MONEY financial crisis

What Bank of America Did to Warrant a $17 Billion Penalty

A protester holds up a sign in front of the Bank of America as a coalition of organizations march to urge customers of big banks to switch to local credit unions in San Diego California November 2, 2011.
Mike Blake—Reuters

It's the biggest settlement ever between a corporation and the U.S. government. Here's what it reveals about how bankers inflated the housing bubble.

Bank of America has agreed to pay $16.65 billion dollars in penalties—the largest settlement ever between the U.S. government and a private corporation—for its role in the financial crisis. As Attorney General Eric Holder said Thursday morning, the payout will help “hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy.”

So what did Bank of America actually do? As part of the settlement, the Justice Department has issued a 30-page “Statement of Facts,” signed by the bank, detailing the actions Bank of America is paying for today. The document includes events that took place at Merrill Lynch and Countrywide, which Bank of America later acquired. It’s full of e-mails and statements from employees and executives, which often make for infuriating, if sometimes grimly funny, reading.

Here’s what happened. In the years leading up to the financial crisis, Bank of America and Merrill Lynch sold various securities based on home loans. If the buyers paid their loan back, investors made money, but if too many defaulted, investors lost. To make sure investors knew what they were getting into, the two companies were required to report to investors on how safe these loans actually were.

The problem? Both BoA and Merrill, the statement says, knew with increasing certainty that many of their loans were troubled or at least likely to be risky, and didn’t fully disclose this.

At Merrill, one consultant in the company’s due diligence department complained in an email:

[h]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch’s RMBS business] is going to keep them regardless of issues? . . . Makes you wonder why we have due diligence performed other than making sure the loan closed.

The Merrill email pales next to the almost-cartoonish cynicism on display in some Countrywide emails. In addition to selling mortgage-backed securities, Countrywide was on the front lines giving mortgages to home buyers. Justice Department documents suggest that the company increasingly offered loans to almost anyone who walked in the door. What mattered was whether the loan could later be sold to someone else. Wrote one exec:

My impression since arriving here, is that the company’s standard for products and Guidelines has been: ‘If we can price it [for sale], then we will offer it.’

In an email from 2007, another executive reflected that:

[W]hen credit was easily salable… [the desk responsible for approving risky loans] was a way to take advantage of the ‘salability’ and do loans outside guidelines and not let our views of risk get in the way.

Because why should a mortgage company care about risk?

But what makes Countrywide special isn’t just that they gave out a lot of bad loans, it’s that they sold those bad loans to others while keeping the good ones for themselves. In a 2005 email, the Countrywide Financial Corporation (CFC)’s chairman—not named in the statement, but it was Angelo Mozilo—wrote that he was “increasingly concerned” about a certain adjustable rate loan. He feared that the average borrower was not “sufficiently sophisticated to truly understand the consequences” of their mortgage, making them increasingly likely to default. He wrote:

…the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and reputational catastrophe.

So what did Countrywide do about it? Sell the products on the secondary market, and keep only the mortgages given to more qualified buyers. According to the settlement document, Countrywide’s public releases “did not disclose that certain Pay-Option ARM loans included as collateral were loans that Countrywide Bank had elected not to hold for its own investment portfolio because they had risk characteristics that [Countrywide Financial Corporation] management had identified as inappropriate for [Countrywide Bank].”

In another email, this time from 2006, CFC chairman Mozilo explicitly spelled out this policy to the president of Countrywide Home Loans, writing:

important data that could portend serious problems with [Pay- Option ARMs]. Since over 70% have opted to make the lower payments it appears that it is just a matter of time that we will be faced with a substantial amount of resets and therefore much higher delinquencies. We must limit [CB’s retained investment in] this product to high ficos [credit scores] otherwise we could face both financial and regulatory consequences.

What do you know? Looks like those “financial and regulatory consequences” happened anyway.

MONEY Google

‘Google for Kids’ Is Coming

Child using Google on iPad2
Alex Segre—Alamy

Reports indicate Google is planning to roll out a suite of services specifically targeting young users.

Google is working on versions of its services, such as YouTube and Gmail, that are specifically outfitted for children.

