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Has Google Inc.'s "Android One" Push Failed?

By Leo Sun – Aug 12, 2015 at 5:00PM

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Google’s “Android One” initiative isn’t gaining much ground in emerging markets.

Last September, Google (GOOG -1.98%) (GOOGL -1.82%) introduced Android One, a line of low-cost smartphones for developing and emerging markets. Google developed, designed, and marketed the devices and OEM partners like Spice, Karbonn, and Micromax manufactured them. The first Android One devices cost around $100, had 4.5-inch screens, 1.3 GHz processors, 4GB of internal storage, and other standard low-end features. They all currently run the latest version of Android, Lollipop 5.1.

The first three Android One phones. Source: Company websites.

With Android One, Google planned to tether first-time smartphone buyers to its ecosystem and reduce OS fragmentation in emerging markets, where low-end devices often run older versions of Android. Today, over 40% of Android devices still run on Android 4.3 or lower, making them incompatible with many of Google's newer features. It was also a way to widen its defensive moat against low-end rivals in India, the third largest smartphone market in the world. That sounded like a solid strategy, but sales figures indicate that the plan has already fallen apart before its one-year anniversary.

How bad are the numbers?
MediaTek, which supplies the processors for the devices, predicted that up to two million Android One devices would be shipped between last September and the end of 2014. Google boldly claimed that Android One would eventually reach "five billion" new users.

But during the program's first 100 days, only around 700,000 Android One devices were shipped, mainly in India, according to Counterpoint Research. The same amount of units was also shipped in the following five months, indicating that the program was quickly grinding to a halt. By comparison, worldwide shipments of Android smartphones topped one billion last year.

Android One smartphones weren't reaching many customers, but Google kept expanding the service. Google introduced Android One to Turkey, its first non-South Asian country, in May. It also recruited more regional OEMs to manufacture more devices.

Losing control of Android
Unfortunately, expanding into more markets and partnering with more OEMs won't significantly boost Android One sales for two main reasons.

First, the devices aren't cheap enough. Rajan Anandan, Google's VP and managing director of India and Southeast Asia, recently told the Financial Times that the "sweet spot" for mass-adoption in India's smartphone market was actually under $50. Since the initial prices were too high, Google is working with OEMs to launch cheaper devices in the future.

Second, the Android One program required that OEMs use stock Android instead of modified versions. This was to help Google monetize the devices with its own apps and services. Several leading Android manufacturers, like Samsung and Xiaomi, previously developed their own app stores and ecosystem apps that cut Google out of the loop. But Android OEMs often rely on that software to monetize their devices, which are already sold at paper-thin margins. Therefore, it made little sense for OEMs to aggressively sell stock Android devices.

Due to Android One's lackluster debut and Google's restrictions, some of its partners teamed up with more flexible software partners. Micromax, which ships over a million smartphones per month, started working with Cyanogen -- which develops a Google-free version of Android -- to launch new phones in India.

CyanogenMod phones -- OnePlus One (L) and Micromax Yureka (R). Source: company websites

The "zero rating" conundrum
Since Android One devices don't have a major advantage in terms of price and hardware over other Android devices, Google plans to partner with more wireless carriers and give users more low data and data-free services. That's a critical strategy in countries like India, which have slow and spotty Internet connections.

In India, Google partnered with wireless carrier Airtel to offer a limited amount of free monthly data to its users. It also launched offline versions of YouTube and Maps, as well as a lightweight version of its search engine. Google also planned to "zero-rate" certain apps. This meant that users could access Google's services without the usage counting toward their monthly data plans.

Google wasn't the first company to adopt this strategy. Facebook's (META -0.54%) comparable initiative, Internet.org, used zero-rating partnerships with wireless carriers to provide free access to certain apps, including Facebook. But that strategy backfired in India, where opponents claimed that Facebook and wireless carriers violated net neutrality by giving preferential treatment to certain apps. That backlash caused Google to put its zero-rating plans on hold in late May.

So, what's next?
Looking ahead, Google will likely face more challenges in India and other emerging markets. Plenty of those smartphone users might use Android devices, but Google's ability to monetize them will be limited by custom versions of Android, OEM-created ecosystems, and Google-free players like Cyanogen. If Google can't zero-rate its apps, it will have trouble monetizing the market with digital ads, which require faster mobile connections.

Unless Google can work with OEMs to sell cheaper smartphones -- which could be tough due to Android One's restrictions -- it's unlikely that the initiative will gain much ground in emerging markets. Instead, Chinese OEMs like Xiaomi, Huawei, and Lenovo will likely expand deeper into the market with cheap Android devices which lack the full Google experience.

Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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