How iOS growth underscores Google's brilliant Android strategy

Any sign of growth in the smartphone market is a good one for Google.

After shipping 24 million iPhones and 17 million iPads, iOS devices accounted for more than 70% ($26 Billion) of Apple’s $35 billion third-quarter 2012 sales. Comparatively, Android is deployed at a rate of about 1 million units a day, increasing worldwide market share by 90 million per calendar quarter. This barely affects Google’s financial performance, but at the same time ensures its core advertising business will continue to grow. It’s not a strategy that Google invented; it owes the idea to Microsoft.

In its ascent to its dominant PC market share, Microsoft let others like Dell and IBM design, build and brand PC hardware that ran its software. Microsoft’s strategy involved leveraging commodity semiconductor components and the Asian supply chain, then taxing each PC shipment for its necessary Windows software, while avoiding downward margin pressure from cut-throat hardware competition. So effective was Microsoft’s strategy that, until recently, it held Apple’s share below 5%

While Google’s goals are different than Microsoft’s, there are many tactical similarities. Android is free, and the most common target processor that runs Android, called ARM, is nearly free. Android device reference designs (Cliff Notes about designing an Android phone or tablet) have permeated the world’s engineering community. Android’s open design takes advantage of Global R&D and supply chains. One only needs to visit Alibaba.com to appreciate how confident the Asian supply chain is in building and selling inexpensive Android phones and tablets.

While there’s no denying that the iPhone and iPad have had some design advantages over Android, the latest Android releases, Ice Cream Sandwich and Jelly Bean, have narrowed the gap. Apple’s App Store leads the Google Play Store, with twice as many apps selling at higher prices, yielding Android developers about a quarter of the aggregate revenues enjoyed by iOS developers. In the context of high growth and rapid development, these differences may not be significant. We are very early in the development of mobile devices. In the not-so-distant future, we will see annual smartphone shipments grow to nearly a billion units, and tablet shipments grow into the hundreds of millions.

Google’s mobile goal is simple: extend its dominance in web advertising through mobile advertising. Every quarter, Google further refines its selection and presentation of internet ads to be more relevant to users, increasing clicks and revenues. Android is Google’s mobile platform for unrelenting refinement of the relevance of its mobile ads by compensating the user for sharing information in return for rich, valuable, exquisite Android extensions.

One look at Google’s electronic assistant “Now” explains this strategy. “Now” is a breakthrough in voice recognition that is tightly integrated with search and the user’s search history, communications and itinerary. “Now” not only has beautifully executed voice-to-text-driven search, but it remembers what users regularly search for and sends them notifications about relevant subjects, such as personalities, sports teams and plane flights. “Now” will even remind the user to leave early if traffic to his next destination is slow.

"Now" gives Google a stream of user search, behavioral and GPS data that fuels the refinement of relevant mobile ads. The user trades information in return for a brilliantly useful app. Users make the same tradeoff using the Google Plus mobile app, the Chrome mobile browser and GPS navigation. Adding the Google search stream to any second source of mobile Android data increases its relevance.

Going forward, Google’s challenge will be to transfer its web advertising dominance to mobile. Confronted with inexpensive Android mobile devices, it will be Apple’s challenge to retain its high-margin premium with significantly better product features and designs. If Google strategy is effective, one can expect to see downward pressure on Apple’s premium prices.

Another way to look at this is both Google and Apple need to perform death-defying feats. Google’s high-wire act is to make the leap from web to mobile and retain its leadership, a feat of disruption rarely accomplished by a market incumbent. Apple must with the strength of Charles Atlas hold up its margins against the disruptive force of commoditization, a feat rarely accomplished by technology companies.

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Copyright © 2012 IDG Communications, Inc.