Android v. iOS Part 3: Network Effect

by John Kirk   |   August 29th, 2012

RECAP

We’ve looked at Android and iOS market share and profit share. Android is winning in market share and iOS is winning in profit share. In any other industry, the analysis would probably be over at this point. Profit is literally the bottom line in business and iOS has it in spades.

FIXATED ON MARKET SHARE

However, everyone in mobile is fixated on market share rather than on profit share. This is because mobile operating systems are software platforms and the lesson we learned from Microsoft Windows in the eighties and nineties was that the platform with the largest market share won. Period. This was due to the Network effect.

NETWORK EFFECT

The Network Effect is when “the value of a product or service is dependent on the number of others using it.”-Wikipedia.

The classic example is the telephone. In the early 1900′s, there were over 40 separate phone providers in the United States. This kind of fracturing of the service was inefficient in the extreme. If you joined network “A”, you could only speak to others who had also joined network “A”. You could not speak to anyone who had joined networks “B” through “Z”. It was only when Bell began to consolidate the phone services that the benefits of the Network Effect truly kicked in. The more subscribers Bell had, the more value – and the more lock-in – they obtained.

THE PC PLATFORM WARS

This is exactly what happened in the PC wars too. There were many competing platforms. Microsoft licensed so many copies of its Windows operating system to its hardware partners that they overwhelmed the competition. The more copies of Microsoft Windows they sold, the more valuable Windows compatible hardware and Windows compatible software became. The Network Effect that had propelled Bell to dominate phones, propelled Microsoft to dominate personal computers.

THE MOBILE PLATFORM WARS

The Network Effect dictates that market share matters and that it matters a lot. If Android has almost all of the market share, even if it makes little or no money, at some point Android’s Network Effect will kick in making iOS irrelevant just as Windows made the Mac irrelevant in the nineties. Then all those lovely Apple profits will disappear or, at least, they will shrink appreciably.

At least that’s the way it was supposed to work.

IF ANDROID HAS ALL OF THE MARKET SHARE, THEN WHY DOES iOS HAVE ALL OF THE BENEFITS FROM THE NETWORK EFFECT?

In addition to garnering most of the profits:

– iOS developers are much better paid. (Source)

– iOS developers develop for iOS first and Android second, if at all. (Source)

– iOS Customers buy more iOS Apps and pay more for them. (Source)

If Android has all the market share and market share triggers the Network Effect and the Network Effect guarantees platform victory, then how can this be?

ONE OF THESE IS NOT LIKE THE OTHER

The value in the phone network is the end user. The more customers there were – the more people you could call – the more powerful the Network Effect and the more valuable the platform.

The value in a software platform is the software, not the end user. The more developers there are, the more applications you can buy and the more powerful the Network Effect and the more valuable the platform.

The customer is everything to a phone network. The developer is everything to a software platform. The only value a customer brings to a computing network is the number of dollars they transfer to developers in exchange for the Apps, content or advertising they consume.

THIS EXPLAINS EVERYTHING

Now the Gordian knot is cut and the paradox unraveled. While we’ve been manically and obsessively focused on customer market share, we should have been focusing on developer market share. It is developers, not customers that bring value to the platform and trigger the Network Effect.

Apple knows this. Microsoft knew this. Google? Maybe not so much.

End users buy the platform that has the most software because it provides the most value. It’s the software that initiates the Network Effect and creates the famous virtuous cycle.

We think that developers chase customers, but they do not – they chase customer dollars. A customer who does not pay for Apps, content or advertising has no value to a platform. They are an empty cipher.

Coming Tomorrow: Android v. iOS Part 4: Platform

Android v. iOS Part 1: Market Share
Android v. iOS Part 2: Profits

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • Waza_Be

    Appleinsider as a source for such a great article…

    • FalKirk

      Thank you for your comment, Waza_Be. Perhaps I should have simply used the numbers from the Apple earnings call as my source:

      “Combining iPhones, iPad and iPod Touch, we surpassed 410 million cumulative iOS device sales, selling more than 45 million in the June quarter. With App stores in 155 countries, the iOS ecosystem continues to grow. The App Store now offers more than 650,000 apps, including over 225,000 apps specifically for iPad. We’re extremely pleased to report that we have surpassed $5.5 billion in payment to developers, and customers are loving iCloud. Since its launch in October, more than 150 million people are using iCloud services.”
      Thank you for keeping me on my toes. (I can use all the help I can get!)

      • twisty

        All those stats are good, but are they accelerating or decelerating?

