Google’s Gambles

It’s a time of transition and risk-taking for the technology giants. Companies that were once very focused on a narrow set of products have been diversifying their portfolios in the face of an ever-changing market. Those who have refused to change – Yahoo!, AOL, Research in Motion, Digg, for instance – are finding themselves relegated to greater and greater irrelevancy, even financial ruin, despite their once being giants in the tech sector. Companies that are maneuvering too slowly, like Nokia and Nintendo, are facing large hurdles in maintaining mindshare among their potential customers as well as encouraging existing customers to return. Companies have to be nimble, and they have to be willing to gamble to stay ahead of the mobile curve and remain interesting and relevant to consumers who are growing increasingly tech savvy.

The most reluctant to change among the big three (Microsoft, Apple, and Google) has been Microsoft. It took them years to respond to the iPhone, and it feels like their response to the iPad has been agonizingly slow coming. Still, the first hints that they recognized the Windows/Office cash cow could not sustain them forever came with the release of the XBox all the way back in 2001. Microsoft entered the risky, loss-leading, and Japanese dominated realm of console gaming. Their failure seemed inevitable, but Microsoft’s console proved to be a modest success, and its successor has been a much larger success. After XBox, Microsoft tried to enter the music market with Zune, a product that never took off but whose software would inspire Windows Phone 7 and eventually Windows 8. Now, Microsoft is taking another hardware risk by creating their own tablet, trying to define the Windows touch experience at the risk of alienating their own partners. I think they’ve learned their lesson with Windows Phone, however, and don’t want to be relegated to the back burner with tablets the way they have been with phones.

Apple is perhaps the safest when it comes to their gambles. They’ve built on their own successes since the introductions of the iPod and OS X in 2001. Both were guaranteed failures at the time, and both proved to be very successful. What was the iPhone but a touchscreen iPod that could make phone calls? The next release of iOS (then called iPhone OS) moved the phone closer to being a handheld computer. The iPad enlarged the experience, and Apple have been cross-pollinating their products the entire time. They take a leap and ride it for a couple of years before announcing the next shift in the evolution of their products. Other risks are taken in a more gradual manner – the introduction of the Retina Display, the new MacBook Pro, the MacBook Air, even the Intel transition – but they keep rolling, determined that the only people who will make their products feel obsolete are themselves.

Now comes Google. I never thought I’d say this, but I think Google may be the most exciting of the large tech companies at the moment. They have so much potential, but they are placing so much on ventures that stray from their usual revenue stream while not providing the immediate, short-term profit margins that investors love so much (and that keep Apple jockeying for the position of the most valuable company in the world). The announcements from Google’s recent I/O conference exemplify the gambles being taken on by the search giant.

The Nexus 7

The Nexus 7 was perhaps the announcement to create the greatest amount of buzz and excitement. Google’s new partnership with Asus, however, is risky on multiple levels. Like Microsoft releasing their own branded tablet, they put themselves in a partner/competitor relationship with other manufacturers. They risk alienating companies they have historically relied upon to create flagship Android tablets while still partnering with one of those manufacturers in the creation on the Nexus tablet. They have not taken the leap Apple has always relied on of keeping the vast majority of their hardware in-house, but they have invested heavily in creating a definitive Android experience.

The seven-inch form factor has not been historically sustainable, though. Similar products like the Kindle Fire and the Barnes & Noble Nook Tablet saw initial success followed by tepid sales. The size has proven to be a novelty, but it is the direction through which Google is differentiating the Android experience from the iOS one. It can’t hurt that the Nexus 7 is significantly more powerful than any other seven-inch tablet on the market, and the promise of quick software updates will make it all the more appealing. Initial sales for the Nexus 7 have been brisk, particularly for the modestly more expensive 16 GB version, but it will take a few months to see if Google has a runaway success in the form of the Nexus 7 or if it will be yet another novelty.

The screen resolution presents another risk for the Nexus 7. I initially thought they chose the smaller screen because scaled-up phone apps wouldn’t look as bad on a seven-inch screen as they would on a ten-inch screen. With a 1280 x 800 display, however, the screen sits at an impressive 216 pixels per inch. No, it’s not as pixel dense as an iPhone or an iPad, but it’s close to the latter. With such a high resolution display, phone-optimized apps will look terrible. Google is placing a great deal of faith in their developers to deliver apps that will look great on this display, but could that faith be misplaced? After all, Android has been tablet-ready since February of 2011, and developers have been surprisingly slow in creating apps that take advantage of the extra pixels. Perhaps the relatively slow sales of Android tablets have fueled developer apathy, though, and a successful Nexus 7 may spur them to more rapidly adapt to greater screen resolutions.

The final risk surrounding the Nexus 7 comes with the fact that Google is selling the tablets at little to no margin, perhaps hoping that greater sales through Google Play will help make the tablets profitable. The device is not exactly a loss leader, but they aren’t generating profits for Google the way the iPhone and iPad generate revenue for Apple. This is another point that could serve to alienate other Android manufacturers who won’t be able to compete with the Nexus tablet’s combination of price and performance for the simple fact that they will not be able to sacrifice hardware profits the way Google can.

Android 4.1 Jelly Bean

Jelly Bean looks to be a fantastic update – a fantastic update I may never see without rooting my device. The new version of Android is not much of a gamble for Google outside the usual odds surrounding carriers and manufacturers actually letting their customers take advantage of Google’s newest offerings. This is one place I’d love to see Google take a major risk: asserting themselves. I know they want to be the anti-Apple in the mobile industry, and one of those contrasts comes with the amount of control they let mobile carriers have over Android. But the results have not been good for consumers. The vast majority of Android devices are running a version of Android that came out two years and three major versions ago (though, I guess this partially excusable since Android 3.0 Honeycomb was tablet specific). Furthermore, carriers are allowed to put their own unremovable apps on Android devices along with their own proprietary tweaks and launchers – all of which increase the time between a new Android release and carriers actually adopting it. To date, only 10% of Android devices are running version 4.0+, released a year ago.