Currently, Google services are technically only meant for persons over the age of 13 years. Users attempting to create a new Google account are asked to enter their birthday, in addition to other information like username and password. Those under the age limit are directed to a page explaining Google’s policy and linking to the Federal Trade Commission’s web page on child privacy.

According to the Wall Street Journal, Google’s new child-approved services will allow parents to control how their children interact with Google’s products and what information the search giant collects from their child’s activity. The Information previously reported that a version of YouTube featuring beefed up parental controls was in development.

Google currently limits its services to an older age group because the Children’s Online Privacy Protection Act (COPPA) requires parental consent before a child’s data can be collected, and restricts how that data can be used and stored. While web sites are not liable if underage users lie about their age, a person familiar with Google’s plans told the Journal that demand from parents who want to create accounts for their children and a desire to remain in compliance with COPPA spurred the company to act.

Another reason for kid-centric services could be a desire by Google to break into the lucrative education market. The company’s Chromebooks are low-cost laptops that might be attractive to schools, but the products are entirely based around Google services. A child-suite of Google apps might make Chromebooks a viable alternative to the iPad among educators interested in introducing technology into the classroom.

Some privacy advocates are not particularly thrilled by the prospect of more children making Google accounts. Jeff Chester, executive director for the Center for Digital Democracy, told the Journal the new services could threaten the privacy of millions of children, and that his organization had already shared its concerns with the Federal Trade Commission.

MONEY Education

How Sending Your Child to Private School Can Save You $53,000

GOSSIP GIRL, Chase Crawford (left)
Giovanni Rufino—CW Network courtesy Everett Collection

Public school can end up being much more expensive than private school depending on where you choose to live.

UPDATED—8:15 A.M.

For most Americans, private school seems like an unaffordable luxury, or an unnecessary extravagance, depending on your point of view. One thing everyone agrees on, though, is that private school is expensive—especially compared with the competition. After all, public education doesn’t cost anything, and you can’t compete with free, right?

The problem with that logic is that public school actually isn’t free. In what might be one of America’s most regressive policies, the government divides the country into school districts, each supported by a local tax base. That means school funding and quality varies drastically depending on where you live, and homes in top school districts tend to be eye-poppingly expensive.

According to a recent Trulia report, houses in districts where even rich families send their children to public school—suggesting the quality of education is especially high—can cost more than twice the national average per square foot. That means in certain cases, private school can actually be a bargain.

To answer the question of how much going to private school could potentially save, we need the help of two fictional families: the Publicos and the Privados. The Publicos want to give their child the best public education they can, so they move to a neighborhood with one of the nation’s top public schools. The Privados prefer private education, so they move to a neighborhood with average schools (and median home prices) and send their child to prep school.

To figure out how much the Publicos will spend, we’ll use Trulia’s Rent vs. Buy calculator* to see how much living in an average-size house in a top school district for 13 years (kindergarten through 12th grade) would cost. A median-priced house in Auburndale, Massachusetts—which Trulia lists as having some of the best public schools—will end up costing the Publicos about $2,120 a month.

In comparison, we’ll say the Privados live in an average school district and buy a home that will cost the national median of roughly $998 a month over the same time period. On top of that, the Privados pay for their child’s private school. According to data from the Nation Center for Education Statistics, the average price of a year of private elementary school is $7,770, and the average annual cost of private high school is $13,030.

By multiplying the cost of elementary school by nine (grades K-8) and adding it to the cost of a four-year high school, we get an average total cost of educating a child privately of $122,050, or $782 a month. Add that to the Privados’ housing bills, and they’re up to $1,780 a month—still a few hundred dollars less than the Publicos’ monthly costs.

Over time, these savings add up. By the time the Publicos’ child graduates high school, they will have paid $52,982 more than the Privados for education and housing. Meanwhile, if the Privados stashed away those savings in a 529 college account, they’ll have a lot of extra money to help pay for their son’s or daughter’s university.

SchoolSpendingChart

Does this mean private school is always a better option for parents? Not at all. The above calculations compare one of the most expensive public school districts in the nation with the average cost of private school. The most elite prep schools can cost upwards of $40,000 a year, while some areas with great public schools are far more affordable than Auburndale.

