Today we have a contribution from Ari Kuchinsky, who writes about the stock market, technology and often the intersection of the two. Here’s an interesting piece that goes a long way toward explaining how Google can “afford” to subsidize so many cheap phones. Enjoy! – JB
What if Google Never Bought Android, Inc.?
Google ($GOOG) was the dominant search engine in 2005 and remains so today. But the threat to Google in 2005 was losing its dominance as traffic shifted from PCs to mobile devices. Imagine if Google didn’t buy Android, Inc. back in 2005.
Where would Google be today? How would the sale of mobile devices be affected? It is questionable whether Google would dominate the mobile search market. Google would be at Apple’s ($AAPL) mercy in cutting a deal to make Google the default search engine on the iPhone and iPad. If Android did not exist, I have to believe that Windows Phone would have, albeit much less successfully, filled the void. Apple would be even more dominant and Bing might have a presence on mobile devices.
By purchasing Android, Google accomplished what Microsoft ($MSFT) set out to do in the 1990s with Internet Explorer. Google search is the default search engine on almost all smartphones and tablets. On most Android devices, there is even a search button that takes you to Google. In the aggregate, all of these searches are monetized through Adwords.
But what are the implications going forward? Apple’s primary business is selling hardware and software. But Google’s primary business is advertising. Google is happy so long as smartphones and tablets have Google set as the default search engine. Any other revenue earned from Android is gravy. There are a slew of Android smartphones available for $0 with a 2-year contract. Older model iPhones can also be purchased on the cheap. The 3G is free with a contract and the iPhone 4 is only $99 with a contract.
So why are these devices becoming so cheap? The maturation of the technology is certainly an important factor. For example, the cost of a multi-touch screen is less than it was a few years ago. But I believe the biggest factor is the subsidy provided by Google. Google is an advertising company and they are giving away Android to phone manufacturers to ensure their place as the default search engine on mobile devices (and thus their search business subsidizes the cost of developing Android). Likewise, Amazon ($AMZN) is happy to give away the razor to sell razor blades. The Kindle Fire is only $199. Amazon is happy to sell cheap devices in order to drive sales of their electronic media products. Neither Google or Amazon are “products companies” like Apple.
Going forward, the comparison has been made that the iOS/Android battle of closed verses open is analogous to the Macintosh/Windows battle of the 80s and 90s. But I think this time around could be tougher for Apple. How do you compete when your primary competitors are in a different business and give away their product?
Follow Ari Kuchinsky on Twitter: @arikuchinsky