Android Wear – One sided game

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As usual the only beneficiary from changes to Android is Google.

• Google has launched a new app. on iOS that will allow devices that run Android wear to synchronise and integrate with the iPhone.
• Many of the core Google Digital Life services that run on iOS will now be available through a paired Android Wear device along with the usual data and fitness functions.
• Older Android Wear devices will not be supported but LG, Motorola and Huawei devices are already up and running and all future devices will have this capability.
• From Google’s perspective, this makes complete sense as Google still generates around 50% of its mobile advertising revenues from iOS devices.
• Hence it is in its interest to ensure that on iOS, its services work seamlessly and offer users as much functionality as possible.
• However, from a hardware maker’s perspective this added functionality offers very little, if any benefit.
• One of the only areas left to an Android hardware maker to differentiate is through a cross-device strategy.
• The idea here is to ensure that all of its devices work as seamlessly as possible with the other device types that it makes.
• The hope here is that this will encourage a user of one device to have a preference in another device category for the same manufacturer.
• If user preference can be created then there is scope to increase prices somewhat and make more than a commodity margin.
• This is one of Samsung’s strategies to keep its margins high after ceding the entirety of the ecosystem to Google (see here).
• However, by making Android Wear work well with iOS, Google is undermining that strategy and making it even harder for the long suffering device makers to be anything other than commodities.
• Hence, I think the current outlook of 2-4% EBIT margins for Android devices remains intact and may even come under further pressure as the smartphone market continues to slow down.
• Samsung is the one exception but I think that its margins (10% – 12%) are driven almost entirely by scale as it outsells its nearest competitor by more than 2 to 1.
• The net result is that the only real beneficiary from Android remains Google and I fully expect it to continue operating in its own best interests to the detriment of its hardware partners who have nowhere else to go.
• Google still has huge problems to solve with Android (see here) but even without fixing these issues, Android remains a huge revenue and profit generator for Google.
• Google has dropped back below what I consider to be fair value but at $618, there is very little upside for shareholders.
• I would consider Microsoft as a much better place to look.