There are also a number of factors to consider that this calculation doesn’t take into account. While private schools cost $9,388 a year in general, religious schools are a little cheaper, and secular schools are much more expensive. There’s also regional considerations, like commute times, employment opportunities, crime rate, and other neighborhood perks that we don’t have time to explore in detail.

One final thing to consider is how many children you plan on sending to school. If both the Publicos and Privados send two children to school instead of one, the Publicos actually save almost $70,000. Although, if the Privados send two kids to public elementary school and then transfer both children to a private high school, they’re back in the black, saving almost $71,000.

So with that in mind, what’s the takeaway from all this? Instead of automatically selecting public or private school for your child, make sure to give both options serious consideration. Sometimes—likely most of the time—public school will be cheaper. In other cases, a good private education may actually cost less. Either way, taking the time to get the decision right can save you thousands of dollars.

 

 

* Other than the “How long would you live there?” field, which we set to 13, and the region, our calculations are based on the calculator’s default settings.

MONEY entrepreneurship

30-Year-Old Tech Mogul’s 1,200-Slide Motivational Opus In One Image

You're welcome.

Earlier this week, a serial entrepreneur named Ryan Allis decided to share online the nuggets of motivational wisdom that he’s accumulating over his 30 very busy years. On its face, that doesn’t sound like a terrible idea. Allis is, by any measure, a very successful businessperson, having launched a couple startups and selling one of them — the email marketing service iContact — for $169 million in 2012. He may be only 30, but he certainly knows a thing or two about being successful.

There’s just one problem. Instead of posting an article or short video, Allis uploaded a 1,285-slide powerpoint presentation detailing everything—and it does appear to be everything—that he’s learned over the past 10 years. Each slide contains just a few colored words in giant, sans-serif letters. Most convey the kind of common-sense motivational bromides we’ve all heard many times — the kind of stuff that, no matter how true or useful, often fails to have an deep effect on people precisely because they’ve heard it so many times.

Other pieces of advice, meanwhile, come across as a little weird. At various points, the iContact founder urges readers to ditch any friends who don’t “inspire” them; suggests moving to a “cultural center” if they don’t already live in one; and recommends finding a mentor by sending unsolicited email or Twitter messages — or even by just showing up at their office. What if that doesn’t work? He suggests you keep up the charm offensive for at least six months.

But what’s really most notable about Allis’s presentation is its sheer length. As I skimmed it, I had to wonder: Would the people who most need to hear Allis’s advice reallyslog through all those slides? I seriously doubted it — and was reminded of something that that greatest of motivational writers, Benjamin Franklin, once wrote: “I have already made this paper too long, for which I must crave pardon, not having now time to make it shorter.”

Figuring that Allis must be too busy to cut his opus down to size, I thought I’d take a shot. You can read my one-slide summary above.

Now you’re ready to succeed in business, make boatloads of money, and eventually write your own motivational slideshow. You’re welcome!

MONEY Bitcoin

Uber, Airbnb, and Others May Soon Accept Bitcoin

Bitcoin
Lucy Nicholson—Reuters

Customers may soon be able to use bitcoin for a variety of web services if a new deal involving an Ebay-owned payment processor goes through.

Bitcoin fans, rejoice. A new deal between a Paypal subsidiary and digital currency companies may soon allow customers to pay for Uber, Airbnb, Opentable, and other services with digital currency.

The Wall Street Journal reports that Braintree, a payment processor Ebay acquired last year, is in negotiations with businesses like Coinbase that allow consumers to store, buy, and send bitcoin, a digital currency that can be either “mined” using computing power or purchased with dollars. Braintree is currently part of Ebay’s Paypal unit. If these negotiations are successful, Braintree’s clients would be able to accept bitcoin payments.

If Braintree does enable clients to start taking bitcoin, they would not be the first to do so. Overstock.com was the first large company to accept bitocoin payments; and Dell, technology retailer Newegg, and satellite TV provider Dish Network, have all followed suit. Most of these services have also partnered with Coinbase.

While the currency has seen increased adoption, not all developments have been positive. In July, New York’s Department of Financial Services proposed new rules for virtual currency businesses that sought to reduce illegal activity—which bitcoin has previously facilitated—and increase consumer protections for the currency’s users. While some have lauded the rules as an important first step toward making bitcoin a viable currency, other bitcoin advocates slammed the regulations for eliminating bitcoin’s anonymity and their arduous requirements on certain businesses.

