Thursday, May 03, 2012

Why Barnes & Noble-Microsoft pact hurts Google


CBS News - 2 May - by Erik Sherman

Amazon's Kindle Fire is the top-selling Android-based digital tablet.Amazon's Kindle Fire is the top-selling Android-based digital tablet. (Amazon.com)
(MoneyWatch) Google (GOOG) must be congratulating itself now that Samsung has taken the smartphone lead from Apple (AAPL). According to IDC, the Korean technology titan sold 42.2 million smartphones last quarter, compared to Apple's 35.1 million. And for Google, that means phones using its Android mobile-computing platform are on top.


Perhaps dampening the joy was news of another Android-based device: Barnes & Noble's (BKS) Nook digital tablet. That's because Microsoft (MSFT) has reportedly agreed to invest hundreds of millions of dollars in B&N's Nook division, valuing the unit at $1.7 billion and spurring talk that the book vendor might spin it out. The move is part of a conveniently synchronous set of strategies at both the software giant and Amazon (AMZM) that splits Google's efforts.
The result? A greater likelihood that Android -- at least as conceived by Google -- will never become a major platform in the burgeoning market for tablets.

Android -- a blessing and a curse

Google's fundamental problem is that it has made Android open source and easy for developers to change. The strategy has been double-edged. On one hand, it has worked with handset vendors -- so far. Google has seen Apple's iOS fall into second place in market share for smartphone operating systems. Although Apple clearly gains far more in profit from the iPhone, Google has modified Microsoft's strategy, giving away the OS to bring consumers to the company's services and gaining ad revenue in the process.

It's the "other hand" that could hurt Google. Hardware companies can take Android and create their own versions, which are known as "forks" in the industry. That's what Amazon did, and now the Kindle Fire is the top Android tablet. Amazon had its own media services, which means far less traffic that goes to Google.

Amazon's self-subsidized price of $199 for the Kindle is a big reason for the success. The company has a robust media sales business that it uses to compensate. Also, Amazon is adept at doing low-margin traditional discount retail business, giving it more room to buy market share. Apple won't bother to compete there.

B&N followed suit when it came to repositioning its Nook as a tablet rather than only an e-book reader -- and creating its own fork. The two companies formed a second, low-cost front for the product category, one that Google didn't really control.

Splitting Google

Enter Microsoft, a Google rival that would happily see Android erased from every mobile device on which it appears (with Windows Phone replacing it). Microsoft has either threatened or sued a growing number of hardware vendors -- excluding Amazon, which interestingly has remained undisturbed -- that used Android. Many started to pay royalties, but not Barnes & Noble. It vowed to fight on. Only now B&N doesn't have to fight, as the two companies have come to some agreement.

Amazon and Microsoft together have apparently created a fork in the road to potential Android tablet success, with neither branch leading to Google. Maybe Microsoft wants a Windows-based e-reader, as Mary Jo Foley at our sister site ZDNet suggests.

Or perhaps Microsoft is potentially happy, at least in the short term, collecting license revenue from Android devices and essentially driving a version that will have its blessing and little to do with Google. The software maker will be particularly content if it can get Samsung to move in a similar direction, taking away the single most important support Google has had in competing with Apple.

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