When Android and the Open Handset Alliance were officially launched in November, 2007, the comments from different players ranged from the ecstatic to the ho-hum. Depending on the interest of the commentator, it was seen both as the real beginning of the smartphone age and as rather irrelevant.
Now, about 18 months after the launch, one thing is for certain: Android is not irrelevant. Even if it doesn’t become a run-away success, it will have changed the mobile operating system and value chain landscape for good – and for the better.
So what is the big deal?The smartphone arena was not exactly empty even before Android.
There was Symbian/S60, Apple iPhone, RIM BlackBerry, Windows Mobile, Qualcomm’s BREW, and even several Linux variants (Android was not the first Linux-based phone operating system by any means – Motorola had launched a Linux phone already as early as 2003), including LiMo, Moblin, and Maemo.
What was significant, though, was the tight coupling of software to specific hardware and vice versa before Android.
Symbian is now an open platform, but for all intents and purposes it still is synonymous with Nokia. Microsoft, being a software company, was willing to license Windows Mobile to all comers, but WinMo carried too much of a PC legacy to really break it big in the smart phone world despite some (theoretical) compatibility advantages. And the Linux camp was far too fragmented to have a real impact.
Unlike the traditional, vertically integrated value chain controlled by a single (or a few) players who would then decide whom to allow entry to the walled garden, Android creates a freefor- all model. The value chain certainly is more messy and harder to analyze than before, but also more conducive to innovation, product differentiation, and new entrants into the game.
So, the game changing aspect of Android is not really its technical architecture (not that it is not interesting) but its transformative effect on the mobile device value stack. The transformation comes from three distinct but interconnected sources: technology, business model, and critical mass.
Different players, different models
Of the current smartphone players, Apple and RIM (Palm could be included, but impact-wise it has been relegated to the minor leagues, at least for now) have the most pure-bred walled garden approach – they have absolute control over the hardware, OS, and UI of their products. Third-party applications are allowed (and encouraged), but especially Apple has assumed the role of the final arbiter even in this area: if Apple does not like your stuff, it does not get sold. The walled garden approach does have its advantages: Apple has done an exceptional job in ensuring a superior user experience throughout the iPhone ecosystem and the iPhone is arguably the most usable smartphone available today.
While there is no denying that the App Store has been a phenomenal success, the level of control Apple exerts on the market and its increasingly combative approach to jailbreaking and nonsanctioned applications is starting to ruffle some feathers. On the positive side, the tight control of a single authority is helpful in ensuring consistent quality and user experience.
Despite perhaps being eclipsed by the recent developments, Microsoft is still a force even in the mobile sector. Windows Mobile still has respectable market share – far above Android at the moment – and a major industry force behind it. However, it looks like Microsoft is currently more focused on the emerging netbook market and its top management (most notably Steve Ballmer) is giving statements downplaying the significance of the mobile market.
And the big buzz around other platforms and vendors notwithstanding, Nokia is still the eight-hundred pound gorilla of the mobile market. They have clear issues with the US market and their smartphone market share is eroding but Nokia is still the clear market leader that should not be counted out.
Symbian – while perhaps not loved by many – is now open source. Whether or not the open Symbian will take off, remains to be seen. Early signs are less than encouraging from Nokia’s perspective, though: just four non-Nokia S60 smartphones have been launched in the past 12 months. Then again, being a handset player, Nokia does not necessarily even want too many nice Symbian alternatives out there. One piece of evidence supporting this theory is the fact that Nokia’s heavily promoted Ovi Store is yet to support non-Nokia Symbian phones.
The state of Android
It has taken some time for Android devices to emerge out of R&D with only two devices (both from HTC) shipping as of Q2 of 2009. Estimated shipments in the first six month of sales were just over a million units, qualifying Android as a serious contender if not quite a smash hit.
This trickle is about to become a major flow, however. New device announcements are being made on a weekly basis and up to 20 new devices are expected to hit the market by the end of this year. While the term “The Great Android Flood of 2009” floated around by some bloggers might still be something of an overstatement, 20 devices in the next six months is undoubtedly a major development.
This is reflected in the analysts’ growth estimates, as well. Strategy Analytics is predicting a whopping 900 % sales increase for Android handsets in 2009. While this is partially explained by the low base sales figure, it is still rather staggering. The numeric estimates for 2009 Android sales typically range from 5 to 10 million units, which would still lag far behind Nokia or Apple’s shipments but nevertheless create a major installed base.
