Broadly speaking, smartphones represent two main revenue opportunities:

• Sales of smartphones themselves (hardware sales)
• Transactions on the phone via a digital storefront (platform sales)

It is instructive to compare and contrast Google and Apple’s respective approaches to this market. Apple’s smartphone strategy can be characterized as a “walled garden” approach, where the OS and hardware are developed, bundled, and sold as a single unit, which affords Apple maximum control of the ecosystem for iPhone users. As Apple has dominated the US smartphone market, it has leveraged this control to substantially grow its services business, capturing revenue from platform sales like paid iPhone apps, in-app transactions, and Apple Music subscriptions.

While Google does offer Android on Pixel phones, it primarily licenses the OS to other hardware manufacturers, like Samsung, with the strategy of maximizing platform sales by trying to capture revenue from every sale that happens on a smartphone that isn’t an iPhone. Google’s strategic positioning can be described as follows:

Strength: Android’s flexibility is its great strength. Google doesn’t care much about who makes the phone and what price point it’s offered at as long as it provides a stable experience for the user. This allows Google to put Android in the hands of users at more diverse price points than Apple, and capture revenue that Apple misses.

Weakness: There are clear tradeoffs to this approach. Google has less control over the experience which means that users of certain hardware may experience problems that are out of the company’s hands (it doesn’t matter if Samsung is more to blame than Google for phone explosions; both companies lose if users retreat to iPhone). Google appears to be okay with this for now, although the appearance of the Pixel demonstrates that Google is exploring its options.

Opportunity: Google’s greatest Android opportunity is in emerging markets. Despite selling more hardware than its competitors, Apple’s iPhone is still an expensive status symbol in the US (as evidenced by the proliferation of financing programs), which makes it prohibitively expensive in many emerging markets. This is a huge opportunity for Google, which can roll out versions of Android for dozens of smartphone experiences at dozens of price points, and potentially capture platform sales revenue from billions of people who can’t afford iPhones.

Threat: Until Pixel phones are everywhere, this strategy makes Google very beholden to its hardware partners. The most obvious threat is from Samsung—if Samsung decides that it is leaving too much platform revenue on the table, it may decide to develop its own OS, which would represent a significant blow to Google. The same goes for Huawei and any other company that decides to capture platform sales by either targeting an iPhone-style experience or developing an OS to license to other hardware manufacturers.

Google Vision: To organize the world’s information

Google Sources of Revenue:

• Advertisements on search and other google products
• Sales from hardware
• Sales from App-store

Industry Trends and Market Analysis:

The world is moving toward mobile computing from desktop searches. As time progresses, a significant amount of internet traffic is going to be directed from phones.

Google makes its money primarily due to people searching for things on google search engine; The self reenformancce nature of search (the more people search, the better the results get); creates a moat parallel to the network effect moat.

Given a level playing field;ie: people able to access any search website with equal ease; most Google’s moat would stand very strong; and people would choose to go to google.com instead of competing search websites due to better results.

In terms of the user journey to locate a piece of content on the internet:

• User gets opens up computing device (powers up OS)
• User connects to the internet
• User opens a browser/app
• User hits the search engine url
• User searches for content
• User clicks on content

Google’s current strength is that a majority of the world has a particular user flow (go to google.com) in step 4.

Competitors can attack any of the previous steps and deter users from accessing google.com (illegal due to internet act) or make it extremely hard for users to go to google.com

Competitors can make the OS redirect directly to a different search engine (bing from IE)

Competitors can stock load a different search app on the phone (Apple safari that redirects users to any default search engine)

Competitors can ensure that the speed of accessing google.com could be slower as compared to other websites (currently illegal)

To safeguard its userbase and ensure seamless access to google’s search and suite of products; google has created

User gets opens up computing device (powers up OS)

• Android for Mobile/Chrome OS for desktop

User connects to the internet

• Google fibre

User opens a browser/app

• Chrome

User hits the search engine url

• Google.com

This would hold even truer, as more users go on mobile; so Android was a must for google to survive in the long term; and not bullied by competitors and squeeze margins

Google’s Mission:

Organize the world’s information and make it universally accessible.

Google offers perhaps the most consequential set services available on the internet today – Search, Maps, Gmail, Drive, Docs, etc. These services reach billions of users across the world and they are all available for free. Google is able to give away these services for free because of how their business model works.

Google’s Business Model:

Google makes money from Ads. They offer perhaps the most sophisticated ad targeting available in the market today. The Ads business generates ~$100B in revenue per year. They are able to do this because they track user behavior on the web and are able to build behavior models that predict buying patterns. The more people use Google products, the better the behavior pattern predictors become.

This type of information is incredibly valuable to advertisers. This entire business model is contingent on people increasing their usage of Google products and Google being able to track user behavior.

Market Trends:

Since the launch of smartphones, most internet consumption has moved to mobile. Everything from browsing, messaging, email (work and personal), etc is predominantly done on mobile. Internet commerce is also on a dramatic rise – some analysts predict that it will overtake web-based e-commerce in the next few years. Advertisers are seeing these trends and increasingly allocating their ad-spend dollars toward mobile-based ads.

Before Android, the smartphone market was predominantly controlled by Apple, RIM, and Nokia. The phones offered by these three companies were expensive and a large portion of the global market could not benefit from the smartphone revolution. This is where Google completely changed the game. They partnered with device manufacturers like Samsung, LG, Huawei, etc. and offered the Android OS for free. Due to this, the device manufacturers could offer phones at a significantly less price than those of Apple, RIM, and Nokia.

Android saw rapid adoption in the lower end smartphone market and today controls ~60% of the global smartphone market.

So why is Android Important to Google?

Android did quite a few things for Google’s mission and business model:

• Brought on billions of new users into the Google ecosystem
• Google is now able to track users on mobile and build better Ad targeting
  • Led to new products like location contextual ads
• Gave google an entry into third world countries
  • Most people in third world countries could not afford a computer
  • But a lot of people in these countries can afford a $50 Android phone
• Revenue sharing with Device Manufacturers
  • Android unlocked an additional revenue stream for google via their partnership with device manufacturers
• Google Play
  • This attracted millions of developers plugging into the google ecosystem
  • Each app pays Google a 30% cut of its app revenues; another revenue stream****

Summary:

Android gives google insight into how people are using the web on mobile. This makes for better Ad targeting and makes the existing business model more robust. Since Google makes more money, they can offer even more services to even more people across the world.