Fall  
2010
 
 
 
 
8  
 
 
 
 
 
 
 
 
 
 
 
Google  and  the  US  Smartphone  Market  
 
 
 
 
 
CMIT  DBI  Synopsis  
 
   
This  document  
  provides  a  critical  analysis  of  Google’s  market  penetration  business  strategy  for  
entering  the  
  mobile  Smartphone  market  and  identifies  its  role  within  its  business  ecosystems.  
Recommendations  
  are  also  provided  for  maintaining  business  success  based  on  theories  of  open-­‐
source,  industry  
  platforms  and  network  effects  of  multi-­‐sided  markets.  
 
 
 
 
 
 
 
 
 

A u t h o r :   M i c h e l l e   L e  
Introduction  
 
Keeping  true  to  its  company  mission  ‘to  organise  the  world’s  information  and  make  it  
universally  accessible  and  useful’,  the  Internet  giant  Google  acquired  start-­‐up  Android  Inc.  in  
2005  with  the  aim  of  extending  its  digital  services  to  a  wireless  platform.  The  philosophy  
behind  vertically  integrating  into  the  mobile  device  business  being  that  more  people  will  be  
connected  to  the  Internet,  thus  boosting  Google’s  primary  business  of  search.  
 
The  Android  operating  system  has  enabled  Google  to  achieve  record  growth  within  the  
mobile  computing  market.  Google  has  managed  to  overtake  major  players  Apple  and  RIM  in  
the  US  market,  capturing  approximately  44%  share  and  leading  its  competitors  whom  each  
hold  26%  and  24%  respectively  (http://www.npd.com/press/releases/press_101101.html).  
 
Although  Google  is  now  the  big  fish  within  the  US  mobile  computing  market,  the  question  is  
whether  it  is  able  to  maintain  this  leadership,  or  will  it  become  complacent  and  rest  upon  its  
laurels?  The  synopsis  below  provides  a  critical  analysis  of  Google’s  current  market  strategies,  
and  recommendations  for  maintaining  this  leadership  based  on  open-­‐source  theories  and  
those  relating  to  industry  platforms,  multi-­‐sided  markets,  network  effects  and  business  
ecology.  

Company  and  Market  Background  

The  US  Smartphone  market  currently  consists  of  a  few  major  players:  OHA  (represents  
Android  as  it  is  administered  by  Open  Handset  Alliance,  led  by  Google),  Apple,  RIM,  
Microsoft  and  others.  The  table  below  identifies  the  vendor,  the  number  of  mobile  OS  units  
shipped  in  Q3  2010,  and  the  current  market  share  of  each  player.  
 
 
  Q3  2010   Percent  
OS  vendor  
  units   s hipped   share  
  OHA   9.1  million   43.6%  
  Apple   5.5   m illion   26.2%  
  RIM   5.1  million   24.2%  
  Microsoft   0.6  million   3.0%  
  Others   0.6  million   3.0%  
  TOTAL   20.9  million   100%  
 
U.S.  Smartphone  Shipments  by  OS  Vendor,  Q3  2010  (source:  Canalys)  
 
The  figures  above  are  only  representative  of  the  US  market,  which  is  at  the  focus  of  this  
synopsis,  however  60%  of  the  world’s  population  are  now  mobile  phone  users  
(http://www.zdnet.co.uk/news/mobile-­‐working/2009/03/03/sixty-­‐percent-­‐of-­‐the-­‐world-­‐
uses-­‐mobile-­‐phones-­‐39621541/),  20%  of  which  are  attributed  to  Smartphone  sales.  23%  of  
world  population  are  Internet  users,  and  if  Moore’s  Law  is  anything  to  go  by,  these  figures  
will  increase  exponentially  over  the  next  decade  until  all  phone  sales  will  primarily  be  a  
Smartphone  with  consumers  being  connected  to  the  Internet  on  a  24-­‐hour  basis.  The  
opportunities  for  market  capitalisation  and  potential  revenue  streams  for  Google  and  other  
players  within  this  field  are  mind-­‐boggling.    Hence  it  is  no  surprise  that  these  Internet  giants  
are  fighting  for  domination  of  a  market  consisting  of  essentially  the  entire  world.    
 

