Android Handsets: Why Google Has to Win this Market (UPDATED)

(MoneyWatch)  It sounds as though the reports that handsets powered by Google's Android software would be delayed until 2009 are wrong. Well, that is if the New York Times story is right and HTC handsets for T-Mobile are out before Christmas. Whether it will be a true rival for the iPhone or Blackberry is impossible to tell yet, but this isn't about one handset versus another.

What is happening is a battle, at least on Google's side, for the ability to serve mobile advertising at all. And the company will use every trick to make economics work in its favor. If it does this right, Apple may remain a premium device, but the market will move toward Google and more affordable devices with similar features. And that means Google stays in the ad business.

Android had me scratching my head for a long time. But I keep thinking about Eric Schmidt talking about mobile advertising. Google hasn't been in the OS or device business, so unless this is really a complete run in a random direction, the work fits into a bigger strategic direction.

I don't think that Google is working on Android simply because it is interested in mobile and sees this as a way to keep its finger in the water. [Update: Google may have wider ambitions for what Android eventually runs.] If that were the case, why not focus on delivering ads as people use the web from handsets? Because that won't work; people don't use handsets the way they use personal computers. You can't depend on someone doing extensive searches through a browser.

No, you have to find other ways to deliver the advertising, and that's why Google has to be in the handsets business. Control the handset OS, and you can incorporate ads in all sorts of ways. If you think that computing is moving toward the mobile, and you happen to derive virtually all of your revenue from advertising, failure to control a whole lot of handsets means you are eventually out of business.

Economics is driving Google in this, and I think the company is counting on economics to help it win. Early reports make it sound as though the new Android-based phone won't be a match for an iPhone just yet. The HTC hardware is supposed to be bulkier than Apple's and Android is said to lack the panache of the iPhone's software user interface, an area in which Apple does excel.

TechCrunch's money is on Android running firmly behind the iPhone:

This will be the first of many Android phones, and it won't have the benefit of being designed soup-to-nuts by one detail-obsessed company. It will take an army of Android phones across many carriers and countries to start to seriously challenge the iPhone.

And frankly, it is difficult to find mobile software startups excited about making Android apps at this point. This is a platform war. If there are no compelling apps for Android, nobody will buy the phones. All of that could change the instant that an Android phone is on the market, but my sense is that most developers are taking a wait-and-see approach. (Especially since very few of them have access to the latest Android software developer kit--a sure-fire way to frustrate and alienate them).

Good points, but not, I suspect, the most important ones. There are plenty of phone manufacturers that outsell the iPhone because they have a range of devices and prices that appeal to a much broader audience. And even with all the "cool" i-factor, there are enough people complaining about the iPhone that it's gained a lot of negative attention. Even if the early adopters continue to keep buying iPhones, Google is interested in far bigger numbers.

Now consider what Android might have economically on its side:

• Potential for big volume to drop costs.
• Competition among the different manufacturers, to push down cost even more.
• Google's ability to integrate Android with its online services and software, combining cloud computing and probably a greater sheer number of brand name users than Apple, with all the people who turn to Google for search.
• Chance for carriers to get bigger hardware margins while still keeping up usage of well paying data services, so there's an incentive for them to push Android phones of some flavor or another.
• The competition among phone vendors will also drive improved form factors for the handsets.
• Sell enough units, and developers will line up.
• Because there is no difference between the phone's basic apps and those from third party apps, Google can leverage many more developers than work for Apple to improve the entire user experience.

Will the first HTC phone put a dent into Apple's numbers? Not a chance. But this isn't a play for the short term. This is a future-looking strategy, and I have a funny feeling that it's far more ambitious than devising a series of consumer electronic devices, which is really Apple's main business these days. Even if Google's efforts don't click at first, they probably will in time, because Google can't afford for them not to.

Update

According to a post today (8/18/08) in BusinessWeek, Android comes pre-loaded with Google's advertising software:

Customers who opt in to receive mobile ads from Google may be offered to buy the phone for a lower price, and may also pay lower monthly service fees. The Google platform will serve ads based on your interests and location, provided by the phone.

Talk about having economics in your favor.