CASE: SM-176

DATE: 07/28/09

GOOGLE’S ANDROID: WILL IT SHAKE UP THE WIRELESS

INDUSTRY IN 2009 AND BEYOND?
We want people out there to use the Internet on their phones a lot. It actually doesn’t matter if it
is Android, the iPhone or something else.
1
—Sergey Brin, Cofounder, Google

INTRODUCTION

On September 24, 2008, Open Handset Alliance (OHA) partners Google and T-Mobile reached a
milestone. They unveiled the T-Mobile G1, the first mobile phone to use Google’s Android
open source operating system. The phone was due to ship in a month’s time.2

Since the Alliance came together in November 2007, consumers and industry participants
speculated about the impact Android would have on the wireless market, and whether Google’s
participation would disrupt the industry landscape. An analyst explained, “I am not sure people
are going to be lining up at stores for this device. The iPhone was a game changer from a
consumer perspective. The Google phone may be more of a game changer from an industry
perspective.”3 Some industry participants even felt that the iPhone was the important trigger
event, as it provided an extremely user-friendly interface and easy Internet access, while Android
was simply riding in its wake.

Rich Miner, manager of Google’s mobile platform group, also contemplated the question of what
would come of Android. He wondered whether Google and its OHA partners would achieve the
success they each had planned by their participation in Android. Had they put together an

1
Miguel Helft and Saul Hansell, “Google Introduces an iPhone Rival Open to Whims,” The New York Times,
September 24, 2008.
2
Ibid.
3
Ibid.
Amanda Silverman and Christof Wittig, with the assistance of David Hoyt, prepared this case under the supervision
of Professor Robert A. Burgelman as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.

Copyright © 2009 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
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Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 2

ecosystem that would result in a rich source of mobile applications, an unparalleled mobile
Internet experience, and the breakaway success of Android-enabled smartphones?

GOOGLE’S ENTRY INTO MOBILE TELECOMMUNICATIONS

At the end of 2007, Google was the largest search engine on the Internet. The company’s core
search engine product maintained an index of data gathered from web sites, news sites, images,
books, and other global sources, and organized this information, making it freely available to its
users. Larry Page and Sergey Brin originally founded the company while studying together at
Stanford University in September 1998. In 2001, Eric Schmidt was brought on as the new CEO,
and in 2004, the company went public. In 2008, Google reported revenues of $21.8 billion,
compared to $16.6 billion in 2007. The vast majority of revenue (99 percent in 2007 and 97
percent in 2008) came from the company’s core advertising products, which appeared on
Google’s search pages. (See Exhibits 1-3 for Google financial data, forecasted revenue, and
biographies of Schmidt, Page, and Brin.)

Google’s principal product was Adwords, a service in which companies, or advertisers, could
purchase ads space on Google sites and its advertising networks. Companies who advertised
using this service paid only when web users clicked on their ads.4 Adsense was a related service,
in which partners, or companies with their own websites, joined the Adsense network. Through
the program, these partners relied on Google to provide them ad content, which they would place
on their own websites. The partners split the proceeds of banner advertisements placed with
Google. Fees included payments on a per click and per impression basis.5 In addition to these
core products, Google was expanding its product portfolio, in part through an aggressive
acquisition strategy that began in 2001 and included notable acquisitions like YouTube (video
content) and Google Maps (interactive maps).6

Google’s New Growth Opportunity in Mobile Telecommunications

Google’s interest in mobile telecommunications was driven by the explosive growth in mobile
subscribers, and the development of mobile technology to enable a wide range of new mobile
applications.

By 2007, there were 3.5 billion mobile phone subscribers worldwide and the base was expected
to grow to 5.4 billion by 2011.7,8 (See Exhibit 4 for mobile phone subscribers by geography.) In

4
“Adwords,” Google website, http://adwords.google.com/select/Login (September 28, 2008).
5
Per click fees were paid when a user clicked on an advertisement. Per impression fees were paid when an
advertisement appeared on a web page viewed by a user.
6
In addition to Adsense and Adwords, Google’s product portfolio included: Google Talk (instant messaging
product); Froogle (comparison shopping services); Google Images (online image library); Google Video and
YouTube (video content); Google News (news feeds); Google Finance (financial news and information); Google
Maps (interactive maps); Google Groups (Internet discussion groups); Gmail (free e-mail service), Orkut (social
networking), Blogger (a web-based publishing tool for blogs), and Google Apps (free, hosted word processing and
spreadsheet applications).
7
“Phoning, the World Over,” Forbes.com, October 25, 2007, http://www.forbes.com/2007/10/25/mobile-market-
subscription-technology-personaltech-cz_1025mobilemap.html, (January 26, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 3

2007, 1 billion handsets had shipped and volumes were expected to grow to 1.9 billion handsets
by the end of 2012, representing a compound annual growth rate of 13.5 percent over the
period.9 By 2007, while the subscriber base in the Americas, including the U.S., represented
around 20 percent of subscribers worldwide, this market accounted for 40 percent of the total
worldwide market by value as measured by revenues from handset sales.10,11 (See Exhibit 4 for
subscribers by geography and Exhibit 5 for global market segmentation by value.)

Demand for particular phone models varied by geography and wealth class. In emerging
markets, most consumers acquired low-end mobile phones to simply access basic voice
telephony services, and sometimes also cherished their mobile device as an affordable luxury and
a symbol of status. Demand for a new type of high-end mobile phone, the so-called
“smartphone” (further discussed later in this case), emerged from a new segment of wealthier
and better educated customers who began to perceive the mobile phone as a pocketable
computer, which could potentially replace all other portable electronic devices. The smartphone
segment accounted for around 13 percent of all mobile phones sold in 2008.12 Worldwide sales
for smartphones were expected to grow to 619 million in 2012.13 (See Exhibit 6 for yearly
forecasts of worldwide smartphone unit sales.) Google saw an extraordinary growth opportunity
in facilitating new types of advertising on these devices.

Google’s Strategic Intent in Mobile Telecommunications

Google had already begun offering mobile services in 2001. At that time, several wireless
markup languages, such as “wireless application protocol” (WAP), enabled Google’s services to
be accessed through a mobile phone’s Internet browser.14 These languages were used to
translate standard websites into websites compatible with mobile phone browsers. While
available on a mobile device, it was generally understood by industry experts that these websites
were unsuitable for the small screen size and slow connection speeds of these devices, or they
were too limited to offer a compelling user experience.

By July 2007, Google had begun testing mobile ads with its U.S. partners, websites that enrolled
in its Adsense online advertising program. The company announced:

As part of our efforts to develop new and improved AdSense products for our
partners, we will begin a limited beta test for AdSense for mobile. AdSense for

8
“Worldwide Mobile Subscriber Forecast,” Shosteck Group and Mobile World, October 31, 2007,
http://blog.clickz.com/071031-141648.html (January 26, 2009).
9
“Global Mobile Phones: Industry Profile,” DataMonitor, December 2008.
10
Ibid.
11
In 2007, the global mobile phone market was valued at $114.3 billion. “Global Mobile Phones: Industry Profile,”
DataMonitor, December 2008.
12
“Smartphones – Smart Revenues,” Juniper Research, February 2009.
13
Roberta Cozza, “Forecast: Smartphones by Operating System, Interface and End User Segment, Worldwide,
2006-2012,” Gartner, December 11, 2008.
14
WAP browsers provide access to WAP sites or websites that are written or dynamically converted to WML, the
Wireless Markup Language. WAP, or Wireless Application Protocol, is the open international standard for the
application layer that enables wireless communication, mainly access to the Internet, from a mobile phone.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 4

mobile allows publishers to monetize their mobile websites through the placement
of targeted text ads. Publishers can take advantage of the fast-growing mobile
advertising market and benefit from our targeting technology.15

On November 5, 2007, Google announced its partnership in the Open Handset Alliance
(discussed in more detail later in this case). In January 2008, Google participated in the Federal
Communications Commission’s (FCC) 700 MHz spectrum auction, unexpectedly placing a bid
of $4.5 billion for the spectrum. The 700 MHz spectrum became available as part of the switch
to digital television, making frequencies once used for analog television broadcasting available
for other uses.16

Meanwhile, Google also led an effort to bind together advocacy groups and lobby the FCC to
adopt open-access rules that would require the winner of the spectrum auction to allow any
device or application to connect over the spectrum. While Google lost the bid to Verizon, the
FCC ultimately gave in to Google’s lobby, requiring Verizon to adopt open access for the
awarded spectrum. Industry experts suggested that Google gained what the company may have
wanted from their participation in the auction, a fast, open network for all its applications and
services, including Android-based devices. Following the auction, Verizon announced that it
would open its existing mobile network to any cell phone and allow subscribers to run third-
party applications on their phones beginning in November.17

During December 2007, traffic to Google’s mobile services surged from a new subscriber base
using the Apple’s iPhone, surpassing traffic levels from any other type of mobile device,18
though at the time iPhone users accounted for just 2 percent of smartphones worldwide
compared to Symbian’s 63 percent.

