Android was accepted by incumbents precisely because the carriers and handset manufacturers were afraid of Apple’s momentum. Motorola, Samsung, and LG needed to figure out how they were going to respond to the iPhone. Google offered their Android OS for free and offered ad-split revenue to carriers and the deal was done. But it was a deal with the devil because the Android handset manufacturers as a group are not making much money. Apple took their profits.

What Google needs right now is for Apple (or someone else) to innovate in TV. Then, maybe, the incumbents will be receptive to Google’s advances. Apple is working on such innovation with their rumored new iTV box, which will provide an application platform that will likely run existing iOS apps. Nevertheless, as Tim Cook has said, Apple believes all these efforts might be marginal until the technology is integrated into the TV set itself, something he claims Apple does not want to do (until the day they do it).

Traditional disruption, described in the Innovator’s Dilemma, is about a cheaper technology sneaking up on incumbent players who are focused on serving their best customers – customers who find the performance of the cheaper new technology to be unacceptable. As time progresses, the new technology matures to the point where it performs acceptably for the mass market, and the market moves to the disrupter.

TV is ripe to be disrupted. It’s expensive for consumers. But you have to remember that you can’t make TV better. According to Nielsen, Americans already watch more than 35 hours per week of it. Watching HD TV over FIOS with a Tivo on a 52 inch Samsung LCD TV is near nirvana. You can only make TV cheaper.

It’s not likely that Apple will disrupt TV by making it cheaper. As the premium provider, they nearly always focus on making things better, not cheaper. Apple did not disrupt cell phones in the traditional sense by making them cheaper. What they did is introduce such a compelling innovation from a user experience standpoint that the least price sensitive, most profitable part of the market moved to the new technology. And then Google’s Android offered a low-cost good-enough alternative to feature phones that offered similar benefits. That’s par for the course in the technology world. What is unique about the iPhone story is just how fast the market is transitioning to smart phones and how rapidly all the profits moved to the early leader in that technology.

Long story short, Google is not going to have much luck with Google TV unless they can offer TV for less for consumers. I think Boxee has the better approach there. That’s traditional disruption. Boxee is a mediocre experience at best today compared to FIOS attached to a Tivo with an HDTV, but it’s free.

Cablevision’s best customers are not asking for low-def TV with fewer channels, constantly shifting line-ups and mediocre picture quality. And even if Cablevision sees the Boxee threat, they don’t want to give up their rich subscription revenue business to answer it. But each year Boxee will get better. And if Joe sixpack walks into a Best Buy and is told that the Boxee integrated Vizio TV in the corner does not require a cable subscription and will save him $1200/year, he will likely take the offer even if that TV offers a slightly worse experience. And that will be the end of the TV franchise as we know it.

Apple made a very deliberate decision in the US to achieve that price parity. They gave an exclusive to ATT, a weaker carrier, in exchange for a whopping subsidy by ATT. The result is that Apple is able to hit the price point that they believed was a necessity to achieve mass market adoption of smart phones. But, they limited themselves to those people willing to use ATT, which is a clear #2 to Verizon in the US.

ATT traded a lot of their profitability to Apple to get the exclusive on the iPhone, a bet that has clearly paid off. Without the iPhone, ATT would almost certainly have shed subscribers to Verizon in the last few years.

But if you look at International markets that enforce transparency, we are able to see the pricing disparity of the iPhone versus Android. In Denmark, the six month cost to own an iPhone 4 is $885, versus $460 to own the LG GT 460 (android) or HTC Wildfire (android). The iPhone 4 cost of ownership is 2x.

And while it’s easy to guess that if Verizon had the iPhone 4, it would outsell Moto Android phones at the same price, the pricing probably would not be the same on Verizon. If Verizon offered the same subsidy to Moto and Apple, Droids would be cheaper.

Android is well positioned to be cheaper. Multiple handset manufactures (Moto, HTC, Samsung) are fiercely competing for consumers but those competitors are unable to differentiate themselves because they all run the same OS. The result is that consumers do shop based on price and the handset makers earn significantly less than Apple does.

