The Commission’s Meddling in Android Could Backfire
In their now regular run-ins with Google, European competition regulators risk taking a step too far and leaving the mobile market worse off for consumers. The latest chapter in the saga is set to unfold sometime this month: The European Commission is expected to order Google to modify its app license agreement that requires mobile device makers to sell devices with unmodified versions of the Android operating system. If the Commission does this, manufacturers will be more likely to modify Android, include their own software, and pre-install apps that other companies pay them to include. While this may seem like a win for EU competition regulators, forcing Google to relax its apps’ license terms would allow device makers to roll out subpar mobile devices that may be more profitable to those selling the hardware but would likely create a worse out-of-the-box user experience.
The interests of device makers are not necessarily the same as those making the operating system they use. Google’s goal is to improve the Android platform to attract more consumers and developers. To do this, it must create a good user experience for consumers and encourage developers to build more apps. In contrast, most device makers are just trying to turn a profit on their hardware. While some device makers, such as Samsung, may be cultivating brand loyalty, many low-cost devices are only competing on price. One way to sell the cheapest phone is to subsidize costs by accepting kickbacks from various third parties to pre-install their apps, regardless of whether they make the device better for consumers.
Google takes steps to prevent device makers from doing this now. Android is open-source, but Google’s apps are not, and the company only lets manufacturers sell devices with its flagship apps pre-installed if they agree to supply them as a bundle and not to use alternative (i.e., “forked”) versions of Android. The Commission particularly objects to the bundling of the Chrome browser and Google Search app with Google Play. Google Play offers access to the largest store of Android apps, along with digital media content and mobile payment capabilities, giving manufacturers a strong incentive to accept Google’s terms. Revenue from these apps is the primary way Google recoups its costs for developing Android.
Google uses its licensing agreement as part of its strategy to make Android better. First, Google tries to limit fragmentation across Android devices to attract more developers. Even though Android has the largest market share, many developers still prefer to build new apps for Apple’s iOS because there is significantly less variation in terms of screen size, processors, and other hardware technology across Apple devices. Second, Google controls how device makers integrate its apps to make Android a more consistent experience across devices and avoid driving consumers toward Apple’s fully integrated system that, as Steve Jobs famously declared, “just works.” Third, Google protects its brand by ensuring its apps only appear on reputable devices. For example, in May, a team of security researchers discovered that thousands of low-cost Android devices, which Google had not certified for its apps, had shipped with malware pre-installed.
Arguments about bundling are reminiscent of another competition case almost a decade ago, when the Commission fined Microsoft for bundling Internet Explorer with Windows. At that time, Internet Explorer had already lost substantial market share to Mozilla Firefox, and was rapidly losing more, proving that bundling does not necessarily freeze other players out of the market. One key difference with the Microsoft case is that there is much more competition in mobile operating systems today than there was in desktop operating systems. For example, when Apple cut its transaction fees to developers last year by half, Google quickly moved to match it.
If the Commission takes the step it is now contemplating, the result could be less competition, not more. Consumers, developers, and device makers all benefit from the economies of scale that arise from having two major mobile operating systems, and Google and Apple compete on many fronts. Requiring Google to unbundle its search app and web browser from its app store might make the company decide to rethink its strategy. It could adopt Apple’s model by not only turning Android into a closed system like Windows, but by making future iterations of Android and Google Play exclusive to its own devices. That would leave Google as the only manufacturer with a platform and an app developer community to rival Apple’s. If that occurs, years would go by before other device makers found a way to compete with the two giants—by which time several would have cut their losses and pulled out of the market altogether.
The Commission should be wary of meddling with the mobile market. The wrong choice would hurt competition, diminish quality and security, and leave consumers worse off.
