At the end of my August 9th Monday Note, “War in the Valley, Apple vs. Google”, I committed to get into Google’s potential weaknesses in this conflict. Since then, things have gotten a tad more complicated.

The enemy of my enemy is my friend.

As discussed last August, Eric Schmidt, Google’s CEO, had to leave Apple’s Board of Directors because, even for a Valley used to “coopetition”, the conflict of interest became really blatant.

Both companies make operating systems for smartphones, the new wave of personal computing. There, we have Android vs. iPhone OS. For the desktop, it’s Chrome OS vs. OS X. Yes, for the desktop: Chrome OS purports to be a Cloud-oriented netbook OS but, as explained in the same August 9th MN, Chrome smuggles very substantial desktop code under the cover of “mere” browser plug-ins, this to let Chrome OS stay useful in the absence of a Net connection. Picasa competes with iPhoto, Chrome, the browser, not the OS, competes with Safari. In July, Apple bought PlaceBase, a mapping company, whose Web site is now reduced to a set of API (Applications Programming Interface) documents, very likely to gain independence from Google Maps.
The more we dig, the more we find places where both companies want to pick the same pockets. If you think about it some more, both companies behave as if they’d want all your attention and all your money. Still ruminating, could it be both companies no longer take Microsoft seriously and, having lost a common enemy must now be at each other’s throat?

Then, we have Verizon and Apple. The “love” between these two has been hot since or, actually, before the very beginning of the iPhone. A few weeks before the inaugural June 30th, 2007 shipment of the JesusPhone, Verizon incautiously circulated the now semi-famous “iWhatever” memo to its troops, dissing the iPhone and its maker. 50 million (we’ll see the latest numbers in about 10 days) iPhones and iPod Touch(es) later, Verizon is more than ever dead set against letting Dear Leader have its way with its business model. To Verizon, AT&T’s fate is anathema: AT&T let Apple “run the table” for digital media sales over its wireless network. Put more crudely, AT&T bent over and became a “dumb pipe”, a wireless ISP in the service of the iTunes content distribution and revenue engine. For this unnatural act, AT&T got a $100 ARPU (Average Revenue Per User, the industry-wide average is about $50) and the use of the iPhone as a lure to steal Verizon subscribers. Verizon can’t stand that thought, they want to keep their birthright, that is a piece of every bit of digital content revenue moving through its network.

Which leads Verizon to announce their upcoming App Store to supplement their music, ringtones and video content revenue. Try any and all of these for your own edification, content and UI. Then compare to iTunes, imperfect, overcrowded and hard to navigate as it is, and draw your own conclusions. Some of Verizon’s clunkiness is cultural, the old phone company culture, some is due to the Tower of Babel of devices to have to support. Still, out of necessity, out of wanting to own media revenue the way Apple does on AT&T’s network, Verizon is hell-bent on having their own iTunes equivalent — just the way Nokia does, or tries to do with Ovi.

Now we have the “logical” alliance of two Apple adversaries: Verizon and Google.

For its iTunes executioner plan to succeed, Verizon also needs an iPhone killer. RIM with the Blackberry? These people are impossible, they sleep with every carrier, strong products but, unfortunately, stronger minds even. Surprise, RIM’s two co-CEOs, Mike Lazaridis and Jim Balsillie want content sales for themselves. Motorola? Enough said. Microsoft? Worse than RIM. Google, on the other hand, is both prosperous and needy, a company of huge means with a no less huge need to establish their Android platform. For Google, Verizon do for Android what AT&T did for the iPhone. But, of course, this isn’t how Verizon sees it: they see Android as doing for their network what the iPhone did for AT&T. A questionable start for a “beautiful relationship”…