Later, in August 2008, Google’s Schmidt described the opportunity to make money in mobile
computing, as contrasted to its revenues at the time which were primarily in desktop, saying:
“We can make more in mobile than [in] desktop eventually. The reason is because the mobile
computer is more targeted. Think about it, you carry your phone everywhere. It knows all about
you. We can do a very, very targeted ad. Over time, we will make more money from mobile
advertising.”19

15
Stephen Wellman, “Google Tests Mobile Version of AdSense for the U.S.,” InformationWeek.com, July 15,
2007,
http://www.informationweek.com/blog/main/archives/2007/07/google_tests_mo.html;jsessionid=AXMO2AQZKD
H34QSNDLOSKH0CJUNN2JVN, (September 28, 2008).
16
“About Lower 700 MHz,” FCC, http://wireless.fcc.gov/services/index.htm?job=about&id=lower700, (May 14,
2009).
17
Elinor Mills, “Spectrum Auction: Google Wins by Losing,” CNET News, March 20, 2008,
http://news.cnet.com/8301-10784_3-9900190-7.html, (November 30, 2008).
18
Miguel Helft, “Google Sees Surge in iPhone Traffic,” The New York Times, January 14, 2008,
http://www.nytimes.com/2008/01/14/technology/14apple.html (September 28, 2008).
19
Henry Blodget, “Google Still Dreaming of $50 Billion Mobile Ad Market,” AlleyInsider.com, August 13, 2008,
http://www.alleyinsider.com/2008/8/google-dreaming-of-50-billion-mobile-ad-market, (September 28, 2008).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 5

ANDROID AND GOOGLE

Android began as a start-up company developing an open source operating system for digital
cameras. However with its purchase by Google, and the later formation of the Open Handset
Alliance, the mission evolved to delivering an open source operating system for smartphone
devices.

Early Days

Android began as a stand-alone company founded by Andy Rubin and Chris White. They were
developing an operating system for digital cameras, but had difficulty demonstrating the market
need, and in securing financing. Meanwhile, Rich Miner was working at Orange Ventures, a
venture capital group associated with Orange, a part of France Telecom. There, he observed the
need for carriers to have a new, more powerful handset platform that could be deeply branded. It
also needed to be truly open. At Orange, he had worked on the Microsoft Windows Mobile
launch with some of his portfolio companies, and noted that “Microsoft was dictating what apps
you could and couldn’t have on the handset and the extent that the handset could be customized.
We had no ability to get source code to fix bugs or influence the platform in any significant
way.”20

At the time, the industry was not well positioned to deliver on this opportunity. Miner
commented, “The carriers felt they were losing their ability to influence some of the larger
handset OEMs or platform providers. And the handset OEMs themselves felt they were not in a
position where they could deliver on the carriers’ expectations for the handsets they wanted.”
The current open source Linux operating system was not sufficient to remedy the problem. What
began as one version of free Linux became 20 different versions licensed by different companies.
The result was a fragmented environment, where one company’s Linux handset was completely
different from another’s, and very complex integration tasks were required in order to compete
with mainstream platforms like Windows and Symbian.

Soon, Miner met with Rubin, who had started to wonder if his idea of an open operating system
was more suitable for the mobile phone than the digital camera. They began to retarget the
Android effort toward the mobile phone. Miner recalled:

We jelled very quickly on a unified vision―that having an open, powerful,

advanced mobile phone platform that we could get adopted by a lot of the handset
OEMs by being very open―was important. And it was at a time when there was
pull from carriers. The handset OEMs also needed it because they were being
pushed by the carriers to deliver powerful handsets with carrier-based branding
and e-branding.21

20
Quotations from interviews with the authors, unless otherwise specified.
21
E-branding is branding on the Internet, with the primary tool being the corporate website.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 6

Google Acquisition and Open Handset Alliance

In July 2005, the team sold Android to Google and stayed on after the acquisition. Much
speculation ensued as Android remained a stealth project until November 2007, when Google led
the unveiling of the Open Handset Alliance (OHA), and made the announcement of Android as
an open source mobile operating system for smartphone devices. Distinct from LiMo,22 whose
Foundation’s members were collaborating to build its operating system, the OHA members were
furnished with Android as a completed operating system.23 As part of the announcement,
Schmidt stated:

This partnership will help unleash the potential of mobile technology for billions
of users around the world. A fresh approach to fostering innovation in the mobile
industry will help shape a new computing environment that will change the way
people access and share information in the future. Today’s announcement is more
ambitious than any single ‘Google Phone’ that the press has been speculating
about over the past few weeks. Our vision is that the powerful platform we’re
unveiling will power thousands of different phone models.24

The OHA had 34 partners including mobile carriers, chipset and handset manufacturers, and
application providers. (See Exhibit 7 for a listing of members.) Most prominent were China
Mobile, the world’s largest carrier by subscribers, T-Mobile, Intel, Motorola, HTC, Qualcomm,
and Samsung. Nokia, the dominant handset manufacturer, and AT&T and Vodafone, both major
carriers, did not join the Alliance initially. An announcement stated the group’s mission:

This alliance shares a common goal of fostering innovation on mobile devices and
giving consumers a far better user experience than much of what is available on
today’s mobile platforms. By providing developers a new level of openness that
enables them to work more collaboratively, Android will accelerate the pace at
which new and compelling mobile services are made available to consumers.25

Android Developer Community

On November 13, 2007, the first release of the Android software development kit (SDK) became
available for free download. As an open source rather than proprietary operating system, the
development community could build mobile applications that could run on smartphones that had
Android installed on them, without any hurdles to obtaining access to the SDK and the
Application Developer Interfaces (APIs), or paying a license fee for shipping the software on the
devices with the respective operating system. Typical developer SDKs in the industry usually
required expensive certification and often high membership fees. License fees of comparable
22
LiMo was a version of Mobile Linux, and was supported by the LiMo Foundation, which was established in
January 2007.
23
Richard Adhikari, “LiMo and Android: Is This Town Big Enough for Both?,” LinuxInsider, February 14, 2008,
http://www.linuxinsider.com/story/61685.html?wlc=1240252610, (April 20, 2009).
24
“Industry Leaders Announce Open Platform for Mobile Devices,” Google website, November 5, 2008,
http://www.google.com/intl/en/press/pressrel/20071105_mobile_open.html (September 28, 2008).
25
Ibid.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 7

operating systems retailed at $0.50 to $25.00 per handset shipped, which were paid by
manufacturers.

The SDK included the entire software package needed to operate the hardware of an Android-
enabled mobile handset, and allowed for advanced features through powerful APIs, including
location-based services and data portability.26 Compared to other platforms, the development
community characterized Android by its ease of use; programming for the Android was
analogous to that of a PC or the web. In contrast to Symbian, which was often regarded by
industry participants as an odd development environment for experts only, Android offered one
that was compelling even for current college graduates who had been programming on Linux and
Java and using open source tools.27 Key features appealed to developers as well; these included
the always-on Internet and location-aware services, including GPS, which worked like a compass
recognizing the subscribers’ geographical position. Altogether, the SDK offered the average
software developer, trained in the popular Java software programming language, the ability to
write and test simple mobile applications in a matter of days.

In addition, chipset providers that built the components managed by the Android operating
system could use the open standard to develop very powerful reference platforms. Reference
platforms were akin to an implementation template for a chipset for a typical phone, without
requiring a full implementation. Chipset designers often used these for testing, deriving their
own implementations, and understanding the best design approach. Thus, they would be able to
bring up new chipsets with greater ease and better performance on a level playing field.

