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Google's Android strategy looks like it's unravelling

Hugh Langley   

Google's Android strategy looks like it's unravelling
  • Google just lost a crucial lawsuit against how it does business with its Play Store.
  • A judge could rule that Google must allow rival app stores to freely compete.

Google's Play Store is under threat.

Epic, the creator of smash hit Fortnite, has emerged victorious in a lawsuit against Google, after a San Francisco jury found the search giant had built and maintained an illegal monopoly with its app store.

The ruling culminates a multiyear campaign by Epic Games against the ways Google and Apple control their respective app stores, and how much they charge developers to be there.

And it threatens to unravel one of the key distribution models Google has relied on for years to make Android popular.

Play Store makes Google billions — for now

We won't know what remedies the judge will impose on Google until January — and Google has said it plans to appeal the case — but Epic wants big structural changes here. It wants Google to be forced to let app developers build their own app stores and run their own billing systems on Android freely and without limitation or punishment.

That could be a huge blow to Google's Play Store business.

While by no means the cash cow that Apple's App Store is, the Play Store still generates big bucks by charging developers up to 30% of app sales and in-app purchases.

Google obfuscates just how lucrative the Play Store is, but a court filing in 2021 revealed the store generated $11.2 billion in 2019.

In theory, Android users can install an app store that isn't the Play Store. But for years, Google has relied on a strategy where third-party manufacturers ship its Android software in their devices. Those companies get an operating system they don't have to build themselves and, in return, Google gets vast distribution of its services, such as Gmail, Maps, Chrome, and, yes, the Play Store. That — and secretive agreements Google struck with potential rivals — undermined the rise of alternative app stores.

This bargain has also earned Android an approximately 70% global market share, and arguably delayed Google's push to build its own smartphones and other devices.

If Google is forced to really let other app stores onto Android devices, Play Store revenue might soon start to shrink — something Google is all too aware of.

Earlier in the trial, Epic referred to an internal Google presentation from 2019 that estimated the company could see losses of up to $6bn by 2022 if Epic and rivals such as Samsung were able to build successful competing app stores on Android.

That alone shows just how important the Play Store is for Google's Android strategy, and why the Epic ruling might be keeping some Alphabet executives up at night.

Google's boasts about Android's openness don't stack up

It might seem odd that Epic largely lost a similar antitrust case against Apple in 2020, but there are some important differences here.

They largely come down to the fact consumers buy an iPhone knowing the App Store is entirely tied to it, plus the way Google does business in the smartphone market. Google has boasted about how Android is an open platform, but the Epic case has shown us that it's increasingly exerted control through secret deals and revenue-share agreements to prevent rivals from popping up.

"Google… has tried to have its cake and eat it too," wrote analyst Ben Thompson in 2021. "After initially competing on being open and unencumbered, the company has since changed the rules, as it were, to lock-in its advantages through a combination of revenue-sharing carrots and contractual sticks."

Said carrots included an secretive deal known internally as Project Hug, in which Google allegedly paid game developers hundreds of millions of dollars to keep their games on the Play Store (you hug them and keep them close!).

If Google had built and sold a smartphone anywhere near as popular as the iPhone, it might not be in this situation. But perhaps it knew this day was always going to come.

"As much as Google likes to talk about the Android model being successful, it's seen as very risky internally," a former Googler recently told Business Insider.

Google's biggest mistake? Not pushing harder and faster on the Pixel

It's not the only risky strategy for which Google's bill is coming due.

Over in Washington DC, another of the company's distribution models has been under threat with the Department of Justice suing Google over alleged antitrust violations in Search.

That case hinged on revenue deals Google had struck with Apple and others to make its search engine the default on the iPhone and browsers such as Firefox. Google argues that its search engine is the most popular because it is the best, while paying tens of billions of dollars to keep it locked as the default. Those two things, critics say, just don't square.

We won't get a ruling on that case until later next year, the remedies could include the company being banned from paying Apple and Android handset makers billions of dollars a year to secure that default placement.

The best solution for Google would be to get its moonshot lab to whip up a time machine, go back to about 2005 and formulate a hardware strategy that would have made the Pixel phone a competitor to the iPhone.

Google can justify developing and powering Android thanks to the success of its distribution model and how much the Play Store rakes in. With that model under threat, the Android strategy might be starting to unravel.

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