So, last week we had a big “partnership” announcement whereby Verizon welcomed the Android platform on its network. See the two CEOs’ sincere smiles in the picture. Ribbing aside, this looks like having the ingredients of a powerful alliance: the best wireless network, Verizon, allied to the Internet search (and almost everything else) giant, Google.
But once you start looking at the “small matters of implementation”, things lose their pleasant ring of synergy. For example, Google doesn’t make the smartphones, just their Android software engine; handset makers such as HTC or Motorola “port” (adapt) Android to their hardware. But as is sadly customary, wireless carriers, Verizon in our case, decide which and software hardware features they’ll allow and which ones they’ll block. That’s how, today, Verizon channels media downloads through their servers’ tollgates. Let’s say Verizon wants to sell navigation services, they may disallow competing Android applications, including Google’s. This would further babelize the Android platform as there would be a version for Verizon and a version, or versions, for the rest of the world.
For perspective, imagine two versions of Windows, one running on Dell machines only and one for the rest of the PC industry; this would segment Windows applications, some running everywhere, some running only Dell machines and some not running on Dell machines. Bill Gates, the enforcer, would have killed such a scheme. (For another take at Android’s babelization and developer support issues, see this TechCrunch piece by Michael Arrington.)
In passing, even Apple had to bend a bit: iPhone (legal) distribution starts this month in China, after two years of protracted negotiations, and after giving up on the Holy Platform Uniformity: Chinese iPhones have no WiFi, all downloads, all Net connections thru the carriers pipes.
Back to Verizon, there is distinct possibility they don’t care about fragmenting the Android platform: with a healthy network and the largest wireless subscriber base in the US, they think they have more than enough mass to create a stable, well controlled ecosystem.
Their goal is clear, they want both monthly ARPUs: AT&T’s $100 and iTunes’ $15 to $20 (the latter number my own unauthorized estimate). In a few years, Verizon could deploy 50 million or more Android-based “iPhone killers”. Turning to monthly revenue, we’ll assume an extra (above the industry average) $70 in ARPU for these smartphones ($50 for the data plan and $20 in content revenue). The result is $3.5B, yes, billions, in extra monthly revenue. Even if we take my assumptions as a tad optimistic and cut the ARPUs down, the result remains very substantial and explains Verizon’s eagerness to replicate the iPhone + iTunes ecosystem. (Apple’s quarterly numbers to be announced next week will confirm the size of the opportunity.)
Pondering how well and, if they do, when Verizon will succeed in building such a combined client-server edifice is an exercise left to the reader. One might want to ponder Microsoft’s inability to create anything approaching iTunes, created in 2001 and wonder about Verizon’s ability to write better software than Microsoft’s.

Instead, let’s turn to Google. What’s in it for them?

It can’t be licensing revenue, Android is Open Source, free. Advertising revenue? All smartphones have a browser (and a small screen…) so there isn’t any momentous advertising advantage for Google in a Verizon partnership; the carrier possesses no realistic way to significantly impact search engine usage, especially with the FCC (the Federal Communications Commission) looking into carrier deals and Net neutrality issues. Content revenue? Not too likely either: Verizon wants that revenue for itself and content owners are even less in love with Google than they’re fond of Steve Jobs. Recall the fracas, still going on, over book rights.
Running out of other possible answers, we fall onto a rather nebulous need to create an impression of momentum for Android: Look, we’re winning, we’re Verizon’s most favored partner.
Perhaps Google sees where the FCC is going: a form of Net neutrality for cell phones, a world where, as long as it is certified by an independent authority, I can “plug” the phone of my choice into the wireless network. (As our European readers know, they’re closer to this form of Net Neutrality than us in the US.)
In this scenario, Google would indeed get momentum for the Android platform before the Grand Opening of cellular networks. Perhaps, but it sounds a little thin, especially when you see Android phones are or will be soon available on T-Mobile, Sprint and AT&T.
We’ll have to wait and see if there is some clever wrinkle to the partnership or if this is yet another announcement whose product is the announcement itself and nothing further. In today’s context, connoisseurs of such BS will recall Verizon’s mellifluous and mendacious Open Network Initiative, promptly denounced as a joke, and Google’s own pious OHA (Open Handset Alliance). (I have one such announcement on my record: the 1989 Apple-Digital Equipment Strategic Alliance which produced strictly nothing beyond sage press coverage praising Apple for recognizing, finally, it couldn’t succeed by arrogantly going it alone…)

I’m puzzled. The more I look at the alliance between Verizon and Google, the more I see something concocted by corporate PR strategists without actual regard for what moves customers. Put another way: do you create a product, or a combination of products that will excite customers and increase revenue and profits as a result? Or do you torture spreadsheets and, once they spat the numbers you wanted, do you figure out ways to foist the answer as the new and improved Open Something upon the unwashed masses?
Jlg@mondaynote.com

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