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There were fireworks at the recent Google developer conference (“Google I/O”). Some of this was well deserved excitement around features found in the newest version of the Android mobile operating system (version 2.2, “Froyo”). Much of the fireworks, however, were due to loud, public taunting of the iPhone and Steve Jobs by senior Google executives.

Since everybody loves a contest, these statements by Google speakers were widely covered in the tech press and predictably stirred up heated comment threads throughout the blogosphere.

In truth, the schoolyard level of the rhetoric (see Kara Swisher) probably does not serve Google’s interests in the long run. This is because Google’s business relationships are symbiotic: Google needs its partners’ trust to continue delivering to Google, via their devices and services, massive amounts of user data for its primary business, which is selling advertising.

As a result of the mentioned spectacle, people seem to forget an important fact: that business-wise, Android is competing against Microsoft not Apple. Microsoft is a software vendor, like Google, but it makes billions by licensing its OS cheaply to multiple hardware vendors. Unfortunately, it seems Google has destroyed that marketplace by giving away its OS for free. John Gruber’s recent insightful post on the Google I/O conference provides more insight on this.

Apple, in contrast to Microsoft and Google, is more of a hardware vendor. Its business model depends on producing consistently great products and charging customers a premium for them. Apple makes a lot of money doing this and, as Gruber suggested, does not need more 20-25% of the marketplace to be wildly successful (it currently has 19%). Apple is only interested in the top portion of the market and already has an astonishing 90% of the market share for PCs costing more than $1000. But, if Apple stops making great products, its business model disappears.

Android promise is near-complete freedom for developers & handset makers and rapid iteration. This freedom will necessarily mean that Android will be fragmented, with multiple software and hardware versions (see Engadget) being sold at any given time. Thus, one can predict that handset and software incompatibilities will negatively impact application development, enterprise adoption and user experience. But, these impediments are not going to stop wide-spread adoption of Android since it only has to be “good-enough” to be accepted at low prices in the mass marketplace.

In the long run, as many have said, there will be more Android than iPhone devices – a lot more (see previous post). But, despite the heated rhetoric from Google, Apple will continue to thrive by continuing to deliver a highly polished user experience with a deep bench of applications deployed on a consistent platform. Nor will the iPhone vanquish Android with its permissive ecosystem, free licensing and large market share.