With the release of the Android SDK, Google also announced a $10 million Android Developer
Challenge, during which a panel of industry judges would select the best applications written for
Android devices. Within less than three months, 500,000 copies of the SDK had been
downloaded. The first of two separate $5 million challenge events took place from January to
August 2008, with submissions due by April 2008, and plans for 50 finalist teams, including ten
$275,000 and ten $100,000 prize winners. The first Challenge was intended to give developers
an “opportunity to explore their ideas using the early SDK, and build prototypes,” while the
second Challenge would give developers a chance to polish their applications once the mobile
handset hardware became available.28 By August, plans for the Android application marketplace
(“Android Market”) were announced.

Unveiling the First Android Phone

As noted earlier, in September 2008, Google and T-Mobile unveiled the G1, the first smartphone
with the embedded Android operating system. It was forecasted that Android-enabled
smartphones would account for 30 percent of Linux enabled smartphone shipments worldwide in
2009 and grow to 80 percent by 2012.29 At the unveiling, Rubin, now Google’s senior director

26
A location-based service (LBS) is a mobile service that makes use of the geographical position of the device.
Data portability is the ability to control, share, and move data from one system to another.
27
Information based on interviews by the author (Silverman) with industry personnel.
28
“Android – an Open Handset Alliance Project,” Google Website, http://code.google.com/android/roadmap.html
(September 28, 2008).
29
Roberta Cozza, op. cit.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 8

of mobile platforms, remarked, “Google was obviously a company that was founded on the
Internet. It’s the Internet that provides collaboration, openness, and that, of course, yields
innovation. With Android, today, we’re bringing some of those advances and strategies to the
mobile phone.”30

However, Google had much to do before achieving its vision of success for Android. Miner
described this vision:

We really want to see Android adopted by a very large percentage of mobile

handsets, especially ones that are more feature-rich handsets. The goal is that
there are a billion-plus mobile phones sold every year and Google would like to
see the majority of those being a very powerful and great phone, [with a]
connected data experience, and be very open. That’s the reason we’re making
this investment.

By 2008, Google claimed not to have a business model of its own for Android. Google was
clear, however, that it would always bundle its dominant Internet search engine firmly into the
fabric of this ecosystem, driving traffic and advertising revenue. Google believed that the future
was about phones that were not only great for communication, but were also highly connected
data devices. Google claimed it simply wanted to have the opportunity to compete on a level
playing field, and the ability to compete on its strengths of technical superiority.

Creating a level playing field also meant removing the restrictions imposed by the proprietary
platforms, such as their reluctance to provide access to source code to fix bugs, strong control
over the development of the platform, and making it difficult for carriers to provide a deeply
brandable handset. For example, while Orange (part of French Telecom) worked with Windows
Mobile, Microsoft dictated which applications would and would not be on the handset and to
what extent the handset could be customized. With these restrictions removed, Android could
compete on best-in-class products, as well as by building a strong developer community with a
common open standard and a single Android market, where developers could launch their
applications to the world.31 While removing entry barriers to the mobile industry would, in
principle, drive innovation, it would also challenge traditional business models of some
technology start-ups. For example, by giving away a free browser, called “Chrome,”32 for
Android, Google would make it unsustainable for startup companies such as Opera, Access, or
Openwave to charge a licensing fee for their mobile browser clients, undermining the ability of
these firms to attract funds for further innovation.

30
“Introducing T-Mobile G1 with Google,” T-Mobile website, September 23, 2008, http://www.t-
mobileg1.com/g1-announcement.aspx, (September 28, 2008).
31
Interview with Rich Miner, Google.
32
Chrome was a free, open source web browser developed by Google, and first released in a beta version in
September 2008. Google Press Release, “Google Chrome, A New Take on the Browser,” September 2, 2008
(http://www.google.com/intl/en/press/pressrel/20080902_chrome.html (July 21, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 9

THE MOBILE INDUSTRY LANDSCAPE IN 2008

The mobile communications industry comprised companies from various sectors, including
mobile telecommunications operators or carriers, mobile handset manufacturers, chipset
manufacturers, software providers, and application developers.

Providing Mobile Services in the U.S. Market

Wireless services revenues for the U.S.-based mobile carriers in the second quarter of 2008 were
around $39 billion, with data service accounting for 21 percent of revenues.33 Traditionally, the
consumer obtained wireless services by subscribing to a plan offered by the carriers. Carriers
often competed for customers by providing better wireless coverage and reselling the latest
mobile devices at a deep, subsidized discount. In 2007, over 70 percent of U.S. mobile
subscribers obtained their handset through their carrier, with much of the cost subsidized by the
operator. Most carriers viewed offering the phone at a reduced price as strategic in retaining
control of the channel to the customers. The expense was simply considered part of the customer
acquisition cost, and carriers usually believed they could make up for the loss in the recurring
fees from monthly service subscriptions.

In addition to this customer acquisition cost, carriers had to recoup their investments for costly
mobile network infrastructure. For example, T-Mobile, launched an “Enhanced Data rates for
GSM Evolution” (EDGE) network to support data services in 2005, and acquired new spectrum
licenses in 2006 for $4.18 billion.34,35,36 By 2007, U.S. carriers had spent $24 billion on wireless
infrastructure to provide better territorial coverage, additional spectrum, and upgrades to newer
generation networks with higher and faster data transmission capacities.

In order to get a good return on these major investments, the carriers sought to increase their
average revenue per user (ARPU)—particularly the wireless data ARPU, since they had to
contend with decreasing wireless voice ARPU. From 2004 to 2007, the average wireless data
ARPU among top U.S. carriers (Sprint, Verizon, and AT&T) increased from $3 to $10 per
month, while the average wireless voice ARPU declined from $55 to $42.50.37 (See Exhibit 8
for ARPU and other statistics for major U.S. wireless carriers.) Fees from early data services
add-ons, such as downloadable ring tones and Java games, provided carriers with an initial
opportunity to supplement revenues from voice minute plans.

The carriers provided this new mobile content to subscribers, who used so-called “feature
phones,” through their own portals. For example, Verizon spent $35 billion on its network

33
Stacey Higginbotham, “More Proof That the Internet Will Save Wireless Carriers,” GigaOM, August 11, 2008,
http://gigaom.com/2008/08/11/more-proof-that-the-internet-will-save-wireless-carriers/, (September 28, 2008).
34
EDGE, a digital mobile phone technology that allows improved data transmission rates, is an extension of the top
standard Global Systems for Mobile communications (GSM), and is backward-compatible.
35
“Wireless Telecommunications Carriers in the US: 51332,” IBISWorld, February 2, 2009.
36
T-Mobile was awarded 120 Advanced Wireless Service (AWS) spectrum licenses in the 1700 MHz and 2100
MHz frequency bands, for which the company paid $4.18 billion. “Wireless Telecommunications Carriers in the
US: 51332,” IBISWorld, February 2, 2009.
37
US Wireless Data Market, March 2008.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 10

between 2000 and 2006, to establish its third-generation wireless network that provided for data
services including V Cast Mobile TV, and V Cast Music Store. By 2006, the V Cast Music
Store had more than 1.5 million songs.38,39 Feature phones, as opposed to the later-released
smartphones, allowed users to make voice calls and to download some basic content, but did not
allow access to the Internet.

Customers readily adopted these new services, but content producers and development partners
often criticized the “walled garden” approach, as it was commonly termed, as carriers pocketed a
large percentage of the paid content fees before passing along the balance to partners. For
example, by April 2007, Sprint chose to launch its own 99 cent music download service to
compete with the Apple iTunes service, instead of partnering with Apple. By contrast, AT&T,
which invested a total of $13 billion during 2005 and 2006 with the intention of enhancing and
upgrading its GSM network infrastructure to enable 3G services, had by January 2007
announced its partnership with Apple to release the iPhone, which would utilize the company’s
EDGE (2.5G) technology, and could play songs purchased from the Apple iTunes music store.40

Ultimately, the early mobile content offerings were not enough to justify the carriers’ hefty
infrastructure investments, and industry consolidation ensued. (See Exhibit 9 for select mergers
and acquisition activities amongst U.S. carriers.) Most typically only a few large, primary
carriers remained. In the United States, two of the largest competitors, AT&T Wireless and
Cingular Wireless, merged in 2004. A year later, Sprint bought Nextel Communications for $35
billion. By 2007, the largest operators in the U.S. were AT&T and Verizon Wireless. (See
Exhibit 10 for a list of the leading global telecom operators as of 2006.)

