Why Android is a Failure: Factoring in Opportunity Cost

By Rob Enderle November 28, 2011

Success or failure it really depends where you set the bar.   If your heart is on first place in the race then anything but first is a failure; but if you just, as is often the case with most folks in my age group, want to finish the race, then last place is still a success, so it is all a matter of perspective.   I’m quite sure the Google founders now think of Android as a success, how could it not be? It is clearly the most popular, in terms of shipping volume, smartphone operating system. But if we were to go back in time and take those same founders while they were in Stanford, put them through a business course on opportunity cost, and ask this same question they’d likely conclude Google had failed with this product.  

Let me explain.

Opportunity Cost

Opportunity Cost is the cost of not doing the next most likely thing and we, as humans, suck at factoring it into our decisions.    Say, for instance, you want to buy a new car and the most likely thing you’ll do if you don’t buy that car is put the money into a 401K.   We’ll make it easy and say the car costs $20K and you are now 25 years old.   When you retire at 65 this $20K would have grown to $2.2M and likely fund much of your retirement.   So the opportunity cost of that new car is retirement security.  

Now at 25, you typically don’t really give a crap about 65, thinking, as most do, that 65 is off into the far distant future, but this showcases that there is more cost to doing something than just the money you spend for the purchase; it includes the cost of not doing something else. 

Xbox Example

The best example of this in business is the Microsoft Xbox, which is currently the most successful gaming system in the market, but from a Microsoft perspective is likely a failure.   What happened was that early last decade, Sony started positioning the PlayStation as a PC killer and Microsoft got worried it just might be.   There was precedence for this opinion given that Commodore was the dominant PC platform at the beginning of the PC era and it was believed this focus on simplicity and entertainment could result in another non-Windows dominant product.

So Microsoft shifted their gaming resources into building the Xbox. But the opportunity cost of this move was Windows gaming. Windows was the product they wanted to protect in the first place and it was weakened rather than strengthened as a result.   Gaming was one of the major drivers for both hardware and software refresh and both largely stalled last decade because another driver didn’t emerge and folks locked down on Windows XP as good enough.    Currently, game developers have started to avoid Windows with their products, and this doesn’t bode well for the platform. 

The cost of the Xbox may have been the elimination of Microsoft’s valuation growth, and weakness in the PC industry over the last decade.    Ironically, I think a simple entertainment focused product did eventually emerge to challenge a weakened Windows but it wasn’t the PlayStation, it was the iPad and the Xbox was no defense.

Android

Google is on record saying Android is or will be (a little unclear here) a $10B business.   That is rather aggressive given that they give it away for free now.    Supposedly, it consumes ads to get to this point but anecdotally, I’m not seeing much ad consumption on the device.   If you pick up a new ad supported Kindle you see what an ad supported model looks like and you can’t miss the ads given they take up the screen when it suspends.   In addition, Google is clearly not funding any marketing on the device and the OEMs complain of inadequate support suggesting the platform is a cost, rather than a profit, center for Google.  

Now, given that Google rose to power before there ever was an Android and, since, has had a valuation that (with some impressive valleys) is nearly as flat as Microsoft’s , would suggest that, just like the Xbox, Android has slowed rather than accelerated Google’s growth.   Looking at the outside, before Android, Google was preferred to Apple products; in fact, Google was allied with Apple against Microsoft.   Post Android, which Steve Jobs felt Google had stolen from him, Apple and Microsoft are now allied against Google. 

Given most ads appear to be consumed on PCs, Apple or Windows, and not smartphones, gaining a smartphone platform but losing a powerful PC partner would seem to be a poor tradeoff actually weakening rather than strengthening Google’s hold on the search/Internet ad market.    In short, to be dominant Google needs to be preferred on all platforms and building a platform makes it certain they will be actively blocked eventually from all those they don’t own.   They actually shrink their available market.  

And add to this that forever they’ll be known as the company that stole from a friend while he was helping them create the product.   For a firm that didn’t want to be evil, that opportunity cost alone may be been too high.    

Wrapping Up:   Opportunity Cost

It is easy to look at things in a vacuum, particularly if it is something you want to do.   For us, it might be a new car or piece of jewelry; for Microsoft, it was Xbox, and for Google, building a phone that could approach the popularity of something Steve Jobs did that blinds us to making a decision in our own best interest.    Decisions aren’t made in a vacuum, there are repercussions to each one that need to be weighed and often aren’t.   I’m not suggesting Google abandon Android, though spinning it out might actually strengthen the company, much like Microsoft’s doing the same with Xbox likely would strengthen Windows (they may be adding Xbox capabilities to Windows 8).   I am suggesting that, when we make decisions, we consider the alternatives and not only factor in the costs of doing them but the costs of not doing them.   In the end, we’ll make better decisions, and I sure hope a few politicians eventually figure this out.   

In the end, I think Android, even though it is very popular, is a failure because it weakened Google more than it strengthened it because had they put this same effort into strengthening their ad tools the overall return to the company should have been higher and the downside risk less.


Rob Enderle is President and Principal Analyst for the Enderle Group. To read more of his articles on TechZone360, please visit his columnist page.

Edited by Rich Steeves

President and Principal Analyst, Enderle Group

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