Arguably one of the most disruptive moves that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google ever pulled off was offering the mobile operating system that it acquired, Android, to third-party manufacturers free of any type of licensing fee. That flew in the face of Microsoft's long-standing business model, which was to develop operating systems and license them out to device makers. Manufacturers still have to bear significant other costs associated with developing and bringing Android devices to market, but saving on licensing fees goes a long way with manufacturer adoption.
There's now some speculation that Google may be interested in charging licensing fees for the world's most popular mobile platform.
Regulators say Android is anti-competitive
The European Union has hit Google with a record $5 billion fine over antitrust concerns regarding Android, alleging that the search giant is abusing its dominance in the mobile market to benefit its search business. By bundling and prioritizing its own apps and services (including search) over those offered by third parties, Google enjoys an unfair advantage, according to European regulators.
"In this way, Google has used Android as a vehicle to cement the dominance of its search engine," European Commissioner Margrethe Vestager said in a statement. "These practices have denied rivals the chance to innovate and compete on the merits."
The practice is illegal under EU antitrust laws. Regulators point to three specific anti-competitive practices that Google engages in:
- Requiring third-party manufacturers to pre-install the Google Search app and Chrome browser in order to license Google Play.
- Paying manufacturers and cellular carriers to exclusively pre-install Google Search.
- Blocking manufacturers that run modified versions of Android -- known as "forks" -- from including pre-installed Google apps.
Regulators are now requiring the search giant to cease all illegal conduct within 90 days. Naturally, Google is appealing the decision, with Google CEO Sundar Pichai penning a response that includes some notable implications.
So far, so free
Pichai argues that Android has "created more choice, not less" for consumers, pointing to the fact that Android powers over 24,000 devices that span every imaginable price point offered by over 1,300 manufacturer brands. Users tend to install approximately 50 apps on their devices and are free to delete any pre-installed apps, Pichai says, which suggests that there are plenty of choices and alternatives for consumers.
Here are the parts that suggest Google isn't ruling out a licensing fee at some point in the future (emphasis added):
So far, the Android business model has meant that we haven't had to charge phone makers for our technology, or depend on a tightly controlled distribution model.
But we are concerned that today's decision will upset the careful balance that we have struck with Android, and that it sends a troubling signal in favor of proprietary systems over open platforms.
Today's decision rejects the business model that supports Android, which has created more choice for everyone, not less.
The balance that Pichai is referring to is how Google is able to offer Android for free in part because it subsidizes the platform with revenues from search and other bundled services that it monetizes. If regulators kneecap Android's current monetization model, Google may need to fall back on a more traditional model of charging licensing fees, and that would have massive implications for the global smartphone market.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA, has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares). The Motley Fool has a disclosure policy.