Of secondary carriers, only those that focused on specific niches, or that were protected by
regulatory frameworks, survived. For example, by 2007, Alltel Networks retained 4.9 percent of
the U.S. wireless market by being the only carrier offering analog (rather than digital) services.41

Sourcing and Manufacturing Handsets

In emerging economies such as India and China, subscribers typically purchased phones directly
from handset manufacturers. This also occurred in Europe, and had just begun by 2007 in the
U.S, where consumers would separately purchase phones in retail stores and a subscriber identity

38
“Wireless Telecommunications Carriers in the US: 51332,” loc. cit.
39
By comparison, the Apple iTunes store carried over 4 million songs by January 2007. However, iPhones were
not yet available and later, owners of the newly released iPhone could not immediately download songs over the air
or 3G network. Sources: “iTunes Store Tops Two Billion Songs,” Apple.com, January 9, 2007,
http://www.apple.com/pr/library/2007/01/09itunes.html, (May 1, 2009); Jesus Diaz, “Tunes Gets DRM Free, New
Prices, Purchase Over 3G,” Gizmodo.com, January 6, 2009, http://gizmodo.com/5124588/itunes-gets-drm-free-new-
prices-purchase-over-3g (May 1, 2009).
40
Ibid.
41
Ibid.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 11

module (SIM)-only plan from a carrier.42 Insiders estimated that about 30 percent of handsets
worldwide were bought in the open retail market, rather than through carriers.43

Carriers sourced phones from handset manufacturers. By 2006, the global handset market was
dominated by five companies that accounted for 85 percent of the market. The top two, Nokia
and Motorola, accounted for 58 percent, with 36 percent and 22 percent shares respectively.44
In the U.S. market, Nokia had captured just 9.9 percent, and new entrants included Apple, RIM,
and several Korean and Chinese manufacturers.45

Traditionally, handset manufacturers competed by designing phones that had a unique aesthetic
appeal. Competing based on fashion allowed manufacturers like Nokia, who had set the world
standard on this dimension, to stand out from other offerings, generating demand for their
products even though they lacked a direct relationship with subscribers, particularly in markets
dominated by a few large carriers. Yet competitive positioning around fashion was difficult to
sustain, as blockbuster hits, like Motorola’s RAZR mobile phone first released in 2004, were
difficult to repeat on a consistent basis.

By contrast, competition based on technical design and utility, functionality, and performance,
had begun to be adopted by other companies, including Apple and Google. It remained to be
seen if positioning around functionality and performance would be as successful―and as
important to consumers―as aesthetic design and fashion appeal.

In any event, as designs were generally fairly easy to replicate, handset manufacturers also
competed by offering compelling combinations of software and hardware. On the software side,
as noted earlier, handset providers had to create the operating system able to run on the hardware
device; and application developers, eager to launch mobile applications, used the SDKs and
APIs provided by the handset manufacturers to program compelling applications that could run
on their mobile devices. To enable this aspect of its competitive strategy Nokia, for instance, had
made a greater investment than Motorola in developing software expertise, by retaining 10,000
software engineers in-house.

On the hardware side, handset vendors sourced chipsets from several competing firms.
Qualcomm and Texas Instruments were the most prominent, with Infineon Technologies,
Freescale Semiconductor, Broadcom, MediaTek, NXP Semiconductors and STMicroelectronics
following. As handset vendors often used hardware to differentiate their offerings, they typically
dictated the specifications for the components in order to appeal to the carriers’ need or to pull
demand from the subscribers themselves. This was typical for the industry, as the carriers tried to
control demand by their choice of which phone models to offer customers.

42
Subscriber Identity Module (SIM) is a removable card that is placed in a mobile handset and stores the service-
subscriber key used to identify the subscriber for the mobile handset. Essentially, the SIM card connects the
subscriber to the carrier’s services and billing.
43
Information based on informal discussions by the author (Wittig) with industry personnel.
44
“Communication Equipment Manufacturing in the US: 33422,” IBISWorld, December 18, 2008.
45
“Market Share: Mobile Devices by Region and Country, 4Q08 and 2008,” Gartner.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 12

For handset chipset vendors, manufacturing internal components was complicated by factors
such as the size of the screen, input mechanisms, and power consumption In addition,
consolidation among handset vendors meant that chipset manufacturers had to fight for orders
from a shorter list of buyers, often competing by streamlining cost and by pre-programming
software onto the chips to produce more powerful, differentiated products.

A related important strategic issue concerned control of the intellectual property (IP) used in the
mobile handset and network equipment. This had been the subject of extensive battles over the
air interface standards used to communicate between handsets and network equipment.46
Manufacturers of handsets and network equipment had to pay royalties to the owners of IP that
they incorporated in their products. For years, Qualcomm had been involved in conflicts over
standards and royalty arrangements related to its coveted CDMA intellectual property.47 As
CDMA became widely used and incorporated into industry standards, Qualcomm reaped
enormous financial returns from royalties on its IP, which in turn increased the cost of handsets.
Qualcomm also manufactured the chipsets used in products made to CDMA standards, profiting
from the sale of these components to handset and network equipment makers.

Smartphones

Prior to 2007, the typical handset offered to U.S. consumers was a feature phone, a phone with a
proprietary operating system and limited capability to add third-party applications. However, as
noted earlier, advances in technology (particularly in telecommunications standards that
provided increased network capacity) gave rise to the “smartphone,” a new type of mobile device
that contained an Internet browser and an identifiable operating system, which made the phone
work, in the eyes of its user, almost independently from the underlying hardware platform.
Smartphone subscribers could readily access and browse the Internet, and replace core
applications like those that operated the phone’s camera component or accessed the address
book. Smartphone users could also add new applications, such as methods of improved
connectivity, new productivity tools, and entertainment, provided by a variety of sources.

Smartphone shipments were expected to account for 40 percent of global handset sales by 2012.
In mature markets, like Western Europe, smartphones were expected to surpass feature phone
sales, capturing 77 percent of mobile device sales.48,49 By 2007, several smartphone platforms
were already in use in the U.S. before the first announcement of Android. These included
Microsoft’s Windows Mobile, first released in April 2000 as the Pocket PC, RIM’s Blackberry in
2002, various models produced by Nokia running on the Symbian operating system, Apple’s
46
Cellular phone handsets and networks communicate with each other using radio frequencies. There are many
technologies, referred to as “air interface technologies” that can be used for this communication. For additional
information about cellular technology, intellectual property issues, and industry dynamics, with particular emphasis
on Qualcomm, see “Cellular Telecommunications: An Industry Driven by Intellectual Property and Technical
Standards,” GSB No. SM-177.
47
Code Division Multiple Access (CDMA) is a data transmission technique in which many calls are transmitted
within a single wide channel. Each call is assigned a digital code, which is used to reconstruct the call after it is
received. CDMA allows many calls to be transmitted simultaneously, greatly increasing the number of calls that can
be handled on a cellular network.
48
“Mobile Handset Shipments by Value Segment,” ABI Research.
49
Roberta Cozza, op. cit.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 13

iPhones since June 2007, and models based on LiMo since February 2008. Compared to the
worldwide market, which was dominated by Symbian-enabled smartphones, the U.S. market was
far from established.50,51 (See Exhibit 11 for smartphone market penetration by Q3 2007,
Exhibit 12 for a forecast of worldwide sales of smartphones by OS type, and Exhibit 13 for
further details on each operating system.)

As noted earlier, the arrival of the Apple iPhone was viewed by many observers as the event that
most changed U.S. consumers’ expectations of the mobile Internet experience. The device itself
offered a simple one-touch user interface, along with a sexy, fashionable form factor, and
embedded software that could adapt during the lifecycle of the product’s use. The homescreen
resembled a PC desktop with application icons, and there was only one button and few menus.

