MarketLine Case Study

Android
From start-up to the worlds
leading smartphone platform
Reference Code: ML00001-076

Publication Date: March 2012

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OVERVIEW
Catalyst
Android is a free, fully open source mobile software platform that any developer can use to create applications for mobile
devices and that any handset manufacturer can install on a device. Android was the brainchild of Andy Rubin, Rich
Miner, Chris White, and Nick Sears. The company was founded in Palo Alto, California in 2003 and has since grown to
become the worlds leading smartphone platform with a market share of 35%. Android was acquired by internet
behemoth Google in 2005 and now operates as a wholly-owned subsidiary of Google Inc. In its 2011 Annual Report,
Google Inc. highlights Android as a particularly strong growth driver for the company and states that as of January 2012,
250 million Android-powered devices had been activated globally. For the purposes of this report, Android will be used to
refer to this subsidiary. Where Google is used, it refers to the parent company, Google Inc. This case study analyzes
Androids rise to the top of the smartphone market.

Summary
Android operates in the burgeoning market of mobile phones. This market has seen strong growth in recent
years, much of which has been driven by a surging demand for smartphones. This provides Android with
excellent growth opportunities.

Android has exploited these opportunities better than its rivals, namely Apple, Microsoft and Research In Motion
(RIM), to establish itself as the clear leader in terms of the number of devices using its operating system (OS).

Android belongs to a consortium of companies known as the Open Handset Alliance. This includes handset
manufacturers such as HTC, Motorola and Samsung. Consequently, Android is the chosen OS on a range of
phones that span a broad pricing spectrum. This gives it a competitive advantage over the likes of Apple and
RIM, whose OSs are only available on their own phones.

Google is currently involved in the web of patent and copyright infringement cases that have enveloped the
industry. Google is being sued by a number of rivals, and rulings against the company could have a negative
impact on future revenues and profits.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................... 2

Catalyst.............................................................................................................................................................................. 2

Summary ........................................................................................................................................................................... 2

Analysis ................................................................................................................................................................................. 6

Android has grown to become the worlds leading platform ..............................................................................................6

The platform has become a significant source of revenue for Google...........................................................................6

A burgeoning mobile phone market provides excellent growth opportunities ................................................................6

Androids growth has consistently outstripped that of its rivals ......................................................................................8

Its involvement in the Open Handset Alliance gives Android a competitive advantage.................................................8

Google acquired Motorola Mobility Holdings Inc. in 2011 ............................................................................................10

Google remains committed to running Android as an open platform ...........................................................................10

The technology industry is currently characterized by a web of lawsuits ........................................................................11

Google is at the center of a major legal case brought by Oracle .................................................................................12

Conclusions......................................................................................................................................................................... 13

While Android has established itself as the clear market leader, uncertainty over legal issues could adversely impact
the platform in the long term ............................................................................................................................................ 13

Appendix ............................................................................................................................................................................. 14

Definitions ........................................................................................................................................................................ 14

Sources ........................................................................................................................................................................... 14

Further Reading............................................................................................................................................................... 14

Ask the analyst ................................................................................................................................................................ 15

About MarketLine ............................................................................................................................................................ 15

Disclaimer ........................................................................................................................................................................ 15

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LIST OF TABLES
Table 1: Global mobile phone market growth rates 2006-2010 and 2010-2015f ..................................................................8

Table 2: Global smartphone market shipments by platform 2011.........................................................................................8

Table 3: Price comparison: iPhone vs. Galaxy Nexus and Droid Charge (on the Verizon network in the US) .....................9

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TABLE OF FIGURES
Figure 1: Global mobile phone market values 2006-2015f ...................................................................................................7

Figure 2: Global mobile phone market volumes 2006-2015f ................................................................................................7

Figure 3: Smartphone competitor patent suits ....................................................................................................................11

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ANALYSIS
Android has grown to become the worlds leading platform
Since it was founded in 2003, Android has risen to become the worlds leading smartphone platform in terms of the
volume of devices using its OS. It has been adopted as the OS of choice by a number of popular handset manufacturers,
including HTC, LG, Motorola and Samsung. This has allowed Android to build a market share of 35% and establish itself
as the clear market leader.

