Breaking Barriers

I opened a box of Cracker Jacks and the toy prize was a cell phone.

Not a smart phone, but a commoditized flip phone that handled voice conversations, kept a contact list and something that resembles a calendar.  A cell phone so fancy that two decades ago we would have taken a human life to obtain one, but today is so feature free that we might give it to a child so some day he can tell his kids how hard he had it.

Markets change constantly, but often products change faster than the markets that support them.  Take the cellular carrier market … please.  Given that the domestic customer base is saturated, carriers are in a constant struggle to keep customers locked into their networks and find new streams of revenue.  Yet they must also help finance your newer and more sophisticated cell phones in order to bring you (back) into their fold.  This is why a $600 smart phone costs you only $200.  The carrier makes back the money they spent on your handset by getting a guaranteed two years of revenue from you via the contract you signed.  Expanded continuing revenue also partially explains why they charge a mandatory network data fee for the newer and fancier phones (that and they want you to grow addicted to having data on demand 24 x 7 x 365 x everywhere and thus in the future perceive it as a necessity and not a luxury).

Despite a slate of new monthly charges for owning a cell phone, the industry has not changed much in decades.  Carriers subsidize handsets, pads and slates, earning their money on the backend.  This creates competition between hardware makers to gain favor and deals with carriers who erect barriers to customers using unlocked phones.  This game is fixed and the carriers are not interested in changing it much.

Which is why Google is breaking the system.

Anytime all competitors are content with the status quo, a great marketing strategy is to break the status quo.  We disreputable marketing types call this changing the rules of the market.  In a mature market you can gain first mover advantage by changing the rules.  The problem is that the more complex the market, with incestuous economics, numerous players and relationships, changing the rules is non-trivial.  Despite making a lot of cheap unlocked phones possible, Google found that Android by itself could not break the carrier subsidy model.  The carriers want money, and are unwilling to relinquish any tool that have for making more.

So Google is breaking the system in smaller chunks.

The hot part of the mobile market is apps.  Apple has a 3-to-1 advantage over Android in the apps department, though many of Apple’s 200,000 extra apps are of questionable commercial value.  This temporary Apple advantage is an Achilles heel since, from a functional level, Apple doesn’t offer much over Android.  Breaking Apple’s status quo of being an app leader is as important as getting more Android phones into people’s hands (though at their rate of growth, Android phones may dominate the market before the 2012 presidential election is over).

Google is breaking the system by changing the revenue model.  You know, that thing that is so important to the carriers.

According to reports, Google may share app revenue with carriers.  Currently carriers get glitch from the roughly $75M Apple earned from apps (another $175M went to developers).  With smart phones making about 5% of the market, this small-but-growing-like-a-virus market means real money down the road in just raw app sales, not to mention in-flow revenue opportunities.  Currently, Apple’s app share would contribute less than 2% of AT&T’s wireless services revenue, but 2% now beats 0%, and once smart phones make up the other 95% of the cell phone market, that number rises to 35% of services revenue.  Multiply this again by the growing roster of apps and their usefulness (sans meowing cat apps) and app revenues may well rival service revenues for the top-line.  Now multiply this revenue engine with pads and slates, many new flavors of which arrive this holiday shopping season.

Non trivial treasure.  Google knows it.  Verizon knows it.  AT&T knows it.  Apple knows it.

Given this new revenue stream, carriers have motivation to promote Android handsets.  Since they will be able to buy such handies from everybody (Motorola, HTC, LG, Demented Dave’s Cellular Designs, etc.) they in turn will focus on promoting the Google/Android brand as opposed to any specific manufacturer’s product.  By breaking revenue model, Google is also breaking the partner loyalty model, another Apple advantage.  AT&T may still sell iPhones … to 5% of the market.  They will sell Androids to the other 95%.

Several marketing lessons are intertwined herein:

  1. First, in any market where partners own the customer relationship, odds are they will not give it up (i.e., allow unlocked phones to cheaply enter the space).
  2. When partners have a lock on the end customer, you have to help partners make money.
  3. If your competitor owns the partner relationship, you have to find ways of helping the partner profit that also hurts your competitors (in this case, robbing Apple of their app and partner-promotional advantage).
  4. If the market ain’t broke, break it.

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