Android v. iOS Part 3: Network Effect

on August 29, 2012
Reading Time: 3 minutes

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