Why Carriers are So Excited About Android

Jean-Louis Gassée, a Silicon Valley veteran, is currently general partner for the venture capital firm Allegis Capital in Palo Alto.

In the eyes of other carriers, AT&T sold its birthright. But they didn't sell cheap. The industry-wide ARPU (Average Revenue Per User per month) is a little more than $50. AT&T's iPhone ARPU hovers above $100. Subtract $25 kicked back to Apple, and AT&T still wins. More important, AT&T's iPhone exclusivity in the US "stole" millions of subscribers from rivals Verizon, Sprint, and T-Mobile-more than 1 million per quarter since the iPhone came out in June, 2007.

(Legend has it that Jobs approached Verizon before AT&T, but Apple's demands were deemed "obscene". If the story is true, Verizon's disgust lost them 10 million subscribers and billions in revenue-much more than it would have made in content sales putatively under its control. Another theory, unprovable but preferable, is that Apple went for the worldwide "GSM'' standard, hence AT&T.)

To the industry at large, the damage had been done. Jobs disintermediated carriers. Consumers woke up to a different life, one where the carrier supplied the bit pipe and nothing else. Yesterday's smartphones became today's mobile personal computers and carriers devolved into wireless ISPs, their worst fear.

Enter Android.

Android is like Linux, it's Open Source, it's free. And it's very good, and rabidly getting better. But with two important differences. Android is Linux with money, Google's money. And Android is Linux without a Microsoft adversary. There's no legally-or illegally-dominant player in the smartphone/really personal computer space. Nokia, Palm, Microsoft, and RIM were and still are much larger than the Disintermediating Devil from Cupertino.

Handset makers and software developers love Android, new handsets and new applications are released daily; see the Android Market here. The current guess is that Android will grab the lion's share of the handset market by 2012. Nokia, RIM, and Microsoft may disagree with that forecast, and Apple is certain to stick to its small market share/high margin, vertical, bare-metal-to-flesh strategy.

Carriers get excited about Android, too. For two reasons. First, Android (and the very good bundled Google apps) allows handset makers to make inexpensive devices. Carriers and Google both encourage a race to the bottom where handsets are commoditized, but smart.

Second, because Android is an Open Source platform, carriers can work with handset makers, they can dictate the feature set and, as a result, revitalize the revenue stream. They can promote their favorite apps, content, and services sales that have been choked by disintermediation.
But it's not a straight shot. Android lays out the playing field for a contest between Google and carriers.
Google's intent is clear: They want carriers out of the way. In their Mountain View Hypergalactic HQ, Schmidt, Brin, Page, and Rubin all think carriers are greedy bumblers, short-term thinkers, technically and culturally incompetent in matters of smartphone OS and applications. The Google brilliants don't want to return to the days of crapware, the applications PC and laptop makers forced upon us in order to generate kickbacks from publishers. (The PC being a lively ecosystem, crapware removal products such as the PC Decrapifier came to the rescue. At one time, Sony obligingly offered a decrapified Vaio for an extra $50.)

Google wants to see smartphones priced at $79, without subsidy, thus taking away the carriers' opportunity to dictate features. At $79 and no contract, consumers can change handsets and carriers at will. This frees Google to have a direct relationship with the consumer, allowing their money machine-advertising today, entertainment and business services tomorrow-to run unimpeded.

The carriers return with their own salvo. They're not oblivious; they see Google coming and have decided to best it at its own game. They're working to appropriate Android, to use it to prime their own money pump.
Three months ago, Verizon and Google celebrated yet another milestone in their successful partnership: A new Motorola Droid handset on Verizon, running the latest Android 2.2. But, a few weeks ago, Verizon suddenly decided to show us who's in charge. In rapid succession, Verizon put Bing, Microsoft's search engine, on a few, not all, of their Android phones; and they just announced their own app store for their Android handsets, independent of Google's Android Market.

Google is reportedly building its own iTunes competitor music service, Verizon has its Vcast. The battle is on. The carrier is serious but, based on past performance, it remains to be seen how it can beat Google at the software game.

Then there are the European carriers. Today, Orange, the "historic" carrier, meaning the remnant of the old France Telecom monopoly, announced that it was taking the OS matter into its own hands. In a September 16th interview in Le Figaro, (in French, think Google Translate…) Orange's new CEO, Stéphane Richard, discussed his plans to deploy his own smartphone and tablet OS: [my translation] "I've invited the CEOs of Vodafone, Telefonica and Deutsche Telekom to a meeting in Paris on October 8th. We want to think about the creation of a joint OS. The OS is the Trojan horse Google and Apple use to establish their relationship with our customers. We're striving for the most open world possible. The four of us represent close to one billion customers, we have momentum, we can influence the industry. This can assume a number of shapes: joint venture, a small unit to make common apps, we'll see… We don't want to be followers, we'll take back the reins and innovate."

These four companies wield huge market power and, armed with the right anti-trust lawyers, could mount an impressive defense against Google's and Apple's disintermediation.

The OS isn't the most difficult challenge. We have the Chinese OPhone example. They make fully legal use of the Android Open Source code, but they skip the Android name licensing and the Google yoke that comes with it. The Four Giants could do something similar, create an ePhone OS based on a Google-free Android, make a deal with Nokia for a mapping application, another with Microsoft for search, and so on.

The real trouble starts with content sales: applications, music, video, books, newspapers, magazines. To fully engage the money pump you need something like an iTunes clone. Ask Nokia-or, better, ask Microsoft-how easy that is. Despite its software engineering expertise, its financial resources, and its worldwide market reach, the PC software giant can't get a dog in the race. iTunes may be far from perfect-the range and number of products it carries make it hard to navigate at times-but it works much better than anything Microsoft or anyone else has to offer, and with an unparalleled micro-payment system.

Carriers aren't without resources. They all have tangible, billing relationships with their customers that they already use to sell content. But the carrier-sponsored platforms don't scale-they lack the ability to become larger without breaking, and they lack a unified user experience across a range of devices (the ability to look and work the same on different smartphones).

I've kept the hardest for last: How do you get the egos, the cultures, the engineering teams of four different European carriers to build a unified OS + Applications + Distribution Platform stack.

To conclude, a word form a paying consumer. I wonder: Has M. Richard, or anyone on his executive staff ever played customer, anonymously? I've bought Apple smartphones from an Apple Store in the US and from Orange corporate outlets in Paris. In the US, the cashectomy is prompt, effective, and painless. At Orange stores, it's a lengthy and frustrating obstacle course. The full Kafkaesque stories-and, trust me, that's not an exaggeration-are too long for this space but they are, sadly, "normal". Nothing personal, that's how Orange customers are treated.

Do carriers realize that their antiquated customer service helps Apple disintermediate them? See a similar take, Kevin Tofel's, from GigaOm, on ''carrier loyalty''. Understandably, carriers (and handset makers) us a possessive pronoun: our customers. But we don't belong to them, we just have their money in our pockets.

By Jean-Louis Gassée
Special to CBSNews.com