Why does the Android ecosystem suck?

My AT&T contract is up, and I’m trying to decide what to do to replace my iPhone 3G. The iPhone 4 beckons, but there’s a 3-week wait, and Android is very appealing as well. Notifications on iOS suck, and how long will it be before I can use Priority Inbox on my phone? In fact, I think I would switch to an Android device if I could find one that met three simple criteria: no QWERTY, stock Android, front-facing camera. As far as I can tell, only two phones even have two of those three features.

Like a lot of other people, I’ve been pondering the question, Why does the Android ecosystem suck? TechCrunch’s MG Siegler has written a couple of posts presenting a conventional view: It’s the carriers' fault. The openness of Android allows the carriers to load the phones with crapware.

My point is that the same “openness” that Android users are touting as a key selling point of the OS could very well end up being its weak point. If you don’t think Verizon, AT&T, T-Mobile, and Sprint are going to try to commandeer the OS in an attempt to return to their glory days where we were all slaves to their towers, you’re being naive.

Google had other plans that were allegedly foiled by the carriers. They were planning to offer the Nexus One as an unlocked phone for $99.

You see, Google’s grand mobile plan had just one pesky problem: Google doesn’t run their own cellular service. They need the carriers’ support in order to make their phones work. Otherwise they’re just handheld WiFi devices (an idea Google also toyed with).

And Google had another problem. Android was already in full swing at the time, and while the Nexus One was going to be a different kind of phone, they still needed full carrier support for all their other phones. They simply couldn’t afford to piss off the carriers who could effectively destroy the platform they had built. So Google backed down.

…

Yeah. That wasn’t Google’s original plan.

Their big back-up plan to revolutionize the industry was to sell the device online. The carriers went along with that, likely knowing it would flop. After only a few months, the entire thing fell apart.

…

Earlier today, Robert Scoble painted a similar (though much more brief) picture over Twitter of the story I just told. “My conversation last night with a Google VP confirmed that they threw their principles under the bus in order to gain Android market share,” he tweeted this morning. “What did the Google VP say? They learned from Google Nexus One that carriers hold all the cards. They had to play ball with them,” he continued. Bingo.

Does this story make sense? I’m not sure it does. At minimum, it can’t be a complete or primary explanation of the Android problem.

The first major problem with the conventional view is that the wireless industry is actually pretty competitive. The carriers are doing all they can to take business from each other. People look at the 2-year contracts that characterize the industry and assume that it is anticompetitive lock-in. But the existence of long-term contracts is not sufficient to demonstrate lack of competition; competitive markets sometimes feature long-term contracts to penalize inefficient switching, haggling, and opportunism, and of course, the contracts help finance the phone subsidies.

Siegler implicitly concedes that the industry is competitive today when he refers to the carriers' desire “to return to their glory days where we were all slaves to their towers.” Undoubtedly, the carriers would like to make us all slaves to their towers, but when you have three competitors trying to undercut you, that is a difficult thing to do. Why wouldn’t one carrier simply run TV ads saying, “We install less crapware than the other carriers?”

The second (related) problem with the conventional view is that it is trivially possible to buy (or get for free) contract-free SIM cards from T-Mobile and AT&T. If Google wants to subsidize a $99 unlocked phone, there is nothing stopping them. T-Mobile even charges less for service if you are not on a contract (since it is not subsidizing your phone). I don’t want to automatically dismiss the testimony of Scoble’s Google VP, but this explanation is hard for an economist to swallow.

If the carriers are not to blame for the sad state of the Android ecosystem, then who is? It’s hard to put this delicately, but…I think you people are. Look, in a competitive market, firms basically produce what consumers want. When there are fixed costs (hello phone development), not every niche gets served by the market. Firms sacrifice the inframarginal customer to go after the marginal customer. Who is the inframarginal customer? Nerds. People who love the Internet so much that they are going to buy a data plan no matter what. Who is the marginal customer? The customer that is on the fence between a smartphone and an old-school phone.

I know it is hard to believe, but the evidence leads us inexorably to this conculsion: the marginal customer loves crapware. Crapware is shiny, loud, gaudy. It is the “America’s Next Top Model” of software. People love it. They also love QWERTY keyboards.

The reason for the iPhone’s success is not that Apple is able to strong-arm the carriers. Apple is able to strong-arm us (or rather, you people, the marginal customers). Apple says, “We know that you think you want QWERTY keyboards, the TouchWiz interface, and an antenna that works, but you’re wrong.” And Apple is right. The carriers, on the other hand, give us what we (again, the marginal customers) think we want.

When something sucks, it’s tempting to look for a villain, and often the villain is a shadowy, secretive, and wealthy corporation. People like this story. It’s less sexy to ask if fixed costs plus bad tastes are at play. And often they are. The Android ecosystem sucks because we suck.