Let’s take a look at 1996, the first full year of Windows 95 availability and pretty much the peak of Windows PC dominance. The worldwide market share leader, according to Gartner data dredged up by Wikipedia, was Compaq, at 10%. In fact, Compaq led every year between 1996 and 200 with its share peaking just short of 14% in 1998. IBM held second place at 8.6%. Packard Bell NEC was third at 6%. Apple was a close fourth at 5.9%. And HOP rounded out the top five.

What has happened to each of these players? Compaq was acquired by HP in 2002 in a deal from which the company has never quite recovered. (HP has been entrenched at No. 1 for the past six mostly profitless years.) IBM sold its PC business to Lenovo which, after several years of struggle, today is the only big PC player whose sales volume is growing. Packard-Bell ended up as an entry-level brand for Acer in Europe while NEC is a small player in Asian markets. And Apple, which nearly died in 1997, now dominantes very profitable high-end computer sales, especially in the U.S., though it has never returned to the worldwide top five.  Dell, which dominated the business in the early 2000s, entered the top five in 1997 and Acer first made it in 2005.

Whatever hardware market share is good for, it doesn’t seem to translate into long-term dominance. Sic transit gloria mundi.

Advocates often argue that victory for Android is inevitable because Google’s platform is more open and open always triumphs over closed. That proposition is debatable at best. But the arguments is muddled by the confusion of several different concepts of openness. I’m going to try to at least clarify the terms of the debate. There are at least three concepts of open clamoring for our attention; I am going to call them open hardware, open software, and open systems.

Open hardware. In the beginning, all personal computers had an open architecture. The first really popular PC, the Apple ][, followed the design of earlier CP/M-based systems and included slots for hardware add-ins. (One of the more successful of these was the Microsoft SoftCard, which let the Apple ][ run CP/M programs.) In 1984, the Mac came along in a sealed box. There's a widely held, but almost certainly incorrect, view that Apple lost the first OS war to Microsoft because Macs were closed and IBM PCs and later clones from Compaq and many others allowed modification. This may have been a small factor but much more important was the fact that IBM and others marketed to business, and business, not the rest of us, was buying most of the hardware. Besides, by the time that Apple lost decisively to Windows in the mid-1990s, Macs too had gone to an open architecture. Apple even tried the Microsoft approach of licensing Mac OS to third-party hardware makers. It didn't work.

Today, this argument is almost entirely moot. Lots of people still buy open Windows boxes (more than you probably think), but hardly any of them ever open them up. Laptops and Apple's iMac and Mac mini are about as closed as the original Mac. And phones and tablets make hardware modification impossible. The hardware openness argument is strictly of historical interest.

Open software. Google makes Android code available, license and royalty free¹, to anyone who wants to use it. Sort of. If you want to use the Android logo and have access to Google services such as Maps and Google Now, to have to agree to play by Google’s rules. As a result, there are two distinct forms of android out there, official Android licensed by Google and used on all the brand-name phones, and Android Open Source Project devices, including the Amazon Kindle Fire and a gazillion no-name Asian phones.

There are fierce sectarian disputes within the “free and open source software” community over just how free and open code must be to qualify, to the point where the Free Software Foundation’s Richard M. Stallman has denounced Ubuntu, a leading Linux distribution, as “spyware.” A lot of code these days mixes open- and closed-source components. Both iOS and Mac OS are based on an open-source BSD kernel, but the higher level of the OS are proprietary. Apple’s Safari and Google’s Chrome browsers are both based on the Apple-developed open-source WebKit. Even Windows contains many open-source components.

Fundamentally, open- and closed-source are two different models of software development. Both have their proponents and arguments in their favor and there is no reason to believe that either is inherently superior to the other, But the bottom line is that except for those swayed by religious arguments, whether a given piece of code is open source or not makes no difference to users.

Open systems. Here we get to a real difference. Apple’s iOS ecosystem is tightly controlled. The iPhone and iPad are both tightly locked down devices. Unless you have “jailbroken” your device, a warranty-voiding software modification, an iPad or iPhone can only load software through Apple’s iTunes App Store. And software sold through the App Store must meet a long list of Apple requirements, ranging from those designed to protect the system from malware to those designed to protect the user from pornography to those intended to protect Apple from some kinds of competition. iOS users implicitly accept a tradeoff: Apple makes a lot of choices for them, and in exchange, they get software that is very unlikely to mess up their device or infect it with malware.

Android is a very different world. Google imposes minimal supervision on apps sold through the Google Play store, and a simple change of one setting on any Android device lets the user install software from any source. Many Android phones let users replace the manufacturer’s firmware, a way to get around the sluggishness of OEMs in distributing Android updates but no way to enhance stability or security.

This sort of openness is extremely important to a relatively small group of enthusiasts who really want to dig deep into their devices and who will accept some inconvenience and risk to gain more freedom. They definitely should by Android products. But I suspect that there aren;t enough of them to explain more than, at most, a couple points of share. The great bulk of Android buyers are choosing on other criteria: screen size, price, or what the guy in the phone store happens to be pushing.