Another factor that leads to Android being cheaper for consumers is that the carriers like Verizon junk up the handset with branding and offers. Like a PC with crapware pre-installed, the cost of the hardware to consumers is subsidized by the companies that pay to put their offers on the device. You can be sure that Blockbuster paid to have their app pre-installed on the Droid X I just bought. If Verizon had the iPhone, they would not get to offset the price off the handset by selling space to marketing partners. Apple would certainly not allow it.

Meanwhile, Google develops the Android OS and charges nothing for its use, content to play the long game and own the software platform so that it is receptive to Google advertising. All this has the effect of lowering the cost of the device to consumers.

The final factor that props up Android in the US is that Verizon, in a brilliant marketing play, owns the Droid brand, backs it with $100MM of advertising per year and doles out the Droid monicker to particular handsets if and only if the handset manufacturers is willing to accept tight subsidies and Verizon co-branding of the experience and crapware.

It really is Mac vs PC all over again. The Android OS is positioned as a multi-vendor, good-enough, cheaper alternative to Apple’s finely crafted but tightly controlled solution. But unlike MS that wanted to be paid to install their OS, Google is giving it away (for now).

Apple has enormous manufacturing scale now. Nobody can build an iPhone for less than Apple. And Apple is the early leader with more applications. Apple is the innovator. But ultimately, Apple will probably be a minority player in smart phones over the long haul, content to accept 20% of the market and 80% of the profits. Why?

The reason I believe is that Apple is driven by different goals than Google. Apple is driven by a desire to see their vision of the world realized. Their goal is self-actualization. In their vision of the world, smartphones are elegant, uncluttered and tasteful. They don’t have porn. They are not tainted by low-brow marketing tactics of the carriers. Apple allowed ATT to sell its holy iPhone only if they would sell it exactly as the artist, Apple, intended it. They could not brand it, put anything on it or control how its used. Is Apple controlling? You bet. And you can see Apple’s orientation in the spoof video they showed at the front of the Antennagate conference? You don’t like the iPhone 4? Don’t buy it.

Google on the other hand is driven by a desire to see open and free access to information. They see mobile as a growing and important way that consumers access information and they want to make sure they can continue to be influential there. In short, Google is hell bent to organize the world’s information (for free) and Apple is hell bent to bring elegance, grace and art to our lives, but only to those who appreciate it.

Android will win this war if your definition of success is handsets sold. When the iPhone eventually does come to Verizon, people will prefer it but only if its the same price and it probably won’t be. But the good news is that this time, unlike in the Mac vc PC battle, Apple will have an installed base of one billion devices at some point and there will always be great support from ISVs for the platform.

So who’s right, Apple or Google? Well, that’s hard to say. There are people starving in the world and yet we still have art museums. Is it more useful to dedicate yourself to art or to feeding the world? Both increase human happiness. It seems that we need a balance and with Apple and Google, we have it.

At the time, we figured they were purchasing On2 for the patent portfolio. I guess we were right. They recently announced the new Google webm video format, based on the On2 VP8 codec. And now they just killed every On2 product. No great loss, their video conversion software was pretty rough around the edges.

Dear Flix customer,

As of June 21st, 2010 we are discontinuing sales of licenses for On2 Flix Pro, On2 Flix Standard, On2 Flix Exporter, On2 Flix PowerPlayers, On2 Flix Live, On2 Flix SDK for DirectShow and Live, and On2 Flix Publisher. Google will no longer sell or support these products.

FINAL ON2 FLIX PRODUCT INSTALLERS

Our Flix licensing server will go offline permanently on December 1, 2010.

IMPORTANT: We have created final On2 Flix Standard, Pro and Exporter product installers that do not verify license keys over the Internet. We strongly recommend that all On2 Flix customers download the final On2 installer for the product you are using and save a backup copy of the installer. These installers will go offline on December 1, 2010.