Apple took a number of steps to encourage an active development community that would build
applications for the iPhone platform. The company released a software development kit (SDK)
to the development community in March 2008. It worked with Kleiner Perkins Caufield &
Byers, a prominent venture capital firm, to sponsor a $100 million iFund that invested in iPhone
application development. Apple also released a firmware update52 upon the launch of the 3G
iPhone, and an application store in July 2008 that allowed third-party developers to sell
applications and retain 70 percent of the resulting revenue.53,54 iPhone owners could purchase
and download these applications through the iTunes App Store, although most applications were
offered free of charge. Upon its launch, the App Store had 500 available applications, and by
September 9, 2008 it grew to 3,000 available applications.55,56 These aspects of the iPhone
experience, along with the presence of the Internet browser itself, were commended by carriers
who felt that the iPhone created a new understanding about the mobile Internet, and that Apple
had finally developed the phone that truly offered the full mobile Internet experience.57

Consumers readily adopted the Apple iPhone, generating FY2007 sales of over 1.3 million units,
and FY2008 sales of over 11.6 million units.58,59 The customers’ frequent use of the iPhone

50
Symbian-enabled smart phones captured 67 percent of the worldwide market by 2007.
51
Paul McDougall, J. Nicolas Hoover, “Nokia’s Symbian Deal Rewrites the Smartphone Rules,” InformationWeek,
June 28, 2008,
http://www.informationweek.com/news/software/open_source/showArticle.jhtml?articleID=208801196, (September
28, 2008).
52
Firmware is a computer program designed for a specific hardware devise, and usually embedded in the device.
Until the mid-1990s, upgrading firmware generally required replacing a component, such as a ROM chip. The
iPhone upgrade was performed by connecting the iPhone to a computer, and downloading the revised program.
“How to Upgrade iPhone Software,” eHow.com, (http://www.ehow.com/how_2214484_upgrade-iphone-
firmware.html, accessed July 10, 2009).
53
“Analyst: There’s a Great Future in iPhone Apps,” Venture Beat, June 11, 2008.
54
Erick Shonfeld, “Kleiner Perkins Announces $100 million iFund for iPhone Applications,” TechCrunch Website,
March 6, 2008, http://www.techcrunch.com/2008/03/06/kleiner-perkins-announces-100-million-ifund-for-iphone-
applications/, (September 28, 2008).
55
Apple press release, “iPhone 3G on Sale Tomorrow,” July 10, 2008.
56
Apple press release, “App Store Downloads Top 100 Million Worldwide,” September 9, 2008.
57
Information based on interviews by the author (Silverman) with industry personnel.
58
Apple press releases, http://www.apple.com/pr/library/, (April 19, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 14

made carriers once again optimistic about the ability to offer fee-based data service in order to
increase ARPU. André Stark of T-Mobile affirmed, “The amount of usage that we’re seeing on
the iPhone in Europe is just outstanding, both in terms of minutes of use from a voice point of
view, as well as data functions.”

Operators had long hoped to capture the data communications opportunity in the mobile Internet
experience that would be available on more advanced mobile devices, but needed to first build
out the required 2.5G and 3G network infrastructure required to offer the data services.60 By
2007, AT&T was the only U.S. carrier that had already done so. Carriers also needed to upgrade
their customers to the newly available smartphones, and consequently began putting pressure on
mobile handset and chipset vendors to produce hardware and platforms to enable these data
services.

Operators wanted to avoid becoming “dumb pipes,” a term coined by Vodafone’s CEO Arun
Sarin, in which they would simply provide data services at cutthroat commodity prices. They
wanted to provide differentiating applications and content as well, and were particularly
concerned about the cost of supporting a wide range of different operating systems. Sarin
opined, “Let the market decide whether it’s Symbian or Microsoft or LiMo, but we don’t need 30
operating systems.”61 They preferred to brand the device they resold to customers, so they could
maintain a strong relationship with their subscribers. They also knew they needed the most
compelling content offerings to entice subscribers to upgrade to smartphones, and to that end
they worked with independent content providers like imeem (music service) and Loopt (presence
of my friends), as well as Facebook (social network), Twitter (micro-blogging) and Google
(Internet search, e-mail, and maps).62

CHALLENGES FACING ANDROID

While Android was still in its earliest stages, challenges began to emerge that could jeopardize
its success.

Forking

A key strength of the open source system was the ability for a large development community to
maintain and enhance the code. To allow for this, the OHA would release a permissive Apache

59
Apple’s fiscal year begins in October. iPhone sales by quarter in thousands were as follows: Q307: 270; Q407:
1,119; Q108: 2,315; Q208: 1,703; Q308: 717; Q408: 6,892. Apple press releases, http://www.apple.com/pr/library/,
(April 19, 2009).
60
3G is the third generation of standards and technology for mobile networking. 2.5G is the stepping stone between
2G and 3G. Operators who implement 3G can offer subscribers a wider range of advanced services, including wide-
area wireless voice telephony, video calls, and broadband wireless data, and achieve improvements in capacity.
61
“Gphone spotted in Barcelona,” The Times, February 12, 2008, http://blogs.thetimes.co.za/patternrecognition/,
(November 30, 2008).
62
Imeem was an online service where consumers could discover their favorite music. Loopt was an online service
that helped friends find each other based on their being present at a location. Facebook was the predominant social
networking website, and Google offered a variety of web-based applications and services, including e-mail,
calendar, chat, and search.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 15

license that would give developers the ability to modify Android.63 However, “forking”―a term
used for developing a separate, incompatible yet legal copy of the code―detracted from the
strength of the open source system. According to the “non-fragmentation agreement” signed by
the OHA membership, the development of separate, incompatible implementations of Android
could not be supported by members. However, some suspected that the agreement would be
difficult to enforce, as players outside the Alliance could modify the code in non-compatible
ways, and as competitors by their nature would lean toward fragmentation to gain a competitive
edge. An analyst emphasized, “Fragmentation is partly caused by forces outside of Google’s
control.”64

Carrier Alignment

Most carriers saw Android as the potential driver of a suitable ecosystem to deliver the mobile
experience consumers wanted. The openness of the model meant that the “long tail” offerings
present on the fixed Internet would become available on the mobile Internet.65 Subscribers
would be able to easily obtain these new applications and content through convenient
marketplaces, thereby significantly increasing mobile Internet usage as observed on the iPhone a
year prior. Moreover, operators seemed to acknowledge that much more significant revenue
opportunities existed with these open marketplaces than with their own portals, commonly
referred to as so-called “walled gardens.” T-Mobile’s Stark explained, “The amount of
download revenue that will be created through these marketplaces will just be huge because it’s
not only ring tones and wallpaper kinds of stuff; it’s far beyond that. It’s software in itself; it’s
applications.”66

Yet operators knew that adopting these marketplace platforms left them with less control than
they had with their own portals; they could not easily require third-party application developers
to share the proceeds of their applications with them. Whether operators would give up this
control to work harmoniously with the developers who wanted to monetize their own content and
applications remained to be seen. Some speculated that operators might be able to sustain a
model where they would share revenue, though more modest in nature, with the application and
content providers.67

Meanwhile, others in the industry believed that in the future, revenue would be derived from
advertising in different shapes and forms, and this advertising would subsidize free access to

63
The Apache license allowed royalty-free use, modification and distribution of software without any reciprocal
duties for the licensee, e.g., to remit software changes to the licensor, as required under the most popular open
source and less permissive license, General Public License (GPL).
64
“Google ‘Guarantees’ Android Compatibility,” ZDNet.co.uk November 13, 2007,
http://news.zdnet.co.uk/communications/0,1000000085,39290713,00.htm, (September 28, 2008).
65
“Long tail” refers to a business strategy for capturing niche opportunities by selling a large amount of unique
items, each in relatively small quantities.
66
Ring tones and wallpapers were early examples of downloadable content that for the most part altered the
aesthetic and attractiveness of the phone itself. Applications, by contrast, will bring programs and websites
available on the fixed Internet to the mobile phone. These may include popular sites like Facebook (social
networking), Twitter (micro-blogging), and Flickr (photo sharing), as well as services like Google’s G-mail.
67
Gathered from interviews conducted by authors.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 16

applications and content.68 Advertisers paid the owners of applications that carried their ads
(such as Google search) a rate that reflected the degree to which their ads could be targeted to
their desired audience. This was a particularly attractive aspect of advertising on mobile devices,
as ads could be targeted to people that were geographically close to the advertiser (such as a
restaurant). To achieve an even higher advertising rate, application providers wanted to be able
to provide demographic information, such as that obtained when a customer signed up for a
mobile phone or set up a Google Gmail account. In order to get this information, application
developers would need to work with the mobile phone operators, or with intermediaries such as
Google. It was uncertain whether this would be possible.69

As these were still the early days of Android, carriers were concerned about Google’s strategic
intent. A wide range of strategic issues presented new challenges for the carriers. For example,
with Android, a carrier did not have complete control over the services that enabled e-mail,
synchronized the subscriber’s address book, and other similar Internet-enabled consumer
applications. Specifically, the G1, the first Android-enabled handset produced by T-Mobile,
HTC, and Google, required users to create or connect to their Google accounts to activate the
phone. This left T-Mobile without subscribers using its own services, which prevented the carrier
from collecting a database of valuable subscriber information.

