Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) Subsidiary Google intends to levy royalties on Android manufacturers in response to an important antitrust decision by regulators in the European Union. This could result in more choice for consumers, but also higher prices once manufacturers have passed these charges.
A full transcript follows the video.
This video was taken on October 1
Dylan Lewis: Why do not we switch to Android in Europe? We recently received a decision from the European Commission to look at Google's Android practices and decide that they are anti-competitive. Evan, do you want to give us an overview?
Evan Niu: The European Commission has imposed Google with a rather massive $ 5 billion fine that appeals to it, of course. That will find its way through the courts. Maybe they sit down, who knows. The problem is that some of the things that Google does with Android are anticompetitive, especially as it has long ago allowed device manufacturers to pre-install Google Apps and Google Play Store. That gives them this big advantage within the Android platform. It really undermines the competitive nature of other companies that want to compete in search.
There is a lot going on here. When the decision was announced, Google CEO Sundar Pichai also suggested that this model change. The speculation was that they would charge a license fee. Well, that's actually what happened. Google has now said that they will charge a royalty to manufacturers – not for Android, the platform itself, but specifically for their suite of apps and services, including the Play Store. The Play Store is a pretty big deal there, because that's where you get all your apps and stuff.
It's a pretty big reversal in terms of money's economy. Instead of paying manufacturers, manufacturers now have to pay for them. And of course these companies are likely to pass on these costs to consumers in the form of higher prices. We have seen this in other computer form factors. When a company licenses the operating system, it usually results in higher prices as these companies have to repay this money and usually put their own margins to the top. I think that has some pretty important implications with the Android ecosystem and the business model, at least in Europe.
Lewis: The result for all of this is, in the short term, it could mean these prices go on Android devices simply because manufacturers have to pay to access those things in a way they do not have in the past. In the longer term, this theoretically leads to more competition. The barriers to competition are a little lower when users deploy apps in the room.
Niu: Right. It also depends, will manufacturers really try to sell Android devices that Google Apps and Services do not have? Maybe some will try to test the market to see if these devices sell well. If these devices sell well, then consumers may prefer lower prices, manufacturers prefer lower costs.
In fact, today broke the news that the license fee will actually be quite high. Google initially said that this fee is quite small and not too much to worry about. I think that what they are doing is trying to bring in the high fee as a way to encourage manufacturers to make other concessions. This fee is supposed to be as high as $ 40, which is massive. That's more than what Windows phones used for their platforms, back when Windows phones were one thing. This fee varies by country and device type. It's as low as $ 3 but can go as high as $ 40. Google will pause if the manufacturer prunes Chrome and Google Search. Pre-installation of Chrome will also be required for some of these revenue sharing agreements that apply to the search. It basically says, "We're going to ask for a lot of money, but we'll give you a break if you basically still preinstall it." It's a detour to keep the status quo more or less. It's a really strong financial incentive to continue to upgrade Chrome and Search, which has always been Google's primary monetization strategy for Android.
Lewis: The reality is why the European Commission is so closely focused on Google, it dominates this market. It is dominant here in the United States, but I think it has a market share of over 80% within the five largest European countries, something crazy.
Niu: Right. That's Kantar estimates. The big five European markets, Android is huge, it's like 80% of the market. Of course Android is also huge worldwide. But, yes, this decision is specific to Europe. They are such a huge player there and they dominate this market and they have this massive market power position where they can really undermine all competing search providers, especially on the mobile front.
Lewis: Right. The core is that they make good products. That's why they continue to use people. Yes, they are the default for so many of these Android devices. They are packaged in such a way that they are very easy to use for consumers. The less friction you have, the more likely you are to use those apps. But many people, even on iPhones, are very keen to use Google Apps because they are pretty good for the industry.
Niu: Right. They also have these agreements with Apple where they pay Apple for the standard search spot. To get rid of friction, preinstalling this material is a big advantage, because many people, even if they really like Google apps and services, may not go out and install themselves. If you buy a new phone and have it already the stuff there, it's a seamless thing, it feeds directly into their search products and other services. This is a huge strategic advantage if these things are preinstalled.
Lewis: The big picture taken for these messages is basically that Google will do anything to get the status quo, even though they have to jump through a few hoops to get that to allow.
Niu: Right. It seems that they are trying to approach him. They do not want to give up these benefits, but at the same time they have to navigate through this new precarious legal position that they have based on this antitrust decision. If they restructure the functioning of the model, they may be able to get away with it. They had to eliminate some of these other restrictions on what devices other people can sell. All in all, on paper it is a positive thing for consumers, because theoretically it will ultimately create more choices. But if that leads to higher prices, that's not a good thing. As Google can keep things as they are, things may not change that much.