Android - beginning of the end

Yesterday Google was in the news directly and indirectly for multiple reasons. On the positive side, the stock shot up 12% as Google reported record Quarterly Earnings, and over $9B in revenue. However, there were couple of news items that were major negatives as well.

Firstly, a judge of the ITC ruled against HTC in 2 patents - in a complaint that Apple had filed against HTC over a year back. These 2 patents are fundamental to computing in general, and do not just target HTC, but literally every other Android phone maker. Both these patents are crucial to smartphones - so it is unlikely that HTC/Google can work around these patents easily.

But the other news, is possibly much more significant. Oracle filed a notice seeking to depose Larry Page as part of Oracle's law suit against Google. The reasoning Oracle put forth, was that Larry Page led the team that was negotiating with Sun regarding licensing Java for Android, and later on decided to go ahead without a Java license when they realized that it would be quite expensive. If Oracle's claims are true, it opens the door for triple damages - if Oracle can show that Dalvik/Android violate any of Java's patents, they can also show that Google was fully aware of this right in the beginning, but decided to chance its luck and not get a license, just to save costs. This is the sort of willful violation that can cost Google real bad.

Getting a sworn deposition from Larry Page strengthens Oracle's case massively - Larry Page cannot afford to lie about events that he was part of - because the consequences of that would be bad, not just legally, but even in the court of public opinion. Now the only hope for Google is that they can place some sort of procedural obstruction and hope that the judge decides against allowing Oracle to depose Larry Page - or just play innocent victim and drum up support from the open source community.

Also, a few weeks back, Apple was granted the "iPhone patent" - a massive patent covering several of the technologies that made the iPhone unique when it was launched in 2007 (before everyone copied those technologies). This patent has opened Google and its Android partners to significant risk. Even before this patent, HTC agreed to license several OS and smartphone technologies from Microsoft. After this patent was granted, several other companies have agreed to pay Microsoft between $5-$15 as "protection" money - hoping that Microsoft's massive patent pool and its cross licensing deal with Apple back from 1997 would protect them from Apple.

However, it is dubious whether Apple's cross licensing deal with Microsoft covers iPhone patents. The terms of that deal covers all past technologies, and going forward 5 years. So very likely that the iPhone patents are not covered by that deal. Secondly, even if the iPhone patents are covered, it is extremely unlikely that Microsoft would have the rights to sub-license Apple's technology. So in all likelihood, Apple could still go after these companies for violating iPhone technologies.

Google has made it a habit of skating on thin ice when it comes to IP/copyright issues. Whether with respect to Google Books, or Google News, or Youtube, or Dalvik or WebM, Google has always paid scant regard to the underlying IP issues. Even the recent launch of Google Music subscriptions went ahead without the approval of the music industry. At some point, such behavior would have consequences, and it looks like the time has come.

Google could have protected itself well if they had succeeded in buying Nortel's patents. However, they failed on two counts - on the one hand, they could not stop Apple from consolidating all the anti-Android forces into a formidable coalition, and more importantly, they could not forge a coalition of their Android partners to fight against Apple's coalition. Even Sony and Ericcson, who are Android partners, decided to team up with Apple rather than Google.

Not just Sony Ericsson, other Android partners are also showing worrying signs over Android. Motorola is rumored to be working on an secret project to come up with an alternative to Android. Samsung, the most important Android licensee is already hedging its bets on Android with its Bada OS. Even the geek/developer community has become frustrated with Android - for small developers, making money from just ads is proving to be difficult - and the combination of piracy, and the ease with which Ads can be blocked (just a simple change to DNS servers can block all ads on Android), makes it difficult to make money on Android Apps. The cost of building for Android is also relatively high, because of fragmentation. Also, despite ever increasing activations/day, it is becoming clear that only the top 10% or so of Android phones have the ability to run complex apps. Most of the Android phones actually cannot run complex games, etc. So even though Android has massive marketshare, the addressable part of the market is much lesser than that for iOS.

Back in the nineties and early noughties, Microsoft was the common enemy for all IT companies - and companies like Sun, IBM, Google, Oracle, banded together to support open source initiatives to fight this common enemy. Today, it has become obvious that Google is the common enemy - they have even managed to bring Apple, Microsoft and RIM into the same bed, something that was unthinkable even 5 years back!