        Wow Apple is so great because they are so profitable. Then why is their market share in smartphones and tablets shrinking quarter after quarter?

        Sure, Apple can still be incredibly profitable with even 10% of the market, and I think we are headed that way given the trend. As a developer would I want to reach out to the masses or confine myself to that small portion? Its a downward spiral. Once your market share goes, so goes your development efforts.

        • benbajarin

          If you look at Nielsens and Comscores mobile data you see that in fact the iPhone is gaining on average 2 points of market share per quarter over the past two years. In fact Nielsen and others remarked starting in January that Android platform share took it first dip in terms of platform share growth for the quarter. And in all quarters since Android has seen a decline in sales from the previous quarter as well as the same quarter YoY.

          There is no question Android still has the market share but matter of factly vendors are having a hard time making money with it. If this continues you will see an inevitable move away from Android in favor of other platforms which will help them have a sustainable business.

          The bottom line is that Android as a business for Google is to suck profits from hardware and put them into Google’s services. Hardware makers do not like this and have huge strains of relationship already because of it.

          Android is the market leader and may be for a while still but I do see inevitable declines in share as Nielsen and others continually point out with their sales stats.

          At some point in time the market share will settle and each platform will carve out its position and look to hold it. We are not there yet as we are still in a global TAM expansion of smart phones.

          My gut tells me no vendor will have more than 60% share and it could be less. This market will not be like it was with PCs where on OS had the dominant share.

          Apple, in my opinion, will continue to hold steady with share and probably continue to gain as well as continue to suck most of the profits in both smart phones and tablets. Leaving them with more cash for RND and other advancement while others are left to struggle to get by year after year.

          When the business side of this entire equation is properly analyzed it is very hard to be so pro Android.

          • twisty

            You’ve referred to Nielsens and Comscores stats. I’m referring to the global market not just the US market where we just saw some heavy trade protectionalism against Samsung who by themselves outsold Apple 2-1. It wasn’t really about patents. Similarly, Apple lost the iPad case in China, lets just say home field advantage and Samsung has zero shot in an American court.

            Well it IS starting to look like the PC-Mac war…

            IMHO Apple’s phone was top of the line until the release of maybe S2 or Galaxy Nexus. It clearly lost its technical dominance when the S3 or HTC One was released back in March 2012. From a software perspective its about the same timeframe. Jelly Bean is on par or better than iOS6. Apple’s technical advantage have been gone for a few months now. Its a HUGE turning point and unlikely to reverse.

            Now even with crappy Android phones, and crappier user experience pre-2012, Android’s model was still able to capture and dominate the smartphone market. This is a terrible sign for iPhones. I might have been willing to fork over the cash to Apple because of their top of the line technology before, but today Android phone’s technology is just more advanced. How can you still be pro-Apple when its lost its technical advantage while at the same time global market share is on a downward trend to around 20% or below?

          • benbajarin

            Can you point me to data demonstrating that iOS is on a downward global decline? We are clearly looking at different market data.

            Also you did not address my point of the business challenge Android presents to OEMS. If you were having the discussion I was having with those making Android devices you would probably change your opinion.

            Google exists to commoditize hardware and suck profits from the. Android exists as an advertising strategy. Android exists to make money for no one but Google. An OS which is an advertising strategy is extremely concerning if you consider the long term prospects. Microsoft is actually interested in helping their partners make money. There is a business issue here and this is a TAM expansion globally so it is extremely hard to say the battle is even nearing completion. Just watch what will happen this holiday season on a global basis.

            When you look at the market share data the press drools over you have to be careful not to get sucked into the trap that the platform share stats they show are for the current quarter not total installed base or annual platform share shifts. Often they say X =’s X % of the last quarter. That data is not representative of the whole global market only the previous quarter.

            Lastly, as I said history will not repeat itself and the the key to this understanding lies in knowing how mature markets work vs non-mature mature markets. Also how post mature markets work as well.

            I encourage you to read the many columns I have written here on our site addressing this. Here is one in particular.

            http://techpinions.com/dear-industry-history-will-not-repeat-itself/3707

          • therealciviczc

            Explain more about how windows is looking to make money for the hardware vendors if you have a second.

          • benbajarin

            We must first keep in the back of our mind that Google makes money on advertising pure and simple. Android for Google is an advertising strategy first and foremost for their own purposes. They did not create Android to give value back to hardware companies like Microsoft does with Windows. Google’s ideal world is a world where Android is everywhere and therefore it is best for Google if Android devices are cheap or free.

