Monday Note

Literally, Droid is the new Motorola phone sold by Verizon and running Google’s latest Android 2.0 release. The early reviews are good and, cleverly, Google issued a new turn-by-turn navigation application for the platform, also well received, complete with voice control and street view pictures. The Droid starts selling later this week, on November 6th, I’ll get one ASAP and report.

Earlier Android-powered phones weren’t so great, I bought a T-Mobile G1 exactly one year ago and wasn’t overwhelmed. I then called it “just a first effort” and wrote: “It’s only a question of time before most phone makers and cellular carriers offer an Android model, 12 months or less.  Motorola, for example, is building a “social networking” Android phone.  This is precisely the beauty of the Android Open Source, it lets phone makers and carriers try different implementations, specialized models, vertical applications.”

One year later, we have a new situation, a real contender for the lead position in the exploding smartphone market. How will Android impact the rest of the industry: Motorola, Garmin, TomTom, Palm, Nokia, Microsoft, RIM and, of course, the iPhone’s meteoric rise?

For Apple, the short answer is: the iPhone will continue to apply the Macintosh method, that is controlling all or most of the user’s experience, with similar results: smaller market share, disproportionally larger profits than the separate hardware-software crowd. More on this later.

Let’s start with a tip of the hat to Motorola. Last year, I questioned Motorola’s strategy and even its survival. Their “mobile devices” business was going to be spun off, the smell perhaps, from the more dignified “institutional” business, selling communications gear to government and enterprise customers. Fortunately, the new co-CEO for the mobile devices business, Sanjay Jha, came in, saw the on-going wreckage, dumped everything, starting with the Windows Mobile anchor. Then, listening to his techies’ advice, Jha bet on Google’s Android. The result is the Droid smartphone, making Motorola a strong contender again.

The same can’t said for makers of PNDs (Portable Navigation Devices) such as Garmin and TomTom. The latter company tried to dodge the bullet by announcing an iPhone application and a car kit. But the app costs $99.99 and the car kit goes for $119.95 at the on-line Apple Store, iPhone app not included. Not going to fool too many buyers, especially if, as rumored, the Google application becomes available on the iPhone. (You cam get a TomTom One for $79.99 on Amazon…)
The situation isn’t any better for Garmin: reviewers panned their Nüvifone, a Symbian-based PND + smartphone combo, now offered on Amazon with a $200 discount!
As a result, Wall Street dumped shares of these companies last week, with prices going down by 30% to 40% in a few days. Keen observers noted Google no longer refers to an external source for map data; previously, it used TeleAtlas, owned by TomTom.

We’ll quickly dispose of Palm, they’re the ones most likely to suffer from Android 2.0 running on Motorola’s Droid. Any hopes of saving the company through a Palm Pre distribution deal with Verizon are now gone. The company’s shares lost 13% since the Droid announcement. (Two months ago, I bought a Palm Pre, tried it and returned it. The Sprint people in their University Avenue Palo Alto outlet, five doors from the Apple Store, were lonely and understanding. My conclusion at the time: if you need a physical keyboard, get a Blackberry; otherwise, get an iPhone.)

Nokia is now reviewing its US market strategy, one they’ve so far treated with hauteur, secure in their leadership position in the rest of the world. They’re making up with Qualcomm, the phone chip supplier as well as attempting to restore “normal” (read subsidized) relations with US carriers Verizon, AT&T and T-Mobile. Up to now, Nokia resisted carriers dictating the features and services allowed on the handsets they distributed. Nokia wanted to sell its own Ovi Content while Verizon, for example, wanted to push its own. I was going to forget suing Apple on IP (Intellectual Property, patents) issues. As it makes new friends and enemies, Nokia is also performing a delicate platform transition dance, throwing Symbian to the curb and, how original, embracing Linux. The Symbian move is dressed up as open-sourcing the aging Psion-derived platform and spinning it to the politically correct Symbian Foundation. As for Linux, we have their Maemo platform: “Linux-based Maemo software takes us into a new era of mobile computing.”
Whether Nokia can write competitive system software and get good applications for it remains to be seen. But one thing is sure: they want to retake their “birthright” taken away by those two Silicon Valley interlopers, Google and Apple.