The platform assumed its position as the global leader in Q4 2010 when it usurped Nokias Symbian OS. According to
data released by market research company Canalys, it cemented its position in Q1 2011 when the number of Android-
powered phones sold hit 35.7 million, giving it a market share of 35%. Q2 2011 brought even stronger growth as 51.9
million units were shipped, 17 million of which were manufactured by Samsung. By way of comparison 20.3 million Apple
iPhones were shipped in the same period. Of the 56 countries in which Canalys tracks sales, Android was the leading
platform in 35 in Q2 2011.

The platform has become a significant source of revenue for Google

Having such a large audience is impressive but Google has excelled in monetizing Android. In an earnings call for Q3
2011, CEO Larry Page announced that mobile revenue was at a $2.5 billion annual run rate, an increase of 150% on the
previous year. As a company, Google generates 96% of its total revenues from advertising, and the income derived from
its mobile segment seems to mirror this. With the mobile ad market predicted to grow very strongly in the coming years,
Google is in a good position with Android being the most used platform. Google ensures that several of its apps (Google
Maps, Google Earth, YouTube, Gmail and Google Search for example) are pre-loaded on Android-powered handsets,
making it the default port of call for several tasks. These apps contain ads and thus generate revenue for the company.
Although Page would not provide a breakdown, a Google executive stated in congressional testimony in September 2011
that two-thirds of mobile searches are conducted on devices running Apples iOS, demonstrating that Android still has
room to grow.

Android Market (the platforms app store) is another source of income, although it is currently an area that is
underperforming and lies far behind the market leader, Apples App Store. Developers receive 70% of the revenues their
apps generate when they sell through Android Market, with the remaining 30% split between Google, carriers and
payment processors. By comparison, Apple takes a 30% cut of apps sold via its App Store. According to analyst Gene
Munster, Android Market generated $341.8 million in revenue between October 2008 and September 2011. This was
dwarfed by the $4.9 billion that Apples App Store contributed between July 2008 and September 2011.

One of the key reasons for this difference is the fact that in-app purchasing was only made possible on Android Market in
March 2011, whereas App Store customers had the ability to purchase in-app as early as 2009. This is of particular
significance to Android, as 65% of its top 200 apps are freemium apps. Freemium apps are free to download initially but
contain additional content and items that consumers must purchase in-app. Android's tardiness in introducing this option
has no doubt hindered its ability to challenge Apple.

A burgeoning mobile phone market provides excellent growth opportunities

In recent years, the global mobile phone market has experienced strong growth both in terms of value and volume. This
trend is expected to continue and is being driven in the main by an increased demand for smartphones. According to
Canalys, the number of smartphones shipped in 2011 reached 487.7 million units, an increase of 63% on the previous
year (299.7 million units). According to Canalyss research, some of the handset manufacturers that have seen the
largest upswing in demand are those that use Android, most notably HTC, LG and Samsung. Data taken from
MarketLines Mobile Phones Industry Profile, which analyzes the value and volume of mobile phones sold globally,
shows that the market is expected to continue to grow through to at least 2015.

This means that Android is operating in something of a boom market, one which presents excellent growth opportunities
for the foreseeable future.

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 Figure 1: Global mobile phone market values 2006-2015f

250

200
Value ($billion)

150

100

50

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SOURCE: MarketLine Mobile Phones Industry Profile MARKETLINE

Figure 2: Global mobile phone market volumes 2006-2015f

2000
1800
1600
Volume (million units)

1400
1200
1000
800
600
400
200
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SOURCE: MarketLine Mobile Phones Industry Profile MARKETLINE

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 Table 1: Global mobile phone market growth rates 2006-2010 and 2010-2015f
CAGR 2006-2010 CAGR 2010-2015f
Value 10.0% 10.5%
Volume 9.0% 6.7%

SOURCE: MARKETLINE MARKETLINE

While it is true that an expanding market offers Android the opportunity to grow its business, the market is the same for
all developers of smartphone OSs. Android has, however, been able to exploit favorable market conditions better than its
competitors.