The only aspect of openness that really seems to matter to the bulk of buyers is that Android devices come in a wide variety of sizes and designs. With iPhone, you have the choice of the 4/4S or the 5, while Android comes in a wise variety of sizes and designs. The fact that Android is increasingly synonymous with Samsung reduces the choice somewhat, but Samsung seems determined to offer a product for every market niche.

1. Just because Google gives away Android doesn’t necessarily mean that you are free to use it without licenses or royalties. In particular, Microsoft claims patents on a number of aspects of Android and nearly all tier one Android OEMs except Motorola are paying license fees to Microsoft.

Most industry folks know that when IBM sought out an OS for their PC, they first visited Gary Kildall and his company Digital Research Inc. as they were interested in his CPM OS. But when they arrived, Gary was not there and more or less snubbed them and they instead went to see Bill Gates and as they say, the rest is history. I did many Computer Chronicle shows with Kildall and he refuted the idea that he intentionally snubbed them; regardless, the end result was that IBM ended up using MS-DOS and it became the heart of their and many PC Clone’s operating system for almost a decade.

Over the years Microsoft has become an industry behemoth and has gotten into many different businesses to help extend their Windows franchise. But from the beginning, Microsoft did have one important goal and focus. It was to give PC OEMs an OS and actually help them make money with their PCs. Microsoft licensed MS DOS and then Windows to PC makers and continued to refine it and upgrade it along the way. The PC vendors could then create hardware optimized for these operating systems and add value through hardware and software add-ons. With each new version of Windows, Microsoft helped their PC partners grow their business and as people upgraded from one version of the OS to the others, many people along the value chain were greatly enriched. Besides PC companies making money, VARs, retailers and value added service providers all benefited from an ecosystem in which they could build new designs and services around Windows and keep all of that money for themselves.

When it comes to money and value creation for their partners, Google’s goals are very different and this is what really sets them apart from Microsoft.

A One Sided Relationship

While they too have an OS that companies can license, the real goal of their licensed OS is to bring users of these devices into direct contact with Google’s ads and services. Google says they really want their partners to be successful and while that is probably true, what they really mean is that if partners are successful in distributing their OS, than Google can reap the majority of the financial benefits. Sources tell me that a company like Samsung, who is literally their largest partner and almost single handily making Android successful, gets only a 10% commission on any of Googles ads or services they bring to Google. That same 10% commission applies to a giant like Samsung as well as any other companies distributing Android on their smartphones and tablets, except for Amazon and Barnes and Noble. In these two cases, Amazon and Barnes and Noble have forked Android for their own uses and can keep all proceeds from products and services sold through their devices. This works because they have an ecosystem of books, music, apps, and services that are their own and don’t need Google’s content to be successful. But most of Androids partners, such as Samsung, HTC and others, must rely on Google for music, video and apps and must pay this very large tax to Google if they want to use Android.

This is not to say that Microsoft’s OS licensee fee is not a tax in its own right. However, once that fee is paid, Microsoft gets no extra revenue from their partners regardless of what they sell in way of their hardware and services. And even if they tap into Microsoft’s ecosystem of apps or services, I understand their revenue cut to their partners is much more than Google gives their partners. This is why there have been rumors that Samsung has not been happy with Google since they do all of the hard work in creating a device, optimizing Android’s OS and delivering a value added UI to it as well as managing the channels and pay to make their own ads. Yet Google treats their cut of the profits the same as a small player that sells a much lower volume of devices than Samsung does with their products. No wonder analysts are looking closely at Samsung’s recent decision to fold their own mobile OS called Bada into Tizen and suspect that if Samsung wants to control their own destiny and keep more of the app, ads and services for themselves, that they might move more and more to Tizen as their mobile OS of choice.

While many rag on Microsoft as being a 900 pound gorilla lording their wares over their partners with a heavy hand, they at least let their partners make and keep as much profit as they can from any products and services they offer their customers. Not so Google. They too are a 900 pound gorilla but in their case these vendors are just a front end distribution medium for putting Google’s ads and services before their customers and ultimately reap the lions share of most of the profits made at the expense of their partners. And in this sense, the difference between Microsoft and Google is glaring indeed.

The Joke

Have you heard this one?

Two farmers bought a truckload of watermelons, paying five dollars apiece for them. Then they drove to the market and sold all their watermelons for four dollars each. After counting their money at the end of the day, they realized that they’d ended up with less money than they’d started with.

“See!” said the one farmer to the other. “I told you we shoulda got a bigger truck.”

Or how about this one?

Android is winning because they got a bigger truck.