Bitcoin has also not fared well in terms of price. After the value of one bitcoin (BTC) peaked at over $1,100 in late 2013, its price has come crashing back to earth. As of today, one BTC is worth $512; down from $747 at the beginning of this year.

MONEY Banking

Why This Bank Bought Its Customers Pizza

Pizza
Jeffrey Coolidge—Getty Images

When Simple, an online bank, experienced an outage last week, the company made it up to customers by giving them dinner and $50 cash.

If you’re like most people, you probably haven’t heard of Simple, the banking startup (recently acquired by BBVA) that promises to bring banking to the mobile world. Simple works like a conventional bank, except the high-tech operation is only accessible through the web. That means if its online services stop working, Simple effectively ceases to exist.

That was a problem last Wednesday, when a transition to a new in-house payment processor went awry for about 10% of users, or roughly 12,000 of the company’s 120,000 customers. The outage lasted all day, and issues still persist for some, prompting a deluge of complaints. Anger at service disruptions is common, especially in banking, but Simple’s response might be unique: The company bought pizza dinner for a number of its users and appears to have given $50 to all those affected by the outage.

“I am deeply sorry,” wrote Simple CEO and co-founder Joshua Reich in a post on the company’s blog. “We let you down. We’re doing everything we can to help make things right.” While Reich doesn’t mention any details on exactly how the bank is making it up to customers, many Simple users took to Twitter, lauding Simple for its surprisingly generous efforts.

At least a few customers who could not access their funds received a free meal, courtesy of the bank. Another user posted an email from Simple on Twitter announcing his account had been credited with $50 as an apology for the downtime. Simple spokesperson Krista Berlincourt said she could not speak to any specific compensation offered to customers, but did stipulate that customer support agents “are empowered to do whatever it means for them to do right by the customer.”

Screen Shot 2014-08-14 at 1.03.01 PM

Berlincourt also confirmed that a subset of customers “who were affected longer than they should have been” received monetary compensation, but declined to specify how many accounts were credited or how much money Simple distributed. The Oregonian, working off Simple’s statement that fewer than 90% of customers were affected, estimates the company gave away about $600,000—not including what it spent on pizza.

Screen Shot 2014-08-14 at 1.04.50 PM

Simple could not immediately provide statistics on its general reliability, but Berlincourt said this is the first outage she knows of that wasn’t the fault of a third-party payment processor. Ironically, Simple says Wednesday’s issues derived from its attempt to switch to its own payment processor, a move intended to improve the service’s reliability and performance.

Now that this transition is completed, the CEO’s statement noted, another outage of this caliber is highly unlikely. “This project isn’t one we ever repeat,” Berlincourt said. “When you build a foundation for your home, once it’s built, it’s there.” And if anything does go wrong again, customers can at least look forward to another free dinner.

MONEY Employment

Youth Employment Enjoys Summer Surge

Jason Priestley as "Brandon Walsh" working at The Beverly Hills Beach Club in 90210
A summer job at the beach club helped Jason Priestley's "90210" character save money for a new set of wheels. ©Aaron Spelling Productions—Courtesy Everett Collection

The number of employed youth increased by 2.1 million this summer, as many young people took summer jobs or began looking for full time work.

From April to July of this year, the number of employed youth between the ages of 16 and 24 increased by 2.1 million, according to a report released Wednesday by the Bureau of Labor Statistics. The total number of youth employed increased to 20.1 million.

July is usually peak employment time for young people, and the numbers reflect that. At the same time, as the number of 16- to 24-year-olds looking for work increases, so does their demographic’s unemployment rate. The number of unemployed youth also spiked from April to July, rising by 913,000 to 3.4 million, down from 3.8 million last summer.

Overall, youth unemployment declined year over year, but only slightly. Since last July, this group’s unemployment rate declined 2 percentage points, to 14.3%. The labor force participation among young people—the total number working or looking for work—was 60.5%, the same as the previous two summers.

As far as where these young people are working, traditional summer jobs remain the norm. One-quarter of employed youth worked in the leisure and hospitality industry, which includes food services, and another 19% worked in retail.

