Mobile

Google’s shutdown of China’s Acer phone makes short-term sense, long-term trouble

Image Credit: liseykina/Shutterstock

One of the big stories developing over the past week is the unfolding drama around Acer, Alibaba and Google.

Hardware maker Acer was planning to launch a smartphone in China running Alibaba’s Aliyun OS rather than Google’s Android OS. But it cancelled that launch last-minute because of pressure from Google.

Much of the commentary has focused on Google, and it does not come off in a positive light. Google’s Android OS is partially ensnared by the company’s own marketing. It wants to be ‘open’ and ‘not evil’. But pressuring a hardware vendor in this way does not seem to be either.

It’s hard not to want to poke a stick at Google at times like this, but there is a bigger question here. Google is not in the business of living up to its marketing, it’s in the business of making money and monetizing web traffic. Did its actions in regards to Acer and Chinese e-commerce giant Alibaba further those goals? Did it make the right business decision?

The answer is yes, with two possible exceptions, one big.

Android is doing incredibly well numerically. Google says 500 million Android devices have been activated, of which I estimate about 380 million are actually in use right now. That’s a very rapid uptake. By my model Android will be shipping close to half of all phones (not just smartphones) sold by 2015. This is an impressive rate of adoption.

Despite that success, Android is in many ways a mess. Google has had a hard time monetizing Android. I think it makes about $10 per phone per year in search revenue, but much of that has to be shared with carriers and handset manufacturers. Another major problem is fragmentation.

The situation with Acer and Alibaba is occurring at the intersection of those two problems.

By now, the extent of fragmentation is well known, but much of the focus has been on developers like Animoca who test their Android app on several hundred models, or Netflix’s 1,500 models and their automatic testing tools. Beyond developers’ frustration, a bigger problem exists. Consumers do not really understand the differences among Android phones and versions. If you ask the average American what kind of phone they have, and the answer is not iPhone, chances are they will respond they have a ‘Droid’. Droid is a Verizon trademark, still this is the answer you get even if the user is on AT&T or Sprint. This is changing in the US, but in emerging markets the problem is much bigger, especially in China. This matters a lot because there is a big wave of smartphone adoption coming in China and many of the markets that buy low-cost China-built phones.

Consumers do not really understand what Android is, and the fact that so many versions of Android exist leaves the door wide open for operating systems (OS) that look like Android, and may even run Android apps, but differ in some aspect from the Android that Google is leading. In China today, you see about a half dozen of these Android look-alike OSes. Some are explicitly ‘re-skinned’ versions of Android, where the owner takes the freely-downloadable Android kernel and replaces all the links to Google.com with links to their own web properties.

Alibaba seems to be offering one of these. Initially it claimed no links to Android, but most people (myself included) believe that the kernel of Aliyun is actually some version of Android. Alibaba itself seems of two minds about this, with some of its documentation highlighting the ability to run Android apps despite earlier claims.

The risk for Google is that just as markets like China, India, and Africa start to see widespread adoption of smartphones, consumers may turn to one of the various look-alikes and potentially get locked in.

Viewed from this perspective, Google is making the logical decision to enforce whatever leverage it has to reduce fragmentation and keep handset makers close to main branch Android. Set aside all the marketing and all the emotion in the blogosphere, and Google’s actions make a lot of sense. By playing tough now, the company will give the alternative OS little room to gain a foothold. And by limiting the hardware footprint of these alternatives, Google can make sure that developers have no reason to take a look either. Played out this way, the alternatives eventually dwindle away as Android moves on to new versions and hardware partners and developers alike focus on staying close to “orthodox” Android.

There are, of course, risks to this strategy. Foremost, it risks antagonizing hardware partners. No one likes to be reminded of their contractual obligations by lawyers. And handset makers struggling to make profits in a very competitive landscape want to have alternatives. That said, outside of China there are effectively no alternatives other than Windows Phone. And Windows Phone has very little traction anywhere, but especially among the smaller Chinese branded phone makers.

A second, bigger concern is that Google invites regulatory scrutiny for its actions. I am not a lawyer, nor a policy expert, so I have no idea if Google’s behavior risks violating any anti-trust regulation in the US. However, my understanding is that when Google acquired Motorola, it had to make certain commitments to keeping Android free and “open.” It is no secret that Google has few friends in China, but I would worry that, by taking action to defuse the fragmentation problem, Android may be opening up doors to a new set of problems further down the road.

Jay Goldberg is a financial analyst with an investment bank. He has been working with tech companies for 10 years. Prior to that he lived and worked in China for almost 10 years. You can follow him on Twitter @jaygoldberg.

[Top image credit: liseykina/Shutterstock]


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