We’ve been digesting Google’s announcement of the Android platform and the formation of the Open Handset Alliance (OHA) for the last couple of days. Indeed, we’ve spent a great deal of time thinking about Google’s mobile strategy in recent years, watching with interest as it mobilised search, mail, personalised homepages, calendar functions, documents and advertising.

Our conclusion: ignore the platform itself and look at the motivation. Google’s long-term objective is not be a player in the mobile platforms business – this is all about creating market conditions compatible with its unique business model. Read on to find out why…

There has never been any doubt about the importance that Google places on mobility. In the long-term it will almost certainly be the dominant delivery channel for its contextual advertising and that’s the only service that generates significant revenues for the company. As such, we always felt Google’s strategy would be based on building the biggest possible audience for its advertising network while balancing the need to maintain as much control over contextual data as possible.

The idea that Google would seek to achieve that by becoming the manufacturer of a single ‘gPhone’ was a nonsense which has merely confirmed the ability of the press to give credence to even the most outlandish ideas through sheer volume of coverage.

Starting with the facts

So what has Google actually announced? Android will be a full mobile operating system, based on Linux, and it will be provided through an open source license. This allows the code to be freely distributed and modified, but does not require those modifications to be fed back into the source code (i.e. if you develop proprietary IP around the source code, you’re not obligated to give it away free). It also said the OS will be modular, allowing elements like the UI and application layer to be easily swapped out and customised.

Google itself will provide a basic set of applications as part of the source code, but there will be no obligation to use them. The company has not yet provided details of these, but we believe they will focus on existing areas such as mapping, documents, email, search, calendaring and contact management. They will be network-centric and inherently linked to Google’s online services, but will also incorporate synchronisation technology which allows them to operate even when a network connection is unavailable. Google has already talked about the ‘Gears’ technology it is developing to enable this.

Third party development will also be a key part of the Android platform. Google plans to make an SDK available next week and developers will be able to write applications which tap into all the capabilities of the OS. It has been been particularly vocal on the concept of ‘all applications are created equal,’ referring to the ability of third party and pre-integrated applications to access all of the same APIs with the same rights.

The Open Handset Alliance comprises about 30 companies, ranging from hardware manufacturers like HTC, Motorola, LG and Samsung, to network operators like NTT DoCoMo, China Mobile, Sprint Nextel and T-Mobile. There are also a number of software providers like Esmertec (which does Java virtual machines), Nuance (speech recognition) and PacketVideo. Chipset manufacturers include Qualcomm, Synaptics (the company behind the iPhone touchscreen), Intel, Broadcom and TI. You can see a full list on the OHA web-site.

HTC is the only company to-date that has publicly commited to delivering a handset running the Android platform within a specified timeframe. It’s first Android device will ship in H2 2008.

If we strip away the hype, Google has announced it is delivering a free Linux-based platform for running mobile devices, an SDK for third party developers, a commitment to delivering its own application suite on the Android platform and a commitment from HTC to deliver at least one handset in the second half of 2008.

The reality check on the OHA

We attach little significance to the supporting statements from other companies in the OHA. They contain few real commitments and, at present, amount to little more than a loose association intended to drive public relations benefits. To put it bluntly, they have nothing to lose by associating themselves with the initiative and reserving themselves a seat at the discussion table. There is also little risk involved: Google does not require them to make any financial commitment, grant them any sort of exclusivity or even have firm product plans. At this stage, the presence of these companies in the OHA is nothing more than a hedging of bets.

It is worth noting the example set by Symbian, where even the licensees with equity investments in the company have been cautious about using the platform in anything other than a small proportion of their handset portfolios.

However, there are some important differences with Android which could alter this equation. Firstly, it is open source, so handset manufacturers or network operators (DoCoMo already has a customised version of the Symbian OS) are free to create their own versions of the platform. Also, it is free of charge, providing a potential saving on the mobile OS license fees charged by Symbian (currently about USD 4.80 per handset), Microsoft and other providers.

The idea of cutting out the license fee from the bill of materials and being able to create a tailored version of an OS without having to share those innovations with their competitors will definitely appeal to handset manufacturers. It will also be attractive to network operators who want to specify a particular platform for use on certain devices but don’t have the resources to build it themselves.

The Google motivation

So what is in it for Google? Why would it go to the expense of building and supporting a fully-fledged mobile OS and then give it away with very few restrictions on its usage? Well, it all comes back to the advertising revenue.

