The mobile industry has grown exponentially since the 1990’s to have about 5 billion connections worldwide and a penetration of more than 100% in several parts of the world. This evaluates to there being more than three times the number of mobile users than PC users with about 500 million connections added every year.
Along with mobile phones, smartphones have captured majority of the cellphone market. High end smartphones have become affordable because of availability of cheaper hardware and technology and fast, affordable internet. The smartphone business has shifted from being device based to being operating system based with Android being the fastest growing operating system. Android has captured nearly 50% of the world market share in 2011 as compared to less than 4% in 2007. But how does Google benefit from all of this? How does it source its revenues from Android?
Google’s derives more than 95% of its revenues from advertising using web based services like Google search, Google mail etc. Google perceives the rising consumer base of smartphone consumers both as an opportunity and as a threat. The high penetration and the huge consumer base across all demographics is a lucrative advertising opportunity for the company. However, the dependence on mobile phones for internet access can lead to less dependence on PCs for consumers where Google is the dominant web based service provider for search. But in smartphones, it is the manufacturer and the operating system that determine the default services. So, Google can end up losing its overall market dominance if the smartphone manufacturers decide to move to different default services.
Google provides Android with zero licensing cost along with an entire plethora of services like Google maps with street view and mail customized for Android running mobile phones. This has ensured presence of a complete and standardized platform across a range of manufacturers. Android gives them the flexibility to develop their own UI and enhance user experience as per the manufacturer’s target segment. A tremendous surge in the smartphone market hence ensued because of lowered barriers to entry and has created a tsunami like impact on Nokia, which is now unable to make use of its scale. Google also provides cloud computing services which links all its mobile services to its online services. This gives it an edge over most of its competitors like RIM and Apple. Android gaining dominance is significant because technology markets tend to get standardized around one dominant platform. The standardization of Android and availability of many substitutes for hardware will lead to reduction in profits from manufacturing. This pushes the business in the mobile industry towards providing mobile based software services i.e. application development.
Apple with an App Store of over 350,000 applications leads in the applications race, followed by Android’s Google Marketplace with over 275,000 applications. However, devices based on other operating systems have barely over 50,000 applications. The business model for both these application markets is different. For Apple, the application store acts as a major source of revenues through paid applications and hence paid applications consist of about 65% of the total number of applications. Google on the other hand encourages free applications over paid ones for the Android platform and has about 60% free applications. Google’s policy is skewed towards free applications for two strategic reasons. The first one being that providing good quality free business and multimedia applications would help in increasing the consumer base and also affect consumer disposition to switch from paid applications, that Apple has created, to free applications. Another reason is that if application developers cannot derive revenues from the sale of applications then the only other way of deriving revenues is through advertisement. And Google owns AdMob – one of the largest mobile advertising companies in the world.
Apple depends on sales of applications in its App Store for its revenues. It mainly targets the segment of people who would otherwise not buy a smartphone and brings them into the world of smartphones. These are potential consumers for Android who can switch for better services and specialized business applications (which Apple cannot move into without alienating its current consumer base) at a much lower price. Google, hence, perceives a low threat from Apple. Another area where this duopoly is heading into is the tablet PC market. This is another fast growing consumer electronic which Apple was successful in commercializing and popularizing. Now, Android based tablet PCs are entering with a similar strategy as that in the smartphones. Thus Google is trying to make Android a standardized platform for mobile phones as well as tablet PCs by creating a vibrant ecosystem of manufacturers, software providers, carriers, developers and advertisers for the consumers so as to supplement its advertising revenue and secure its dominant position in the market.