Apple's slow attack on Google

When Google entered the Mobile phone space and blatantly copied Apple, the relationship between the two companies soured. From being partners and friends, they soon became sworn enemies.

For a long time, Google was the one taking all the pot shots at Apple. Then last year, Apple announced iAd. This was the first direct response from Apple, targetting Google's biggest revenue streams. However, iAd focussed only on the top end of the advertising market - with a minimum ad budget of $1 million - so it never really took off in a large way.

At the same time, Apple also introduced a feature in the Safari browser - called the Reader. Reader strips out ads, unneccessary pictures, and formats the text content into an easy to read "black-text on white" format. Considering Google makes most of its money from ads, this attempt to sidetrack the ads was another attack on Google. However, Safari has a very small share on the desktop, so it did not really hurt Google much.

Last week however, Apple announced some things that would directly hurt Google and hurt Google bad. Firstly, they announced that the Reader feature would be available on Safari on iOS 5. While Safari has a small marketshare on the desktop, in the smartphone segment, Safari has a massive market share. Apple has 18% of the global smartphone market, but this 18% has a disproportionately high share of mobile browsing market. Considering that most of the installed Blackberry and Symbian phones have pathetic browsers that aren't really used much, and considering that a lot of the cheap Android phones don't even sell with data plans (when you buy an Android phone, you get another one free - and most of these free phones end up being used like iPod touches at home), Apple's share of mobile browser works out over 50%.

The Reader functionality on iOS 5, is going to hurt Google massively. And I would not be surprised if future versions of iOS5 offered the Reader functionality as the default behavior in Safari - or maybe add an option to "Open in Reader" - in the same list that offers "Open in New Tab", "Add to Reading List", etc. If this is done, the user would never ever see the ads - meaning, the value of ads would drop significantly.

The second major initiative is the iCloud announcement. Google is the king of the cloud space, offering a lot of free services. However, everyone and their dog knows that Google uses these Cloud services to learn more about you, and target ads more effectively. The privacy implications of this are enormous. With Apple, the privacy fears are a lot less - because ads are not that important to Apple. Apple makes enough money on its devices, and can afford to offer iCloud as a way to make their devices more attractive. Even if Apple offers Ads, their track record on privacy is much better than Google's, and customers are likely to trust Apple more than Google.

I wonder when Apple is going to take on Google directly - and get into Search. That will be the mother of all battles!

Android in trouble!

Over the weekend, the blogosphere has been buzzing with "evidence" of Google having copied code from Sun/Oracle's Java and even worse, changing the license terms on that code. While some people see this as a nail in the Android coffin, several others see this as irrelevant, as the code in question is only related to testing, and unlikely to have ever found its way into shipping devices.

The point is, it is entirely irrelevant whether the code in question is important, or whether Google really copied the code, or some third party copied the code, or whether this code ever found its way into any shipping devices. The findings over the weekend will hurt Google quite bad in more important ways.

In these sort of cases, it is entirely upto the plaintiff (Oracle) to prove that Google violated their patents/copyrights. And this is a stiff hurdle. Very rarely is there a smoking gun that can be used as evidence. Especially in a project like Android, that has roots in Apache Harmony Project, and has also seen some third party contributions, it is difficult to pin the blame on Google, even if some violations can be proven. So Oracle has a really tough job on had.

That being said, Oracle has one real big advantage in this situation - time is working for Oracle. The more delay there is in resolving this court case, the more uncertainty there will be in the Android community and amongst hardware manufacturers. And this weekend's news only serves to increase that uncertainty. Already we are seeing articles on Android friendly sites - that things are not looking good for Android. This is the sort of PR that Android just cannot afford. This is the sort of situation that can easily go out of control and start impacting Android.

Microsoft Windows Phone 7 could be the unexpected beneficiary of this confusion. I expect manufacturers to start hedging their Android bets with either WP7 or other alternatives like Bada.