Despite developing its own platform, we believe Google is actually agnostic as to which technology succeeds in the market. It’s primary objective is simply to catalyse internet usage on mobile devices by ensuring as many as possible can support web services. Android is a means to an end. By doing some of the hard work on their behalf, Google is hoping it will encourage handset manufacturers and network operators to extend internet connectivity to more mobile users, more quickly. It is a calculated gamble: if Google’s software effort means 500m more users connect to the web on mobile devices and that happens two years quicker than it would otherwise, it will easily recoup its costs in the additional advertising revenues generated.

As an aside, the beauty of Google’s contextual advertising model is it spreads the company’s revenues across a complex network of industries. Analysts often point to Google’s reliance on advertising as its single source of revenue as a weakness. We believe this misses the point. The revenues may indeed come from selling a single capability – that of connecting potential customers with potential suppliers – but the universal appeal of that capability across all industries will ensure Google’s revenues are sufficiently diversified to weather any downturn.

This is an important concept to grasp in understanding why Android makes sense for Google. The company does not need to monetise a specific software platform or hardware device to succeed. Nor does it need to charge for its applications. In fact, tying its success to any or all of these things would be the least effective way of achieving its objective. Instead, it’s goal is to foster the largest base of mobile internet users capable of accessing its portfolio of free tools and applications.

If Google does its job right, greater mobile internet usage will mean greater advertising revenues, regardless of whether that usage occurs on Android or any other platform. Google is confident that by maintaining its focus on usability and leveraging its huge existing customer base, users will choose Google services for themselves. It just needs to ensure open access and a rich set of tools to enable it to innovate.

Android could help with this objective in several ways. Firstly, it may directly provide some handset manufacturers with a relatively low cost software platform for delivering mobile internet services to a broader range of customers. This is most likely to have the greatest impact in emerging markets.

Secondly, it simplifies Google’s task of proliferating its applications and thereby expanding its advertising base. Companies using the Android platform will have the option of adding a pre-integrated set of Google applications to complement the OS – it’s an easy cross-sell.

Thirdly, it challenges the rest of the mobile industry to match its promise of open, web-centric services. We think this could be the most significant factor of all. Even if Android itself only captures a small percentage of the installed base, it will spur other manufacturers and operators to develop similar capabilities. They may do this with another Linux-based OS or Symbian or Palm or any number of other options and Google really won’t care.

Google is in the business of connecting customers with suppliers. It makes its money from facilitating commerce, not from selling software licenses. Android’s most important role will be to spur activity across the market as a whole. Some of that may happen using its technology and some it may be driven within the OHA, but Google’s ability to make money from mobile will not be dependent on this success.

Understanding the wider context and seeing the world from outside the mobile industry

The company’s decision to pursue this kind of strategy is interesting in itself. Google faces several macro-challenges unrelated to mobile. The first is to maintain its stratospheric stock market valuation: it provides Google with a powerful currency for acquisitions, it keeps investors happy, it motivates staff with stock options and it buys Google a seat at the biggest strategic discussion tables simply because no one can afford to ignore it.

Another major challenge is to keep attracting and retaining the most talented people by convincing them they are changing the world. Monetary compensation only goes so far. Those with a true passion for what they’re doing are often driven by much more than financial benefit.

It also needs to convince its customers and partners that it is genuinely different. Google wants and needs to be seen as the ‘good guy’. This is a company which included ‘do no evil’ on the list of its stated objectives. The power of its brand is built around the concept of good experience.

If you recognise these three top-level objectives – maintaining financial firepower, nurturing intellectual talent and promoting its brand – it becomes much clearer why Google felt the need to build its own mobile platform, even when it is probably fully aware that it can succeed it mobile without it.

Google’s share price has risen from about USD 480 in mid-August, when speculation started to mount about its mobile ambitions, to more than USD 725 on the day it announced it Android. Objective one has certainly been met.

The company has also managed to recruit some of the highest profile executives in the mobile business. Andy Rubin, founder of Danger, is leading Android platform efforts after selling his start-up (also named Android) to Google. Nikesh Arora, former head of T-Mobile’s mobile internet business, now leads European operations for Google. It’s no surprise that T-Mobile is one of the operators supporting the OHA. Google has also built a huge mobile operation, particularly in the UK and on the West Coast of the US, rallying large numbers of engineers to its cry of ‘open source software for all’.

