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

by John Kirk   |   November 13th, 2012

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
  • 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.

    Next

    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.”

    John Kirk

    John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
    • def4

      The analysis is fine for the short term, but it seems to me Google is playing a longer game and they are doing it quite well.
      Google had two big obstacles in their quest for mobile: rival operating system platforms and mobile operators.

      Android’s platform dominance was achieved by making it subservient to the interests of mobile operators in exchange for the distribution that made possible the explosive growth that annihilated all but one of the rival platforms.
      Unlocked prices on this year’s Nexus lineup suggest that Google is now turning their sights on Android’s erstwhile mobile operator patrons.

      Just like with monetizing Internet content, Google seems to not be looking to eclipse their competitors by extracting as much profit as possible, but by making it virtually impossible for their competitors to extract any profit.
      I suspect Google wants to implement a slightly less greedy version of the Microsoft model, which should also be more resilient to low end disruption .
      Commoditise, lower the bar for everyone else and maintain dominance not through their own exorbitant profits but through their competitors’ utter lack thereof.

      • FalKirk

        “Google seems to not be looking to eclipse their competitors by extracting as much profit as possible, but by making it virtually impossible for their competitors to extract any profit.”

        It seems more like Google is allowing everyone to extract profit from the market except themselves.

        • def4

          That doesn’t ring true.
          Who makes more money from mobile advertising than Google/AdMob?

          If you’re looking at device profits, the image may look confusing with Apple and Samsung making all the money. I suspect Google doesn’t care about those profits because they consider them fleeting.

          • FalKirk

            “I suspect Google doesn’t care about those profits because they consider them fleeting.” – def4

            Tens of billions of dollars deposited in one’s bank account is the opposite of “fleeting”.

            “Who makes more money from mobile advertising than Google/AdMob?” def4

            Please point me to numbers indicating the amounts that Google is supposedly making and then we’ll talk.

    • http://www.facebook.com/profile.php?id=100001035136448 Sihan Zheng

      I have to disagree with your analysis.
      Android is the new Symbian. It is the de-facto OEM OS in the mobile world. Android does not need to make a cent for google right now, the goal is to attack apple.
      Google is playing a long term game. Android does not need to be profitable now, or even for the next 5 years. But when it becomes the de-facto number 1, the profits will start to roll in.

      • FalKirk

        “Android is the new Symbian” – Sihan Zheng

        An inauspicious comparison.

        “Android does not need to be profitable now, or even for the next 5 years.” – Sihan Zheng

        I doubt Google shareholders (or Google’s management) feels the same way.

        • steve_wildstrom

          The Symbian comparison is odd in another way. Symbian was developed by Psion, but it ended up owned by, and almost exclusively identified with, a single handset maker, Nokia. It was never, in practice, the sort of open platform Android is.

        • http://www.facebook.com/profile.php?id=100001035136448 Sihan Zheng

          How much does android development cost Google anyways? It doesn’t cost that much, and tech companies often pursue long term research projects that are not profitable.
          Even if android does not produce direct profits, the personal data Google gets is a gold mine.

          • mhikl

            “Even if android does not produce direct profits, the personal data Google gets is a gold mine.”
            I suspect we shall find the answer to the gold mine of personal data tomorrow. Stay tuned, Sihan.

          • FalKirk

            “How much does android development cost Google anyways?” – Sihan Zheng

            Definition: op·por·tu·ni·ty cost; Noun: The loss of potential gain from other alternatives when one alternative is chosen.

          • JDL

            It cost Google the $12.5 billion that it paid for Motorola.

      • Larry Page

        Spot on. These writers here are true fanbois.

        • gdavid2

          Well said. Deftly argued and supported with data and logic.

    • Defendor

      The real issue is does Google earn more per device from Android or iOS?

      If they earn enough more from Android than iOS,then it can be worth it.

      But if they earn equal or more from an iOS device, then this was an expensive pointless exercise.

      Worse still, not only was it more expensive, but they also alienate former partner Apple, who now appears to be working to move replace Google services in iOS.

      Apple could replace search with Bing (or something better IMO, like Duck, Duck Go) to further kick Google to the curb.

      Spending 14+ billion+ and counting, to earn less per device and alienate your most profitable partnership is beyond senseless.

      • mhikl

        I’m looking at DDG at this moment, Defendor. If only there were a really good
        alternative to iGoogle- with news, finance etc as good. I’m also trying
        to figure a way out of Google mail.

    • ArchivedAnnals

      If you look at a lot of google’s products outside of search the profits appear to be quite small, or non-existent, their revenues outside of advertising appear to be 666 million.
      This is on products from gmail, to google apps, to mapping software, for android and Chrome OS, the chrome browser, and google+.

