all tablets. That only leaves 2% to 9% total web traffic for every other type of tablet combined.

And Apple dominates tablet downloads too.

“We estimate in the first half of this year the iPad saw over five times more app downloads than all Android tablets combined.”

TABLETS AD SPENDING OUTWEIGHS SMARTPHONE AD SPENDING

And in the absolute kicker, it is anticipated that tablet ad spending will outweigh smartphone ad spending this holiday season.

Think for a moment just how crazy that is. The ads for all the Android, iOS, Windows Phone 7 and every other smartphone combined will be outsold by the ads sold on tablets this holiday season. Wow.

Google has won the battle for the desktop. Android has won the battle for the phone. But Google’s prospects are possibly worse today than they were when they embarked on their Android strategy. Tomorrow we sum it all up and look to the future in the final article of the series entitled:

“Picking Your Battles Is As Important as Winning Them”

Why Android Is Winning The Battles But Google Is Losing The War: Part 3

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

3) The War For Mobile Phones Lost

Mobile Search Is Not The Same As Desktop Search

THE PLAN

Google’s plan was to transport their highly successful desktop search strategy to the phone. This only made sense. Search worked on the desktop. Mobile was the future. Therefore, Google’s future would be search on mobile.

MARKET SHARE

Google’s problem is not a lack of market share. eMarketer notes that Google’s share of mobile ad revenue is 55% and it controls 95% of mobile search ads. No, Google’s problem is that search doesn’t work the same on mobile as it does on the PC. In fact, it barely works at all. On the PC, search rules. On the phone, apps rule and search is the court jester.

SIZE MATTERS

When it comes to ads, size really do matter. One of Google’s strenghts when advertising on the desktop was that they would unobtrusively place relevant ads next to and above their search results. On a phone, this was not possible. There simply wasn’t enough screen real estate to display both search results and advertisments.

“Size absolutely does matter,” says Christine Chen, director of communication strategy at Goodby Silverstein & Partners, an ad agency in San Francisco. “If you look at the real estate available on a smartphone, it’s really sad compared to not just banner ads on the Web, but also to TV, print and outdoor advertising.”

“The evidence is telling: advertisers are willing to pay much more to reach a thousand pairs of eyes gazing upon a computer or tablet than a thousand pairs looking at a smartphone screen.

INVISIBLE OR IGNORED OR INVASIVE

Mobile ads are relegated to a tiny portion of the screen and are often invisible or ignored by consumers.

It’s a double-edged sword that cuts against advertisers both ways. It the ads aren’t big, they’re invisible. If they’re bigger, they’re seen as intrusive.

Phones are seen as very personal. Users to not want to be tracked. Interestingly, while 60 percent smartphone users do not allow themselves to be tracked only 7 percent of tablet users and 18 percent of PC users reject tracking on their devices.

NO OPTIMIZATION

For both technical and privacy reasons, advertisers lost the ability to know who they were advertising to. On the desktop, cookies were the standard. On the phone, such technology was either unavailable or seen and intrusive or even offensive.

“What makes Web ads so attractive to advertisers is the ability to track actions and optimize accordingly,” . Because a smartphone cannot use the same technology “your ability to track and optimize is much more blunt, or in some cases nonexistent.”

This makes phone advertisments much less valuable that desktop advertisments. A banner ad on a Web page that costs $3 to $5 for every thousand impressions may cost only 75 cents or $1 for a thousand impressions on a smartphone.

CONTEXT

Context is important too. People surf the web for long periods of time on their tablets and on the desktop. They use their phones in bursts. Trying to promote ads when the user is attempting to grab a quick bite of information is annoying and counter-productive.

ENGAGEMENT

Finally, the engagement levels for smartphone users are lower, reflecting the slower speeds and smaller screens on smartphones.

Android Doesn’t Monetize Ads Well

How much of a problem is all this for Google? Huge. Android is so bad at monetizing ads that a study done on Opera placed Android in third plce behind BlackBerry on value for the money.

Let me say that again. Android’s ads were in third place. Behind Blackberry.

Apps Rule

Google didn’t know that search on the phone wasn’t going to work the same as search on the desktop. Another thing they didn’t know was how important a role apps would play in both search and advertising.