From a legal standpoint also, Google is on weak ground.
- The Counter-suit approach is not viable here - Google has very limited patent portfolio, and that is concentrated heavily around search. They can't find anything to beat Oracle with.
- The clean room defense will not fly - Google has hired way too many Java engineers from Sun - including Sun's former CTO - Eric Schmidt.
- "We didn't do it" will not fly - When it came to the original lawsuit, Google tried to blame Apache Harmony for the 6 pages of code that were alleged to have been copied. Apache promptly pointed out that that code did not come from Apache, and is from Google itself.
- Delayed enforcement will not fly - Oracle sued within months of acquiring Sun. Android itself has just been around for 2 years, and over those 2 years, Sun has made enough noises about not being happy with what Google has done with Java.

But all this is not important now - the main thing is, PR and sentiment tide just turned against Google!

What can $3.9B do?

In Apple's latest results conference, Tim Cook mentioned that Apple has invested $3.9B to get an edge on the competition. He also compared this to Apple's move in 2005 to prepay for enormous amounts of Flash Memory, to not only get a very good price, but to also create scarcity for the competition.

I think the comparison to 2005 is very ingenious. This time around, I don't think most of the money has gone into prepayments, but towards Capital expenditure. Like partnering with other companies to setup factories to make components exclusively for Apple requirements.

For instance, take the iPad - there are rumors going around about the resolution of the iPad going up 4 times - to Retina range (even though it will be only 260 pixels per inch, the iPad is generally held further away from the eyes than an iPhone - so even 260 pixels qualifies as Retina). Displays in this league are currently used for Medical monitor purposes, and for professional film and photo editing - and can cost several thousand dollars a unit. So talk of Apple using a Retina display on the iPad seems improbable. However, the point to be noted, is that if production is done at massive volumes, there is no reason an iPad Retina display cannot be produced at a cost that is just marginally higher than the current display cost. This is the sort of thing that Apple would invest in.

My guess is that the 3.9B is spent on following areas:

- Partnering with Samsung on a Chip Fab Plant for A4 and its successors. Considering a new fab plant costs $2B, Apple is likely to have invested $1B in this. This is likely to be an aggressive move to take the A4 to 28 nm process for now, with plans to move to 22 nm eventually. We should see dual core processors with dual/quad graphics cores integrated. For iPhone and iPad, this chip will be clocked at 1GHz, while for Apple TV, this chip will be clocked at 1.6GHz (which will make the AppleTV a viable alternative as a full fledged gaming platform - able to hold its own against the PS3, Wii, and XBox 360).

- Partnering with LG to make Retina displays for iPad to begin with, and later on for Mac Book and iMac as well. Again, Apple is likely to have invested $1-1.2B in this. I expect a move to E-IPS to reduce power consumption via more efficient backlighting, despite higher resolution.

- Partnering with Samsung or Toshiba to build Flash memory. The thing is, everyone knows that the future of storage is Flash, and that Flash is likely to replace HDD for most purposes in about 5 years time. This is the sort of thing that Apple has the power and clout to make happen a lot quicker. All the technology is in place and is mature - the only thing required is to migrate the technology to a more efficient process, and to scale up volumes dramatically. My guess is that this takes about $750M USD.

- With aggressive moves on processors and display, the new iPad will likely see much higher power requirements. Unless Apple dramatically ups Battery efficiency, this will the battery life would drop. I see this happening with two approaches. A big investment to make custom batteries for iPad, with marginal improvement in chemistry. Any increase in weight of the device because of extra battery capacity would be offset with reduced case weight because of moving to LiquidMetal/carbon composite. Should cost about $500B in terms of capital investment.

- The other, and more interesting technique that we are likely to see is the move to integrate Solar Power in the devices. In case of the iPhone, the move to have a Glass back for the case is a clear indication of the intent to harness Solar Power. The only reason we did not see it in the iPhone 4 already, is that the efficiency of the Solar Panels was too low (< 5% efficiency), and therefore made very little sense from a cost benefit perspective. Apple is likely to invest in Nano Technology based Solar Film Panels that will have an efficiency of around 22% or more. In the iPhone, this can be done easily by placing the film behind the glass on the back - but on iPad, I expect a more innovative approach, placing this screen under the backlight - thereby recapturing some of the wasted energy from the backlight. This positioning will also allow the device to charge itself from ambient light when not in use. I expect this to cost about $750B.

With these moves, Apple will distance itself further away from the competition. Already, no one is able to match the prices of the iPad with even remotely close to the specs of the iPad, and with these moves, Apple will make it tougher for everyone else.

