Thursday, March 20, 2014

Cold Fusion

This week, I got revisit the IT world through the efforts of my students. In a class on innovation strategy that I recently completed at UCI, four MBA student teams presented final projects on the current business dilemmas of tech companies.

The most intriguing was that of Fusion-io (FIO), a company that provides faster solid state disc (SSD) systems for server farms — 40x faster than a conventional SSD. The company was founded in 2005 and IPO'd in June 2011.

The story sounds pretty daunting. Although it has plenty of cash, the company has lost money the last two years (on revenues of $432 million and $359 million, respectively). It historically has depended on Apple and Facebook server farms for the majority of its revenue, and has been unable to land another comparable sized customer. It’s also competing with a number of much bigger and more diversified rivals in a segment (like any IT) that is commoditizing.

At a $11.88 close Wednesday, the stock is up 40% from a historic low of $8.32 in January. Still, the company has lost nearly 40% of its market cap since the IPO. Stock coverage is thin and mixed. Pac Crest rates the stock as a outperform with a $14 target. The Street rates it “as a Sell with a ratings score of D.”

Appointed last August, CEO Shane Robison (former Compaq and HP CTO) has brought in Yelp and some other moderately large clients. He’s resisted calls to sell the company: it’s not clear whether he likes being CEO or really thinks he can turn things around.

The students think that a sale is inevitable, and I find their logic persuasive. They suggest three potential buyers: Seagate, EMC and NetApp. They say EMC is best positioned to buy the company, but I think Seagate has the more urgent need to diversify as its core HDD business continues to decline. With 27% of the shares held by large institutional investors, I think the pressure to sell will eventually become irresistible (unless they decide to use the recent runup to bail out).

Either way, it points to a problem that I’ve remarked almost since the first days of this blog: it’s really hard to build a stand-alone tech business nowadays. The complete offering that firms need to provide are complex and diversified, and the incumbents have strong distribution channels and financial positions to keep out any newcomer. Unlike in the early PC era, they are no longer complacent and ignoring new threats and opportunities.

Wednesday, March 12, 2014

Apple can't replace Steve Jobs - but it must try

It's no secret (and no surprise) that Apple has not been the same since the retirement and death of Steve Jobs in 2011. But with the stock stalled, now some are calling for Jobs' hand-picked successor, Tim Cook, to get the axe.

The public challenge came this week from Trip Chowdhry, head of a small (and little-known) Bay Area stock analyst firm. From my PR background, it appears to be a (successful) attempt to gain publicity by getting ahead (or fueling) a change at Apple.

His March 8 analyst note is direct and to the point:

RESEARCH: Every month we attend 8 to 11 Technology conferences, Summits and User Group Meetings, and speak to no less than 300 people. Here is the converged view on Apple

KEY MESSAGE:
• Apple Shareholders, Apple Employees and the Developer Community at-large have lost confidence is Apple’s current leadership
• Apple’s CEO Tim Cook is being incentivized to operate in a comfort zone of complacency until August 2016
• To prevent further destruction of shareholder value, Apple’s CEO and CFO need to be replaced sooner rather than later
• The team of Jon Rubenstein [sic] (Father of iPod) as CEO and Fred Anderson as CFO, may be best to revive Apple
He notes that Apple stock has fallen since its 2012 peak, while the NASDAQ has risen. While comparing to the stock's (any stock's) peak is unfair, Apple has lost ground to Google over the past 2 years (although Apple out gained Google over the past 5 years).

Apple vs. Google share price, March 2012-March 2014 (source: Yahoo)
While I recommend reading the entire document, I’m not sure how much stake I put in his conclusions, and not just because he misspelled the name of his would-be savior, Jonathan Rubinstein. Let me take the report’s arguments in order.

An Impossible Standard
First, no one — no one — could repeat Steve Jobs’ success: Steve Jobs is an impossible act to follow. In the 14 years of the Jobs II era (1997-2011), the company created the iPod, iTunes, iPhone and iPad. (This doesn't even include launching the company and creating the Apple II and Macintosh in his first decade at Apple). While there have been great CEOs in the past 50 years — Jack Welch and Lou Gerstner come to mind — none has the sustained record of innovation and industry transformation to compare to Jobs. (One might argue Intel had more of an impact on the IT industry, but it was under a series of CEOs).