Nevertheless, carriers made attempts to limit the strategic implications of their potential loss of
control. For example, T-Mobile worked with Skype to adjust the application it would release in
the Android Marketplace. Skype, a provider of IP-based telephony which allows users to place
free Skype calls to one another’s Internet-enabled terminals bypassing the fixed line and mobile
carriers, essentially could have enabled a T-Mobile subscriber with an Android-enabled handset
to use the data plan and Internet access on the device to place calls and bypass the voice
application altogether. T-Mobile, presumably realizing that this outcome would have hindered
its revenue from voice services, asked Google to not publish the Skype application on its
Android marketplace, and instead worked with eBay, the company that acquired Skype, to
design a Skype-lite version for the Android Marketplace. That benefited T-Mobile and gave a
kickback to Skype.

By 2008, industry participants could adopt any one of three models of deploying Android. The
first model, described as “Google experience phones” was similar to the G1, and required an
agreement between the carrier and/or handset manufacturer and Google to use the Google brand
and popular Google services such as Gmail, Google maps, and, most importantly, Google’s
Internet search with its embedded advertisements. The second model was Open Handset
Alliance-based phones, which used Android source code but included neither certain popular
Google applications nor the Google brand. (See Exhibit 14 for the distinctions between the
basic Android-enabled phones and G1 smartphones.) Among other rules, which were not
formally stated, but understood within the industry, these OHA phones would need to run any

68
Miguel Helft, “Google Sees Surge in iPhone Traffic,” The New York Times, January 14, 2008,
http://www.nytimes.com/2008/01/14/technology/14apple.html (September 28, 2008).
69
Mobile subscribers were usually sensitive to advertising as it relied on access to their personal information. In
this regard, Android seemed to be an improvement over iPhone, where the subscriber was asked which of the
phone’s resources s/he wanted to restrict, thereby prohibiting applications from accessing them.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 17

application from the Android marketplace. The third, most permissive model, was a purely open
source smartphone, which permitted any party to augment the software in any manner so long as
that party complied with the terms of Android’s very permissive open source license.

Google suggested that it would work with carriers to find new revenue opportunities, such as
advertising, as the mobile Internet came to fruition, but most operators were cautious about the
long-term ways that benefits would be shared, even worrying that Google itself would become a
threat to the carriers’ business models. However, most carriers justified the risk of working with
Google to “kick open a door in order for the ecosystem to develop,” knowing that they would
eventually have to rein Google in while not entirely certain if that would be possible.

With respect to other benefits of the open source approach, most carriers viewed it as little more
than removing the cost of the SDK from the mobile handset’s bill of materials. Yet carriers
seemed to feel that this would have little, if any, positive impact on their bottom lines. First, the
most expensive components in the bill of materials were the baseband processor (which is
different from the application processor),70 touch-screen display, and camera unit, not the SDK
license.71 Secondly, they knew that licensing costs actually protected them from warranty issues.
For example, if the carrier had licensed the OS from a provider and it was faulty, the carrier
could go back to that provider and the OEM that had warranted their product. However, in the
case of Android, it was unclear what provider would warrant the operating system and perform
second and third-level support, a problem that customers might encounter when calling the
carriers’ customer care operation. Moreover, the OEMs seemed to provide shorter-duration
warranty coverage for Android-based phones than for phones with other operating systems.

Among the unknowns that carriers faced were concerns about the rate of adoption, as the
majority of phones owned at the time were still primarily used for making calls, not for accessing
the Internet or other new applications.

Keeping a Loyal Developer Community

The Google brand name and the Android Developer Challenge seemed to attract the beginnings
of a vibrant developer community, which would be needed to deliver the mobile experience the
OHA had in mind. One Android Developer Challenge finalist, Phillip Breuss of Wikitude.org,
remarked, “Google was developing something new and the contest was maybe one of the most
exciting things. The whole development community was able to join in and figure out the ideas.
Google is a strong brand worldwide, this was very interesting.” Moreover, developers prioritized
building applications for each platform, including the iPhone and Blackberry, by the potential
prize money and the contest deadlines. Thus, many web developers became first-time mobile
developers, attracted by the ease of programming for Android and motivated by the success they
had already seen with open source movements like Linux. The SDK was modern, easy to use,
70
The broadband processor handled the radio frequency communication between the handset and the mobile base
station. The applications processor handled the programs in the handset involving its operation as a computer.
71
The BOM for the component expenses (not inclusive of licensing and other fees) for the T-Mobile G1 was
$143.89, with the baseband, touchscreen display, and camera unit being the three most expensive components,
costing $28.49, $19.67, and $12.13 respectively. Source: “T-Mobile G1 Costs $144 to Manufacture Bill of Material
(BOM),” Cellphonemarket, November 11, 2008, http://blogger.xs4all.nl/jurjen1/archive/2008/11/11/422941.aspx,
(November 30, 2008).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 18

and based on widely known Java. Breuss observed that developers who were part of the open
source community, and who had welcomed Linux, were thrilled by the prospects of Android as
having the “spirit of Linux and reach of Windows,” believing that it would be available on many,
many phones.

However, developers were not motivated just by contests. They were excited about the
possibility of the application stores, which they saw as efficient markets to sell their programs.
The majority of developers felt that no matter which platform they started with, they would build
for other platforms so that they could protect their ideas and maximize distribution. Breuss, a
finalist, acknowledged that, “You think you have this great idea now and someone else will
release it on the iPhone. Everyone, of course, looks at this published list of winners. They see
what ideas they came up with [so that] they might implement the same thing on the iPhone.”

The Android marketplace also seemed to remove the traditional distribution challenges of
working with carriers. Google’s Miner described these: “It was nearly impossible for a
developer to get through the hurdles of the carrier organization; to finally get approvals and
maybe have their application on deck.” Moreover, carriers had to speculate about which
applications would be significant enough to work with OEMs and to have them pre-installed.
For developers who wanted to become successful mobile entrepreneurs, the carriers’ demands
meant “the cards were stacked so high against you.” Yet, developers were still mindful of
distribution challenges. Although subscribers could add applications to their Android-enabled
phones, developers tried to work directly with the carriers. In the case of T-Mobile, they
competed to be one of the five applications that would be pre-installed on their phones.72

It remained unclear how long developers would stay loyal to Android without a large installed
base of users and valid options to turn their applications into real businesses. Meanwhile,
Google felt that most developers did not yet require monetization, but thought it was worthwhile
to get their applications into use by having subscribers download them for free.73

Nokia Makes a Move

Not long before the G1 announcement, on June 24, 2008, Nokia, which already had a 48 percent
stake in Symbian Ltd., acquired all of the rights to the Symbian operating system for $410
million.74 Nokia had plans to release it under the Eclipse Public License (EPL) 1.0, an open
source software license.75 This release process would begin in March 2009, though it could take
a year or more for all of the Symbian code base to be included.76 With Symbian migrating to

72
Information based on interviews by the author (Silverman) with industry personnel.
73
Information based on interviews by the author (Silverman) with industry personnel.
74
Paul McDougall, J. Nicholas Hoover, op. cit.
http://www.informationweek.com/news/software/open_source/showArticle.jhtml?articleID=208801196, (September
28, 2008).
75
Matt Asay, “Nokia Takes Symbian Open Source. What Will This Mean for Mobile Linux?,” CNet.com, June 24,
2008, http://news.cnet.com/8301-13505_3-9975902-16.html, (September 28, 2008).
76
Paul McDougall, J. Nicholas Hoover, op. cit.
http://www.informationweek.com/news/software/open_source/showArticle.jhtml?articleID=208801196, (September
28, 2008).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 19

open source by 2010, forecasts estimated that by 2012 nearly 60 percent of worldwide
smartphones sold would run on open source operating systems.77

There was speculation about the rationale for Nokia’s acquisition of Symbian. Some
hypothesized that it was a competitive response to the iPhone and Android. Others concluded
that Symbian had been formed over 10 years earlier, and simply needed a new ownership
structure. Nokia, being the largest and most successful stakeholder, was a more natural acquirer
than either Siemens or Panasonic. At the time, Symbian held 60 percent of the mobile market,
and had long been the dominant mobile operating system. Analysts projected that developers
would “redouble their efforts” on Symbian, having already been familiar with the platform, and
with Symbian having a larger installed base than competitive operating system offerings such as
Google’s Android and other mobile Linux platforms.