      Google relies a lot on personal data to provide the best search experience for its users. The mobile focus a) allows google to garner extremely higher amounts of data, and b) creates a new media by which to service ads.

      Part of the reason I believe that Android was developed was to make sure that google, and search wasn’t locked of the mobile web, and remained culturally relevant. The focus of the supporting products that google delivers for free is to build a huge moat around their core product, search, and retain market dominance.

      Finally, the lesson that has been learnt through the digital revolution is that it’s better to cannibalize your sales on a lower profit platform then to lose your business entirely. If margins are worse on mobile search, and that becomes the norm, then better than money then none…

      To say that Android is a Pyrrhic victory, is to miss the point that Android was developed as an open source platform, and to ignore the fact that many nexus devices appear to be sold at low margins. Immediate profits clearly isn’t googles strategy here…

      • FalKirk

        “Immediate profits clearly isn’t googles strategy here…” – ArchivedAnnals

        I’m sure that’s news to both Google’s shareholders and to Google too. If a strategy is not making profits and is not locking in long term profits then it’s not a strategy, it’s a distraction.

        • ArchivedAnnals

          I’m so glad you read at least one line of my post… Yes not making immediate profits implies that they are investing in the ecosystem to derive some kind of longer term revenue stream.

          But it’s not a distraction… it’s who google is (as a company). They balance a profit motive with a purpose motive. They are able to do this because of the share management structure that they employed whereby most of the voting power lies with the founding employees. In fact Google shareholders are more akin to bond holders, because they derive rent from their initial investment rather than having input into the direction of the company.

          I mean this shouldn’t be a surprise to investors, the company has a strong equity bias, hence the pricing structures that they release (and focus on making the web accessible to the impaired) and a corporate mantra of “Don’t Be Evil”.

          It is because google consistently acts in the interests of the consumer that it has taken this long for the US to launch an anti-trust case against the company.

          If you want to talk about further “distractions” that the company working on consider project Glass, or the self driving cars, or the 2 programming languages that Google has released over the past few years (Dart and Go).

          The fact remains that Google is much, much larger than their bottom line, and their strategy serves the majority of voting shareholders…

          • steve_wildstrom

            I don;t want to get all accountant-y, but to reinvest in a product, it first has to generate operating profits. Otherwise there is nothing to invest unless you take profits from other operations. Is Android generating operating profits? We have no idea.

            • ArchivedAnnals

              You also have payback periods. That’s how toll roads get built by the private sector, a whole lot of money is put in at the start to establish a market, and then it is paid back over time.

              Would google be dominant in search in 5 years without adapting to a mobile market? We have no idea. My guess… no.

    • thorntondw

      As far as I can determine, only two companies actually have profits attributable to android: IBM and Samsung.

      • thorntondw

        I meant Microsoft and Samsung. Sorry.

      • gdavid2

        Don’t forget Apple. After all they will soon be receiving something like $8 per HTC Android phone. Not to mention the cool billion from Samsung.

    • alexkhan2000

      Nice analysis, John. People who continue to compare the mobile market share numbers to the old PC paradigm really don’t get it and probably never will. The dynamics of that industry and that era are so different from what is going on now. As you pointed out, even Google could not have imagined that they’d be so successful in achieving such market share dominance, but therein lies part of the problem. Google has unleashed something that they themselves cannot control.

      The new “post-PC” mobile market and industry is vastly more complex, fast-moving and multi-dimensional than the old PC industry that was dominated by the Wintel duopoly. Looking back at the PC wars of the 80′s and 90′s, it’s like watching classic black-and-white movies of the 40′s and 50′s while the current mobile tech wars is like watching the latest gee-whiz blockbusters on an Imax screen. It’s just not the same.

      If everything had actually gone *exactly* as Google would have liked, they certainly wouldn’t have acquired Motorola. Acquiring a struggling hardware company that competes against some of their biggest partners like Samsung would have been the last thing Google wanted to do. And then you have Amazon. Yes, Amazon does its part to pad the Android marketshare numbers but Amazon’s version of Android is incompatible with all the other versions of Android. The point is that Android is a fragmented mess that Google cannot clean up, so they were forced to get into the hardware business.

      When did Microsoft decide during their heydays that they needed to compete against their OEM partners? Microsoft was never open source. Microsoft exerted/exerts as much proprietary control over their OS and platform as Apple did/does. Google’s business model with Android really isn’t anything like Windows at all. It’s just amazing – well, laughable, i.e. – to me that people would say, “Android is Windows all over again.”

