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Google's Android Business Model Is Changing

October 17,2018 01:18

At issue is Google's practice of bundling and prioritizing its own apps in ways that bolster its search business -- at the expense of search rivals. Google CEO Sundar Pichai said that the European Commission's decision "rejects the business model that ...

Over the summer, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google got hit with a record $5 billion fine for alleged anti-competitive behavior, which Google is expectedly appealing. At issue is Google's practice of bundling and prioritizing its own apps in ways that bolster its search business -- at the expense of search rivals. Google CEO Sundar Pichai said that the European Commission's decision "rejects the business model that supports Android," which sparked speculation that the search giant could start charging fees of some form for the most popular mobile platform on Earth.
Google has just announced it will indeed start charging fees. Here's what that might mean for the platform.
Image source: Google.

Charging instead of paying
The Wall Street Journal reports that Google will start charging handset manufacturers fees in order to pre-install Google apps on Android devices. That's the complete opposite of how Google has operated in the European Union thus far. One of the anti-competitive practices that Google engaged in, according to regulators, was paying certain manufacturers and network operators to pre-install Google apps, giving it an inherent advantage right out of the box. The company would then monetize Android through greater usage of Google Search, helping recoup those payments.
Charging manufacturers instead of paying them is part of complying with the commission's order. Google has not yet disclosed precisely how much the per-device licensing fee will be, but says it will be reasonable and will not vary by manufacturer. That differs from Microsoft, which had previously charged varying licensing fees for Windows Phone (back when Windows Phone was still a thing) at its discretion based on the manufacturer.
Additionally, Google is lifting restrictions against manufacturers who sold phones running modified ("forked") versions of Android, as well as dropping its requirement to pre-install Google apps.
What this means for Android, at least in Europe
In the European Union -- where Android has 80% market share across the five biggest European markets, according to Kantar Worldpanel ComTech, the change has widespread implications on the competitive landscape. Most obvious, as the intended consequence, is that competing search providers will have a better chance at gaining ground in mobile search since one of Google's advantages is being weakened. Manufacturers will have much more leeway in choosing what apps and search engines to pre-install on Android phones.
Depending on what licensing fee Google ends up charging, the prices of Android phones could increase accordingly. As we've seen across other computing form factors, hardware manufacturers pass along the licensing cost to consumers in the form of higher prices, often adding a margin on top for themselves as well. Android's historically free nature has long been a major contributor to hardware affordability.
Licensing the apps will certainly be less than licensing the underlying operating system, so the ultimate price increases that consumers might face will probably be fairly modest. Manufacturers might even test the market, and see if devices that come with Google apps and services pre-installed sell more, justifying the extra costs. If they don't, manufacturers might choose not to license Google apps, and leave it to users to download the apps for themselves if they so choose. After all, that's what regulators are after here: greater consumer choice.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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