Androids growth has consistently outstripped that of its rivals

The growth of Android in the recent past has been highly impressive and significantly better than that experienced by the
likes of Apples iOS, RIMs Blackberry platform and Microsofts Windows Phone. Data published by Canalys shows that
between 2010 and 2011, Android-powered device shipments saw year-on-year growth of 244.1%. This was a much
faster rate of change than was seen by the industry as a whole (62.7%). The best of the rest of the major players was
Apples iOS, which saw volumes increase by 96% in the same period. Blackberry's OS also saw increased volumes, but
only by 5%, while Windows Phone saw shipments of its devices fall by 43.3%. This means that Android-powered devices
accounted for over 48% of all smartphone shipments in 2011, making it the clear leader.

Table 2: Global smartphone market shipments by platform 2011

Platform Full year 2011 shipments Share Growth 2010/2011
Android 237.8 48.8% 244.1%
iOS 93.1 19.1% 96.0%
Symbian 80.1 16.4% -29.1%
Blackberry 51.4 10.5% 5.0%
Bada 13.2 2.7% 183.1%
Windows Phone 6.8 1.4% -43.3%
Others 5.4 1.1% 14.4%
Total 487.8 100% 62.7%

SOURCE: Canalys MARKETLINE

Its involvement in the Open Handset Alliance gives Android a competitive advantage
In November 2007, a consortium of companies led by Google established what is now known as the Open Handset
Alliance (OHA). The OHA is made up of mobile operators, handset manufacturers, semiconductor companies, software
companies and commercialization companies and includes multi-national firms such as T-Mobile, Vodafone, Samsung,
HTC, LG, Intel, eBay, Accenture and Wipro Technologies. The alliance originally started with 34 members but has since
expanded, and as of February 2012 had 84 members.

The alliances stated aim is to develop open standards for mobile devices, which it hopes will enable players to innovate
more rapidly and to better serve consumers ever-changing needs.

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Android is the alliances first joint project and was launched with the explicit goal of being the first open, complete, and
free platform created specifically for mobile devices.

The involvement of leading handset manufacturers, such as Samsung and HTC, means that there is a natural route to
market for the OS. Flagship phones such as Samsungs Galaxy SII and HTCs Sensation run using the Android OS and
have earned reputations as some of the best phones available on the market. The Android OS is, however, also
available on cheaper phones such as HTCs Wildfire, Samsungs Galaxy Gio and the Droid Charge by Samsung. In total,
Android is the chosen operating system on 149 phones made by 31 manufacturers. It should be noted, however, that
together, HTC, LG, Motorola, Samsung and Sony Ericsson account for over half of all Android-powered devices.

The fact that Android is the operating system powering such a wide range of phones means that it has access to every
level of the smartphone market in terms of price, and this is where it has a clear advantage over many of its competitors.

Androids closest rival is Apples iOS, which powered 19.1% of all smartphones shipped in 2011 according to Canalys.
The iPhone has undoubtedly been a phenomenally successful product for Apple and it is credited as the device that kick-
started the smartphone revolution. iOS is, however, limited as it is only available on one phone, the iPhone. This is a
high-end, expensive product and as there is no cheaper version of the device, Apple does not have access to customers
at the lower-cost end of the market in the way that Android does. While the phones at the cheaper end of the market,
such as the Droid Charge, do not offer the same functionality as the iPhone, this is not the primary concern of some
consumers and others simply cannot afford the significant cost of the Apple product. Androids presence on phones at
both the cheap and top ends of the market gives it a much wider potential market, a clear advantage over the likes of
Apple.

Furthermore, the iPhone is often priced higher than similar spec phones of other manufacturers such as Samsungs
Galaxy SII and Galaxy Nexus, and with cost always being a major consideration for consumers, this again puts Android
in an advantageous position.

