Google's (GOOG 0.87%) (GOOGL 0.75%) Android OS is the Microsoft (MSFT 0.43%) Windows of mobile phones. Google licenses the software to smartphone manufacturers for free in exchange for making sure things like the Play Store and Chrome browser are pre-installed -- which allows Google to make money on the back end as well as provide basic functionality of a smartphone.
But Google seems to be increasing its asking price for smartphone OEMs to use its version -- the most popular version -- of Android. The Information reported last week that Google is telling smartphone manufacturers like Samsung (NASDAQOTH: SSNLF), Huawei, and HTC to pre-install as many as 20 Google apps. That's up from the current nine, which include Gmail and YouTube.
Google's position in the smartphone market gives it a unique ability to ask a lot of its manufacturing partners. If it's not careful, however, we might see a redux of the antitrust case against Microsoft.
Microsoft's run-in with the law
Back at the turn of the century, Microsoft had handily won the browser wars with Internet Explorer. By 2002, Internet Explorer accounted for over 96% of web browser use.
As you might imagine, controlling how people access the Internet can be extremely valuable. Search engines like Google are willing to pay traffic acquisition costs to browser owners to make their services the default search engine.
But Microsoft had something of an unfair advantage. It bundled Internet Explorer with Windows, rendering your Netscape discs unnecessary. This move allegedly restricted the market for third-party browsers, which had to be downloaded over slow connections or bought in stores. Additionally, Microsoft was accused of altering its application program interface, or API, to favor Internet Explorer over other browsers.
Microsoft's settlement with the Department of Justice required the company to open its API to third parties for five years, but it didn't stop Microsoft from continuing to bundle Internet Explorer with Windows.
Similarities with Android
The Microsoft case sets a precedent for Google to continue bundling apps with its Android OS. In fact, one of the main reasons a smartphone manufacturer will agree to Google's ever-stricter terms is to gain access to Google's API.
Third-party developers already have access to the Android API, which allows apps to send push notifications and interact with other apps. This is why it's so hard to ditch Android, though, because developers design their apps with Google's API.
So, Google seems to be technically in line with what the DOJ laid out in its settlement with Microsoft.
The extent to which Google is bundling its apps and exercising control over smartphone OEMs to differentiate their products is not addressed by the Microsoft case, though. Not only is Google requiring a large number of its apps to come pre-installed on devices, it's also specifying where those apps appear. Microsoft also had restrictions on what could and couldn't be displayed on users' desktops, but not to the extent of the new Android agreements.
Google's tense relationships with phone makers
In January, Samsung agreed to new terms with Google that required the manufacturer to tone down its TouchWiz user interface and other Android customizations. In response, Samsung stepped up its development of Tizen, but the alternative OS has yet to see much traction. Tizen phone launches have been delayed as the app ecosystem lags the OS development.
Last month, Huawei's chief executive of its consumer business group, Richard Yu, told The Wall Street Journal it can't make a profit selling Windows Phones or any other OS besides Android. He noted, "It's easy to design a new OS, but the problem is building the ecosystem around it."
As a result, Android essentially holds a monopoly over smartphone OEMs not named Apple. Forcing OEMs to bundle Google's apps, so it can save money on those traffic acquisition fees and make more money from digital advertising, could be seen as antitrust practices, especially considering Google makes the same apps available for every other mobile OS where it competes with first- and third-party developers.
Should investors worry?
Facing an antitrust suit would certainly be bad for Google. The press would definitely be bad, and could give a slight market edge to other OSes. The limiting factors of OSes like Windows Phone and Tizen, however, still exist, which ultimately makes them less appealing to consumers no matter what. It's hard to see the government requiring Google to share its API with competing OSes.
But even if Google faces an antitrust case, there's not much the government can do to change its bundling practices. After Microsoft's case, it still bundled Internet Explorer with Windows. Google might have to loosen its grip on manufacturers, but it still holds the upper hand. There's only so much the government can do to stop Google from dominating attention on Android phones.