    2  
Michelle  Le  CMIT  DBI  Synopsis  
   
Vendors  currently  delivering  large  quantities  of  Android  devices  include  Samsung,  HTC,  
Motorola,  and  Sony  Motorola.  There  are  also  more  focused  efforts  from  other  vendors  such  
as  LG,  Huawei  and  Acer.  

Open-­‐Source  
 
The  Android  OS  Project  evolved  as  a  result  of  Google’s  acquisition  of  Android  Inc.  Android  is  
now  a  participant  of  OHA,  an  initiative  currently  led  by  Google.  By  allowing  vendors  free  
access  to  the  Android  OS  source  code  where  they  are  able  to  make  customisations  as  
desired,  it  could  be  argued  that  Google  is  pursuing  an  open-­‐source  market  penetration  
strategy  with  its  Android  operating  system.    
 
From  a  private-­‐collective  model  perspective  (Von  Hippel  and  Von  Krogh,  2003),  the  private  
loss  incurred  by  Google  as  a  result  of  freely  revealing  its  software  may  be  perceived  as  low  
since  the  Android  platform  is  significantly  differentiated  from  those  on  the  market.  For  
example,  it  is  in  stark  contrast  to  Apple’s  skimming  strategy  where  the  Iphone  iOS  product  
offering  is  based  on  exclusivity  and  premium  pricing.  Due  to  the  Android’s  open-­‐source  
nature,  vendors  are  able  to  offer  a  range  of  Android  devices  with  differences  in  
functionalities  and  price.  Thus  Google  is  able  to  widely  penetrate  the  market,  reaching  more  
price-­‐sensitive  segments,  and  counteract  its  lower  profit  margins  through  capturing  a  higher  
share  of  the  market.    
 
Google’s  pursuit  of  a  larger  customer  base  at  the  cost  of  higher  profit  margins  per  unit  is  also  
advisable  as  the  more  people  with  Android  essentially  translates  to  more  people  using  the  
plethora  of  Google  apps  and  the  Internet,  which  is  where  Google’s  real  business  is.  The  gains  
in  revenue  from  complementary  markets  of  search  and  online  advertising  will  more  than  
offset  any  losses  Google  may  incur  through  lower  pricing.  As  one  analyst  at  research  outfit  
IDC  simply  puts  it  ‘Wireless  is  the  new  frontier  in  search’  
(http://www.businessweek.com/technology/content/aug2005/tc20050817_0949_tc024.ht
m).  
 
Benefits  that  may  be  derived  from  Google’s  open-­‐source  strategy  include:  
• A  higher  quality  product  due  to  expert  contributors  collaboratively  improving  the  
code,  and  the  report  of  bugs  by  users.  The  Coverity  Scan  2010  Open  Source  Integrity  
Report  identified  the  average  defect  density  for  the  Android  kernel  at  0.47  defects  
per  1000  lines  of  code,  half  the  number  expected  (http://blog.coverity.com/open-­‐
source/launch-­‐of-­‐the-­‐coverity-­‐scan-­‐2010-­‐open-­‐source-­‐integrity-­‐report/).  
• Increased  market  share  through  high  user  adoption  rates  due  to  positive  network  
effects.  These  effects  are  discussed  in  more  detail  in  subsequent  sections.  
• Sustained  competitive  advantage  through  continued  innovation  as  a  result  of  the  
open-­‐source  model.  
• The  creation  of  a  community,  OHA,  will  simultaneously  promote  brand  equity,  
reputation  and  development  productivity.  
• Lower  product  development  costs  than  competitors,  as  each  Android  vendor  is  
responsible  for  their  own  product  differentiation  costs.  
 