Size Does Matter

Steve Jobs stirred a hornet's nest with his comments about the 7" iPad competition that has been talked about for months now.

While Steve has a valid point about user interface usability, there is an even more important point to consider.

The iPad has a 9.7" diagonal screen, and the competing products have all picked a 7" screen. The trouble with a 7" screen is that you get only 45% of the screen area, so the interface has to be redesigned to fit that form factor. This redesigning is theoretically possible for some applications, while it will be impossible for some applications.

But there is another problem with having just 45% of screen real estate - you only have 45% space behind the screen to hold all the electronics and the battery. Presumably, the electronics in the iPad and the competing tablets are similar in size - so that means the space left over to hold the battery would be severely restricted for the competing pads. This only gets worse when you include bezel, because the larger screen of the iPad allows a wider bezel - on a smaller screen, the bezel has to be a lot smaller, otherwise it would be really weird.

Let us do some guesswork here.

Lets say the electronics take up 20% of the internal space in the iPad - the same electronics would take up almost half the space of the competing tablets. So while the iPad has 80% of its larger internal space left over for batteries, the competing tablets have only HALF of their SMALLER internal space left over for batteries.

This means that the competing tablets would be a lot lighter - because they have much lower battery capacity. And means that they will have a lot lesser battery life. With the math above, it is clear that the competing pads will have only about 25% of the battery capacity of the iPad.

A smaller screen will consume lesser battery - so a 45% smaller screen 7" would likely consume 45% of the power of a 9.7" screen. This is debatable, because most of the 7" screens would still have a resolution comparable to the iPad. When it comes to the power consumption of the other electronics, Apple has a massive edge with its A4 architecture - and an OS which is designed specifically for the A4.

I think most of these competing tablets will struggle to have a battery life of 3-4 hours compared to the iPad's 10 hour battery life. If Apple wants to lower the weight of the iPad, all they need to do, is lower the battery capacity by half - they will still have 5 hours battery capacity, in a much lighter device, with over twice the screen space of their competitors! Since the battery counts for significant part of the weight of the device anyway, lowering battery capacity by half should lower the weight of the device by about 25%, thus bringing it to a much more comfortable 1-lb weight.

Also with their recent acquisition of exlusive rights to LiquidMetal technology for electronic devices, Apple could lower the weight of the iPad even more by using LiquidMetal alloy for the case - without compromising the structural rigidity and durability of the iPad.

With this kind of change, Apple can sell a iPad Lite model that is 25% lighter, same flash capacity as today, at a 20% cheaper price, and still offer same screen size! Considering that most iPad use happens at homes, a 5 hour battery life is more than sufficient.

I also foresee Apple dropping the 16GB iPads, and moving to 32GB for the base model. This would be workable for Apple because of their lower costs for Flash, due to their humongous volumes, but it would be a tough act to follow for their competition.

5 things Apple can do with its cash hoard

Apple is likely to have ended the September quarter with a cash hoard of over $50 Billion. Steve Jobs has said that he wants the money to do something "big and bold". Here is my take on what they can do with this money. I think most of these things qualify as "big and bold", and also fit in with the grand plans of Apple.

- Apple should look at buying Time Warner. This gives Apple phenomenal presence in Content - including Movies, Music, Print Publications, News, online portal, Cable distribution, Internet Service Provider, etc. Costs $35B, Apple can likely buy them out for $40B. Time Warner's market cap is languishing because of a bad digital strategy, Apple would be the perfect fit to rectify their digital strategy. Considering the close ties Apple has with Disney, this takeover of Time Warner would effectively make Apple unbeatable in the media business.

- Apple is building a massive data center in North Carolina spending about $1B. They should look at creating 4-5 such data centers in different parts of the world - specifically, India, China, Europe, South America and possibly one more data center in North America. This will allow them to become the biggest player in the cloud services space. This will not just allow to offer services to each geographic location, it will also serve as a backup for other locations. Should cost about $5B, but if, as expected, Apple uses most of its own equipment, this will increase their revenues and profits massively.

