There is no shortage of analysts predicting the future of mobile, some with more foresight than others. Needless to say what follows is merely my own speculation on the matter, but it seems clear to me that mobile computing will soon be assailed by another wave of disruption, this time coming from none other than Amazon. To understand why and how this disruption will take place, it is necessary to first understand one of the driving forces for change in industry.
It is a well-worn concept that any business strategy has natural compliments. Two industries are complimentary when the increase in demand in one naturally results in increased demand in the other. Commoditization is the process by which and industry reaches its theoretical lower bound in terms of price. Reduction in the price of products in one industry increases demand by lowering the barrier to entry, and in turn increases the demand for all compliments of that industry. A classic example of these principles at work is computer hardware and systems software. Microsoft licensed out their OS to every IBM PC compatible vendor. Since the soul of a computer is really its software, and since the IBM PC used off the shelf hardware, these vendors were forced to compete almost entirely on price. This drove price down to commodity levels, which encouraged sales, and in turn increased sales of Microsoft’s OS.
We can characterize the industry players being commoditized as prey and the one benefiting as the predator. Important note: predator does not mean that they seek to drive all their prey to extinction: that would be counter-productive. It means that they wish to extract almost all the value from that business and move it to theirs. Microsoft was a natural predator for computer hardware vendors. Their dominant stem software caused many hardware vendors to go out of business, while the remainder was forced to compete at cut-throat prices. Well, almost all.
While every other industry player has been scrapping by or spinning off, Apple has enjoyed terrific margins and booming sales. How can this be? Apple is a computer hardware vendor; they should be Microsoft’s prey. And indeed they are. The trick though is that prey can shield itself from predators. While predators hunt by commoditizing their compliments, preys insulate themselves by integrating their compliments. Despite Apple not making any real money off of software, they integrate it into their computers, adding value and protecting them from being commoditized.
Microsoft themselves are an excellent example of this. Microsoft is a software vendor. They are prey to those who benefit from commoditizing software down to free pricing. One such industry force is Google. Google benefits from an environment where all software is freely distributed on an open platform (in this case the web) and the only way to monetize it is through ad services, namely Google’s. Microsoft insulates itself from this by controlling the killer app for Windows: Microsoft Office. If you want office you have to get it on Windows.
Finally Google does this as well. Google’s business is selling ads. The compliment to selling ads is ad portals; places where those ads are viewed. So like a smart company Google integrated their business model with the biggest ad portal on the web: the Google search page. Only Google can put ad there because they own the thing. This makes heir adwords platform almost impossible to assault.
Of course Google has another business. While adwords displays ads in their own properties, its sister service, adsense, puts ads in webpages Google does not own. A website makes some of their real-estate available to Google, Google provides ads, and the revenue from impressions and click-through is split between the website and Google, 60/40 I believe.
Now it is clear that this business model is not as insulated as adwords, since Google does not own the portal, but it is more protected than you might think. Google uses the massive amount of data provided by their search engine to analyze the click-through rate of their adwords ads, and then uses that analytical data to serve more relevant ads in adsense. Any ad provider in wanting to compete with Google must be able to provide similar or better relevance, or else Google’s ads are simply more valuable. Google’s massive data pool makes this nearly impossible to achieve.
So far, Google’s ad presence exists almost solely on webpages, be it theirs or others. But with mobile there is a massive opportunity to extend this. Native client apps have taken off on mobile in a way no one predicted. Each app becomes valuable real-estate on which ads can be delivered. The problem is that Apple, the originator of this trend, created an app store in which apps can be easily monetized without ads, through either purchases or in app transactions. This directly competes with Google’s core business model of selling ads, since people generally won’t tolerate intrusive ads on a purchased product.
Now contrast this with Google’s app store. They promote a culture of free everything. The excess of app spam decreases confidence in up front purchases, and the absence of the paid app store in many countries makes the free+ads model more attractive to developers.
However, the monetization of ads on apps isn’t even the biggest potential money maker. By controlling the platform, Google has the option of pushing ads into the default client apps, or even the very OS itself. These potential revenue streams would be all but cut off without control of the platform.
So now that I have identified Google’s interest in Android and mobile in general, I digress back to the original topic: prey and predator. Microsoft is Apple’s predator, Google is Microsoft’s predator. Who is Google’s predator? Well let’s think. Google’s business model is selling ads. What is the natural complement of ads, a business that benefits from ads being as cheap or as integrated as possible? Why, the answer is rather obvious: retail. Ads promote the selling of things, retail sells things. The cheaper the ads or more control the retailer has over the ads, the wider the audience and larger the potential pool of buyers. Google’s natural enemy is none other than Amazon.