            In fact I wrote an article 5 days before Google bought Moto laying out the logic on why I thought Google should buy Motorola. My timing was impeccable since they did actually buy Moto 5 days later.

            http://techpinions.com/why-google-should-buy-motorola/1561

            Microsoft has at least attempted to be forward thinking with their hardware partners. They show them long lead roadmaps of their software as well as work closely with them on new hardware innovations. Google shows none of their partners any work on Android unless they are the approved launch vendor. They play a severe case of hardware favoritism and it leaves a very bad taste in the minds of their hardware partners. But keep in mind if you are a hardware company and you do not make your own OS you simply have to deal with it because you have not choice.

            I recall a few years ago our discussions with the PC OEMs and they were ecstatic about the prospect of having an alternate OS to Windows. No after many of them have spent the few years working with Android and trying to partner with Google they are happily anticipating an alternate to Android.

            When you put yourself in the shoes of a hardware OEM it is hard to not sympathize with their struggles with a horizontal platform to which you don’t control. The reality is that all hardware brands do not control their own destiny. Google or Microsoft do.

            Apple on the other hand controls their own destiny. Something I think will keep them around for a long time.

          • therealciviczc

            I think you’ll see a huge bounce here soon though. Too many people have a bad taste in their mouths from crap android phones, and an iphone is a safe bet. Not as good as a good android phone, but never terrible like a bad android phone. I think the number of people with crap android phones and expired contracts waiting for the iphone5, is going to be staggering… millions. I’m guessing obviously, but probably half the android users that I know are waiting on the iphone5, and won’t even consider one of the great android phones available.

  • Juancho

    Wrong. Apple manufactures phones, however Google doesn’t, yet it makes big bucks on advertising. As more Android phones are out there, more advertisement profits for Google. It doesn’t matter, Google doesn’t charge for Android, or that most apps in use are free. At the end Google has become an advertisement company.

    • twisty

      Google’s goal is to put as many screens in front of people for their ads, so it gives away Android. While Apple is a device maker who is out to make a profit on their phones.

      As a customer, do I want to pay that premium for Apple? I’m getting a high quality mobile OS either way. There used to be a quality gap technically prior to the 4S but that has been erased and IMHO surpassed by Android already. The free Android offers far more features than iOS.

      Free&more or expensive&less?

      • http://twitter.com/qka qka

        Time is money. Do I want to spend all my time looking at Google ads?
        One way or another, you’re going to pay. With Apple, it’s a one time payment. With Google, it’s never ending.

        • therealciviczc

          As a constant android user, I notice almost zero ad noise. In fact, out of curiosity after reading your post, I just did the basic things a person may do with the smart phone to see how many ads I’d see. I looked at my contacts, placed a call, checked facebook, twitter, instagram, google talk, read an MMS, checked the weather and the 5 day forecast, checked the time, changed a few settings, looked at my calendar, took a picture, looked at it in the gallery, and finally listened to a song, and never once saw and ad. Then i got to thinking if I could intentionally find an ad, and opened an ad supported game and finally did see an ad. It was honestly sort of tough to find one though until I tried. The idea that android is loaded with ads though is not realistic. Many games you can get free with ads, or purchase them without.

    • FalKirk

      “(Google) makes big bucks on advertising…” – Juancho

      That is demonstrably false, Juancho. Tune in for tomorrow’s article to find out why.

  • Mayson

    One factor to look at in this fight is switching rate: how many users of each platform switch to the other when they get a new phone? This is especially important in the near future, as the smart phone market (especially in the US and other developed countries) approaches saturation. What’s the data so far?

    Pretty clearly, at this point, iOS wins: many more Android users switch to iOS than vice versa.

    • FalKirk

      “One factor to look at in this fight is switching rate: how many users of each platform switch to the other when they get a new phone?” – Mayson

      Agreed. I expect to discuss that in Friday’s edition of the series.

  • http://www.facebook.com/profile.php?id=1022074982 Bill Keeshen

    Network effects can be supply side or demand side. Too often, and Apple can be this way sometimes, companies try to court their users by offering more supply side features. Supply side network effects are much easier to unhook from and connect via another service. Apple’s biggest challenge is the same as Google’s they actually know very little about their customers, and a customer can now switch platforms relatively easy. Apple’s focus should be on applications that bring their community closer to one another… that is a killer app and will create a strong, defensible position.

    I believe that killer app is facebook and over time create the utlimate killer demand side network effect, strong enough to make the platform much less relevant.