While summer jobs remain popular, they’re a lot less common than in previous generations. Prior to 1989, the July labor force participation rate for young men was in the 80% range, and the participation rate for young women peaked that year at 72.4%. Since then, however, the labor force participation rate among young people has drastically declined, decreasing by about 20% for men and roughly 15% for women.

 

MONEY Education

You’ll Never Guess the City Where Private School Is Most Common

Ben Affleck, Randall Batinkoff, Matt Damon, Brendon Fraser, Cole Hauser, Andrew Lowery, Chris O'Donnell in SCHOOL TIES (1992).
Paramount—Courtesy Everett Collection

Whether a family sends its children to private or public school can be influenced by a number of factors, and it's not always about money.

Private school versus public school isn’t an option for most Americans. The average annual cost of a private education is $10,940, and only about 20% of students have parents willing or able to pay that freight.

Knowing that, one would expect the city that sends the highest percentage of its children to private school to be among the richest in the country. Manhattan perhaps? Somewhere in Connecticut? Wherever the prep school in School Ties was located?

Nope. According to a new study by real estate website Trulia, the city with the highest proportion of private school enrollees is New Orleans. A whopping one-fourth of all students in the Big Easy attend a private institution—and it’s not the only Louisiana city in the top 10 for private school enrollment. Baton Rouge ranks fourth, with just under 20% of all students going the private route.

Many of the cities you might expect to see don’t even make the list. While the East Coast generally sends a higher than average percentage of students to private school, its only cities to place in the top 10 are Philadelphia (18.4%) and Wilmington, Del. (17.6%). The rest of the list is dominated by Midwest cities in Ohio, Wisconsin, and Missouri, as well as outliers like Honolulu and San Francisco.

Why do some areas choose private school at a higher rate than others? According to Trulia, metros that are largely more wealthy, more educated, more white, and more Catholic are the most likely to have their children privately educated. Faith is especially important, because most private schools are religiously affiliated, and half of those schools are Catholic. New Orleans, Philadelphia, and Cleveland all have a large Catholic population.

Dr. Jan Daniel Lancaster, superintendent of Catholic Schools for the New Orleans archdiocese, was surprised to learn that her city led the nation in private school enrollment rate, but had no doubts about why New Orleans’ Catholic schools were so popular. “New Orleans is a very Catholic area,” said Lancaster. “People want a very strong academic education that is embedded in the catholic faith, and Catholic schools are so strong academically.” Another reason might be the example set by prominent members of the community. Lancaster says two state senators, the mayor, and the local district attorney, among others, all received a Catholic education.

Courtesy of Trulia

Screen Shot 2014-08-12 at 7.43.23 PM

Public school quality matters too. After adjusting for neighborhood demographics, Trulia found that students in areas with the worst public schools were four times as likely to attend private schools than their peers in areas with the best public education. Areas with high income inequality also showed an increased percentage of private school students, which the study speculates could be caused by more affluent families wanting to keep their children out of public schools with greater income diversity.

Screen Shot 2014-08-12 at 8.03.41 PM

Some public schools are so good that even the wealthiest families choose them over private options. However, those areas aren’t exactly cheap to live in. After looking at affluent Zip codes where over 90% of students received a public education, Trulia determined these areas had housing prices that were more than twice the national average on a square-foot basis. In fact, housing prices were directly correlated with the quality of local public schools.

Home prices in the worst school districts were 41% lower than the national average, while areas with top-tier instruction were 32% more expensive. That means anyone hoping to move from a terrible district to a great one could face a 73% price increase.

Screen Shot 2014-08-12 at 8.07.17 PM

 

It’s interesting (and a little depressing) to see how expensive living near a good school can be. Where families ultimately decide to send their children “really depends on the specific neighborhoods you’re considering, how much house you need, and the type of private school you’re considering,” says Jed Kolko, Trulia’s chief economist. “But I think a larger point is that both private and public schools can cost a lot of money.”