Smartphones were made for apps. People love to use apps on their smartphones. If they want the time for the next train, they use an app to tell them rather than doing a search. If they want to find a restaurant, they might do a search but they’re even more likely to use an app.

Google’s problem is that apps are not searchable by web crawlers. If Google can’t search it, they can’t sell ads against it. For Google, apps are like a large and ever expanding black hole in their advertising universe. And as that hole gets bigger and bigger Android’s advertising opportunities get smaller and smaller.

Android App Apathy

But Android has apps. 700,000 of them. As many or more than any other operating system. So why isn’t Google making money from the sale of apps and app advertising?

Take the University Co-op Society, which sells University of Texas merchandise via stores, the web, an m-commerce site, an iPhone app and an Android app. When it comes to m-commerce, Apple rules.

“IPhone app sales are about 25% of our total mobile business and Android app sales are less than 10%,” says Brian Jewell, vice president of marketing. “That leaves a big chunk of sales that come directly from the mobile site. People entering our address directly or coming to us via a search engine or also possibly clicking through from an e-mail blast.”

And on the mobile site, Apple dominates. Today, 50% of mobile traffic to the University Co-op Society’s web site stems from iPhones, 25% from iPads, 20% from Android devices and 5% from devices running other mobile operating systems.

Retailers of all stripes tell similar stories, which is why retailers building mobile apps invariably have started with an iPhone app. Android is an afterthought.

“Android users do not buy. IPhone users buy,” says David Sasson, president and founder of overstockArt.com.

Android advocates bristle when confronted with the suggestion that Android owners do not buy content or consume advertising on their mobile phones. They say it is insulting.

First, I’m not insulting anyone. If anyone is insulting Android owners, it is the facts, not I.

Second, Android owners are not required to buy aps and content or consume advertising. It doesn’t make them bad people. It just makes them bad customers.

We can argue all day as to exactly why Android owners aren’t buying. There’s lots of theories. The one thing we can’t argue with is the facts. Android owners aren’t buying. And that single fact turns all the market share numbers and the arguments for Android’s dominance on its head.

‘Cause you see – and this is the key point missed by most pundits – developers, advertisers, retailers and others don’t follow unit sales – and they don’t follow customers – they follow the money. And until Android owners are induced to part with more of their money, their overwhelming market share numbers mean little.

The Future

The future of mobile advertising doesn’t look any brighter for Google either. Voice search poses a huge threat as voice activated searches, like Siri, simply bypass Google search altogether.

And then there’s always the ultimate threat that Apple will simply purge Google from its system by making Bing or some other brand the default search engine. It is reported that Google pays Apple $1 billion to be its default search, and earns about $1.3B from searches on Apple mobile devices. In the near-term, it seems unlikely that Apple will remove Google search. But there’s no love lost between the two companies and the long-term remains uncertain. Apple made the difficult and painful decision to remove Google from their Map application. Changing the default search carrier sometime in the future seems like a very real possibility.

It’s A Trap

All of Android’s mobile activations don’t add up to a hill of beans if they can’t be monetized. And Android simply isn’t doing the job it was born to do.

It’s a classic tech trap. Google provides a rapidly growing service that is popular with non-paying users while it constantly becoming less and less valuable to Google’s paying customers – the advertisers.

The result is pernicious. More and more time, money, energy, attention and resources are devoted to Android while the return – a 15% decline in the price advertisers paid per click on a Google ad – continually becomes less and less.

Android is struggling to monetize phones, but there is more to mobile than phones.

Tomorrow: “The Battle for Tablets”

Why Android Is Winning The Battles But Google Is Losing The War: Part 2

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

2) The Battle For Mobile Phones

The Battle Plan

Tech insiders have been predicting that peak search would happen for some time, as people shifted from using websites – where search is a natural activity – to using mobile apps.

Google was far from unprepared. They knew that mobile was the future of search and they carefully crafted a plan:

Step 1: Create a (putatively) open source mobile operating system called Android.

Step 2: Give the Android operating system away for free.

Step 3: Sell mobile ads and other mobile services on those mobile devices running Android in much the same way that they were currently selling ads and services on the PC.

A Glorious Tactical Success

Parts 1 and 2 of Google’s plan worked to perfection. In fact, Android was more succesful than anyone, including Google, could have anticipated or even imagined. Internal Google documents revealed at the Oracle v. Google trial show that Android’s growth far exceeded even what Google had projected or expected.

