Why Android Pay Isn’t Really About Payments At All

To no one’s great surprise, we added another “Pay” player to payments last week.

Android Pay threw its hat into the mobile payments ring as the “other” operating systems-based payments scheme to launch in less than a year. Apple Pay, as is old news by now, was first out of the gate with the launch of its iOS-based payments scheme in September 2014.

Many pundits have characterized Android Pay as a “copy/paste” version of Apple Pay and, as such, have already crowned it the “other” dominant mobile payments scheme. And like they did when Apple Pay launched, many have inferred that it’s pretty much curtains for anyone else with ambitions to compete for market share in the mobile payments ecosystem.

Apple Pay is for stuff that is bought by people who own iPhones. Android Pay is for stuff bought by people who own devices that run Android. Done and done.

It’s easy to see why that’s the conventional wisdom going into June 2015.

Like Apple Pay, Android Pay went to market arm-in-arm with the existing payments ecosystem. All of the major card brands are supporting it, along with a handful of issuers. (Though not nearly the stampede that we saw when Apple Pay launched.)

And, like Apple Pay, it’s embracing NFC technology and will work at all of the same merchants that accept Apple Pay today, and enable NFC going forward. That is some 700k retail locations (not merchants – there’s a big difference). That 700k includes ~400k vending machines.

Android Pay also exposes an API that allows developers to enable it for in-app payment.

Google wants to use Android Pay as a way to get more consumers to buy more Android phones.

Tokenization is also at the heart of its security and digital identity strategy, perhaps allaying the fears on the part of merchants that Android Pay is all about scarfing up consumer data and using it against them later.

It has a cute little icon of the green Android guy on the pay button to signal acceptance.

Which is where many of the comparisons end.

First, unlike Apple and Apple Pay, Android Pay is not really an “Android” play, it is a Google Android Play, and the two aren’t the same.

Google, of course, has been regarded as the unofficial godfather of Android since it acquired it in 2005, but Android is an open source software platform that can be licensed, and modified out the wazoo, by anyone who wants to use it.

Which means that it has a huge fragmentation problem staring it right in the face – a huge obstacle when trying to replicate an Apple-like strategy.

At its launch, Google announced that Android Pay would be supported on devices running KitKat and higher. That’s roughly 44 percent of Android enabled devices, and none of those that operate a forked version of Android, like the Amazon Fire phone, for instance or Samsung’s Tizen.

That means that despite Android having a humongous share of the operating system market worldwide, its potential Android Pay customer funnel is reduced by the number of consumers with handsets that have both NFC capabilities and that are running a current version of Android. By comparison, more than 80 percent of iPhones have upgraded to its most recent operating system, iOS8.

Here’s why that matters – with a little back of the envelope math for the U.S. which is where it’s launching.

In the U.S., as of March 2015, comScore says that 187 million people own smartphones.

Android has a 52.4 percent of that market – so some 97 million phones run the Android operating system.

That actually beats Apple by a whole lot – like 17 million.

But only 44 percent of those handsets run a version of KitKat and higher. Less than 5 percent run Lollipop, its most current version.

That reduces the number of phones with KitKat or higher to roughly 42 million phones.

A rough guesstimate of how many of those 42 million are NFC enabled – and therefore ready to rock it with Android Pay – is 6 million. (In 2013, 18 percent of all handsets shipped were NFC enabled – and 80 percent of those were Android. So, 18 percent of 42 million and then 80 percent of that number is 6 million.)

Compare that to Apple and its iPhone 6/6 Plus.

Kantar’s latest reports say that 18 percent of the 80 million iPhones in the U.S. are 6’s – that’s 14.4 million phones ready and able to enable Apple Pay. That doesn’t translate to Apple Pay usage, we estimate the number of active users to be ~600k – but simply estimates the size of the addressable market for Apple Pay.

That means that out of the gate, Google Android Pay has about half (57 percent) of the addressable market that Apple Pay has.

Now, combine that with Android’s big spending power problem.

According to Pew’s latest study of smartphone demographics- which was done before the iPhone 6 was released – and before all of the stats about Apple’s ability to attract “switchers” were too – the differences were stark.

  • 31 percent of adults earning more than $75k owned a phone running an Android operating system, compared to 40 percent with Apple phones;
  • 28 percent of adults earning under $30k own Android phones, compared to 18 percent with Apple phones;
  • 29 percent of Android users are college educated, compared with 38 percent of Apple phone owners;

All of which suggests strongly that the commerce advantage goes to Apple.

Not only are there more Apple users in the upper income categories but more of them are concentrated in their peak spending years. In fact, we estimated a year or so ago, that roughly 66 percent of retail spend in the U.S. is driven by those who own iPhones.

This suggests that on the basis of Android Pay alone, Google will have great difficulty persuading merchants that Android Pay will drive a ton of incremental volume for them. It’s no wonder they decided to embrace a carbon copy of the Apple Pay model – they get to ride the draft of whatever momentum the networks and issuers create for Apple.

Then there’s the whole issue of getting Android Pay into the hands of consumers in the first place.

Apple is a closed ecosystem. It controls what goes on its handset – emphasis on the word handset. The only models for sale now are the 6 and 6 Plus and Apple controls everything that goes onto them. The mobile operators don’t have any say. It’s why when consumers buy Apple devices they’re not all junked up with icon after icon of mobile operator dictated apps.