The Joke Is On Us

Both “jokes” are based upon the old saw that one can lose money on every sale but make it up in volume. Unfortunately, the joke is on us because this is exactly the kind of nonsensical analysis that is being doled out by tech pundits and lapped up by the press and investors. You think I’m exaggerating? Take a gander at some of these recent tech headlines:

– Android is crushing Apple and Microsoft in the mobile device market
– Android looks like it’s winning
– CHART OF THE DAY: The iPhone’s Market Share Is Dead In The Water
– Despite its upmarket history, Apple needs to compete on price
– Gartner: Apple falls below 20% in smartphone market share
– Harvard Liquidates Apple Stake After IPhone Sales Lose Steam
– How Apple Is Losing Mobile
– IDC: Apple’s share of worldwide tablet market drops under 40%
– iPhone growth stalls as Android continues to nip away at Apple’s market share
– iPhone Market Share Stuck At 18%
– Nearly 75% Of All Smartphones Sold In Q1 Were Android
– Sharp to seek Samsung edge for survival as Apple sales lose steam
– Why Android Is Winning The Tablet Wars

I could link to a dozen more headlines just like them. These headlines – or their underlying articles – all have two things in common:

1) They contend that Android is winning and Apple’s iPhone is in deep, deep trouble; and
2) They point to market share as the sole or primary basis for their conclusion.

TechCrunch sums up the thoughts of many this way:

“The latest numbers are in: Android is on top, followed by iOS in a distant second. There is no denying Android’s dominance anymore. There is no way even the most rabid Apple fanboy can deny that iOS is in second place now. Android is winning.”

ReadWrite takes it one, final step further, stating:

“The Mobile Battle Is Over – And Google Won.”

In other words, pundits think that Android has won because they “have a bigger truck” (i.e. more market share) – regardless of how much – or how little – profit Android manufacturers make. Android, the pundits opine without a hint of irony, is not making much, if any, money but that’s okay because they’re making it up in volume.

But is that really how market share works? Can you tell how well a company or an operating system is doing solely by measuring its market share?

No, of course not.

Quiz #1: Market Share Alone

Question: Company A has 25% market share. Company Z has 75% market share. Which company is doing better?

Answer: With market share alone, there’s simply no way to know or tell. Company A might be bringing in all the profits and company Z might be going bankrupt.

The Wrong Way To Calculate Who’s Winning

(T)he primary problem with using market share as a measure of business health is it provides no insight into the profitability of the product being sold. ~ Bill Shamblin

Scoring by market share alone and ignoring profit is like saying that a baseball team won because it had more hits when the other team scored more runs. Scoring by market share alone and ignoring profit is like saying that a football team won because it gained more yards when the other team scored more points. Scoring by market share alone and ignoring profit is like saying that a hockey team won because it had more shots on goal when the other team had more goals.

Market share without context is not only useless, it is worse than useless because it is likely to be misinterpreted.

First, market share without context assumes that each percentage of market share is equal to another – that every Android activation is equal to an iOS sale. Nothing could be further from the truth. You can’t simply total up market share and determine a winner any more than you could count up coins or poker chips without knowing the underlying value of those coins or chips. A penny does not have the same value as a quarter and only a small child would rather have more coins than fewer coins but more money.

Second, market share without context implies that market share is a zero sum game – that market share gains for one always result in a loss to another. But in a rapidly growing market, a company can actually LOSE market share yet have both positive unit sales and profit growth. Not growing as fast as another company is not nearly the same as “losing”, especially if the growth is coming in a more desirable portion of the market.

For example, despite a decline in Q1 market share, iPhone sales actually increased based on year over year comparisons. (iPhone sales were not declining,they were growing slower than the overall market.)

The same was true of tablet sales. Last quarter, Apple LOST tablet market share, but because the entire market was rapidly growing, they GREW unit sales by 65%.

Source: Apple 2.0, “Pie charts of the day: Tablet sales grew 140% year over year”

The “Fair-Share” Way To Calculate Who’s “Winning”

What matters is not only market share and not only profit share but the ratio between them. This is called Fair share profit analysis. Fair Share Profit Analysis contends that 1 point of market share should deliver 1 or more points of profit share.

Less than a 1-to-1 ratio of profit share to market share demonstrates that a company is buying market share; that the company has not been able to differentiate its product in the market and is likely competing primarily on price.

More than a 1-to-1 ratio of profit share to market share demonstrates a company’s ability to differentiate its products, provide more value than its competitors, command higher prices, charge a premium and enjoy pricing power.

Quiz #2: Market Share or Profit Share

Question: Company A has 25% market share and 75% profit share. Company Z has 75% market share and 25% profit share. Which company is doing better?

Answer: If you said anything other than company A, then you are dumber than a doorknob. Any intelligent person would take company A’s profit share over that of company Z’s market share.

No one would be confused if Apple had 50 percent market share and 50 percent of the profits. But apparently it’s very confusing to some that Apple has only 5 percent of the market share and well over 50 percent of the profits. ~ John Gruber, The church of market share

Imagine, for example, that Apple were a hamburger chain who made more money than McDonalds, Burger King, and Wendys combined, but only sold 5% of the total hamburgers. Would anyone seriously contend that Apple was “losing” the hamburger wars?

Apparently so. For example, take this analysis from Matt Asay of ReadWrite (please!):

For those who say market share doesn’t matter, that Apple still commands most of the industry’s tablet profits, they clearly haven’t been paying attention to the smartphone market.

It turns out it’s a really big deal to maintain market share, and not simply profits. Profit share follows market share.

Profit share follows market share? Are you kidding me? Show me a business sector where profits have a 1-to-1 correlation with market share and I’ll show you the exception that proves the rule. The reason market share doesn’t necessarily correlate to profit share is because profits are made up of both market share and margins. And market share alone tells us nothing about margins, therefore market share and profit share are almost always going to be unbalanced.