Just five years after its debut, Google‘s Android mobile operating software now claims 75% of smart phones shipped, according to a new report from market researcher IDC. A simply stunning overall achievment.

A Glorious Public Relations Success

And don’t think that Android’s spectacular rise has gone unnoticed:

CNet:

“Android’s ascension to glory has been incredible to behold.”

Dan Lyons:

“Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.”

CoolSmartphone:

“Why Android has won”

CEO Nathan Eagle

“Why Android Has Already Won the Global Smartphone Race”

Joe Wilcox

“Android wins the smartphone wars”

Chris Pirillo

Android is the New Windows (I mean that in the most polite way, too)

Venturebeat

“As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

An Inglorious Strategic Failure

“Another such victory and I am undone.” ~ Pyrrhus

Every report, every study shows that Google got it right. More and more ad revenue is moving to mobile. An analysis of the mobile traffic from a cross section of advertisers reveals up to 25-30% of all paid search traffic is now mobile. And more and more mobile phones are powered by the Android operating system. It’s only logical to assume that the more people buy and use Android phones, the more money Google will make from the sale of search, content and other services.

Only that’s not happening. That’s not happening at all. Android appears to be an overwhelming success in every way. But it turns out that it is only an overwhelming success in one way – market share. In every way that matters – and especially in profits – Android has been a dismal failure.

Unexpected, exponential user growth is usually accompanied by a dramatic positive improvement in the finances of a company and a higher return to shareholders. The curious aspect of Android’s success is that it has not had an impact on either. ~ Horace Dediu

Yearning For Earnings

During the Q3 2012 Earnings call, Google announced that it had a run rate of $8 billion from its mobile business consisting of revenue from ads, apps and content. That was contrasted with a $2.5 billion run rate of a year ago. CFO Patrick Pichette added “Ads continue to be the bulk of [the $8 billion], the vast majority of it.” Sounds like good news, right?

The problem with the $8 billlion number is two-fold. First, the increased revenues appear to represent more of an reshuffling of assets than actual growth. Second, despite the presumably large increase in the run rate, Google declined to disclose Nexus 7 sales, app sales, content sales or ad sales and they stoutly refused to address mobile margins and profits.

What we do know for sure is:

— Cost-per-click (CPC) was down
— Traffic Acquisition Costs (TAC) were up
— Profit from Android was un-reported and possibly non-existant

Upon revealing the numbers, Google’s stock tanked. With Google’s stock falling a shocking $68 or 9% in a matter of hours, Google was desperate for good news to give to its shareholders. If there was ever a time to reveal Android’s profits, that would have been the time. Instead, managment adamantly refused all requests for specifics on mobile sales, margins or profits.

With their stock plummeting, you can bet your bottom dollar that if Google had garnered any profits from Android, they not only would have revealed them, they would trumpeted them as loudly as possible. After all, it’s not like Google doesn’t like to brag about Android. They tout their Android activation numbers all the time. The fact that Google did not reveal any good news regarding Android can mean only one thing – there was no good news to reveal.

After all, there is simply no good reason NOT to reveal Android’s numbers and associated profits. You could argue that Google is being coy and hiding numbers for competitve advantage but what possible competitive advantage could there be?

Further, there is every reason TO reveal profits. If the numbers are rising at an appreciable rate, that would be an exciting development that Google would want to reveal. It woud prove that their strategy was correct and that Android was winning. It would put to rest any lingering doubts, questions or suspicious that things with Android might not actuallly be as they seem. It would be a demoralizing blow to their competitors and a shot in the arm to their stockholders. And perhaps, best of all, it would be an incentive for their customers to increase their ad spending and hop on board the Android gravy train

It is, in fact, almost a certainty that Android DOES make Google a profit. But that profit must be so embarrassingly small that it would be counter-productive for Google to announce it. Doing so would not help Google’s stock, it would hurt it as the revelation would expose exactly how little Android has actually accomplished.

Pyrrhic Victory

Android has overwhelmingly won the battle for marketshare. But the purpose of market share is to get more developers, more apps, more advertising eyeballs, more content, to deliver more revenue – and most importantly – more profit for all involved. Android isn’t delivering any of that.

