Bank: Without software mojo, Android OEMs are doomed to 'implode'

Analysis You’ve heard that “when Wall Street sneezes, the world catches cold"*, and there are dozens of variations. But perhaps the line needs to be brought up to date. When a large technology platform company dozes off, companies that rely on it for innovation feel the chill – and the chill can be fatal.

Ten days ago, investment bank Oppenheimer caused a very minor sensation when it released a research note about Samsung. The headline-grabbing observation (and it didn’t grab as many as it should have) was that Samsung’s phone business is "imploding", but the reason why affects all of Samsung’s Android rivals too.

Oppenheimer’s analysts argued that Samsung and other Android OEMs had neglected the "software user experience” and sought to distinguish themselves through hardware, with the S6's designers opting for: “A cutting-edge CPU, curved display, iPhone-like metal casing, front area fingerprint sensor and camera with OIS.”

But the problem was that the software had barely changed. Look past the hardware and Samsung wasn’t rewarding previous brand owners with anything particularly new or interesting. Neither are other OEMs in the crowded Android market. They have also distinguished themselves through tiny hardware details and similarly don’t have a software story.

This is both obvious, and a tad unfair.

Google stormed the world with a compelling proposition for Android: OEMs could get some of that modern iPhone magic and sell lots of phones. And it was free! There was a dark side, however: the manufacturers surrendered platform independence to Google, with all the downsides that entailed. These downsides weren’t too apparent as Google rampaged on, improving the platform enormously, far faster than anyone expected. As a business case lesson in “execution”, Android’s progress from 2009 to last year has very few rivals. Today it enjoys close to 80 per cent market share worldwide.

But last year Google took its foot off the gas. Even within the Android empire at Google, attentions range from laptops, TVs, home automation, watches and other wearables, and the Internet of Things. IoT was the big deal at this year’s annual I/O developer event. Never mind the balloons, robots, driverless cars and other things competing for the R&D budget at Google. For the past two years, in fact since the ART runtime was dropped in, Android has barely changed. There’s been a cosmetic makeover, and that’s about it. It’s all tweaks.

But if you’re an Android OEM, look what happens when you try and differentiate yourself through software. Samsung is a case in point. It developed a radically new and stylish magazine UI for its Galaxy devices – but Google crushed it. It wanted deep level platform security to make its phones more attractive to enterprises. Google crushed that too. Samsung has to work higher up the stack than it would like.

Last week’s I/O event underlined how little software wiggle room Google leaves for OEMs. Samsung announced Samsung Pay on March 1st, launched to accompany the Galaxy S6s – impressive work coming only six months after Apple revealed Apple Pay. Last week Google announced Google Pay. How do you think Samsung’s app can compete with those two platform giants?

Now you can argue that this is Baumol's “Free Market Innovation Machine” working exactly as it should? I can hear Mr Worstall cranking his PCW into life.

Google has brought to the mass market a far more affordable version of Apple’s expensive innovations. Many consumer electronics devices start costly, and the prices fall. Eventually they become cheap enough to include in a Christmas cracker. That’s undoubtedly a good thing – but it isn’t inevitable. Cars haven’t followed this path at all.

Car manufacturers retain control of key parts of the business proposition, such as the engine and dealer networks. Combined with the high barriers to entry into the market, this ensures only one American start-up car company since Chrysler has become a success: Tesla. Samsung clearly wanted to knit the many disparate consumer offerings – TVs, air conditioners, wearables – together to achieve something similar.

Google has other ideas. Last year, its Silver program relegated the top-tier OEMs to the role of a component supplier, much as PCs became white box commodities subordinate to Wintel. Consumers would see the Silver brand and know it was a quality kitemark – it de-risked Android, and Google offered premium service for Silver phones. Lower-cost Chinese manufacturers and operators rather liked it, but the OEMs screamed so loudly Google withdrew the scheme.

For years, analysts have been advising phone OEMs to “hang together, or you’ll hang separately”: to create a platform on Android that they could control. That looks further away than ever today, and even if it happened, it is probably be too late. Much as striking workers have little real bargaining power if the employer knows they can fill their posts with cheap replacement labour, the Android OEMs today have very little clout. Huawei, Meizu, Xiaomi and dozens of others are standing by.

Oppenheimer singles out Samsung for disappointing results, but it’s got the furthest to fall merely because it’s the biggest. The bloodbath has been underway for some time. The OEMs are only just starting to count the cost of “free” in the “free platform” proposition. ®

Bootnote

* The original – “when Paris sneezes Europe catches a cold” – is attributed to Metternich, the Austrian chancellor.