It may be time for Google to put their foot down with carriers and definitively define the Android experience. Like Apple and iOS, Google should be in control of when a device gets a software update, and the only fragmentation should come from the hardware the system is running on, not the whims of a mobile carrier that doesn’t want to support new software on older devices, companies that are only interested in their customer satisfaction at the beginning of a new contract cycle and are uninterested in interacting with their customers in the interim. Android is the dominant player in the mobile industry, and Google is in a prime position to consolidate control over the Android experience. Such intentional fragmentation is unprecedented in recent technology history. Can you imagine Apple being okay with 60% of iPhone users using iOS 4? Could you imagine Microsoft allowing Dell to prevent users from upgrading to the most recent version of Windows? Why is Google okay with such disparity? My guess is they aren’t, but they’ve given so much control to the carriers, they may not be sure how to take it back.

The answer may simply come in the form of an internal update mechanism – one the carriers cannot block or disable – that offers the latest Android updates to users whose devices are capable of running it. The carriers may not like it, but they will have no recourse. To whom else will carriers turn if they don’t like Google regaining control over their own product? Neither Microsoft nor Apple will cede so much control to the carriers, and no other mobile system is close to competing with the features and ecosystems built into the big three. Furthermore, carriers don’t make as much money per unit from Windows phones or iPhones as they do Android devices. Google has tried to invite carriers to more quickly adopt new versions of Android in the past. It didn’t work. It may be time for them to use their position of dominance to force carriers and Android device manufacturers into line.

The Nexus Q

The Nexus Q places itself head-to-head with devices like Apple TV and Roku, but it does so with a higher price and fewer features. The big sell for the Nexus Q comes in its great social features (unique to a device of its kind) and the fact that it can proudly proclaim: “Made in the USA.” No joke. The Nexus Q is basically a domestic product, but this comes with a serious tradeoff for Google – price. Manufacturing in the United States costs more than offshoring, and the Nexus Q’s price reflects that. The question is, if the device is a success, can that money be thrown at a more efficient process, resulting in lower prices? If the Nexus Q can later become price competitive with similar devices from other companies, will Google turn to the States for more products? And if they can prove you can make compelling and price-competitive products while avoiding labor that flirts with human rights abuses, will other device manufacturers follow suit? Can Google help tip the balance to a revitalization of American manufacturing? It may seem far-fetched, but there is a lot of pressure on companies to stop outsourcing their products from people who don’t understand the logistical difficulties of their own demands. If Google can prove those challenges can be overcome, perhaps others will follow.

The challenge comes with the Nexus Q becoming a sustainably successful machine. To do this, I hope Google rolls out some updates to it that bring it more in line with (or even leapfrogging) the likes of Apple TV, and content on Google Play is paramount. The variety and quality of media available through Google Play pales in comparison to the iTunes or Amazon stores, and a device like the Nexus Q is nothing without a healthy ecosystem behind it. Google seems to view this as a chicken-and-egg problem and are facing the problem head on with products that demand consumer attention. Historically, consumer interest in Google Play (outside the downloading of Android apps) has been tepid at best; this makes it hard for Google to draw in and negotiate with content providers. The potential customer base is too small, so interest from the studios is low. This feeds into the problem of Google Play being uninteresting to consumers. With the new Nexus products, Google seems to be hoping that selling great hardware – even with low profit margins – will drive enough people to Google Play to perk the big studios’ and labels’ interest.

Unfortunately, this strategy hinges more on the Nexus Q than the Nexus 7. With an iPad, for example, iTunes is definitely the main source of media consumption. Other avenues are available, but none are as compelling, integrated, or as convenient as iTunes. Google Play, at least until now, has not been as compelling a market to Android customers. Others – like content from Barnes & Noble or Amazon – are available and work just as well as Google’s. This is both a testament to the open nature of Google’s platform and an obstacle to their position as a content provider. Unlike a tablet, for the Nexus Q, Google Play is the only game in town. If Android enthusiasts want to support Google’s foray into the living room, they will have to spend more time in Google’s media store, and, if they do that, more and better content may follow. As it sits right now, the Nexus Q has sold through its first batch in one day, so demand for the device is apparent. The question for Google is whether or not demand will continue after people get their hands on it and experience both its strengths and its limitations. Will it be a sustainable product, or will it become a technological novelty – much like the PowerMac G4 Cube, the iPod Hi-Fi, or the Microsoft Zune?

Wrapping Up

In a few short years, Google has moved from being a search giant to being a major player in the mobile industry, a media content provider, and a compelling social networking alternative. They are building more and better tools, and recent talent acquisitions prove they are not satisfied with sitting on their laurels. They want to raise the standard of their product experiences, and they are willing to make some gambles to make their vision a reality. Despite initially strong sales, nothing guarantees the Nexus 7 or Nexus Q will be long-term successes, but I hope they are. Android is a compelling operating system, and the Nexus 7 looks to make the case for Android better than any tablet to come before it. Jelly Bean looks like a great update, and I want it to find its way to as many people as possible. Google has proven to be an exciting and innovative member of the technology sector, and I hope their current risks reap great rewards that not only help them, but, in the end, will both benefit their customers and their competitors’ customers in the long run.


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