Additionally, some posited that Linux was a compelling mobile operating system, as it was open
source. But with Symbian soon open, the benefits of transparency, flexibility, and community
would move to Symbian, negating a preference for Linux.78 Others projected price competition
in the market, as an open source Symbian operating system relieved manufacturers of up to $4
per handset in license fees, while competitor Microsoft charged up to $25 per phone for
Windows Mobile. However, skeptics were wary of the rising costs required for internal IT
departments to support variations in the Symbian operating system with the move to open
source.

A newly formed Symbian Foundation envisioned creating “the most proven, open and complete
mobile software platform.” The Foundation sought to accelerate innovation in the mobile
category, and would make the platform available to members under a royalty-free license. Early
members included Nokia, Sony Ericsson, Motorola, AT&T and Vodafone.79 John Forsyth,
Symbian’s VP of strategy, explained, “We want to make this the most widely used software
platform on the planet.” 80

CONCLUSION

As the G1 smartphone was announced to the market, Google and its partners in the OHA seemed
to be making progress toward realizing the vision for Android. At the same time, Miner and
others at Google continued to carefully examine whether they were on the way to realizing their
own strategic goals for Android. In particular, they were evaluating whether Google was
creating the required ecosystem for market success, and whether there was more that Google
could do to optimize the chance for success.

77
Roberta Cozza, op. cit.
78
Asay, op. cit.
79
“About Us. Introduction,” Symbian Foundation website.
http://www.symbianfoundation.org/about_us_intro_.html (December 15, 2008).
80
Asay, op. cit.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 20

Exhibit 1
Financial Performance of Google

Income Statement (all data in $000)

2006 2007 2008

Revenues
Advertising 10,492,628 16,412,643 21,128,514
Licensing and other 112,289 181,343 667,036
Total revenue 10,604,917 16,593,986 21,795,550
Costs
Cost of revenue 4,225,027 6,649,085 8,621,506
Research and development 1,228,589 2,119,985 2,793,192
Sales and marketing 849,518 1,461,266 1,946,244
General and administrative 751,787 1,279,250 1,802,639
Total costs and expenses 7,054,921 11,509,586 15,163,581
Income from operations 3,549,996 5,084,400 6,631,969
Impairment of equity invest. -- -- (1,0994,757)
Interest income and other, net 461,044 589,580 316,384
Provision for income taxes 933,594 1,470,260 1,626,738
Net income 3,077,446 4,203,720 4,226,858

Selected Balance Sheet and Cash Flow Data (all data in $000)

2006 2007 2008

Cash and marketable securities 11,243,914 14,218,613 15,845,771
Accounts receivable 1,322,340 2,162,521 2,642,192
Property and equipment, net 2,395,239 4,039,261 5,233,843
Total assets 18,473,351 25,335,806 31,767,575
Cash flow from operations 3,580,508 5,775,410 7,852,857
Capital expenditures 1,902,798 2,402,840 2,358,461

Selected Ratios and Supplemental Information

2006 2007 2008

Revenue growth, Y/Y 73% 56% 31%
Advertising rev. growth, Y/Y 73% 56% 29%
Licensing and other rev. growth 53% 61% 268%
Advertising as % of revenue 99% 99% 97%
Gross margin, % of revenues 40% 40% 40%
Operating income, % of rev. 34% 31% 30%
End of year headcount 10,674 16,805 20,222

Sources: Google Website, “Financial Tables,” http://investor.google.com/fin_data.html (accessed July 10, 2009;
Google 2008 Annual Report, p. 66.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 21

Exhibit 2
Google’s Growth, Actual and Forecast

Revenue ($000) Y/Y Growth (%)

2001 86,436
2002 439,508 508
2003 1,465,934 334
2004 3,189,223 218
2005 6,138,560 92
2006 10,604,917 73
2007 16,593,986 56
2008 21,795,550 31
2009E 22,903,800 5
2010E 27,255,800 19
2011E 31,942,600 17
2012E 36,783,100 15
2013E 42,087,000 14
2014E 48,183,300 15

Sources:
1. 2001-2008 actual revenue from : Google Website “Financial Tables,”
http://investor.google.com/fin_data.html ; http://investor.google.com/fin_data2005.html;
http://investor.google.com/fin_data2003.html (all accessed July 10, 2009).
2. 2009-2014 estimates from “Google, Inc.” Credit Suisse, June 18, 2009, p. 12.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 22

Exhibit 3
Google’s Founders and CEO

Eric Schmidt, Chairman and CEO

Schmidt was recruited to become Google’s CEO by co-founders Larry Page and Sergey Brin in
2001. Prior to joining Google, he was CEO and Chairman of Novell, where he was responsible
for strategic planning, management, and technology development. At Google, Schmidt has
focused on building the corporate infrastructure needed to maintain the company’s rapid growth,
and on maintaining product quality while at the same time minimizing product development
cycle times. Schmidt, Page, and Brin share responsibility for day-to-day operation.

Before joining Novell, Schmidt was chief technology officer at Sun Microsystems, which he
joined in 1983. At Sun, he led the development of Java and was responsible for developing the
company’s Internet software strategy. Before joining Sun, he was part of the research staff at
Xerox Palo Alto Research Center, and worked at Bell Laboratories and Zilog. He has a BS in
electrical engineering from Princeton, and an MS and Ph.D. in computer science from UC
Berkeley.

Larry Page, Co-Founder, Director, and President (Products)

Page was Google’s founding CEO. Under Page’s leadership, the company grew to more than
200 employees and became profitable before April 2001, when Eric Schmidt became CEO and
Page moved to his current position as president of products.

Page is the son of a Michigan State University computer science professor, and developed a love
of computers at an early age. He earned a BS in engineering, with a concentration on computers,
at the University of Michigan. He entered the Stanford University computer science Ph.D.
program, where he met Sergey Brin. In 1998, Page and Brin founded Google. He took leave
from Stanford after earning his master’s degree.

Sergey Brin, Co-Founder, Director, and President (Technology)

Brin was born in Moscow. He received a BS in mathematics and computer science from the
University of Maryland, then entered the Ph.D. program in computer science at Stanford
University. He received his master’s degree, then took leave to run Google. According to his
biography on the Google website, Brin’s “research interests include search engines, information
extraction from unstructured sources, and data mining of large text collections and scientific
data. He has published more than a dozen academic papers.”

Source: Google Website, “Google Management,” http://www.google.com/intl/en/corporate/execs.html#eric

(accessed July 10, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 23

Exhibit 4
Mobile Phone Subscribers by Geography as of July 2007

Region Subscribers
(in millions)
North America 298.6
Latin America 382.3
Western Europe 471.6
Eastern Europe 412.3
Africa 298.9
Middle East 170.6
Asia Pacific 1,378.9

Source: Compiled from research by Gartner, reported in “Phoning, the World Over,” Forbes.com, October 25, 2007,
http://www.forbes.com/2007/10/25/mobile-market-subscription-technology-personaltech-cz_1025mobilemap.html,
(January 26, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 24

Exhibit 5
Global Mobile Phones Market Segmentation
Percent Share, by Market Value, 2007

Market value is defined as the total revenues generated by the global mobile phones market,
measured by the number of shipments (of both analog and digital handsets) to end-users,
including both new uptake and renewal purchases at the retail selling price (RSP).