This is a classic Pyrrhic Victory. Android is winning the market share battles but Google is losing the profit war.

The irony here is poignant. In a reversal of the famous Rolling Stones song, Android got what it wanted – market share – but not what it needed – profits.

How could this be? How could there be such a disconnect between the number of Android users and their value to Google?

Tomorrow: “The War for Mobile Phones Lost.”

Why Android Is Winning The Battles But Google Is Losing The War: Part 1

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

1) The Battle For The PC

A Glorious Victory

Google began in January 1996 as a research project by Larry Page and Sergey Brin. While conventional search engines ranked results by counting how many times the search terms appeared on the page, they theorized about a better system that analyzed the relationships between websites. They called this new technology PageRank, where a website’s relevance was determined by the number of pages, and the importance of those pages, that linked back to the original site. via Wikipedia

The Battle for search on the PC (notebooks and desktops) was a glorious victory for Google. Seldom has a company come so far, so fast, made so much money and so utterly anihilated their competition. By 2006, Google dominated search and was one of the largest, fastest growing companies on the planet. Their PC search strategy had proven to be brilliant and they were virtually printing money.

I can give Google no greater compliment than this: They make their money by distributing ADVERTISING, yet they are liked by most and even loved by many. The words “amazing” and “awe-inspiring” don’t even begin to cover that achievment.

All Glory Is Fleeting

Sic transit gloria mundi

But Google had two problems, which were really one and the same problem: “peak” and “mobile”.

Many of us are familiar with the concept of “peak oil”. It’s a term used to describe the fact that oil production had to, at some point in time, peak because there was only a finite amount of oil in the ground and once that peak was reached there must inevitably be a steady, albeit gradual, decline in oil production.

An equivelent peak is occuring in computing. In fact, two peaks: “peak PC” and “peak search”, both of which raise serious issues for Google.

For eight straight quarters, search was growing. Then for three straight quarters, that growth deaccelerated. Then last quarter, something happened that had never happened before. People searched less. We have reached peak search.

Ben Schachter of Macquarie Securities noted this in a research note:

Notably, total core organic searches declined 4 percent y/y, representing the first decline in total search volume since we began tracking the data in 2006. While this month marks the first y/y decline in total search volume, growth rates have been decelerating since February’s recent peak at 14 percent y/y growth (for the prior two years, growth rates were largely stable in the high single-digit to low double-digit range).

Not only is search declining, the proft from search is declining too. “Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – is down. Way down. In its third quarter 2012 earnings, Google reported that its cost per click was down 15 percent.

Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – has been dropping for the past four quarters, after rising for eight previous quarters. Surrounding circumstances make it clear that there is no reason to expect it to rise again.

Why is peak search happening and why now?

First, there are fewer and fewer PCs. Like peak oil, we’ve reached peak PC. The PC market is in permanent decline. In fact, the PC market is not only declining, it may be headed for a cliff. (See Tim Bajarin’s fine article on “How the iPad Mini Could Impact Future PC Sales.”)

Second, the search market is maturing. The places where people are going online just don’t pay as much as they used to.

Third, less and less people are doing their searches on their desktops and more and more peole are doing them on their mobile devices. When it comes to search, the portability of the mobile device trumps the power of the PC.

Smartphones have been outselling PCs (notebooks and desktops) since the end of 2010 and by the end of 2012, tablets will make up over 25% of all PC sales. Further, well respected mobile analyst, Mary Meeker believes the global smartphone plus tablet install base will surpass the install base of the PC by the end of Q2 2013.

Fourth, and finally, try this thought experiment. You’re standing by your PC. You want to know the weather, the score of the big game, where a movie is playing or a local place to eat and how to get there (GPS). Do you perform the search on your PC or on your phone? For more and more people, this is an activity that you do on your mobile device, even when your PC is readily available.

AUTHOR’S ASIDE: Ya gotta love Microsoft’s play in the desktop search industry. They are losing BILLIONS on Bing, buying into the desktop search market just as it has peaked and started its decline. What a company.

Now it’s not such a bad thing to be dominating a market that is just past its peak. It means that you’ll be getting great income – nearly as much as you’re getting today – for a long while yet to come. But it also means that your’ve got no longterm future. Unless you plan for one. Which Google did.

Tomorrow: “The Battle for Mobile Phones Won.”