The Search Company and the Phone Software
You are a senior executive at a fast-growing internet search and advertising company. Mobile phones are starting to browse the web, but the phone industry is controlled by carriers and handset makers. A small start-up building an open operating system for phones wants to be acquired.
Should a web company buy a tiny start-up and enter the phone software business?
The situation
It is 2005. Your company runs the most popular search engine on the web and makes most of its money from advertising alongside search results. It is growing fast and has recently gone public. Almost all of its users reach it from personal computers.
Mobile phones are changing. Some now have web browsers and data connections, and a growing category of “smartphones” can run additional software. But the phone business is controlled by mobile carriers, who decide which phones they sell and what is installed on them, and by handset makers. Smartphone software comes from a handful of companies, each with its own interests, and is fragmented: building for all of it is difficult.
What you know
A small start-up, founded by an experienced engineer who had previously worked on mobile devices, is building a new operating system for phones based on open-source software. It has a small team, little revenue and a vision of an open platform that any handset maker could use. It is looking for funding or a buyer. The price under discussion is small for a company of your size.
What you don’t know
You do not know how quickly people will use phones to reach the internet, whether carriers will ever let an outsider shape phone software, or whether existing platforms will consolidate first. You do not know what phones will look like in three years. You do not know whether a web company can manage a hardware-adjacent business involving dozens of manufacturers and carriers.
The voices in the room
Some argue that mobile is a distraction: tiny today, dominated by carriers and far from your expertise in search. Others argue that if phones become the main gateway to the internet, whoever controls phone software could control access to your users, and that a small purchase is cheap insurance. Still others prefer to partner with existing platforms or simply build apps for all of them.
What happened
The company was Google, and the start-up was Android, co-founded by Andy Rubin. Google acquired it in 2005; the price was not disclosed, but has been widely estimated at around $50 million. Android’s early designs resembled the keyboard-based smartphones of the time. When Apple introduced the iPhone in January 2007, the project shifted towards touchscreens. Google announced the Open Handset Alliance with manufacturers and carriers in November 2007, and the first Android phone went on sale in 2008. Android was given to manufacturers free, funded by Google’s services and advertising, and became the most widely used operating system in the world. A Google executive later called the acquisition its best deal ever.
Judging the decision apart from the outcome
The process deserves a Strong grade because the shape of the bet matched the situation. The future of mobile was uncertain in the deep sense: nobody could list the outcomes, let alone their probabilities. Under such uncertainty, small, reversible bets that preserve options are worth more than their expected value suggests, as the idea of irreversibility and option value explains. Google paid a small price for a large option, and it kept the option flexible enough to change direction when the iPhone appeared.
The strategy also changed the basis of competition rather than fighting incumbent platforms head-on. By giving software away, Google turned handset makers from customers of platform vendors into partners, which is the path dependence lesson applied: you rarely beat lock-in on the incumbent’s terms.
Luck played its part. Apple’s iPhone transformed the market in a way that favoured an open alternative for other manufacturers. Had phones developed differently, Android might have joined the roads not taken. A strong process can still fail.
What a good process would have weighed
The alternatives, building apps for every platform or partnering with an incumbent, left Google dependent on others’ control of the gateway to its users. Waiting risked the window closing. The acquisition’s main costs were attention and integration, both modest at the start.
Sources and limitations
The acquisition price is an estimate reported in the press; Google did not disclose it. The history of Android’s redesign after the iPhone draws on Vogelstein’s book and widely reported accounts. The judgement that the process was strong is the author’s; reasonable observers could weigh the role of luck more heavily.
The reveal
Google and Android, 2005
Buy the start-up and develop an open phone operating system to give to handset makers.
Paid off
The company bought the start-up in 2005 for a price widely estimated at around $50 million. After a major redesign in response to a rival's touchscreen phone, its free, open operating system launched on phones in 2008 and became the most widely used operating system in the world.
Strong
Judged on what could be known at the time, separately from the outcome. See moral luck.
The forces pulling at the people deciding
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A cheap option on an uncertain future
The price was small relative to the company's resources and the stakes. Buying kept a strategic option open at low cost, which is exactly when acquiring options is most valuable.
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Nobody could forecast how phones would develop. A flexible, inexpensive bet suited the situation far better than a detailed forecast would have.
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Changing the basis of competition
Rather than fight incumbent platforms on their terms, the company would give its software away, so that handset makers could compete with the incumbents. Lock-in would be broken by changing who paid.
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When a rival's touchscreen phone appeared in 2007, the project's design shifted towards touch. Converging with a rival's form was a pragmatic response to where customers were going.
Signals that were visible at the time
- Phones were gaining web browsers and data connections, though use was small.
- Carriers and handset makers controlled phone software, and could favour rival services.
- Existing smartphone platforms were fragmented and controlled by companies with their own interests.
- Handset makers without their own software had reason to welcome a capable, free alternative.
When the future is uncertain and the price is small, buy the option.
Follow the thread
Connections
Where this comes from
Sources
- VentureBeat, “Google exec. Android was ‘best deal ever’” (2010). Reports the undisclosed price estimated at $50 million.
- Fred Vogelstein, Dogfight. How Apple and Google Went to War and Started a Revolution (Sarah Crichton Books, 2013).
- Open Handset Alliance announcement (November 2007).
Teaching this case? The teaching note has learning objectives, a 60-minute session plan, discussion questions and the key facts on one page.
Shrikant Kumar. “The Search Company and the Phone Software.” Decide case, Telos. https://shrikantk.com/decide/the-phone-software/