Table 3: Price comparison: iPhone vs. Galaxy Nexus and Droid Charge (on the Verizon network
in the US)
iPhone 4S 64GB Galaxy Nexus Droid Charge
Price of handset with 2 year
$399.99 $299.99 $9.99
contract

Price of handset with no contract $849.99 $649.99 $499.99

SOURCE: Verizon Company Website MARKETLINE

RIMs Blackberry platform has also struggled to keep pace with Androids relentless rise to the top of the market, and
although it managed volume growth in 2011 as a whole, the 9.7% decrease it saw in Q4 2011 compared to Q4 2010 will
worry the company, which is now only the fourth largest player in the smartphone OS market. Blackberry has suffered in
recent months with reliability issues that have dented consumer confidence in the brand, and according to
MillwardBrowns Brandz Top 100 Most Valuable Global Brands, the Blackberry brand declined in value by 20% in 2011.
In October 2011, Blackberry users in Europe, the Middle East and Africa found themselves unable to send or receive
emails and messages on their devices. The issue lasted for three days and spread to the US and Canada, creating
widespread customer dissatisfaction. Androids growing reputation as an excellent OS puts it in a prime position to
capitalize on Blackberrys problems and win any disaffected customers looking to switch to a different platform.

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Windows Phone has struggled to make any headway in the market since it was officially launched in November 2010 and
remains a minor player, having accounted for only 1.4% of all smartphones shipped in 2011. This represented a year-on-
year decrease of 43.3%, suggesting that Windows Phone is one of the main casualties of the Android juggernaut. The
OS is the successor to Microsofts failed Windows Mobile venture, which was discontinued in 2010 when it had only a 7%
share of the market. This is perhaps the reason for low consumer enthusiasm.

In an attempt to arrest this alarming slide, Microsoft signed a deal with Finnish handset manufacturer Nokia in April 2011
to put the Windows Phone OS on Nokia devices. Both companies hope that the agreement will allow them to improve
their respective positions and Nokia CEO Stephen Elop described it as a co-dependency. Microsoft is believed to be
taking much of the financial burden as it is eager to close the gap on Android and Apple. Under the terms of the
agreement Nokia is still free to use other operating systems, and so how much benefit Microsoft will see is debatable.

Google acquired Motorola Mobility Holdings Inc. in 2011

In January 2011, Motorola announced that it was to spin off its mobile devices division and create a separate entity that
would be listed on the New York Stock Exchange. Motorola Mobility Holdings Inc. (Motorola Mobility) was subsequently
founded and floated using the ticker MMI.

In August of the same year, Google announced that it had reached an agreement for the purchase of Motorola Mobility
and that it was going to cost the company $12.5 billion, representing a premium of 63% on the share price. This premium
shows the strategic importance Google sees in the deal. The rationale for the deal from Googles point of view is that it
allows the company to gain a reported 17,000 mobile patents and strengthen its hardware business. Android has been
the subject of a raft of patent and copyright infringement legal cases, and Google CEO Larry Page believes that the
Motorola acquisition will strengthen the companys patent portfolio. Upon announcing the deal, Page stated We recently
explained how companies including Microsoft and Apple are banding together in anti-competitive patent attacks on
Android. The U.S. Department of Justice had to intervene in the results of one recent patent auction to protect
competition and innovation in the open source software community. Our acquisition of Motorola will increase competition
by strengthening Googles patent portfolio, which will enable us to better protect Android from anti-competitive threats
from Microsoft, Apple and other companies.

Google remains committed to running Android as an open platform

Google has, however, been keen to stress that the acquisition of one of the leading Android device manufacturers does
not mean the end of partnerships with other large Android-powered device manufacturers such as HTC and Samsung.
When discussing the deal, Page stated This acquisition will not change our commitment to run Android as an open
platform. Page commented further in his post, Motorola will remain a licensee of Android and Android will remain open.
We will run Motorola as a separate business. Many hardware partners have contributed to Androids success and we
look forward to continuing to work with all of them to deliver outstanding user experiences.

The acquisition of Motorola Mobility was approved by the U.S. Department of Justice and by the European Union in
February 2012.