What is impressive in its own right is the number of titles available in the Android Market: less than eight months after its opening, the market features over 3000 titles. While this is significantly less than the perhaps 50000 titles available in the Apple App Store, it is still a major accomplishment given the relatively short time period and the small number of available devices.
With the new generation of devices coming down the pipeline, it is expected that the number of applications available will also increase sharply.
The anatomy of Android
The Android OS can best be described as a software stack. Each layer of the stack groups together several programs that support specific operating system functions. The key stack components include:
While Android is open source, it is based on the Apache 2.0 License, which is commercial-use friendly as it does not have the copyleft (basically having to grant free redistribution and modification rights) provisions of more “purist” open source licenses. This means the developer of an Android device can use the free platform but can keep the modifications and additions to it closed – allowing differentiation which is crucial to many commercial players (creating, on the other hand, potential fragmentation).
Also interesting from a commercial and ecosystem point of view is the division of Android into three different flavors:
Providing several flavors of the system appears to be a shrewd move on Google’s part. This way even very different kind of players can have a package that suits their needs.
The obligation-free version lets developers go far out and try even wild ideas and lets them leverage the OS without getting anything they might consider commercial baggage.
Especially large operators should be interested in the Google distribution version: they have full power to do their own branding and can control the user experience to a large degree while still providing some of the most requested Internet tools preloaded at no extra cost to them.
For smaller players, the third option can be lucrative. They can get the full leverage from both Google technology and brand while still adding their own spin.
The new rebel alliance
While Google is clearly the major driving force of Android, it is not the only significant player behind it. The OS is officially developed and controlled by the Open Handset Alliance (OHA).
Although “Alliance” is a fairly common name for various industry coalitions, it is hard to avoid associations with the Rebel Alliance (fighting for the good, of course) in the Star Wars movies. As to whom the evil empire might be, the Alliance is politely silent about, but there can be few doubts as to who the obvious suspect is.
With a growing membership of nearly 50, the alliance represents a broad cross-section of the mobile industry, with a few notable and understandable exceptions: Nokia, Apple, Microsoft, and RIM which all promote their own walled gardens.
Industry impact
Future historians will get to decide which was the cause and which was the effect, but it is undeniable that the development and launch of Android have coincided with the final breakthrough of the smartphones.
While smartphones still only correspond to about 13 % of unit shipments of all mobile phones, they are estimated to generate nearly 57 % of the total industry revenue.
Prognosticators have announced Android either the Next Big Thing or Dead on Arrival (and most in-between states, as well), all depending on their own bias and interest. While the ultimate fate of Android itself is still open for debate, it appears clear that it will be the force that drives the smartphone market into a more open direction and be a major catalyst for the growth of the smart phone software market.
It may sound contradictory, but Google’s position in the race appears to be win-win. If Android is a major success, Google undoubtedly is a winner both commercially and from a PR perspective. On the other hand, Google does not need Android to win; it is enough for them that smartphones significantly increase mobile Internet usage.
From the operator perspective, Android is a welcome entry. While they already have considerable negotiating power, an open source system like Android makes it even easier for them to offer phones and other devices that are driven by their own, not the manufacturer’s, brand, identity, and services.
Investment perspective
Being an investor in mobile and wireless technologies, Nexit sees the emergence of Android as a very positive phenomenom. The increased dynamics of the industry will spur new growth, new players, and new investment opportunities in the smartphone value chain as it is being reshaped in the next several years.
The growth of the installed smartphone base and the increased convergence with the Internet creates significant new opportunities for application developers and Nexit is keeping a close watch on developments and the most promising new companies in this area, as well.
A second, very interesting opportunity is created by some of the weaknesses or omissions in Android. While Android is a very good platform, it is not a fully complete solution. There are some significant technical challenges that Android does not address and providing specific value-adding solutions to these bottlenecks appears to be a lucrative niche for some teams.
Our recent investment into Aava Mobile is a prime example of this. Aava is a value-adding player which especially helps operators bring out new smartphones faster, at a lower cost, and better branded than ever before.
And finally, even if Nexit never makes another Android investment (do not bet on it, though), the pace of smartphone adoption and the resulting innovation is in any case accelerating, creating some exciting opportunities.