The fact is, hired CEOs can often succeed at squeezing out fat, but are rarely successful at driving innovation. Welch led tremendous improvements in efficiency (which allowed GE to successfully diversify) and Gerstner accelerated a long-overdue shift from high-margin (but increasingly commoditized) hardware to low-margin, differentiated services. It's almost always the entrepreneurs and founders (like Jobs) that create the breakthrough business models and technologies that transform an industry.

A decade ago, the Apple community was speculating who would eventually replace Jobs. One scenario was to buy a Facebook or Twitter and let the acquired CEO take over. (That is, after all, how Jobs rejoined Apple in late 1996 after selling NeXT back to his former employer). But buying an immature (if inspired) leader of a one-trick pony is not going to help the world’s most valuable company create new forms of diversification.

Developer Disinterest
I am inclined to discount the developer reaction, for two reasons. First, developers (particularly Apple developers) tend to be whiny when the platform leader doesn’t give them everything they want — yesterday. That was my world for 15 years, and without visibility into the priorities (and limitations) of the mother ship, we were always good at telling Apple what we wanted but not much help in getting there. (I don’t imagine Microsoft developers are any better).

Second, we know Apple’s developer loyalty had peaked and would peak. As Mike Mace and I showed four years ago, Apple got ahead of its competitors with the iPhone but gave everyone something to copy. At some point, one of its rivals (in this case Android) would match many of its best features, attracting both buyer and developer interest. In addition, as in any platform war, developers who missed out on the first platform will hope to strike it rich on the second, while winners on the first platform look to add other platforms to obtain revenue growth.

Lack of Urgency
A major thesis of Chowdhry is that the stock option grants to Cook do not encourage him to act quickly, but in fact encourage him to wait another two years to stimulate the company’s growth. It’s unfortunate that Chowdhry didn’t make this point two weeks ago, because this would have been a great question for shareholders to ask at the Feb. 28 annual meeting.

I don’t know Cook, his financial situation or motivations, but certainly the whole point of options is to encourage executives to act in the best interests of shareholders. But I do agree with Chowdhry that Apple can’t wait, and if there are new technologies ready to release (iWatch, a new AppleTV) they are long past due.

Jon Rubinstein
Qualcomm Annual Meeting
March 4, 2014
Anointing a Savior
Probably the strongest contribution of the piece is the suggestion of Rubinstein. I don’t know if Rubinstein (former NeXT and Apple exec, former Palm CEO, current Amazon and Qualcomm director) would do a better job that Cook.

However, from having followed him for more than a decade, I think he is a very plausible choice. He is an innovator, he seems to be able to lead large organizations, he knows Apple well. He also seems to have the ego necessary to be a great Apple leader — not the ego of a Jobs or Gates (let alone a Musk or Ellison), but enough to really throw himself into making the company great once again.

Is there a better choice for the next Apple CEO than Rubinstein? Maybe, but I can’t think of one. (Then again, Carol Bartz looked good on paper before joining Yahoo, and we know how that turned out).

A Foolish Consistency
“A foolish consistency is the hobgoblin of little minds”
Ralph Waldo Emerson.
I’d never head of Chowdhry, but then (except for my iPhone research) I haven’t followed Apple as closely as I did before I closed my company in 2004. A quick Google search found two stories about his prior predictions for Apple.

First, a July 2013 story (by an Apple fanboy) in Fortune lambasted Chowdhry for saying innovation at Apple was over. It cites the four points of the latter’s complaint
  1. Apple has not innovated since the passing away of Steve Jobs.
  2. The likelihood of Apple being able to come up with innovative product ... is very slim, given that the Apple Stock is 40% below its high of $705: This lower stock price is prompting some of the smarter Apple employees to leave Apple for other companies such as Google, which is a very serious problem for Apple.
  3. Apple has changed from being an innovative company to a company returning cash to the shareholders; and that has completely backfired: ... Everyone is wondering who is getting all the Cash? ... Some are speculating if Tim Cook and Peter Oppenheimer will remain at Apple.
  4. The current executive team led by Tim Cook and Peter Oppenheimer have destroyed the shareholder value at Apple:
So in some ways, this makes the March 8 report old news, but at least it’s consistent.

However, the other story from January 4 of this year reports:
Global Equities Research analyst Trip Chowdhry came out in support of a bullish perspective on Apple (NASDAQ:AAPL) in a recent research note obtained by Street Insider. The analyst argued that Apple has the ability to continue to expand its gross margins throughout 2014. Chowdhry reiterated his “Overweight” rating on Apple shares and an $800 price target.
Hmmm... The stock closed at $536 on Tuesday, below where it was on January 1. If I were Chowdhry’s customer, this quick flip from bull to bear would cause me to question his competency more than a simple spelling error.