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The technology industry is currently characterized by a web of
lawsuits
Perhaps inevitably given the amount of new technology packed in to smartphones, the industry has been enveloped by a
raft of lawsuits with handset manufacturers, software developers and microprocessor producers all suing each other for
perceived patent and copyright infringements. These cases involve all of the smartphone OS players including Google,
Apple, RIM and Microsoft.

Figure 3: Smartphone competitor patent suits

SOURCE: www.fiercewireless.com MARKETLINE

Google is itself subject to several lawsuits and has been drawn in to more as a result of the Motorola acquisition.
Motorola is currently the subject of lawsuits being pursued by Apple, Microsoft and Gemalto. In February 2012, Apple
won a patent dispute against Motorola in Germany regarding the slide-to-unlock feature on its smartphones, signaling a
landmark decision. It is unclear at this stage what the decision means for Android as a whole, but patent consultant
Florian Mueller described it as a very significant win for Apple against Android. The victory over Motorola only relates to
Germany, but Apple is now looking to enforce the slide-to-unlock patent in other jurisdictions.

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Furthermore, it is seeking to do so against all three leading Android device makers and could go on to use it against even
more manufacturers in the future.

Other leading manufacturers of Android devices, most notably Samsung, are also embroiled in numerous legal cases.
Samsung is pursuing claims of patent infringement against Apple and vice versa. Samsung is looking to have the sale of
the iPhone 4S banned in Australia, as the Korean electronics giant claims that Apple has infringed three of its patents. A
hearing date of March 2012 has been set in Australia and similar cases are pending in France, Italy and Japan. On the
other side of the coin, Apple is suing Samsung for alleged patent infringements, with the International Trade Commission
in the US looking into whether or not Samsung has infringed Apple patents on a global scale. Indeed, Apple has already
scored preliminary wins in some jurisdictions. For example, a German court imposed a sale injunction on the Samsung
Galaxy Tab 10.1 in August 2011, which was upheld in January 2011. Samsung has, however, since developed a
modified version dubbed the Samsung Galaxy 10.1N and in February 2012, courts in Dsseldorf and Munich rejected
Apples bid to have sales of this newer device banned. The Galaxy Tab 10.1N therefore remains on sale.

Another major Android device manufacturer, HTC, is also involved in cases with Apple. In February 2012, the Taiwanese
manufacturer had a case against Apple dismissed by the International Trade Commission. HTC had claimed that Apples
iPhone violated patents related to how a phone manages its power supply, but as HTC was not incorporating the
technology in its handsets, the International Trade Commission ruled against it.

These are just some examples of the legal issues surrounding the industry. The fact that many of the lawsuits being
pursued are against Android handset manufacturers creates a problem for Google, as it has to concentrate on helping
out handset manufacturers that are facing patent infringement problems. In a worst case scenario, manufacturers that
have adopted Android could decide to pull out of the smartphone market if they feel that legal obstacles and costs are
prohibitive to a profitable operation, or if sales embargos, such as the one Samsungs Galaxy Tab was placed under in
Germany, become commonplace. Although this is unlikely it would present difficulties and stop routes to market for the
platform, as Android does not itself manufacture handsets. It could be argued that Googles acquisition of Motorola
Mobility is an insurance measure against this, as Google can ensure that handsets using Android OS continue to hit the
shelves.

Google is at the center of a major legal case brought by Oracle

Google is currently the subject of an ongoing lawsuit brought by software giant Oracle. In January 2010, Oracle
completed the acquisition of Sun Microsystems (Sun) and with it, became the owner of Suns Java software platform. It is
around this that the lawsuit centers.

In August 2010, Oracle announced a lawsuit against Google for copyright and patent infringement of Java technology in
the development of the Android platform. Initially, Oracle had been seeking $6.1 billion in damages, but this amount has
decreased in stages and in September 2011, Oracle announced that it was suing for $1.16 billion. The companies could
not reach a settlement out of court and a trial date of October 31st 2011 was set. This has since been put back twice as
the presiding judge, Judge William Alsup, has not been satisfied by Oracles damages report and its methodology. He
has hinted that Oracle may wish to use $100 million as a starting point for its claims. For its part, Google denies the
claims and states that it uses a so-called clean room version of Java that does not infringe on any of Oracles patents or
copyrights.