However,  Google  should  also  be  wary  of  the  disadvantages  associated  with  open-­‐source,  
and  implement  suitable  preventative  or  minimisation  measures  to  offset  the  risks  involved:  
• It  is  important  to  manage  customisation  amongst  disparate  phone  makers  to  ensure  
that  the  Android  does  not  fragment  into  too  many  different  versions  that  are  
incompatible  with  each  other.  Google  has  implemented  preventative  measures  in  

    3  
Michelle  Le  CMIT  DBI  Synopsis  
   
 the  form  of  a  compatibility  test  suite  containing  a  set  of  rules  that  must  be  met  in  
order  for  a  manufacturer  to  carry  the  Android  brand.  
• Open  disclosure  of  the  source  code  also  makes  the  Android  platform  vulnerable  to  
risks  of  adoption  by  competitors.  However  Google  may  be  able  to  mitigate  these  
risks  through  its  high  brand  equity,  sheer  size,  and  the  continual  innovation  inherent  
to  the  open-­‐source  model.  
• Risk  of  hackers  to  the  Android  platform  is  also  higher.  
 
Although  Android  is  based  on  an  open-­‐source  platform,  Google  still  maintains  a  significant  
amount  of  control  via  its  compatibility  suite.  This  may  be  viewed  negatively  by  some  
vendors,  for  example,  Verizon  one  of  the  largest  mobile  carriers  in  the  US  has  chosen  not  to  
participate  in  the  OHA  and  is  rumoured  to  be  dropping  the  Nexus  One  from  its  product  
range.  Hence  it  is  essential  that  Google  find  a  balance  between  maintaining  the  integrity  of  
its  open-­‐source  image  and  protecting  the  quality  of  its  Android  platform  from  
fragmentation.  
 
Platforms,  Multi-­‐Sided  Markets  and  Network  Effects  

The  Android  Smartphone  can  be  perceived  as  an  industry  platform  that  acts  as  a  
technological  foundation  upon  which  an  array  of  firms  within  the  business  ecosystem,  i.e.  
phone  makers  and  app  developers,  are  able  to  develop  complementary  products  and  
services.  As  an  industry  platform,  the  Android  effectively  solves  a  business  problem  for  many  
firms  in  the  mobile  phone  market  as  it  provides  manufacturers  such  as  Motorola  and  
Samsung  with  the  tool  to  offer  a  differentiated  product  that  can  compete  viably  against  
Apple’s  Iphone  and  RIM’s  Blackberry.  
 
The  Android  can  also  be  perceived  as  a  multi-­‐sided  market,  both  on  a  physical  and  digital  
level,  as  it  facilitates  transactions  between  several  groups  of  users  on  different  sides  of  the  
platform.  From  a  physical  perspective,  Android  brings  together  the  following  groups:  
1. Phone  manufacturers  (e.g.  Samsung)  
2. Mobile  carriers  (e.g.  AT&T);  and    
3. End  consumers    
 
From  a  digital  perspective,  it  facilitates  transactions  between:  
1. Android  application  developers  
2. Online  advertisers;  and    
3. End  users.  
 
However,  it  is  not  simply  a  multi-­‐sided  market  as  it  also  facilitates  innovation  in  new  
products,  technologies  and  services.  Hence,  it  can  be  suggested  that  Google  plays  a  keystone  
role  within  its  business  ecosystem,  and  its  success  thus  so  far  can  be  attributed  to  its  ability  
to  capture  positive  cross-­‐  and  same-­‐side  network  effects.  
 
Google’s  open-­‐source  market  penetration  strategy  has  enabled  it  to  more  easily  capture  
positive  cross-­‐side  network  effects  as  proliferation  of  Android  devices  ranging  in  price  
throughout  the  market  resulted  in  a  larger  number  of  end  customers  having  access  and  the  
ability  to  purchase  an  Android  product.  The  higher  the  demand  for  a  product,  the  more  
attracted  mobile  carriers  and  manufacturers  will  be  to  the  platform.  Similarly,  from  the  
digital  perspective,  a  larger  base  of  users  with  access  to  the  Internet  via  Android  will  attract  
a  higher  number  of  Android  application  developers  and  advertisers.  Google  helps  facilitate  
this  transaction  by  ensuring  the  process  of  approving  an  Android  application  is  more  easily  

    4  
Michelle  Le  CMIT  DBI  Synopsis  
   
achievable  than  competitors  such  as  Apple.  This  will  result  in  a  higher  number  of  
applications  available  for  the  Android  platform,  thus  attracting  more  users  in  this  virtuous  
cycle.  
 