TIME health

We Need To Do Better Than the Ice Bucket Challenge

Ice Bucket Challenge
Boston City Councillor Tito Jackson, right, leads some 200 people in the ice bucket challenge at Boston's Copley Square, Thursday, Aug. 7, 2014 to raise funds and awareness for ALS. Elise Amendola—AP

The Ice Bucket Challenge is problematic in almost every way. It's also raised millions for charity. How can we reconcile those two facts?

I remember the first time I heard about the Ice Bucket Challenge. It was a few weeks ago when photos and videos of people dumping water on their heads began appearing on Facebook. Soon, I started to see headlines on twitter mentioning one famous person jokingly challenging another. It sounded fun.

I also remember when I found out the Ice Bucket Challenge was started to combat ALS, the neurodegenerative disease my father died from 18 years ago. That was last Saturday. Initially, I was overjoyed all this attention was now focused on ending a disease that had caused me so much pain. My favorite hockey stars were participating, and Ethel Kennedy even challenged the president to douse himself.

But when I looked closer, I became uneasy. No wonder it took me weeks to learn the Ice Bucket Challenge was linked to ALS. Most of its participants, including Kennedy and Today’s Matt Lauer didn’t mention the disease at all. The chance to jump on the latest trend was an end in itself. In fact, the challenge’s structure seems almost inherently offensive to those touched by ALS. Here’s how the ALS Association describes the rules:

The challenge involves people getting doused with buckets of ice water on video, posting that video to social media, then nominating others to do the same, all in an effort to raise ALS awareness. Those who refuse to take the challenge are asked to make a donation to the ALS charity of their choice.

That means everyone you’ve ever seen dump water on themselves, per the rules, is not asked to donate. They may choose to, but the viral nature of this fad appears centered around an aversion to giving to money. “Want to help fight this disease? No? Well, then you better dump some cold water on your head.” The challenge even seems to be suggesting that being cold, wet, and uncomfortable is preferable to fighting ALS.

Ice Bucket defenders would argue this is all just meant to “raise awareness,” meaning those who participate are still doing good without donating. ALS needs all the awareness it can get, but somehow I doubt many learned a whole lot from contextless tweets of wet celebs smiling and laughing.

But here’s where my argument breaks down. Problematic elements aside, the Ice Bucket Challenge has raised $2.3 million since July 29th. That money will go towards treating people just like my father, and maybe one day, finding a cure. So do the ends justify the means?

After thinking long and hard about it, my short, reluctant answer is yes. I’m not going to stand here and try to stop a trend that is doing so much good. I’m also encouraged by an increase in the number of participants who I’ve seen at least mention ALS alongside their tweets and Facebook posts. I plan on participating myself, and I urge everyone reading this to join me. You can donate to ALS research here.

But at the same time, I can’t help but feel this challenge could have done so much more good if it were structured differently. Maybe people could dump ice water on friends who haven’t donated as goofy way of encouraging others to give, or dump water on themselves before promising to donate. Maybe helping ALS could at least have been presented as something other than a consolation prize.

Articles like this one, reductively titled “Stop hating on the ice bucket challenge — it’s raised millions of dollars for charity,” miss the point. In an age where hashtag activism and information-free awareness campaigns are becoming more and more common, we should be very conscious of how to make viral trends as useful as possible.

The Ice Bucket Challenge has done a lot of good. Let’s make sure the next one is even better.

MONEY

This Is the Biggest Threat Facing Google Right Now

Xiaomi released its new smartphone product Mi4 on its annual new product release on Tuesday.
Xiaomi, a Chinese phone maker, sells devices running a modified version of Google's Android operating system, but without any Google services. Zhang Jin/Xinhua—Alamy

Google's Android operating system can be used—and changed—by anyone. Now the search giant might be losing control of its creation.

When Amazon’s Kindle Fire phone debuted last month, the engineers at Google’s Mountain View headquarters probably weren’t clamoring to get their hands on one. Exactly zero of the search giant’s mobile apps are available on the Fire. No Gmail, no Maps, no Play store, no Docs. Even the default search engine is set to Microsoft’s Bing. Amazon might be the first company since Microsoft to announce a major phone completely devoid of anything Google.

Which is strange, because without Google’s help, the Fire wouldn’t exist.