WILDFORM FLIX DESKTOP SALES AND TECHNICAL SUPPORT TRANSITION

Under a licensing agreement with Google, Wildform is assuming development and sales of Flix Pro, Standard, and Exporter under the Wildform Flix brand. We currently expect that Wildform will continue selling and improving Flix, and Wildform has already added support for the new WebM (http://webmproject.org) open media format to Flix. For more information visit http://www.wildform.com.

Wildform will not sell or develop On2 Flix PowerPlayers, On2 Flix Live, On2 Flix SDK for DirectShow, or On2 Flix Publisher.

Support tickets from On2 Flix Pro, Flix Standard and Flix Exporter customers must be opened through Wildform at http://wildform.com/eTicket/. Although we expect Wildform to provide reasonable support for these products for a period of six months beginning on June 21st, 2010, please be aware that the terms of support for each such product are governed by the product license or customer agreement associated with the product.

Sincerely,

John Luther
Product Manager, Google/On2

Terry Semel continued the same theme. Nearly all of Yahoo’s technology came in through acquisition: Yahoo Store is ViaWeb. Yahoo Mail was RocketMail. Yahoo search is a combination of Inktomi for the organic search results and Overture for the bidding and inventory management system.

And then Yahoo lost its way, forgetting that they were never, at their heart, a technology company, even though they were founded by two Stanford Engineers, Jerry Yang and Dave Filo. They rebuilt their search technology and developed several in house social networking projects.

Microsoft, on the other hand, has typically built their core technology from scratch, with some notable exceptions like SQL server (a Sybase port) and Internet Explorer (Spyglass). And Microsoft is not a media company. Microsoft got its start by selling software that they wrote directly to customers. You won’t find “Microsoft Producers” in the core Microsoft organization. Remember Ballmer screaming Developers, Developers, Developers? That is not a media company. Microsoft people are technology geeks at their core.

With the Microsoft/Yahoo deal announced today, Yahoo returns to its roots as a media company. Under the deal, Yahoo will use Microsoft Bing for search. They will essentially monetize their audience using Microsoft technology. Ad sales fall to Yahoo, which again makes sense because they are the media company, the company that understands the three pillars of any good media company: content, audience and advertisers.

And Microsoft can stop pretending to be a media company. They have been struggling to figure out how they can continue to exist as a software company when most software for the masses will be ad-supported and free. Do they have to learn how to sell to advertisers? Painful.

This is not the first time that Yahoo has been called upon to use their massive reach to build a technology king. Early on, Yahoo used Google’s search technology on their site. We saw how that worked out.

The challenge for Yahoo? With the costs of developing search technology off their plate and Microsoft offering a whopping 88% of the search revenue to Yahoo for five years, Yahoo will be a awash in cash. Now they need to figure out, without the burden of having to build the technology, how to entertain that audience. And Carol Bartz is not a likely choice to run a successful media company. If she is smart, she will find a successor quickly and step aside, taking the credit for changing Yahoo’s focus back to where it began.

The best proxy for running Yahoo is Disney. Build a diversified media company with a unique experience, including strong core values that run through all the properties. And buy the best technology and most creative people in the world to get it done. But rather than Disney, which monetizes mostly through premium fees, do it with advertisers.

When I worked at SGI, our best customers were not asking for low-end cheap PC card graphics. But every year those Nvidia and ATI cards got better and better, and eventually, our customers bought those.

Kodak’s best customers in the early 90s were not asking for digital cameras; they were inadequate in terms of quality. And Kodak had a huge chemistry, paper and film business to protect. They were scared that if they offered digital solutions, their traditional businesses would suffer.

When Craig’s list got started, the advertisers of the NY Times classifieds had no interest in the relatively small online audience. As a result, the NY times and other mainstream media outlets missed the opportunity for online classifieds, losing the business to Monster, Hotjobs and Craig’s list, none of whom had been in the classifieds business previously.

The leaders in auctions before the Internet were Sotherby’s and Christie’s. Ebay had no experience in auctions.

Zagats owned populist restaurant reviews but they did not want to cannibalize the sale of their books so refused to do a completely free version on the internet. That opened up an opportunity for Yelp, and the rest is history. Now their book sales are going to zero and they lost the online business too.