The  Android  platform  is  also  subject  to  positive  same-­‐side  network  effects,  although  to  a  
slighter  degree  than  those  described  above.  More  users  will  be  attracted  to  the  Android  
platform  as  the  number  of  users  increase  either  through  recommendations  by  friends  and  
family  or  the  desire  to  be  ‘in  with  the  crowd’.  
 
However  there  are  also  negative  network  effects  inherent  to  the  Android  platform  that  
Google  needs  to  be  aware  of  and  manage  effectively  to  ensure  its  success.  From  both  a  
physical  and  digital  perspective,  a  higher  number  of  mobile  carriers,  phone  manufacturers,  
application  developers  and  online  advertisers  result  in  higher  levels  of  competition  for  
existing  players.  This  translates  to  lower  profitability,  as  more  resources  must  be  injected  to  
attract  attention  from  a  limited  customer  base  with  diminishing  returns.  The  implication  for  
Google  is  the  need  to  manage  the  balance  between  proliferation  of  its  Android  product,  and  
hence  larger  market  for  its  search  and  online  advertising  business,  and  the  risk  of  market  
saturation  where  its  user  groups  will  turn  to  another  platform  from  an  inability  to  offer  
substantially  differentiated  products  and  thus  make  a  profit.  Google  has  tried  to  mitigate  
these  risks  through  its  open-­‐source  philosophy  by  allowing  manufacturers  to  customise  the  
Android  product  and  deliver  unique  product  offerings.  
 
Negative  same-­‐  and  cross-­‐side  effects  also  exist  for  end  users  of  the  Android  platform.  The  
more  user  with  access  to  an  open-­‐source  platform  such  as  Android,  the  higher  the  risk  of  
hackers.  Also,  more  advertisers  may  be  ideal  from  Google’s  perspective,  however  users  may  
become  annoyed  with  the  number  of  ads  displayed  and  switch  to  a  competing  platform  with  
less  clutter.  Again  Google  needs  to  achieve  a  balance  between  increasing  its  profits  from  
advertising  revenue  and  delivering  a  product  that  sufficiently  satisfies  its  end  user  group.  
This  may  be  identified  as  the  most  critical  dependency  to  Google’s  business.  
 
From  a  physical  platform  view,  Google  can  be  seen  to  subsidise  the  phone  manufacturer  
group  as  the  Android  platform  is  made  available  for  free  and  Google  does  not  make  revenue  
from  this  transaction.  In  this  case,  end  customers  and  mobile  carriers  can  be  viewed  as  the  
‘money  sides’  as  consumers  are  quality  sensitive  in  this  respect  and  generally  willing  to  pay  
for  access  to  the  services  provided  a  Smartphone.  As  demand  increases  mobile  carriers  will  
be  willing  to  purchase  products  from  a  manufacturer  to  meet  customer  orders.  
 
Although  Google  does  not  recoup  much  revenue  from  the  physical  platform  transactions,  it  
is  an  advisable  strategy  as  it  drives  demand  for  the  platform,  and  results  in  a  larger  customer  
base  of  end  users.  From  a  digital  perspective,  this  translates  into  a  large  subsidised  group  of  
users  accessing  the  Internet  via  the  Android  product.  In  this  case  the  money  side,  
advertisers,  will  be  willing  to  pay  Google  a  premium  to  access  this  market.  Thus,  Google’s  
loss-­‐leader  strategy  in  the  mobile  phone  market  is  essentially  a  strategy  to  boost  its  
complementary  and  primary  business  –  search  and  online  advertising.  
 