Conclusions
As an Apple shareholder and 30-year Apple user, the questions Chowdhry raises are important ones, and long overdue to be discussed.

Only three directors have the potential to put pressure on Cook. Art Levinson is board chair and was CEO of Genentech from 1995-2009. Bill Campbell was an Apple execs in the 90s (head of Claris) before becoming CEO of Intuit in 1994. Finally, Robert Iger has been CEO of Disney since 2005 and an ABC executive since 1974.

Alas, if Apple holds true to form, it will be like any other Fortune 500 company and fight change tooth and nail. The directors will circle ranks around the CEO, either because they believe in him, because they are cautious, or because they know a new CEO will replace most of the board. (Al Gore, in particular, seems unlikely to be retained by a future board, and so can cash his $54m in Apple shares and move on to something else).

So if there is going to be change at Apple, it will come from BlackRock, the investment firm that is Apple’s largest shareholder (at 5.6%) according to Apple’s most recent proxy statement — a shareholding unchanged from a year ago. Its shareholdings would be worth $8.4 billion more if Apple returned to its September 2012 stock price.

The reality is that Apple must innovate — or stagnate and slowly die (ala HP). Its competitors will copy its best ideas, and thus it must continuously come up with new ideas. That’s the opportunity — and risk — of being an innovator.

As someone who sleeps in a house paid for by Apple’s success from 1998-2002, I’d like to see Apple regain its mojo. But at this point, I’m not optimistic enough to place a major bet on such a revival.

Wednesday, February 26, 2014

If Facebook kills entrepreneurship, what’s next?

Cross-posted from Engineering Entrepreneurship.

The $19b that Facebook paid to buy WhatsApp is shaking up Silicon Valley, as other Internet startups try to figure out how they can get their own inflated multiple.

But for the rest of the world of tech entrepreneurship — such as life sciences — it could further starve the flow of investment capital they need to get off the ground.

Entrepreneurship guru Steve Blank tweeted Monday

steve blank ‏@sgblank Feb 24
Why Facebook is killing Silicon Valley http://steveblank.com/2012/05/21/why-facebook-is-killing-silicon-valley/ … more relevant today
The earlier article talked about his work teaching entrepreneurship for science-based startups:
The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet. And who can blame them.

Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.

The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking. The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. …

If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division. As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.
Two years ago — ironically a few weeks before Blank’s blog posting — I started writing my own posting along these same lines. What I wrote (but never posted):
Did software ruin entrepreneurship?
On Friday, I sat between two entrepreneurs at an office party for my old job. One of the entrepreneurs is in clean tech (hardware) while the other is in IT (software). One is in his 30s and one is in his 50s.

The hardware guy was talking about his challenges raising funds. One VC told him (I'm paraphrasing): “I gave Instagram $5 million and got back $200 million. Why should I give you money?” [after their $1 billion acquisition by Facebook].
The remainder of my (incipient) argument was that software promises abnormally low cap short returns, and the amount of money needed to fund a software company is getting smaller by the week, as VC Mark Suster wrote back in 2011.

How will this play out? I see at least four possibilities:
  1. During the dot-bomb (dot-con) era we had too much money chasing too few good ideas, and what resulted was what economists call excess entry. Eventually the bubble burst — and it could again.
  2. Another possibility is that these other ideas don’t get funded. There are business models that made sense in the 1890s or 1950s that no longer make sense — such as ones that are labor intensive or based on craft work — and new businesses here don’t get launched.
  3. Blank points to the genius philosopher-king model — where a really rich guy (it’s almost always a guy) puts his money where is mouth is (again, almost always a big mouth). In a previous century it was Howard Hughes or Richard Branson, while today Blank points to Elon Musk.
  4. The final possibility is that politicians play kingmaker, not with their own money but with Other People’s Money, i.e. yours and mine. (They will be egged on by a incantations of “market failure” of a few economists.) While this may make sense for public goods such as public health, we saw how such large scale private intervention worked with firms like Solyndra.
Of course, these are not mutually exclusive. Musk depends on public subsidies to support the business models of Tesla and SolarCity, although — unlike Fisker and Solyndra — he’s at least offering something people want to buy. SpaceX depends on public procurement, but I believe his announced plans that this is just a bootstrap to get the business off the group (so to speak).