In technology and in life, underdogs often drive innovation. This makes sense. People with less to lose take greater risks, and are hungrier. Sequoia capital, the VC behind successful companies like Apple, Google and Cisco, says they prefer first time entrepreneurs because they are hungrier. Many of their most successful founders have been first-generation Americans, with very little to lose.

Steve jobs, in his address at Stanford’s commencement in 2005 talked about lightness of being a beginner after being thrown out of Apple. “Stay hungry, stay foolish” he advised. This is all the same effect, at a personal level versus a corporate level.

I love that entrenched, successful players continue to miss disruptive opportunities. Entrenched players have so many advantages in terms of capital and brand. Disruptive technology levels the playing field, giving promise to the words in the Declaration of Indepence that “all men are created equal.”

In Digital Photography, we are seeing the power of disruptive technologies play out right now.

Panasonic is leading the pack in introducing micro four-thirds cameras that take photos approaching that of an SLR, while dispensing with the mirror, pentaprism and mechanical shutter. Makes sense. Panasonic is an also-ran in digital cameras. You don’t see Canon and Nikon racing to remove the mirrors and put electronic viewfinders in their SLRs. Why would they?

Shutterfly, Snapfish and Kodak all but owned mainstream consumer consumer photo and video sharing with their print-oriented offerings. Then one day they woke up and realized that facebook, something they had not considered photo sharing at all, was the largest photo sharing network in the world. Oops. Did it hurt them they they did not innovate their core sharing capabilities for 5+ years? You bet it did.

And finally, the one nearest and dearest to my heart: smart phones are attacking point and shoot cameras from the low-end. And of course, Canon, Nikon and the other traditional camera companies are mostly ignoring the opportunity because their best customers are not asking for these types of devices.

You can see where this is going. Put a slightly better camera on an iPhone, add video and an LTE or Wimax network connection and smart phones will be better consumers cameras, with more convenience and lower cost (since consumers are all going to carry smart phones) than traditional point and shoot cameras.

The camera companies did not miss the transition from film to digital (well, most did not miss it, Leica and Hasselblad did). It was a fairly straight forward transition for them. Film cameras were becoming increasingly electronic anyway, and digital photography just brought a few more components over from analog to digital.

But the movement to smartphones is a completely different animal. Because these are sold differently. The smartphone is a subscription-based device that runs on the public networks and has a significant service component. The traditional camera companies have no experience providing high quality software and services. It would require a tremendous amount of learning on their part to make the transition, and a hunger to do it.

What does it take to not have disruptive technology put you out of business? It requires vision and the willingness to cannibalize your own business with what will likely be a lower margin product competitor.

Who does it well? The first example that comes to my mind is Amazon. They are ruthless. Knowing that electronic books will someday replace paper books, they entered the electronic book market and had the lower-priced Kindle versions of the books compete with the paper-based books on Amazon’s site. They invested significant money in doing the Kindle development, entering a field they knew nothing about: the design and manufacturer of portable mobile devices with wireless connectivity.

Seeing the possibility that Google could effectively compete with Amazon by selling links to Amazon’s competitors, Amazon sold links to their own competitors right on their pages! Amazon market place sellers who offer a lower price are ranked ahead of Amazon’s own offerings in search results. I bow down before them. They get it.

Everyone likes to bash Microsoft for missing the internet and paid search. True enough, they were protecting their business model of shrink-wrapped software and failed to embrace ad-supported software as service quickly enough.

But Microsoft did see the potential for game consoles to replace personal computers and invested heavily there, building the class-leading Xbox system into a profitable business.

Just happened to be that their vision was wrong there. Turns out that game consoles don’t replace PCs. They are additive to the consumer’s home. It is smart phones like the iPhone, probably in larger form factor, that replace PCs, and that opportunity they did miss. Or more accurately, they invested but could not see beyond the windows paradigm when developing windows CE.

Apple is no underdog, but in smart phones, they were the underdog. They had no business in mobile phones, nothing to protect, and certainly no mobile customers to lead them the wrong way.

I wonder what will get disrupted next? Exxon by solar energy?