Now we have seen from before that being a natural predator does not mean you win. Microsoft didn’t destroy Apple’s value (though they came close) and Google so far hasn’t destroyed Microsoft’s. What it does mean is that the potential for damage to one player is much greater. Apple at its peak is no real threat to Microsoft. The most they feel is a 1 or 2% drop in market share. But Microsoft at its peak nearly killed Apple, and it was only Microsoft’s desire to have Apple live as a legal buffer that kept them in business.
Amazon up to this point has had no real avenue to attack Google despite being their natural predator. But things are about to change.
It is pretty much confirmed at this point that Amazon will release a tablet this year or early next. A conservative prediction would be an Android-based custom OS with Amazon’s app store, kindle store, music and video store, and Amazon’s, um, stuff store. It will probably do quite well. But that’s not the most interesting part.
Earlier this year Amazon released the Kindle with special offers, a normal 6” kindle with ads displayed in the OS. The product is sold at $114, a $25 discount on the regular model. Think about that for a second. A $25 discount made financial sense to Amazon on a device that sells books and nothing else. Amazon could likely decrease the cost of their tablet by $50 or more using nothing but these special offers. In other news, Google makes an estimated $6 on ads per Android device per year.
The important thing to note hear isn’t so much the figure, but rather the fact that Amazon can give up 100% of the ad value towards reducing the price of the device and just make it up on actual retail sales. Google can’t do that. Their business model is ads: They can’t give up 100% of its value. That is how they make money.
Also note that this is much different from web ads. The reason Amazon could never compete with Google on web ads is simply because not enough people use Amazon. Sure, millions do, even hundreds of millions. But as a percentage of total web users that’s still pretty small, and most of them probably only buy Amazon store goods for gift giving season. Most likely don’t buy digital video or music from Amazon, and those who buy books are more likely to do so on their e-reader as oppose to their pc. A 100% Amazon ad network could not ever hope to reach a wide enough audience on the open web. This is totally different on the Kindle, or indeed any other device with highly integrated Amazon services. Here you know that everyone has an Amazon account, and moreover will use Amazon digital content right on the device. Here Amazon ads are basically guaranteed to hit their target.
The other important realization is that, much like Google, Amazon doesn’t care too much about selling devices. Their end goal is to get an end-to-end retail channel in as many content categories and in front of as many consumers as possible. This is evidenced by the fact that Amazon has no problem releasing the kindle store on competing devices. They want to be the premiere ebook retailer much more than they want to be the premiere ebook reader.
So if Amazon creates its own Android fork for their tablet with all these store and services preinstalled, the next logical step is to license it to get it on as many devices as possible, both tablets and handsets.
Now why in the world would a manufacturer want Amazon’s fork instead of bona-fide Android? Google gives them key services like gmail and maps, as well as a strong brand, and most importantly the Android market.
The thing is that Amazon’s value proposition is simply better. They also get have app store as well as get key value add services like the kindle reader and cloud storage. Even Google’s crown jewel, Google maps, has equivalents from Microsoft, Nokia and others.
But by far the most incentive is the sack of money Amazon can give to these manufacturers for displaying ads on the device. As stated before, a tablet is probably worth $50, handsets more like $30. That’s a lot of money if you’re in a cutthroat market, and its money that Google can’t match, since they have no means of making it back.
Another huge factor is that since Google purchased Motorola, Google is a direct competitor with all of Android’s vendors. Samsung would much rather rely on Amazon than a competitor.
Finally, since Amazon’s OS would be Android at its core, Samsung and HTC wouldn’t have to throw out all the work they’ve done on Touchwiz and Sense, and existing customers would be able to move their apps to the new platform.
The most beautiful thing to me about this is that Amazon doesn’t even need to close source any aspect of their fork. Open-source only gets you free, but Amazon is offering better than free. Each vendor can have total freedom to mess with any aspect of the OS, but if they want Amazon’s sack of money, they better keep Amazon’s store, services and ads.
The repercussions of this extend far. If you are making an app that sells on the Amazon store, you could use Google’s admob which will give you some of the click-through revenue… or you could use Amazon’s that will give you all of it. Wonder which one I’d choose. When the web browser from an Amazon device goes to your web page, you could use adsense to display Google ads and get some of the revenue from impressions, or you could use Amazon’s service and get all of it. Again, Amazon can give away all of the ad value, or even loss lead. They don’t need it. They sell things. The greatest irony is that Amazon’s mobile ad revenue may end up being less than if they had never launched Android at all.
It seems ridiculous on the surface that the mighty Android platform could be hijacked, but remember, the mobile landscape is nothing if not volatile. Android, a platform that barely existed two years ago, now outsells all other platforms combined. Heck, four years ago Google and Apple were the best of friends. Now look at them. At the very least I would expect Amazon to dominate to non-iOS tablet market. But don’t be too surprised if the next phone you buy has Amazon written on it.
rvqs 