Is there a happy ending? Like Blank, I think the Facebook effect is going to get worse before it gets better.

Monday, February 24, 2014

Nokia's non-Android Android phone

At Mobile World Congress Monday in Barcelona, Nokia introduced its Nokia X series — three hybrid quasi-Android phones. The phones combine the Android kernel with Windows-style tiles.

The Nokia phones are as much (or little) Android as is Amazon’s Kindle. Like Amazon, Nokia eschewed Google’s proprietary layers and added its own proprietary layers on top of the Android Open Source Project. The new phones have Nokia’s Store, with Nokia’s maps, radio and in-app payments.

According to Nokia

Nokia Store testing has shown that approximately 75% of Android apps will run properly without any modifications; they’re ready to be published in Nokia Store.
For the remainder:
If your app uses Google services for push notifications, maps or in-app payments, you’ll need to make a few changes, but it won’t take long (usually less than 8 hours). Nokia services have been designed to minimize porting effort from apps using corresponding Google services and allow developers develop and distribute a single APK targeting multiple stores.
Nokia even offers a service for testing apps to see if they are compatible. If not, Nokia is doing a road tour (the “Nokia X Porting Bus”) across Europe to help developers to port their apps to provide dual-platform support.

Either way, developers will need to submit their apps to the Nokia Store to have them made available to customers.

The news sites are speculating about how Microsoft feels about this signal undercutting Nokia’s devotion to the Windows platform, in anticipation of the handset business being swallowed by Microsoft.

Microsoft can keep or cancel the platform once it takes control. In the meantime, Nokia and Android developers can attempt a low-cost experiment to see whether app makers will pay the porting costs, and whether Nokia’s hardware competencies are valuable for Android customers in third world countries. Still, it’s hard to imagine a scenario under which this platform is still available for sale in three years.

For me, what is most interesting is what this experiment means for the future of non-Android Android devices. The Nook was first, then the Kindle. Will this encourage other experiments? Will these experiments create a demand for non-Google Android devices? Will developers make dual-platform applications? Will it undercut the market power of the Android compatibility program?

So will this reduce Google’s control of the platform by moving demand to lower layers? Will it promote further dominance by Android? Or will it be the tree that falls in the forest, that no one ever hears?

Monday, February 17, 2014

In the real world, Android is a proprietary platform

Since Android was first released, many of us have wondered how open it really is. Last week, we learned more about Google’s tight control over Android through documents released as part of an European antitrust investigation.

The story was first reported by the Wall Street Journal, based on an analysis by Harvard professor Ben Edelman. (The WSJ said that Google declined to comment). The meat of the revelation were copies of the 2011-2012 “Mobile Application Distribution Agreement” (MADA) that was signed by Android licensees Samsung and HTC. The agreements were exhibits in the Google-Oracle (née Sun Microsystems) Java copyright lawsuit in the Federal District of Northern California.

Ties That Bind

Rolfe Winkler of the WSJ summarized the (MADA) agreements as follows:

The Samsung and HTC agreements specify a dozen Google applications that must be "preinstalled" on the devices, that Google Search be set as the default search provider, and that Search and the Play Store appear "immediately adjacent" to the home screen, while other Google apps appear no more than one screen swipe away.

The terms put rival mobile apps, like AOL Inc.'s MapQuest and Microsoft Corp.'s Bing search, at a disadvantage on most Android devices. Mr. Edelman, who is a paid consultant for Microsoft, said the terms "help Google expand into areas where competition could otherwise occur."

Google has successfully promoted its own apps on Android. Four of the top 10 most-used apps on Android smartphones in the U.S. during December were Google's, according to comScore. On Apple's iPhone, only one Google app—YouTube—was among the top 10.
Calling Edelman a Microsoft consultant seems like a red herring. More relevant is that he embarrassed Google by noting that it tracked user browsing even when users disabled it. Edelman seems an equal opportunity Internet activist, having spent his entire adult life at Harvard (earning an AB, AM, JD, and PhD in econ before becoming an assistant and associate professor at Harvard Business School).

In his own analysis, Edelman shows how Google’s activities constitute tying:
If a phone manufacturer wants to offer desired Google functions without close substitutes, the MADA provides that the manufacturer must install all other Google apps that Google specifies, including the defaults and placements that Google specifies. These requirements are properly understood as a tie: A manufacturer may want YouTube only, but Google makes the manufacturer accept Google Search, Google Maps, Google Network Location Provider, and more. Then a vendor with offerings only in some sectors—perhaps only a maps tool, but no video service—cannot replace Google's full suite of services.