It’s hard to imagine a company with anything other than a ‘world changing’ mission building such a team in such a short space of time. Second objective fulfilled.

The third objective – maintaining the unique value of the Google brand among customers and partners – will take longer to evaluate. However, end consumers are likely to consider themselves winners if Google’s actions prompt the arrival of more free mobile services. Partner companies are also showing themselves open to the idea of its open source strategy by supporting the OHA – after all, who doesn’t like free stuff?

The practical realities of platform development

We haven’t yet talked much about how Android will compare with other platforms on a tecnological basis. There’s a simple reason: Google has kept a lot of the details under wraps. If you visit the OHA web-site at the moment, you can see a video featuring Andy Rubin’s dog and another in which a young girl tells you she’d like a magic phone which makes “cup cakes with sprinkles [that’s ‘hundreds and thousands’ for our British readers].” More will hopefully become clear as developers get their hands on the SDK next week.

This technological prowess will be a crucial factor in determining whether any of the 30 or so companies who’ve put their name to the OHA press release actually move forward with the platform. It’s going to be about the basics: integration costs, time-to-market, interface flexibility, hardware costs and ease-of-use.

Talk to anyone at Symbian or Microsoft and they’ll tell you about what’s really involved in building a mobile OS that can meet handset manufacturer’s objectives of sub-USD 100 build costs and sub-12 month development times. The fact that these two companies, supported by whole eco-systems of partners and billions of dollars of investment over the last 10 years, still haven’t hit these targets is testament to the blood, sweat and tears required to get the job done.

There’s little benefit to using an open source platform like Android if the savings you make on the license fee are going to be outweighed by the additional costs of training staff on new tools, a bigger bill of materials and reduced time-to-market. There’s also the issue of fragmentation. Google’s licensing approach carries a fundamental danger of increasing fragmentation within the industry by spawning a wide range of Android variants, each adding to the costs of the manufacturer, operator or chipset company which developed them. Even if integral support for open web standards makes it possible for third party developers to write applications across these different OS builds, you’ve still got costs being duplicated thoughout the supply chain, making the devices themselves less economic to build.

Google has a lot of questions to answer in this area. However, we take the presence of Andy Rubin in the driving seat as a positive sign: the Danger platform provides an excellent user experience and is a text book example of how to build a connected mobile platform that still functions in off-line mode.

How will it play out?

So, given what we know about the technology and the strategic priorities of Google and the companies associated with the OHA, how do we think this will play out in the market?

We expect the first tangible signs of progress to be some devices from HTC, aimed at a mass consumer pricepoint and sold initially through an operator like T-Mobile. This will happen in Q3 2008.

LG, Motorola and Samsung will also release some experimental products built around the platform, but will continue to hedge their bets with a multi-platform strategy incorporating Symbian, Microsoft and proprietary devices.

Chipset manufacturers will announce a series of partnerships with technology suppliers, software providers and systems integrators to develop some reference specifications which can be easily customised for particular operator requirements.

The third party developer community will seize on the opportunity to create some interesting applications for the Android platform, but the pace of these efforts will be directly proportional to the commercial success of devices running Android and the strength of the delivery channel for monetising their wares. To this end, we expect to see Google building a service for selling third party mobile applications or monetising them through advertising revenue share, rather like the AdSense network offering for web-site owners. This service will be offered as an optional application, just like the email, mapping and search functions.

In the long-term, we don’t expect Android to ship in anything more than a single digit percentage of mobile devices. By way of comparison, Symbian OS devices represented about 7% of the total handset market in Q307 (source: PMN Handset Industry Insight), which itself was a record quarter for Symbian. It’s taken Symbian more than 10 years to reach that level of penetration.

However, we do expect Google’s efforts with the Android platform to play a signifcant role in shaping the technological landscape and business model of the mobile industry. Much of this will be achieved by the competitive response it attracts rather than adoption of its own technology and commercial agreements. It will expedite the expansion of mobile internet capabilities into mass consumer devices; it will encourage the use of common, web-based standards for delivering mobile applications and, perhaps most importantly, it will spur consumer adoption by making services free for consumers while enabling revenue generation through advertising.

We’re interested to hear views from throughout the value chain on this analysis.

– How do you expect Google’s mobile strategy to evolve over time?

– Do you feel Android will benefit or compete with your company?

– Will Google end up capturing the lion’s share of the value in the mobile business by dominating mobile advertising?

Please post your comments to the blog below…