While the initial hearings seem to have favored Google, the major issue is the protracted nature of the case. This creates
uncertainty over what the findings will mean for the Android OS in the long term. Florian Mueller claims that Googles
chances of getting out of this unscathed are rather slim and that Oracle probably would not win a trial on all counts but it
is highly likely to win on at least some of them.

With no trial date set as of February 2012, it is unclear how long this could continue. The legal uncertainty around the
open source operating system may make new customers wary about licensing the Google mobile platform, and could
cost current Android customers millions of dollars. Unfavorable verdicts in any of the matters related to patent
infringement or other intellectual property rights may of course also affect the company's financial condition and operating
results.

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CONCLUSIONS
While Android has established itself as the clear market leader,
uncertainty over legal issues could adversely impact the
platform in the long term
Since it was founded in 2003, Android has risen to become the worlds leading smartphone platform in terms of the
volume of devices using its OS. It has been adopted as the OS of choice by a number of popular handset manufacturers
including HTC, LG, Motorola and Samsung. Of the 487.8 million smartphones shipped in 2011, 48.8% used Android OS,
a position of clear dominance.

The adoption of the platform by numerous popular handset manufacturers has given Android a significant advantage
over the number two operating system, iOS, as it means that handsets in different price brackets use Android as
opposed to Apples sole carrier, the high-end iPhone. Continued development of the platform is keeping Android ahead
of its competitors and Googles position as a member of the OHA ensures that collaboration with other leading
companies will continue.

However, a number of legal cases against Google and its partners pertaining to Android continue to cast a large shadow.
The outcome of these cases remains uncertain, but they could potentially have a significant impact on the companies
future revenues and, in a worst case scenario, its ability to sell Android-powered devices in certain jurisdictions. The legal
wranglings involving the likes of Google, Apple, Microsoft, Oracle and Samsung look set to continue for some time to
come, and the verdicts delivered could make or break Android.

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APPENDIX
Definitions
Annual Run Rate: how the financial performance of a company would look if you were to extrapolate current results out
over a certain period of time.

Clean Room: the method of copying a design by reverse engineering and then recreating it without infringing any of the
copyrights associated with the original design.

Open Source Software: computer software that is available in source code form. The source code and certain other
rights normally reserved for copyright holders are provided under a free software license that permits users to study,
change, improve and sometimes distribute the software.

Freemium Apps: An app which is free to download but in which a premium is charged for advanced features,
functionality, or related products and services.

Sources
Google Inc. 2010 Annual Report

www.openhandsetalliance.com

www.canalys.com

http://investor.google.com/releases/2011/0815.html

www.bbc.co.uk/news/technology-17058508

http://latimesblogs.latimes.com/technology/2011/04/nokia-and-microsoft-officially-sign-windows-phone-os-deal-ahead-of-
schedule.html

www.bloomberg.com/news/2012-02-09/apple-loses-second-bid-to-ban-german-sales-of-samsung-s-galaxy-tab-10-
1n.html

www.businessweek.com/news/2012-02-19/htc-loses-patent-case-against-apple-at-trade-agency.html

www.bgr.com/2011/08/15/google-ceo-larry-page-explains-reasoning-behind-motorola-acquisition-spoiler-patents/

www.computerworld.com/s/article/9224388/Google_rebuts_Oracle_damages_report_in_Java_lawsuit

http://civicactions.com/blog/2011/feb/02/google_android_market_vs_apple_app_store

http://techcrunch.com/2011/10/13/page-google-plus-40-million-mobile-2-5-billion/

http://www.guardian.co.uk/technology/2011/oct/14/android-google-ad-revenue

Further Reading
Global Mobile Phones MarketLine Industry Profile

Mobile Phones in Europe MarketLine Industry Profile

Mobile Phones in Asia-Pacific MarketLine Industry Profile

Mobile Phones in the United States MarketLine Industry Profile

Google Inc. MarketLine Company Profile

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Ask the analyst
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