Source: Asymco, Escaping PCs

Take, for example, the Apple Mac. As the pie chart above demonstrates, the Mac has 45% profit share with only 8% of the market share. That means that Apple pulls in an awesome 5.63% of the sector’s profits for each and every 1% of its market share.

Profit share always follows market share? Not hardly.

The truth is, anyone can get market share if they want it badly enough. All they need to do is sell their product at cost, give it away for free or, better yet, subsidize (pay their customers) to take the product off their hands. This is called “buying” market share, but it always comes at the cost of profits.

Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin

The problem is, you can “cheat” and buy market share, but you can’t do the reverse and “cheat” to buy profits. You have to EARN profits. Buying market share is a downhill race to the bottom but gaining profits is an tortuous uphill climb and it can only be made if the manufacturer is able to produce highly valued and differentiated products. The company that buys market share must inevitably go out of business or reverse its course and fight its way back up to profitability. The company with the value and the profits, on the other hand, has the advantage of holding the high ground and can choose to take market share at will.

Quiz #3: Less Market Share Can Be Better Than More

Question: Company A has 25% market share and 50% profit share. Company Z has 75% market share and 50% profit share. Which company is doing better?

Answer: Anyone with any business sense would say company A.

Company A is commanding 3 times the price of Company Z. The formula is 50% profit share divided by 25% market share (50/25 = 2). This means that for every one percent of market share, company A has two percent of the profit share. Company Z’s position is reversed. For every one percent of market share, they command only 0.5% profit share (50/75 = 0.66). Company Z would have to work three times as hard and sell 3 times as much product just to match the profits of a single sale by company A.

Grading The Contestants

Android accounts for approximately 70% of global smartphone shipments and 29% of global profits. This means that the average Android manufacturer creates just .41% of profit for each point of market share (0.29/0.70 = .414). In other words, the average Android manufacturer needs to capture 2.4 points of market share just to increase their market profit by 1%.

Such a low fair share profit index may indicate that Android manufacturers are:

– Having difficulty differentiating their product;
– Sacrificing profits in order to buy market share (the “race to the bottom”);
– Unable to reach economies of scale in the manufacturing process.

(Profit data, source: Canaccord, Market share, source: IDC)

Samsung is doing far, far better than the average Android manufacturer. Samsung’s 2013 Q1 market share was 33% and its profit share was 43%. This means that Samsung reels in 1.3% of the profits for every 1% of the market share it owns (0.43/0.33 = 1.30). Samsung, unlike all other Android manufacturers, is earning, rather than “buying”, market share.

(Profit data, source: Canaccord, Market share, source: IDC)

Apple’s iPhone 2013 Q1 market share was 18% with 57% profit share. This means that Apple’s iPhone took in a lavish 3.12% ((0.57/0.18) of all profits for each 1% percent of market share it controls.

If Android manufacturers needed to sell 2.4 phones just to gain 1% profit share, they would need to sell a staggering 7.5 units just to match the profits that Apple garnered from the sale of a single iPhone.

As Daniel Eran Dilger puts it:

“… Apple could simply have blown through much of its $13.1 billion quarterly profit to “beat” Samsung in market share, rather than allowing Samsung to do that while earning $4.8 billion less than Apple.”

Further, in 2012 Q1, Apple held 23% market share and 74% profit share. This means that each 1% of market share was equal to 3.22% (0.74/0.23) of the sector’s profit share. Apple’s market share to profit share ratio remains almost identical, which means that Apple has maintained its pricing power. Not only that, by focusing on just a few smartphone models, Apple has become the low-cost manufacturer in smartphones as well.

Source: Ben Evans, Mobile is eating the world

Take a good hard look at the chart, above, then go back and re-read the headlines I listed at the start of this article. What each and every one of those headlines is contending is that Android is winning and Apple is losing because Apple doesn’t control the green portion of the chart, above.

I mean, honest to goodness, take a look at the total units sold compared to the paltry profits obtained from those green sales. Who in their right mind would even WANT that market share?

Price Elasticity

What we’re really talking about here is the economic concept of price elasticity. “Price elasticity” seems to be way beyond the pay grade of most pundits and analysts who follow the mobile sector, but what it essentially means is that when the price of something goes down, sales almost always go up, but the rate of that sales increase depends upon the price elasticity of the product. In other words, dropping prices may increase sales but the increased sales may result in disproportionately larger or smaller profits.

Unless we truly understand the price elasticity of the iPhone, we really shouldn’t be calling for Apple to drop its iPhone prices.

Summation

It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so. – Will Rogers

Not only do the high priests of market share have it wrong, they have it exactly backwards. The company with the lower market share and the higher profits has all of the leverage. The goal is to INCREASE, not decrease, the ratio of profits to market share. Increasing market share at the cost of profits is a recipe for disaster, not a formula for success.

Apple may or may not do well in the future but right now, and contrary to popular belief, they are winning the smartphone wars and winning them handily.