That’s because the very guts of the Fire, the open-source Android operating system, is owned by Google. Since 2007, Google has allowed hardware makers to use Android for free in their phones. Google generally benefits from this arrangement because its operating system plays well with — and thus sends a lot of users to — its own (money-making) applications. But by creating the Fire devoid of anything Google, Amazon appears to have short-circuited this strategy.

Unfortunately for Google, Amazon isn’t the only company doing this. A recent study by ABI Research found that some 20% of the smartphones worldwide run a customized version of Android that isn’t required to carry other Google apps. A portion of these smartphones do include some Google software, but many replace Google’s apps with competing services. For example, Xiaomi, China’s leading smartphone maker, replaces Google Play with its own app store.

To put this threat in context, Apple’s iOS operating system has a market share of only 11%. That means Google, not Apple, is Google’s largest competitor. By powering such a large percentage of the competition, the company has become its own worst enemy.

How did this happen? It goes back to the company’s early decision to grow Android as quickly as possible. In 2007, the year the iPhone was released, Google had virtually no mobile footprint and its executives feared that Apple might soon dominate the market and cut Google products out of the equation. To avoid that, Android was released as “open-source” software, meaning it could be freely modified and included on any phone, free of charge.

For a long time, the plan seemed to work. Manufacturers and wireless carriers loved Android’s customizability as well as its low, low cost of zero. The OS rapidly gained market share; according to Strategy Analytics’ most recent estimate, it currently runs on 85% of all smartphones. As Android became more and more essential to phone-vendors’ bottom line, Google used the threat of withholding its crucial suite of services to ensure phone makers gave its own apps preferential treatment. Android seemed to be under control.

But that control has begun to weaken. The first cracks in Google’s strategy appeared in 2011 when Amazon released the Kindle Fire, a tablet (and Fire Phone precursor) that ran a modified version of Android. Users of the product could still access Google services on the web, but everything on the device, from its custom app store to its Microsoft-powered search engine, steered owners in a different direction.

Other companies soon followed Amazon’s lead. Alibaba’s Android-based Aliyun OS—and the precedent it would set—scared Google enough that the company threatened to pull its services from Acer’s phones if the hardware maker didn’t drop the product. Acer complied, but Alibaba has since partnered with five other smartphone makers.

Now that the genie is out of the bottle, it may be hard to put back in. Horace Dediu, a technology analyst and founder of the website Asymco, thinks Google-less versions of Android will only become more popular. As handset margins continue to fall, phone makers will have more incentive to replace Google’s services with their own — both to pad their bottom lines and to make their own products stand out among legions of other Android phones.

“If you’re a phone vender, you don’t just want to be in the commodity hardware business, you want to move up the value chain,” Dediu says. “This is part of a decades-long quest for vendors to differentiate and not to allow the platform owner to capture all the profits.”

Over time, he adds, more phone makers in emerging markets like Vietnam and Indonesia will replace Google apps with locally tailored versions, something Xiaomi has already done in China. Samsung, the world’s most profitable Android phone maker, has also begun to challenge Google by shipping phones with a Samsung app store and other software that competes with Google’s apps. The company recently tussled with Google over its new “Magazine” user interface, which hid some Google services.

Other experts play down the threat to Google. Benedict Evans, for example, a mobile analyst currently at Andreessen Horowitz, says an aversion to Google apps is largely limited to China, where the government has crippled or censored the search giant’s services. “Google isn’t on mobile in China, but then Google isn’t in China anyway,” he says. Indeed, outside of China, Xiaomi phones ship with a full suite of Google apps.

That Google allows Xiaomi to sell both standard and non-standard Android products may indicate Google recognizes the danger it faces, and is prepared to make concessions to device makers in certain markets to keep its services available. Generally, hardware vendors are forced to choose between shipping Google apps on all of their Android phones, or being denied Google services entirely. Ron Amadeo, a journalist who has previously written on Google’s attempts to control Android, says Xiaomi’s unique arrangement appears to be a special exception.

The fate of Android may come down to whether other deep pocketed companies can offer compelling replacements for Google services. That’s no easy task, but it’s not impossible. China’s mobile market is thriving sans Google; Samsung continues to develop the non-Android Tizen operating system in case relations with Mountain View sour; and Amazon remains committed to building out its Fire platform. “Within five years,” says Dediu, “things can change a lot.”

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