The  ability  to  capture  these  positive  network  effects  implies  that  Google  will  incur  higher  
margins  that  will  enable  it  to  invest  in  R&D  and  offer  lower  prices  in  comparison  to  
competitors  due  to  economies  of  scale.  This  competitive  advantage  will  assist  Google  in  
maintaining  its  market  leadership  and  essentially  act  as  a  high  barrier  to  entry,  thus  resulting  
in  a  few  large  players  in  the  market.  This  is  already  the  case  with  three  major  players,  
Google,  Apple  and  RIM  and  a  few  smaller  players  in  the  US  Smartphone  market.  Therefore  it  

    5  
Michelle  Le  CMIT  DBI  Synopsis  
   
may  be  suggested  that  there  is  a  ‘Winner-­‐take-­‐all’  dynamic  to  the  platform  as  multi-­‐homing  
costs  are  high,  network  effects  are  positive  and  strong,  and  neither  side’s  users  have  a  
strong  preference  for  special  features.  
 
Ecological  Stage  within  the  Business  Ecosystem  
 
Google’s  immediate  business  ecosystem  within  the  mobile  phone  industry  currently  consists  
of  the  following  players:  mobile  handset  makers,  mobile  carriers,  chip  manufacturers,  
application  developers,  advertisers  and  customers.  Google  also  players  a  major  role  in  
another  related  business  ecosystem  –  online  search  and  advertising.  Within  this  ecosystem,  
Google  can  be  perceived  as  ingrained  in  the  Leadership  stage  (Moore,  1993).  However  in  the  
mobile  computing  ecosystem,  it  can  be  seen  as  just  entering  the  Leadership  stage  within  the  
US  market.  
 
Google  has  already  achieved  expansion  by  offering  a  valued  business  concept  to  customers  
and  stimulating  demand  for  its  Android  product  through  an  open-­‐source  market  penetration  
strategy.  Currently,  it  is  experiencing  strong  growth  and  profitability  characteristic  of  the  
leadership  phase.  Google  incurred  a  11%  market  share  growth  in  the  last  quarter  compared  
to  1%  and  -­‐21%  by  competitors  Apple  and  RIM  respectively  
(http://www.pcmag.com/article2/0,2817,2371865,00.asp).  
 
Google’s  bargaining  power  may  be  perceived  as  high  as  there  is  substantial  customer  
demand  for  an  Android  product,  and  hence  the  Google  brand.  Hence  players  within  its  
business  ecosystem  must  rely  on  Google  to  continue  meeting  their  respective  customer  
needs.  Google  also  plays  a  major  role  in  improving  the  health  of  its  overall  ecosystem  
through  the  provision  of  its  Android  platform  from  which  other  organisations  are  able  to  use  
to  build  their  own  differentiated  offerings  of  Android  devices.  The  Android  App  program  also  
facilitates  the  creation  of  new  products  by  third  parties  more  efficient.  Thus  it  can  be  seen  
that  Google  occupies  a  keystone  role  within  its  ecosystem.  
 
Its  business  model  will  assist  in  reinforcing  this  central  position  as  constant  innovation  is  
encouraged  from  its  base  of  code  and  application  developers  due  to  the  open-­‐source  
nature.  As  stated  before,  Google’s  high  margins  will  help  boost  internal  innovation  through  
increased  research  and  development.  Thus  Google  effectively  has  an  organic  business  model  
that  is  continually  improving  the  Android  platform  on  a  price  and  performance  level.  By  
sharing  the  value  created  to  other  participants  within  the  ecosystem,  Google  will  be  able  to  
maintain  its  position  as  a  keystone  firm,  thus  making  it  difficult  for  future  competitors  to  
overthrow.  
 
Conclusion  
 
Google’s  success  so  far  may  be  attributed  to  its  ability  to  bet  on  the  most  promising  new  
technologies  –  search  and  wireless  –  and  deliver  a  highly  valued  package  by  combining  the  
two.  If  Google  is  able  to  maintain  its  success  through  careful  management  of  risks  associated  
with  open-­‐source  and  network  effects,  and  maintain  its  position  as  keystone  firm  within  its  
business  ecosystems,  Android  may  allow  it  to  become  the  leading  search  engine  company  
within  the  winner-­‐takes-­‐all  mobile  computing  market  worldwide.  Google  will  further  
strengthen  its  brand  equity  and  place  in  popular  culture  where  people  today  refer  to  
performing  an  Internet  search  as  ‘Just  Google  it!’  
 

    6  
Michelle  Le  CMIT  DBI  Synopsis