Source: Compiled from “Global Mobile Phones: Industry Profile,” DataMonitor, December 2008.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 25

Exhibit 6
Forecast of Worldwide Smartphone Sales Volumes (in thousands of units)

2007 2008 2009 2010 2011 2012

Units (000) 122,316 144,565 190,816 294,891 446,877 619,240

Source: Roberta Cozza, "Forecast: Smartphones by Operating System, Interface and End User Segment, Worldwide,
2006 - 2012," Gartner, December 11, 2008.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 26

Exhibit 7
Founding OHA Members

Mobile Operators: China Mobile Communications Corporation

KDDI Corporation
NTT DoCoMo, Inc.
Sprint Nextel
T-Mobile
Telecom Italia
Telefónica

Semiconductor Companies: Audience

Broadcom
Intel Corporation
Marvell Semiconductor, Inc.
NVIDIA Corporation
Qualcomm Inc.
SIRF Technology Holdings, Inc.
Synaptics, Inc.
Texas Instruments Incorporated

Handset Manufacturers: HTC Corporation

LG Electronics, Inc.
Motorola, Inc.
Samsung Electronics

Software Companies: Ascender Corp.

eBay Inc.
Esmertec
Google Inc.
LivingImage LTD
LiveWire Mobile
Nuance Communications, Inc.
PacketVideo (PV)
SkyPop
SONIVOX

Commercialization Companies: Aplix Corporation

Noser Engineering Inc.
TAT – The Astonishing Tribe AB
Wind River

Source: “Members,” Open Handset Alliance Website, http://www.openhandsetalliance.com/oha_members.html

(September 28, 2008).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 27

Exhibit 8
Summary Statistics for Major U.S. Wireless Carriers

Verizon AT&T, Sprint T-Mobile

Wireless Incorporated Nextel
Corp.
Market share of industry revenue 24.3% 23.7% 19.3% 10.7%
(as of 2007)81
Subscribers (as of 2006) (in 59.1 61 53.1 21.2
millions)
2006 Annual Revenue (in billions) $38.4 $37.5 $31.90 $17.25
Subscriber Churn (as of 2006) 1.17% 1.80% 2.30% 2.90%
Aggregate ARPU, per month (as of $49.80 $49.10 $59.00 for $52.0082
2006) post-paid
$33.00 for
pre-paid
Source: “Wireless Telecommunications Carriers in the US: 51332,” IBISWorld, February 2, 2009, pp. 31-41.

81
Industry Revenue in 2007 was over $186 billion.
82
ARPU as of Q306. Source: “T-Mobile Reports Lots of Customers, ARPU, and Profits,” November 8, 2007,
http://www.wirelessandmobilenews.com/2007/11/tmobile_reports_lots_of_custom.html, (April 28, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 28

Exhibit 9
Select Mergers and Acquisitions among U.S. Mobile Carriers

1999
• VoiceStream Wireless spins off from Western Wireless.

2000:
• Verizon Communications and Vodafone plc form joint venture, Verizon Wireless.
Verizon Wireless comprises the merger of three U.S. wireless carriers, Bell Atlantic
Mobile, GTE Wireless, and AirTouch Cellular.
• Cingular forms as a joint venture between SBC Communications and BellSouth.

2001
• Deutsche Telekom acquires VoiceStream Wireless and Powertel, later launched under T-
Mobile brand in 2002.

2003
• Verizon acquires assets of Northcoast Communications LLC.

2004
• Cingular Wireless merges with AT&T Wireless Services for $41billion in cash.
• Verizon acquires assets of Qwest Communications.

2005
• Sprint merges with Nextel Communications in a $35 billion cash and stock deal.
• Sprint Nextel Corp. acquires US Unwired for $968 million.
• Sprint Nextel Corp. acquires Gulf Coast Wireless Limited Partnership for $221 million.
• Verizon acquires assets of NextWave Telecom.
• Verizon acquires assets of Leap Wireless.

2006
• Verizon acquires Key Communications.
• Sprint Nextel Corp. acquires Alamos Holdings, Inc. for $3.4 billion.
• Sprint Nextel Corp. acquires Enterprise Communications Partnership for $77 million.
• Sprint Nextel Corp. acquires UbiquiTel Inc. for $1.3 billion including $300,000 in debt.

2007
• Verizon acquires Ramcell and Rural Cellular.
• AT&T Inc. acquires Dobson Communications for $2.8 billion.
• T-Mobile USA agrees to pay $1.6 billion for SunCom Wireless.

Source: “Wireless Telecommunications Carriers in the US: 51332,” IBISWorld, February 2, 2009.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 29

Exhibit 10
Top 10 Global Telecom Operators by Revenue, 2005

Operator Revenue
(in $ billion)
1. NTT Corporation 100.99
2. Verizon Communications 75.10
3. Deutsche Telekom 74.20
4. Vodafone 64.47
5. France Telecom 58.08
6. Telefonica 44.85
7. AT&T 43.86
8. BT Group 34.99
9. Sprint Nextel 34.68
10. China Mobile 30.13

Source: Gary Eastwood, “The Top 10 Telecoms Operators: Transformation, growth and convergence in leading
players,” Business Insights Ltd., 2006.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 30

Exhibit 11
Smartphone Market Share

By Operating System Vendor: United States

Vendor 2005 Share (%) 2007 Share (%)

RIM 48 46
Microsoft 9 25
Palm 32 6
Symbian 11 3
Apple -- 18
Linux -- 2

Source: Estimates based on chart in: Daniel Roth, “Google’s Open Source Android OS Will Free the Wireless
Web,” Wired.com, June 23, 2008, http://www.wired.com/techbiz/media/magazine/16-
07/ff_android?currentPage=all (September 30, 2008).

By Operating System Vendor by Region (Q3 2007)

Vendor EMEA (%) Japan (%) China (%) N. Amer. (%) ROW (%)
Symbian 85 69 57 3 83
Linux 4 30 38 2 9
Microsoft 7 1 5 25 5
RIM 4 -- -- 37 2
Access -- -- -- 7 1
Apple -- -- -- 26 --

Source: Estimated shares based on chart in “Q3/07 Smartphone Market Share,” excerpted from “Symbian Market
Roundup” published by Canalys (http://mobilephonedevelopment.com/archives/507, accessed June 22, 2009).
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 31

Exhibit 12
Forecast of Worldwide Sales of Smartphones by OS Type
(in 1,000s of units)

2007 2008 2009 2010 2011 2012

Symbian 77,684 76,244 98,764 142,835 208,067 278,098
RIM 11,768 23,699 32,611 50,780 71,739 93,509
Microsoft
Windows Mobile 14,698 16,565 20,264 35,324 60,009 86,082
Mac OS X 3,303 12,104 21,260 35,960 56,999 83,999
Linux 11,757 11,120 15,705 28,747 49,829 78,152
Palm OS 1,763 3,272 1,489 825 - -
Others 1,344 1,561 725 419 235 -

Source: Roberta Cozza, "Forecast: Smartphones by Operating System, Interface and End User Segment, Worldwide,
2006 - 2012," Gartner, December 11, 2008. This report did not include Android.
Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 32

Exhibit 13
Detailed Overview of Operating Systems for Smartphone Handsets

Operating Handset Backers, License SDK Server

System Software Adopters
Symbian Derivative of Nokia Proprietary “Symbian Nokia promotes
old Sony until 2008 signed” connection to
Java ME Ericsson ($0.60 - $3 certification Ovi servers
(optional) LG per handset) required Different,
Samsung Open source Free incompatible
Motorola and royalty development implementations
free in the tools by different
future OEMs (S40,
UIC, etc.)
Android Linux OS Google Open source Free Preferably
Java SE Motorola Royalty free Open source connected to
(Dalvik) LG Apache Google Services
Samsung License
HTC Free
+ other development
members of tools
OHA
Limo Linux OS Motorola Open source Open source n/a
Java SE Access Royalty free Required
Trolltech certification
(acquired by unknown
Nokia) Free dev tools
Windows Windows Microsoft Proprietary Certification Smooth
Mobile Sony $7 - $25 per available synchronization
Ericsson handset Standard with Exchange
LG MSFT dev (Outlook)
Samsung tools ($s)
Palm
HTC
Blackberry Java ME RIM Proprietary Not available Connected to
Licensing to RIM provided
third parties servers
unknown Runs behind
corporate
firewalls
Palm OS Java ME Palm Unknown Unknown n/a
Access
iPhone Objective C Apple Unknown Available Connected to
Java since 3/08 Apple’s
(announced) MobileMe

Source: Compiled by author from company websites.

Google’s Android: Will it Shake up the Wireless Industry in 2009 and Beyond? SM-176 p. 33

Exhibit 14
Distinctions Between the Google G1 Applications and Open Source Android Applications

Application Available on Google Available with

G1 Open Source
Android
Dialer Yes Yes
Browser Yes Yes
Contacts Yes, synched with Yes, but not
Google Services synched
Calendar Yes, synched with No
Google Services
Gmail client Yes, synched with No
Google Services
POP3/IMAP4 E-mail Yes Yes
SMS & MMS Messaging Yes Yes
Gtalk Instant Messaging Yes No
Camera Yes Yes
Picture Gallery Yes No
Google Maps Yes, including No
“Streetview”
Music player Yes Yes
YouTube Yes No
Alarm clock Yes Yes
Calculator Yes Yes
Marketplace Yes Yes
Settings Yes Yes

Source: Compiled by author from various sources.