- Enter the finance business. Apple already is the largest processor of small payments in the world - and they currently pay credit card companies as high as 15% in fees (15 cents minimum transaction fees for a 99 cents transaction on several cards). They should look to create a brand new network for small transactions. They can kickstart this network by adding RFID/NFC capability to the iPhone. They can come up with a global service and also be the biggest customer for this service, via iTunes! Should cost about $2B to create, but will result in massive savings on their current transaction processing costs. In 5 years, iTunes, iBooks and AppStore revenues could easily be $10B - and this payments network will save Apple a ton of money.

- Extend Apple into domains that have huge potential, but are currently not exploited effectively. An area like Home Automation could explode if Apple focusses on this domain. Instead of just taking over the living room, Apple can take over the entire house! Current offerings in this segment are way too complicated to use - Apple has the software and hardware skills to come up with a very easy to use implementation. This could be yet another component of Apple's grand ecosystem with iTunes, iPod, iPhone, iPad, etc. I expect this to take just $1B.

- Pay a dividend - Along with all these initiatives, it will be healthy for Apple to pay a dividend.

5 reasons why Android has peaked

TheStreet.com has an article on 5 reasons why Android has peaked. While I agree with their conclusion, I don't really agree with the reasons. The reasons are not so much because Nokia, HP/Palm, Microsoft, RIM get their act together, but more because of Apple.

Here are the reasons why Android has peaked according to me:

- Android has thrived in an environment where iPhone is available only on 1 carrier in the US. As AT&T loses its exclusivity, and the iPhone is available on more carriers in the US, Android will have to start competing with the iPhone. That is not going to be an easy battle.

- The recent announcement that Google and Verizon came up with is likely to be legalized. I think it is clear no one expects Wireless to have the same rules as the wired internet because the structure of the two businesses is entirely different. If Net Neutrality ends on Mobile Networks, Android's biggest edge will be wiped out. Right now, literally anything goes on Android - tethering, WiFi Hotspots, Google Voice, literally anything is possible on Android. Once Net Neutrality ends however, the playing field will get levelled - the ability of a handset to access these features will purely be determined by how much the subscriber is willing to pay. And in that scenario, Apple is likely to have the edge, because Apple customers tend to be higher spenders. The only difference between iPhone and Android would be that there would be no porn, and no malicious apps on the AppStore.

- As iAd takes off, and as iOS spreads into more and more devices, developers will realize that there is a lot more money to be made in the AppStore than in the Android Marketplace. Whether it is because of piracy, or the unwillingness of Android users to pay for software, or the customer irritation from regular ads, Android's revenue potential will be a lot lower than for iPhone. To add to this, Oracle's law suit against Google and Apple's law suit against HTC will only add to the confusion around Android. To add to this confusion, ChromeOS will muddy the waters even more. ChromeOS is a clear indication Google wants to move away from native apps to web apps - while Apple provides the best Native environment, as well as a great environment for web apps.

- The hardware innovation cycle that Android is enjoying currently will be counter-productive in the long run. Handset makers have absolutely no choice but to keep releasing newer and better handsets to stand out amongst the crowd of Android handsets. However, the upgrade cycle for customers will still be the same as the iPhone - every 2 years. Because of this, soon we will see a situation where even the best handsets have lukewarm reception in the market. Plus margins will be curbed even more as handsets will have to discounted or given away. Apple's release cycle on the other hand, is designed to encourage hysteric reactions in the market place, plus Apple's margins increase over the year from the introduction of one handset till the next one. Motorola, HTC, Samsung, etc. will soon be fighting a race to the bottom and will be struggling with losses. The need to distinguish one handset from the other will also mean that handset makers will have to resort to extensive software and interface changes. This will make it difficult to upgrade phones to the next version of Android, whereas, iPhone customers will enjoy a seamless upgrade experience.

- Finally, Apple is going to seriously up the innovation pace. The A4 chip and its low power consumption already make it clear what direction Apple is going to take. Apple is also investing heavily in battery technology, materials technology, innovative manufacturing techniques, etc. Apple is also not shy about using its massive cash pile to source materials like displays, flash memory, etc. No one is anywhere near close to replicating Apple's ecosystem, but Apple is already busy extending its ecosystem to even more areas, like books, TV content, games, etc. Android managed to catch up to Apple because it got Apple's innovation for free - like mobile enhanced Webkit, Multi-Touch technology, etc. But this time around, Apple is using techniques that won't be so easy to copy.