RIM is in similar but apparently stronger situation, and no less decided keep their standing in the race. The company has been successful with enterprise customers, less so with consumers who don’t care much for Microsoft Exchange compatibility/synchronization. But they now face their application platform’s limits: it is significantly harder to write applications for the Blackberry, it uses Java and, as a result, the applications have less “expressive powers” than with other operating systems. Think of a flute versus an organ’s many registers. For just one example, iPhones (and the iPod Touch) have become a leading gaming platform, something customers love, a good 30% of downloaded apps are games. Engaging, highly interactive games aren’t really possible on the Blackberry platform. How RIM will deal with their OS shortcomings isn’t known yet, but the two co-CEOs, Jim Balsillie and Mike Lazaridis, aren’t pushovers; actually, other, sharper epithets are often employed when referring to their fighting skills. In the last 3 months, RIM shares have gone down by 23%.

As for Microsoft and its Windows Mobile product, we already discussed their situation last week. In struggling for dominance, we know what, for them, constitutes creativity: opening Microsoft Stores next to Apple Stores or re-christening their smartphone platform Windows Phone. Emulation might be a better word. Microsoft faces a difficult problem and a tough adversary. The problem is the price of a Windows Phone license, somewhere in the $15 to $25 per handset, an enormous sum in that industry. Android is free.
Nokia writes code, the expense is part of the cost of engineering their devices, there no additional unit cost. The same is true for RIM, Palm or Apple.
For Microsoft, to survive in the fight for the really personal computers market, they’d have to give away their software. Will they? They have as much or more money than Android’s mother ship, Google; but do they have a hope of ever recouping the Windows Phone investment through advertising or Cloud services, as Google must be planning to do some day? The other possibility would be making their own Microsoft-branded smartphone. They said they wouldn’t. They also said that for MP3 players and then turned around and did the Zune. For that matter, they might emulate Steve Jobs again, not averse to 180º turns himself: remember ‘No native apps on the iPhone’. As Android keeps gaining momentum, it’ll be interesting to watch Steve Ballmer’s lips.

Which leads us to back Apple and its iPhone/iTouch platform.

Consider the past, how the Macintosh climbed back from a 2% market share nadir to its current 9% and growing faster than the PC industry as a whole. Moreover, in the “premium”, that is above $1,000 segment, consumers are said to give Apple a 91% share.
How did this happen in an industry where Microsoft provided Windows and Office applications to legions of PC makers?

When Steve Jobs came back at Apple, in 1997, he got rid of top managers, brought his own team in and put an end to the Mac OS licensing agreements. At the time, this was viewed as heresy. What critics conveniently forgot was that real strategic purity would have  taken Apple completely out of the hardware business, no more Macs, just Mac OS licenses, just like Microsoft doesn’t make PCs. Steve’s view was Mac clone makers were bleeding Apple’s hardware margins, taking away the financial resources it needed to invest in its future. Instead, Apple went on a campaign to more completely control the quality of the Macintosh customer experience: hardware, software, the buying experience at Apple stores, consultation, training, data migration when buying a new computer or switching from Windows, technical support and repair. Both JD Powers and Consumer Reports surveys attest to the success of such strategy, consistently placing Apple as the #1 in customer satisfaction.
A look at profits sheds further light on the respective benefits of open versus proprietary systems. In their latest quarter, Dell’s net income (profit) amounted to $472M; HP’s Personal Systems Group had an operating income of $386M, not exactly comparable to Dell’s figure; HP’s net, after-tax number is probably lower. In the same quarter, Apple’s net profit was $1.67B, that is more than twice the combined earnings for Dell and HP’s PC business. These two companies enjoy a combined 33% PC market share, versus Apple’s 9.4%. Market share and profits aren’t the same, ask BMW and General Motors.