RATIO OF PROFITS TO MARKET SHARE
3.12% Apple
1.30% Samsung
0.41% All Android

Not only is market share not the best way to evaluate the relative positions of competitors but, without context, it is one of the worst. Assuming that market share will always bring you success is like assuming that a bigger truck will always bring you bigger profits. It’s literally a joke.

Next Week

Next week, I’ll talk about how market share affects razor blades, platforms and the network effect. If that’s your objection to my analysis, please consider holding your fire until then.

The public learned this week that HTC is losing key personnel at a rapid rate. Through friends of mine that worked there¹, I had a sense this was coming for a while. For the past few years I have been watching the numbers of all the handset vendors and HTC was one that concerned me the most given the trends.

Unlike many other Android handset competitors, HTC only has one business, selling smartphones. Samsung, LG, Motorola etc., all have many other businesses to help them deal with growth or declines in other areas. Chinese competitors are simply focused on the low-end for the time being, but HTC is geared to play in the mid to high-end arena. Which is close to no mans land when employing HTC’s current strategy.

That is why in 2010, I wrote an article stating why I felt Microsoft should buy HTC.² I had concluded at that time HTC was in trouble. If I was them, or any other mainstream Android OEM looking to make a dent in Samsung’s 95% of the Android profit pool³ this is what I would do.

I would surrender to Google. Stop trying to differentiate through software or UI value ad-ons and just simply make extremely elegant and innovative hardware, running the latest and greatest stock Android OS. Be vigilant about Android upgrades making sure your devices are always up to date in every area. Work closely with Google to deeply embed every one of their core services as if they literally own you. Focus on making great, elegant, affordable hardware and let Google take care of the rest. This way you can get a portion of the ad-revenues, and other service revenue sharing Google offers, and you have built your device and integrated Google’s services in a way to maximize Google’s revenue potential and yours. Be a Nexus device, without officially being a Nexus device.

This logic is absolutely counter to a market where one needs to stand out through differentiated software experiences. The problem is only Android competitor has successfully done this. I have championed against the Android sea of sameness and now I recommend pursuing it aggressively. People like HTC devices. Carriers like HTC devices.⁴ As Avi pointed out on Monday, other than the iPhone, HTC devices hold their value longer, this is good for carriers. HTC makes great hardware and can still do well by focusing on great design and unique hardware innovations. They simply need to let go of the software and work closely with Google to ship the latest and great stock Android on their devices.

This is a template that could work for HTC but could also work for others. The bottom line is the current strategy being employed by Samsung’s Android competitors is not working. Stock Android is very good and arguably always the best Android experience⁵. If needed there is room to add some better apps, like a better exchange email app for example, but don’t change the interface and leave the rest to Google.

1. They no longer work there
2. I still feel this is a good idea and likely
3. It is impossible for Android handset makers to survive competing for only 5% of the profit pool
4. With a few exceptions of course, like the First
5. As much as I applaud and appreciate the attempts to differentiate Android, I prefer stock Android every time

Of course, the hardware still has a lot to prove. The ultimate goal of the digital living room is a single box that can deliver all your entertainment desires. On paper, at least, the Xbox One comes closer than anything we have seen before. But features on paper, or even in a demo, are one thing and real life is another. Even Google TV looked sort of good in a demo before flopping with consumers.

The biggest challenge facing the Xbox One is the promised integration with cable set top boxes. Success will depend on the new Xbox’s ability to control the set top box through an easily set up HDMI connection. It needs to banish the cable box to irrelevancy for everything except accessing and decoding content, ultimately becoming your DVR and your gateway to video on demand. That would make it a huge breakthrough. But if it needs IR blasters to control cable, it will go the way of Google TV. Microsoft is so far silent on which boxes from which cable operators the Xbox will integrate with.

It also remains to be seen how well the gesture and voice control will work to replace traditional remotes or controllers. Again, these are technologies that often demo better than they work, but successful elimination of the need to use hardware to control the box would also be a huge step forward.

So it looks like Microsoft will have a hardware edge when the Xbox One ships “later this year.” The real challenge is to build on what already appears to be a slim lead in the availability of content. Here Microsoft can built on two advantages. One is that it has been a technology partner of both studios and and cable and satellite operators for years. For example, AT&T U-verse service runs on Mediaroom IPTV technology developed by Microsoft (the division was recently sold to Ericsson.)

But a more important reason, and an odd one given Microsoft’s history as the big bully of the tech industry, is that Microsoft is the company that Hollywood is not afraid of. Microsoft’s leading rivals in the living room are Apple, Amazon, and Google (Sony could claw back into contention, but it has fallen a long way behind.) Each of these competitors inspires fear and loathing in the studios. Apple is the company that ate the music business. Amazon is the company that seems to destroy value in every market it enters–good for consumers, but torture for producers. And Google is a company whose ambitious are scarily unbounded. Apple and Google TV effort has been hobbled by lack of cooperation from content owners and distributors’ Google so far has restricted itself to selling and streaming downloads to other companies’ devices, though it is rumored to be contemplating a set top box of its own. In this company, Microsoft can position itself as an honest broker, a neutral player with no dog in the fight.