I have repeatedly flagged Google using its various popular and dominant services to compel use of other services. For example, in 2009-2010, to obtain image advertisements in AdWords campaigns, an advertiser had to join Google Affiliate Network. Since the rollout of Google+, a publisher seeking top algorithmic search traffic de facto must participate in Google's social network. In this light, numerous Google practices entail important elements of tying:

If a wantsThen it must accept
If a consumer wants to use Google Search Google Finance, Images, Maps, News, Products, Shopping, YouTube, and more
If a mobile carrier wants to preinstall YouTube for Android Google Search, Google Maps (even if a competitor is willing to pay to be default)
If an advertiser wants to advertise on any AdWords Search Network Partner All AdWords Search Network sites (in whatever proportion Google specifies)
If an advertiser wants to advertise on Google Search as viewed on computers  Tablet placements and, with limited restrictions, smartphone placements
If an advertiser wants image ads Google Affiliate Network
(historic)
If an advertiser wants a logo in search ads Google Checkout
(historic)
If a video producer wants preferred video indexing YouTube hosting
If a web site publisher wants preferred search indexingGoogle Plus participation
Not all tying is illegal. But tying by a dominant firm is legally suspect — even more so in Europe, where the competition policies are more aggressive (especially for US firms like Google).

Technically Open, Commercially Not

From a practical standpoint, phone makers have no choice but to comply with Google’s terms (with the exception of China’s domestic market, where Google’s services are blocked). As OSS IP maven Florian Mueller wrote:
Technically you can take the free and open parts of Android (in terms of the amount of code, that's probably the vast majority, though the share of closed, tightly-controlled components appears to be on the rise) and build a device without signing any individual license agreement with Google, and some have indeed done so. If that is so, why did Samsung and HTC sign those agreements that have now come to light? For commercial reasons.

If you want your Android device to sell, you normally want to be able to call it an Android device. To do that, you need a trademark license from Google. Open source licenses cover software copyright, they may come with patent provisions, but licenses like the GPL or ASL (Apache) don't involve trademarks.

The trademark -- the little green robot, for example -- is commercially key. In order to get it, you must meet the compatibility criteria Google defines and enforces, which are mostly about protecting Google's business interests: the apps linked to its services must be included. And those apps are subject to closed-source, commercial licensing terms. That's what the MADA, the document Samsung and HTC and many others signed, is about.

Even if you decided that the trademark isn't important to you, you would want at least some of the apps subject to the MADA. What's a mobile operating system nowadays without an app store? Or without a maps/navigation component? Google gives OEMs an all-or-nothing choice: you accept their terms all the way, or you don't get any of those commercially important components. And if you take them, then you must ensure that the users of your devices will find Google services as default choices for everything: search, mail, maps/navigation, etc.
This “free” software comes at a price. Even if Google doesn’t charge royalties to use its applications, the London Guardian estimated last month that it costs $40k-$75k to test a new handset for compliance with Google’s standards and thus be allowed to ship Google’s applications.

Google Isn't Open About Not Being Open

Most troubling for me has been — since the beginning of Android — the gap between Google’s rhetoric of openness and the reality; for example, see “Open source without open governance” (June 2008), “Perhaps someday Android will be open” (July 2008), “Sharing in faux openness” (October 2009), “Google’s half-full glass of openness (January 2010), “Andy wants you to buy his openness (June 2010) “Semi-open Android getting more closed” (October 2013).

While these agreements have been in place for at least three years, Edelman notes that Motorola redacted the most important provisions of the MADA when it disclosed excerpts in a 2011 SEC filing. Google’s lack of transparency about its non-openness helps it be more successfully non-open:
MADA secrecy advances Google's strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response. If users, app developers, and the concerned public knew about MADA restrictions, they would criticize the tension between the restrictions and Google's promise that Android is “open” and “open source.” Moreover, if MADA restrictions were widely known, regulators would be more likely to reject Google's arguments that Android's "openness" should reduce or eliminate regulatory scrutiny of Google's mobile practices. In contrast, by keeping the restrictions secret, Google avoids such scrutiny and is better able to continue to advance its strategic interests through tying, compulsory installation, and defaults.

Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google's restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.
With some irony, the WSJ article quoted Google’s former CEO:
"One of the greatest benefits of Android is that it fosters competition at every level of the mobile market—including among application developers," Google Executive Chairman Eric Schmidt wrote to then-U.S. Senator Herb Kohl in 2011.
Peeling Back the Layers of Openwashing

While the most specific and conclusive, this latest revelation is not the only evidence that Android is more openwashing than open source.

For example, in October Ron Amadeo of Ars Technica listed all the cases where “open source” Android once came with a key application available in open source, but then Google orphaned the open source app when it brought out a fully-featured closed-source replacement. This includes the Search, Music, Calendar, Keyboard, Camera and Messaging apps.

At the same time, Google (with great success) sought to convince app developers to use the Google Play APIs rather than the official Android APIs — thus making these apps incompatible with devices that use only the open source part of Android (e.g. Amazon’s Kindle). If you want to use apps from the Google app store, you have to use the Google APIs.

Finally, there’s the matter of the Open Handset Alliance, the organization nominally leading Android development. Amadeo makes clear that OHA is more like the Microsoft Developer Network than the Eclipse Foundation (emphasis in original):
While it might not be an official requirement, being granted a Google apps license will go a whole lot easier if you join the Open Handset Alliance. The OHA is a group of companies committed to Android—Google's Android—and members are contractually prohibited from building non-Google approved devices. That's right, joining the OHA requires a company to sign its life away and promise to not build a device that runs a competing Android fork.
Google: Partly Open and Opening Parts

In the early 2000s, open source was a paradox. When I began researching my second open source article (which I used as a job talk in December 2001 and was published in 2003), it was not clear how firms could make money from something nominally open. Based on a study of Apple, IBM and Sun, I concluded that firms made money off of openness with strategies that were open in one of two ways: they opened parts (leaving other parts close) or they were partly open (granting some rights, but not enough to enable competitors).

Google is clearly doing both. Amadeo emphasizes that with Android, Google is only opening parts — leaving key components under tight control. Meanwhile, the latest news points to Google being only partly open: rights to use the “open source” (actually, a mixed-source) system depend on complying with a series of Google restrictions.

In 2011, mobile analyst Liz Laffan studied the openness of eight mobile-related open source communities. Building on a 2008 study I did with Siobhan O'Mahony, she developed a 13-factor openness score for firm controlled open source communities. In her report (summarized in a 2012 journal article) Laffan assigned scores from 0-100% open. Android was lowest at 23%, and in fact the only project less than 50%. At the other extreme, Linux was 71% and Eclipse (designed to be open from the start) was 84%.

Conclusion: Real World Android is a Proprietary Platform

In the 1980s and 1990s, Microsoft won commercial success by widely licensing its PC operating system to all comers. However, after the initial licenses (with its launch customer IBM), Microsoft largely dictated the terms of these licenses.

When people buy an Android phone, they are not buying the Android Open Source Project but (as Amadeo makes clear) the Google Play Platform. This platform — call it Real World Android — has the following characteristics
  • Like Apple’s OS X (or IBM’s WebKit), it combines open source and proprietary elements.
  • Like Windows, it is licensed to a wide range of hardware manufacturers.
  • Like both OS X and Windows, much of the value comes from bundling a wide range of proprietary, closed-source applications
In short, Real World Android is a proprietary platform: proprietary in that it is a mixture of open source and proprietary elements, but the complete platform (including application functionality and access to the Android app ecosystem) requires licensing proprietary technologies under a restrictive proprietary contract. (For a true open source system, the open source license would be enough).

A few market experiments (notably Kindle and the Chinese market) have been made using the Android open source project (which Amadeo dubs AOSP). For the remainder, as Florian notes, commercial success requires agreeing to Google’s terms to use its proprietary platform. If it was ever accurate to refer to Android as an open source platform, it’s clearly no longer true today.

Yes, by using an ad-supported (two-sided market) approach Google doesn’t have to charge royalties, but that doesn’t make it free (as in speech or as in beer). With 42% of the US mobile ad market — and Android accounting for the majority of US smartphones — Google makes billions off of Android users. Google’s preloaded apps command choice real estate, and if Google didn’t control this real estate, handset makers could sell this real estate to the highest bidder.

So despite all the rhetoric, Google is just another tech company that wants to rule the world and make zillions for its founders and executives. It controls its technology to gain maximum advantage, and (like many firms nowadays) uses openwashing to render spotless its proprietary motivations. This shouldn’t be surprising. It won’t be a surprise for anyone who reviews the how Android evolved (and the strategy emerged) over the first five years.