Now, I know what you’re saying: Google spent $55 million to buy the Softcard licenses that will give them the right to push an Android Pay icon onto every handset. Yes they get the right to do that. But that doesn’t mean that consumers will use it – they didn’t when it was Softcard. Or that will be free. Android Pay still has to negotiate separate deals with each of the handset manufacturers – and that’s just here in the U.S. When Android Pay wants to move to Canada, the U.K., Europe, it will have to negotiate deals with all of those carriers too.

Apple doesn’t have to do diddlysquat.

Meanwhile, in Europe, the European Commission and a lot of countries seem to have it in for Google, which has been under antitrust investigations for years. Google and China parted ways many years ago when Google decided it wasn’t going to put up with all the censorship nonsense.

Taking Android Pay global will be interesting to watch.

Speaking of the Android Pay business model, the operators, I’m sure, will want a piece of the action. It’s what they’ve always wanted from payments going mobile. But unlike Apple Pay, my guess is that the flow of revenue around the Android Pay ecosystem is more likely going away from Android Pay – rather than to it – to get it off the ground. Android Pay just doesn’t come to market with the same swagger and brand cachet as Apple Pay did.

But that’s probably not all that important to Google. They have gobs of money to pour into Android Pay. My guess is that, like Apple Pay, Android Pay isn’t really about monetizing payments, per se, but using it as a way to gain another advantage that drives revenue for them. Apple Pay’s “something else” is about getting consumers to buy handsets – hardware sales account for 75 percent of Apple’s revenue. When analysts publish estimates of Apple generating a billion dollars from Apple Pay in a few years, that’s not even a rounding error for them. It’s a freckle on a pimple for a company with $174 billion in cash just sitting around waiting to be spent.

Android Pay’s something else? Well, it’s not clear that there is one.

Android Pay may be one of many building blocks Google needs to overcome the impact of mobile and Apple on its main source of revenue.

Eighty percent of Google’s revenue is via search-based advertising, a fact well known to Google.

“More Google searches take place on mobile devices than on computers in 10 countries including the U.S. and Japan,” Google posted last week on its blog which also touted the “tremendous opportunity for marketers to reach people” that these new “touchpoints on the consumer’s path to purchase” represent.

That trend has had a tremendous impact on how Google makes its money.

A New York Times article last week extracted data from a Goldman Sachs report on Google’s search revenue challenges. In it, it was reported that this year – 2015 – Google’s ad revenue will be split 58/23 desktop to mobile. In 2016, that’s expected to adjust further to 54/27. It isn’t hard to imagine that by 2020, those numbers will not only flip as “mobile” expands to become wearables, cars and a collection of other connected devices that consumers own and use but change entirely as search becomes less about using search engines and more about consumers using apps to find the things they want to buy.

That detail suddenly becomes pretty important since mobile ad revenue, on a good day, clocks in at a lot less than desktop revenues. More mobile search means less search revenue even if volume is increasing. All you have to do is review Google’s last couple of years of earnings reports to see the impact that it’s already having on its revenue.

But there’s a larger and related threat facing Google.

Today, 51 percent of product searches no longer start via a search engine at all, but a site where consumers can find what they want and buy it in one stop. Sites like Amazon and Walmart.com and shopping apps like Wish and Lyst and Net-a-Porter and Spring all make it possible for consumers to dive into apps that curate what they like to buy and have purchased and make it efficient for them to do more of the same.

New entrants like Messenger for Business are also experimenting with the notion of retail inside of messaging. Wanna know what Google Play’s No. 1 free app is by usage? Messenger. The bottom line is that as more consumers are given more opportunities to default to apps that eliminate the friction from the commerce experience, the more at risk Google becomes to losing its search ad revenue cash cow.

Then there’s this.

Approximately 75 percent of Google’s mobile search revenue is the result of people using iPhones and iPads to find things on their path to purchase. A search initiated via Safari is actually powered by Google.

Having one of your biggest partners also be your biggest archrival down the road in Cupertino can’t make anyone at the GOOG feel happy pappy or very secure.

Now, the Apple Maps fiasco taught Apple a valuable lesson about what happens when you decide to move consumers to an inferior experience just because you want to control everything they do on your platform. You can only do that if you have a really outstanding alternative ready to offer them.

Which is why Safari’s search default is Google –unless or until Apple redefines search in a way that minimizes a user’s need to use Google for search or replaces it altogether.

Google’s decision to buy Android in 2005, and invest in it, has given it a ton of distribution, but not as much control as Apple has over how developers use it, how consumers experience it and how Google could make money from it.

Nothing that was all that important when desktops ruled the world and mobile, never mind online, was an asterisk when retail sales were reported.

And Apple was just getting off the ground.

A decade later, Google now has to pull out all of the stops so that more and higher spending consumers become more sticky to its mobile operating-based ecosystem.

Something that’s less about payments and Android Pay, and more about what to do when your biggest competitor also happens to drive the bulk of the revenue coming from the devices that are changing everything about commerce.

Because, payments after all, isn’t something that even their biggest and arguably better positioned competitor is finding all that easy to pull off either.