The only entertainment content deal that Microsoft announced at the Xbox launch was an exclusive with the National Football League that will bring a lot of “second screen” content, such as stats and highlights, while watching a game on your Xbox. But there was no word about making the games available outside of the NFL’s existing deals with CBS, Fox, NBC, and ESPN. (Microsoft will also get branding on the hoods of replay stations; let’s hope that works out better for them than Motorola branding on coaches’ intercom systems.)

In the end, it is Microsoft’s ability to strike content deals with studios, networks, and sports leagues and getting cable operators to support deep integration of Xbox with their services that will determine success in the living room. At a minimum, though, it seems that if Apple ever announces that unicorn of tech unicorns, an Apple television, it will have to get over a bar that has been raised by Microsoft. It’s been a long time since we could say that about any product.

The Senate can grumble, but Apple is just taking advantage of what Congress has given it.

I’ve closely observed each major console announcement since 2000 and at each and every one there was a clear and focused message: this console was first and foremost about a great gaming experience. No longer is that the message. Great gaming experiences are simply assumed. They are the new normal and expected. The question that consoles need to address in order to evolve and appeal the wider audience necessary for broader adoption is: what else can you do for me?

Microsoft spent not only the introduction of the Xbox One but the vast majority of the presentations emphasis not on gaming, but on the what else can you do for me. This is very telling. Not just about where we are as an industry but Microsoft’s living room agenda at large.

I’ve long said, and I’ll continue to state that I believe Microsoft’s best asset to build upon and around is the Xbox. It is, arguably, the strongest and most relevant consumer brand they own today. It is also the strongest from an ecosystem standpoint, and the one I feel they need to build out from with regards to personal computing.

Of course the Xbox One will have amazing games, and I for one am extremely excited about that aspect. But, the most interesting parts of the unveiling were not the graphics, or games, or even the exclusive titles. The most interesting announcements were the OTHER exclusives.

Exclusivity is No Longer About Game Titles

We have a name for exclusive games. We call them platform drivers. The first Halo on the first Xbox was a platform driver. It was the single greatest selling point for that generation of XBOX hardware and it was exclusive to the Xbox. Many other top-tier titles were born as Xbox exclusives and its continued demand and strong sales were tied to those exclusives regardless of whether they stayed exclusive. It was almost always Xbox first or Xbox only with many top-tier franchises. To be fair Sony has many of their own, but the elusive hard-core gamer between the ages of 18-35 seemed to generally gravitate to the Xbox and the exclusive titles that drove the Xbox experience.

Today, however, Microsoft discussed exclusives of a new kind. Of course there will still be exclusive games, but now games are not the only exclusive content Microsoft appears to aggressively going after. Exclusive TV series, and network deals with the NFL, along with unique interactive content with SportsCenter were key parts of this announcement. I get the feeling that Microsot hopes that unique content of this kind may drive platform adoption the same way exclusive titles have in the past.

We keep wondering when our set-top boxes will break free from the mercantilist nature of our cable and TV programing companies. My thoughts on this is that we are simply waiting for an Internet only, or over-the-top-service only, blockbuster success. If that happens we will almost certainly see a paradigm shift. Perhaps Microsoft with the Xbox One will be the catalyst to drive this paradigm shift and create a true leadership position in the digital living room.

Wireless audio speakers and headphones are growing as a consumer category.  Best Buy has 192 different “wireless speakers” on their website, Amazon, 400.  The growth in wireless audio was helped by the growth of the premium music headphone phenomenon, started by Beats Audio.  Of these wireless speakers, the clear majority utilize either Bluetooth or AirPlay to connect the device to the speaker or headphone. The problem is that both of those standards fall short on premium audio quality, openness or ease of use. Skaa, an emerging audio standard with roots in pro wireless could solve most of today’s problems inherent in today’s wireless solutions.   

Apple’s iPhone sets the pricing floor ($0 for the model from two years ago), middle ($99 for last year’s model), and ceiling ($199 for this year’s model). Just two phone families – Apple’s iPhone and Samsung’s Galaxy S – make up the majority of U.S. smartphone sales overall. AT&T is particularly iPhone-centric; 80% of smartphones it sells are iPhones, so even though the carrier prides itself in offering the widest variety of phones, vendors, and operating systems, practically speaking, there is little room for rivals to sell into. This is a residual effect of AT&T’s long exclusivity with the iPhone and its smart policy of locking consumers into family and business contracts. But carrier exclusives overall have been declining on a percentage basis, even as the total number of smartphones on offer has grown:

Not only are carrier exclusives declining on a percentage basis, but the best phones are increasingly the ones available across carriers – the iPhone, HTC One, Samsung Galaxy S. (At a recent presentation for the Competitive Carrier Association, I pointed out that this means the playing field is now basically level in terms of devices. Smaller operators may need to agree to fairly high minimum orders, but they can get access to the devices that are in the highest demand.)

