Figuring out a better Monetization Model for Android
In my article on Epic’s fight with mobile operating systems I focused on Apple. That has justifiable reasons, but it’s true that Android behaves not much better.
The Google Play Store (formerly known as Android Market) offers roughly the same deal as Apple’s App Store. In some cases Android is more “open”, see the ability to sideload. But the fundamental business model including the 30% cut remains.
The question is: Why does Android work the way it does in the first place?
The founding legend goes as follows: Back when mobile became a thing Google feared that a new platform like Windows Mobile could raise a wall between customers and Google, prohibiting it from becoming the search engine of choice. Boy, what a great insight! It’s exactly what would have happened.
So, in a defensive move, Google build Android to make sure that its services would get to the end customer without paying a toll to the highwayman.
While doing that they chose to do everything just like the market leader, but cheaper. Costs got swapped with market share: Smartphone makers don’t pay Google with money for the right to use the OS — they pay with the commitment to bundle and pre-install Google Services with the device.
The big change for Android is this change in the OEM business model. This is it. In all other areas they look to mirror the market leader closely.
At the beginning the market leader was Blackberry. Therefore the first Android prototypes looked like a PDA.
Yes, I wouldn’t call that very innovative.
Shortly after — and to this day — the market leader has been the iPhone with iOS.
I don’t want to disregard all the little details that differ, but in the grand scheme of things Android copies what worked for iOS (and recently vice versa). OS software will become even more indistinguishable.
If everything else is equal but you’re cheaper, how can you loose?
While Google doesn’t break out financial statements for Android it’s safe to say that the business model has worked out so far. It’s estimated that the Play Store fees brought in $9.1bn in 2019. The benefits of having not to pay for the channel come on top.
But now we’re at a critical juncture in mobile operating systems. They have become universal and the most important device in everybody’s live. We should take a look at how a future-proof business model would look like. It needs to work for all sides, esspecially suppliers (developers), customers and politicians (Antitrust). The current one doesn’t.
Why concentrate on Android? Isn’t the App Store the bigger lever? It is, changes int the App Store would be copied over soon after. But I lost my hope that Apple will change how they think about the iPhone and its ecosystem. At some point far too late in the future they will have to alter their policies due to European rulings —yet we know that Antitrust almost surely creates a subpar compromise. Better to tackle this ahead of time.
My proposal to Android is actually pretty easy:
- Get rid of the “Unknown Sources” checkbox in settings
- Reduce the Play Store cut to 10%
- Instead, charge smartphone makers a licensing fee of $10 per device
- Prohibit sponsored partner deals
The first point would make it easier to install software that is not going through the Play Store. The option to sideload software is good, but apparently too hidden. Removing the checkbox advances Android into the same software model as macOS: Install directly (with a prompt that this software can do harm) or go through the official Store.
Secondly, the reduced cut enables a lot more business models to flourish on mobile. This should result in more apps and cheaper prices for consumers. For Google, the takerate would still cover all costs and then some. Even if we assume that not more purchases will be done with the Play Store, revenue is more than $3 bn.
To make that cut sustainable to Google, I would establish a licensing fee of meager $10. Sounds small and should be tolerable by the smartphone makers like Samsung or LG.
But in aggregate Google will get more than $12 bn out of that (~1.5 bn smartphones sold per year * Android market share ~85% * $10). That alone is more than the Play Store Fees of today.
The licensing fee can’t be coupled to the OS, Android is open source. But it can be coupled to the Google Play Store Services which are the brains for Android secretly behind the scenes.
Interestingly that’s already the case in Europe, where Google had to offer a version of Android without Search and Chrome in exchange for a licensing fee.
So, as before smartphone vendors can fork Android to circumvent any dependance on Google. Also as before the product would be considered broken in the western world — imagine a phone without access to Gmail, YouTube, Google Maps services or Google Login services. Google holds all the leverage.
Still, the small licensing fee makes hardware vendors more susceptible to going their own route and e.g. making a partnership deal with Bing. That’s where the fourth point comes in: If it’s illegal for Google to bundle Services to the OS, it should be illegal for everyone to bundle 3rd party apps to the OS, too.
Someone like Samsung would still be able to offer its customers special deals, but it has to be a Opt-In rather than a pre-installed Opt-Out. The Android ecosystem would get better UX because there’s no bloatware around.
Overall, the new model works towards aligned incentives: Google Services would have to compete on merits. Android the OS, too. Likely that we see more competition.
It’s about time for Google to stop playing defense with Android. It’s the unquestionalble leader in market share, it should behave like that and push radical changes if only in the business model. Who knows, maybe this could even help Apple transitioning to something more Developer-friendly for once.