  • Dai

    The effect may be amplified beyond just application availability for Apple due to the nature of the ecosystem that’s built up around the iPod and iOS (hardware accessories etc); the content on iTunes; the integration between devices like the iPhone and iPad; and going forward, iCloud as a hub to tie it all together. In android, multiple agents are trying to achieve the same for themselves: notably Samsung, who seem to be trying to copy everything Apple does; but also Google with Google Play (=iTunes), the Q (=AppleTV), and others; Amazon with their marketplace; and others. Because the Apple environment actually works, there’s a high degree of lock-in: not only would you have to replace your apps if you switched platform, you’d also lose data syncing with other devices & the cloud etc, access to iTunes media purchases, etc. You could switch to an Android phone and use Google services to replace some of this, but the more invested in the Apple environment you are, the harder it becomes. On the other hand, if you’re currently using Google services there’s no problem switching to use them on Apple devices.

  • tspx23

    Interesting article. I am an Android geek but I definitely understand how Apple has an ecosystem advantage over android. The iPhone is the single most best selling smart-device worldwide. As an app developer there are more reasons to develop for the iPhone with the first reason being more money.I can see the network effect is more probably for Apple due to the software being bundled with the device friends and family can easily use facetime, imessage, etc. versus third party apps on Android.

    Still however, I don’t completely agree with the article. It is too early to call it that Apple can continue to reign its dominance over the crowd. Up until gingerbread Apple had the clear advantage in terms of maturity and software. Android is catching up and it’s own marketplace is no slouch; this June it has reached over 600,000 applications and 20 billion downloads. Developers actually make the same amount on Android as iOS percentage wise, but even if they didn’t think about it like this. Android users may download and pay for apps less but there are 2-1 Android users over iOS. Considering Android is open source it is a way for developers to code without having to invest in thousands of dollars worth of apple products just to create an app. The network effect generally applies to the largest population. It is hard for me to make this connection otherwise. At this point Android has the fastest growing app market coupled with the largest amount of users.

    • FalKirk

      “Developers actually make the same amount on Android as iOS percentage wise” – tspx23

      Not even close. Android developers make about 24 cents for every dollar that an iOS developer makes.

      • tspx23

        1, Actually they do. Angry birds developer makes 70 cents for every dollar, Android payout is based on the number of buyouts. For any popular app it makes sense to develop on iOS. For any crappy application that no one downloads, you would make less on Android.

        2. Even if Android developers make 24 cents for every dollar, this also means that there is a potential of earning double that per each app since the user base is greater on Android.

        3. The disparity between app stores is decreasing and the amount of people developing on Android is increasing at a much faster rate than Apple’s. Any average person can build an app and submit it to the Android app store while for Apple, you need to invest around 2-3k up front.

        There are essentially no extra costs to develop on Android, you have twice the user population, fastest growing app market, and you can potentially make the same amount of cash.

        • steve_wildstrom

          and FalKirk are talking about two different things. Both Apple and Google pass through to developers 70 cents of every dollar in App Store sales. The 24 cents refers to the fact that revenues for am average Android apps are 24% of those for an iOS app.

          • tspx23

            If he is, he needs to do use new statistics. Last year it was a 3-1 iOS to android ratio (probably where we get the 24 cent value). in 2012 the difference between people who don’t buy apps vs people who do is 1 percent between android and iOS.

            http://www.pocket-lint.com/news/47102/android-users-finally-buying-paid-apps

          • AdamChew

            Is this survey accurate?

            And I believe no many of us want to be labelled cheapskate in a survey.

          • tspx23

            That’s just one report of many. The Google play store has surpassed the number of apps the apple app store has, and the top paid selling ones are ones unavailable on Apple. Also surveys online eliminate bias due to anonymity.

  • Spartalosopher

    New survey data suggests the theory on this page may be outdated or overblown:

    http://www.pocket-lint.com/news/47102/android-users-finally-buying-paid-apps

    • FalKirk

      A great catch, Spartalosopher. However, it only indicates that the gap between Android and iOS purchases is narrowing – the gap is still huge. We’ll have to wait and watch to see if this trend continues.

      • Snarfus

        I am not quite sure how you can say the gap is still huge … (ideal setup to illustrate counterpoint) … if 19% of the 70% has more than 20 paid apps and 26% of the 20% has more than 20 paid apps there is a huge gap … and it is not in favor of iOS.

    • AdamChew

      The writer is too polite to question the validity of this survey especially when it is sponsored by android centric parties.