      Why is Google in the hardware business competing against their hardware partners? Why prompt Samsung to work on their own software and ecosystem as well as hedge their bets with Microsoft’s Windows Phone? Would Microsoft have done something like that and tick off HP, Dell, and all the other Windows PC makers? And why is Microsoft in the hardware business now, alienating their long-time hardware partners? I don’t think it’s because they *want* to. Does anybody believe that getting into the hardware business is what Google and Microsoft *really* wanted to do?

      They realized that they can’t make money and/or that they have no control over their respective platforms. It’s become a free-for-all that’s out of their control. And they’re not making the money. So who’s making the lion’s share of the profits in this industry in the tune of something like 70%? Companies are in business to make money, aren’t they? What would Google prefer? Marketshare numbers reported by the likes of IDC or record *profits* year after year? At least during the PC wars, Microsoft and Intel earned the huge majority of the PC industry profits through their marketshare domination. Not so with Google… Not even close…

      • ArchivedAnnals

        This doesn’t explain why the nexus 7 was sold close to or at cost price…

        • FalKirk

          I will address the Nexus 7 and tablets on Thursday.

        • alexkhan2000

          I’m not sure what you mean. That’s just another example of Google being forced to do what they don’t want to do – selling at cost or near cost and not making any money.

          If you asked anyone the following question, I’m pretty certain what the answer would be:

          “Would you prefer selling 250 units of something and make $750 or 750 units of something similar and make $250?”

          • ArchivedAnnals

            These devices sell out in hours, they could charge at least an extra $100 on the nexus 7, and nexus 4 imo. Not sure about the nexus 10…

            They choose not to. There is a reason.

            • alexkhan2000

              To gain marketshare?

            • ArchivedAnnals

              Exactly. They are consciously choosing to forego profits to gain market share… Do you think they would do this just for kicks?

            • alexkhan2000

              Well, that’s pretty obvious. But as John points out in these ‘Pyrrhic War’ articles and I stated on my original post, Google can’t monetize their marketshare position. What’s the point of giving everything away when you can’t make any money off of it? Selling ads on a phone screen just hasn’t worked out the way Google thought it would. People would rather pay not to have ads show up the screen. And people in the third world countries who get their BOGO or dirt cheap Android phones will just ignore the ads.

            • Walt French

              @alexkhan2000 wrote, “What’s the point of giving everything away when you can’t make any money off of it?”

              Your question echoes the same issue I’ve had with most of Google’s strategy of late, and somehow inspired a possible response.

              Christensen claims markets move from innovators’ proprietary solutions to commoditized, inter-operating ecosystems. Google’s first decade was marked by the effort to neutralize Microsoft, so that it couldn’t maintain proprietary systems that’d exclude them. That was the original inspiration for Android, BTW.

              Now, Apple is the proprietary incumbent that they must disrupt, and they are much more aggressive than a startup could afford to be: distributing product at cost, even undercutting its own hardware partners to drive all the profits out of the mobile market and make smartphones into interchangeable access points for generic services. RIM is dead. Microsoft is trying to rebuild its proprietary tools on mobile, but seems extremely unlikely to get critical mass when it charges hundreds more for equivalent capability. Even powerhouse Samsung is 100% expendable; let them try to take an Android fork and build whatever service bundle they could create; they exist today under Google’s not benevolent, but indifferent, umbrella.

              Apple is the only proprietary solution that could block Google. If Apple were actually afraid of Google, they’d be nudging customers towards Bing search, striking deals or otherwise looking to marginalize Google. As someone who appreciates the quality — and limitations — of Apple’s approach, and who imagines they’ll be behind the NEXT computing revolution, I hope they’re aware and responsive to this assault.

            • steve_wildstrom

              Nexus phones have never sold particularly well and I don’t think the Nexus 4 is an exception. Carriers have little incentive to move them. The Nexus 7 seems to be doing OK, but not great, based on Asus information.

              BTW, it’s really easy to sell out an initial production run by not ordering very much. HP sold out the initial run of its spectacularly unsuccessful Windows Slate–but it only ordered 5,000 units.

            • ArchivedAnnals

              Completely true :). But android units are never going to sell as well as apple products because it has such a diverse range of OEMs.

              To be honest, I’m surprised that the SGS3 has sold 30 million units…

              From what I’ve read the galaxy nexus did pretty well, and it’s too early to tell for the nexus 4 (though I think US sales will be down on N4, but higher in markets without LTE network coverage in the short term).

              Our standards are a little different, I think the N7 has done really well, but that’s just different standards. In terms of google play selling out I think that’s just a gross underestimation of sales AND some under ordering. In terms of Apple, it is the huge spike in sales a new release generates and the fact they can’t push so many out all at once.