As exclusives have waned, pricing at the high end has dropped. Samsung’s Galaxy Note straddles the line between a smartphone and a tablet, and it has launched at premium pricing even for a flagship. However, the Note seems to be an exception – LG’s Optimus G Pro, which also sports a 5.5” display with higher resolution and more storage than the Note 2, launched at just $199. (However, the Optimus G Pro is an exception to the previous dataset – it is an AT&T exclusive.) Apple and Motorola have offered versions of their phones with additional memory above $199 for a while, and Samsung and HTC have finally picked up on that strategy, but on average, flagship smartphone pricing has declined over the past three years:

Here’s where it gets interesting. Not all flagships are created equally, and when a vendor’s high-end phone does not sell well, it drops in price:

As expected, Apple and Samsung phones have strong price stability, but Apple’s ability to maintain a premium price level for a full year in a hyper-competitive market is simply mindboggling. While it is true that iPhones sell best the first quarter they are available, iPhones continue to outsell rivals in non-launch quarters as well. HTC has enjoyed strong carrier launches which has kept prices stable even as its sales have declined overall. Smartphones from Sony and LG have not fared well, and within 3 – 4 months of launch, they drop into mid-tier pricing territory. Unsurprisingly, this has impacted the number of mid-tier smartphone launches:

It is awfully hard to sell a phone designed to sell for $99 with subsidy when consumers continue to snap up last year’s iPhone model for the same money a full 18 – 24 months after Apple introduced it, and three-month old flagship Android phones are pushed down to $99 as well.

The trends are quite clear, but there is one wildcard going forward: T-Mobile USA’s installment purchase plans. T-Mobile is asking consumers to buy their phones upfront, but it will split the cost of the phone into monthly installments alongside a no-contract voice plan. If consumers treat this as a direct replacement for subsidized plans – or if T-Mobile is simply too small to impact Verizon and AT&T at this point – then I expect the trends to continue. However, if enough consumers see the real cost of their flagship phones and opt to buy less expensive models, then we may see the return of the mid-tier phone in the U.S. after all. We don’t have data on that – yet.

While analysis can sometimes be a solitary pursuit, I owe a huge debt to my team for tracking, trending, and charting the data presented here. In particular, Peter Han was instrumental in pulling this together, and he co-authored the report that this column is based on.


Similarly, Microsoft was in a growing position in smartphones with Windows Mobile. They had tinkered with software stores but the experience never really gained significant traction. Companies like Handango helped fill the gap but again much of what existed then is gone now.

The most robust third party mobile developer network I witnessed when I joined Creative Strategies 13 years ago was the Palm developer community. In fact, the Palm developer community in terms of passion, excitement, and quality of applications being developed, reminds me a lot of today’s iOS developer community. Microsoft never enticed the same commitment and passion for their mobile platforms as the Palm community, even when they gained share and Palm itself began shipping Windows Phone. Despite their efforts Microsoft is still today struggling with weak developer interest.

As I think about this situation that Microsoft is in, it reminds me of the situation they were in with Internet Explorer for so long. They missed the boat on leading the Internet revolution and now again they have missed the boat on leading the app revolution. All while they were in the best position to lead in both.

The Network Effect

Both Palm and Apple achieved the network effect.

In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a goods or service has on the value of that product to other people.²

The economics in turns of monetary opportunity for developers, as well as the critical total addressable market achieved by both Palm and then with Apple, created a strong network effect. This is still going strong for Apple today.

Interestingly, despite Microsoft’s position in PCs, I would argue they never achieved the network effect.³

You may have noted that I did not include Android in the network effect discussion. While it’s true Android has the lions share of the smartphone market, we also know just looking at Android’s market share does not singularly indicate the strength of a platform. Engagement is consistently reported as lower on Android than iPhone and developers are continually facing economic challenges of making money with Android.


Being in Silicon Valley I get to meet and talk with a lot of software startups. Android to many of these software companies I meet with is treated as a secondary priority. Rarely, do I meet with a company creating software for Android first or only. If this platform was doing well for the masses then I would imagine we would see more exclusive applications and I would see more software startups getting funded for Android only development. This is simply not the case. Android is benefiting from the network effect of iOS, however, as developers are generally taking their iOS first apps to Android eventually. Android has achieved a degree of the network effect by default, and on the heels of the iPhone.

This network effect is a key area that is driving both iOS and Android. This network effect has created long tail applications.

Long Tail Developers

Chris Anderson helped popularize the concept of the Long Tail with his book called The Long Tail: Why the Future of Business is Selling Less of More. (link) The concept in short is that there is value found in having large quantities of something (apps in this case) which appeals to smaller groups of people. Another way of describing would be simply to say having a successful long tail model means having massive quantities of niche content.

A successful long tail strategy, the one that I would argue creates the highest degree of loyalty to a platform or service, is one that has all the mass market goods (the popular items) but also and large quantities of goods that appeal to smaller groups of people. When we apply this theory to apps only iOS and to a degree the Google Play store are in the discussion. Popular apps may be the most profitable but long tail apps are often the most discoverable.

Imagine being a Windows Phone or BlackBerry user for a moment. Your friends or family members are all talking about the new apps they discovered or are using, for things like health and fitness, education, gardening, sports, etc. They all rave about these great apps that they love and are adding value to their lives. These apps don’t exist on your platform and probably won’t for a long time if ever, unless a critical mass is acquired. Which, of course, is not going to happen without long tail apps and long tail app developers. Its a chicken and egg problem.