Turning to the iPhone and Android: How will Apple deal with Android’s new 2.0 version running on a strong Motorola Droid — and with the legion of other handsets that are sure to follow?
Today, with close to 60 million devices in the market, with China distribution opening up, 100,000 applications by the time you finish reading this, Apple has momentum. Besides a good product, Apple enjoys a strong network of retail outlets, the Apple Stores, and iTunes, the King Kong of media distribution platforms with an integrated micro-payments system.
But, in a market that will eventually number billions of devices, as discussed last week, this isn’t an impregnable position.
For Apple, the temptation could be to keep rolling in cash while Android 2.0 is followed by version 3.0 and so on, garnering more and more support from handset makers and applications developers. Some pundits conclude: Eventually, Apple will be overwhelmed by a swarm of Android-based smartphones and applications. Further, just as Microsoft leveraged the OS-applications combination, the Windows-Office relationship, Google could, will use a synergistic relationship between the data in its 2 million servers and the new generation of mobile pocket computers. The power of Google data is already demonstrated by the new Android 2.0 navigation application.
Let’s address this question: will Google play its server farms and data against Apple or will it use the iPhone as well as any other smartphone to further its only cash-generating business: advertising. Or, if Google uses Google Docs to really go after Microsoft’s gold mine, Office, will it team-up with any and all devices or just use Android (and the Chrome OS) for this fight?
Put another way, with a free Android, Google isn’t in the smartphone OS business per se. Google believes in the future of these devices and, as a result of such belief, it wants to make sure to have enough influence on this emerging genre. More specifically, Google wants to guarantee all (or most) smartphones feed their Cloud Computing cash machines, starting with their advertising business.

Then we have Facebook becoming the Internet’s largest site, having 300 million users and growing fast. In a not-too-distant future, Google’s failure to achieve any momentum in this sector of Cloud Computing will reshape alliances as Facebook’s advertising business takes off. It will, see this. Google will need to keep all smartphones as “happy clients” for its services as Facebook becomes a real alternative.

Besides business model focus, advertising versus operating systems, and the shifting of Internet power centers (I spare you the “tectonic plates” bromide, this is happening much faster), we have Apple itself, its product or products, versus the Android universe.
In the end, will the swarm of Android-based phones overwhelm the monolithic Apple platform?
Drawing on the Macintosh story, the iPhone can end up selling less units than the total of Android-based handsets and yet make a great deal more money for its shareholders, its employees and its future. The significant difference between the Macintosh adventure and the current iPhone situation is the iTunes + App Store weapon. Steve Jobs understood what almost happened when Apple didn’t have the means to boost the distribution of Macintosh applications. Never again. — jlg@mondaynote.com

Related columns:

1. Droid and Android Last Friday November 6th, the much-awaited Motorola Droid came out. Powered by the latest version of Google’s smartphone OS, Android 2.0, the new handset is exclusively distributed by Verizon. The carrier backs Motorola’s handset with an aggressive marketing campaign on its website and on TV ads. For such a “gifted” (Motorola + Verizon + Google) product, [...]...
2. Android Week Something to keep our mind off the Wall Street catastrophe. Who knows, we might be on the verge of a “nuclear winter” as the Bush administration wakes up to another consequence of its intellectual shallowness, of its inability to understand that for markets to be really free they need to be regulated with an effective, [...]...
3. The Nexus One Puzzle Let me state it at the outset: I understand the buzz generated by the Google Phone a.k.a Nexus One. But, the more I look into details and their ramifications, the more I’m puzzled. What exactly is Google trying to do? Make Android, their smartphone OS platform the “Windows” of the new era of really personal [...]...
4. Android: First Impressions Let’s forget, for a moment, the sublime irony at the end of the W years, the right-wing neocons’ parting gift: a socialistic, state-owned financial system. Too depressing. . Instead, let’s take a first look at Android, the latest entry in the most dynamic segment of the high-tech industry, smartphones.  (The nice folks at T-Mobile will immediately object, [...]...
5. The Apple Licensing Myth Legends die hard. In the pre-Web days, they got printed and reprinted, told and retold and so became official, like spinach being good for you because it held the iron your red cells needed. After decades of the disgusting veggie inflicted upon young kids - I remember, a scientist went back to the bench and [...]...