Or imagine your kids sports team starts using an application to help manage schedules and parents assignments, but it only exists on iOS or Android. Your favorite grocery store, market, magazine, favorite brand, etc., comes out with an app, but it’s only available on iOS or Android. Your kids schools offer mobile apps, but they are only on iOS or Android. The workout video series you just bought has an app but it is only on iOS or Android. I hope you see my point.

Windows Phone and possibly BlackBerry may get the popular apps from the big developers, but where the platform really suffers is in the long tail apps and content, which is the driving strength for the mass market with iOS and Android. Only iOS and Android are attracting long tail developers at the moment.

Developing a critical mass of long tail apps and the developers who will continue to make them, is the biggest single hurdle I believe Microsoft, BlackBerry, and any other platform that aspires to enter the market. Without them, these alternative mobile operating systems will continue to struggle to find customers for their products until the same long tail apps make it to their platforms. If they make it to their platforms of course.

1. Updated: There was a Windows Marketplace but came no where close to the app stores I am talking about
2. Alpheus Bingham and Dwayne Spradlin
3. Happy to debate this point.

Dear Business Insider, how is this helpful?

1) In 2007, Apple introduced the iPhone. Google’s then CEO, Eric Schmidt was a member of Apple’s board and an honored guest at the iPhone presentation. It appeared that all was right with the worlds of Apple and Google – Apple was going to do its hardware thing and Google was going to do its services thing and a new era of mutually beneficial cooperation was about to begin.

2) In 2008, Google introduced Android – a direct competitor to Apple’s iOS – and the Apple/Google alliance quickly began to unravel. Schmidt soon left Apple’s board, Steve Jobs later vowed to go “thermonuclear” on Android and the Apple/Google alliance was over almost before it had begun.

3) It’s clear that pre-iPhone, Google was initially aiming Android as a Blackberry and Microsoft Mobile competitor, but as soon as the iPhone appeared on the scene, Google’s Android focus dramatically shifted. Assuming that competing with Apple was the right strategy, Google should be given all the credit in the world for pivoting as rapidly as they did from their original plan to creating a legitimate iPhone competitor.

4) As an aside, I also give Microsoft lots of credit too. When the iPhone initially appeared, Microsoft didn’t foresee the danger it posed. But soon afterwards, they not only recognized the danger but they acted and acted decisively. They took the radical step of abandoning Windows Mobile altogether and initiating their new Windows Phone 7 platform. It was a bold move, but as history as shown, it was one year too late. Windows Phone 7 (now 8) has never gotten any traction and it languishes in third place, just above the rapidly fading Blackberry OS.

5) I think I could make a pretty compelling case that Google should never have made Android a competitor to Apple’s iOS. By doing so, they destroyed a promising alliance and, perhaps, took a long, long, detour down a path that they never should have taken. But that’s all moot now. We’ll never know how that alternative reality would have played out, so there’s little point debating it.

6) What can’t be debated is the effect that Apple’s iOS and Google’s Android have had on the incumbent smartphone competitors. Palm and WebOS were wiped out. Blackberry was devastated. Nokia was humbled. Microsoft Windows was abandoned and replaced by Windows Phone 7.

Pundits often frame the smartphone/tablet wars as a battle between Apple’s iOS and Google’s Android, but in reality, those two operating systems – with Apple descending from above and Android rising from the below, crushed the existing smartphone competitors between them.

There is little proof that Android has ever made any significant income for Google, but if the destruction of their enemies was Google’s aim, then there is no doubting that the Android strategy was eminently successful.

7) Google’s I/O keynote barely even mentioned Android or any kind of hardware at all. If there was a common theme, it was about service unification between Chrome and Android.

Instead of an updated Nexus 7 tablet or a new Chromebook model, Google spent three hours during Wednesday’s keynote to discuss services and feature upgrades for both Chrome and Android.

If I could describe #io13 in one word it would be “unification”. Same features, services, UI and experiences on Chrome and Android. ~ Kevin C. Tofel

I think that Ben Thompson is spot on with this analysis:

“Services are where Google excels, and it’s where they make their money. It’s why they make the most popular iOS apps, even as their own OS competes for phone market share.

Apple, on the other hand, makes money on hardware. It’s why their services and apps only appear on their own devices; for Apple, services and apps are differentiators, not money-makers.”

“Apple invests in software, apps, and services to the extent necessary to preserve the profit they gain from hardware. To serve another platform would be actively detrimental to their bottom line. Google, on the other hand, spreads their services to as many places as possible – every platform they serve increases their addressable market.”

8) The battle for mobile is over. Apple’s iOS and Google’s Android reign as a duopoly and Microsoft and Blackberry hang on by the skin of their teeth. Google is free to put its web services on Android and iOS and to ignore the Blackberry and Windows 8 operating systems. Android has ensured that Google’s services are freely accessible on the only two operating systems that matter. The Android strategy was a success although, perhaps, at great cost. Google’s I/O keynote is living proof that Google is now re-focusing on their original mission of dominating web services.