The HTC One: Setting a New Bar for Android Phones

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I’ve been using the HTC One for a few weeks now as my primary smartphone and I have to say it is an impressive device on many levels. The HTC One is undoubtedly the best Android device I have ever used.

Through the years, HTC has shown that they can create extremely well designed and unique hardware. The HTC One is the pinnacle of the companies efforts and rasies the bar for all Android, and Windows Phone devices for that matter, going forward. The HTC One is the first smartphone that even comes close to the iPhone in terms of hardware and in some respects it is superior.

From my experience with the HTC One there were three key things that stood out to me.

Speakers and Sound

The speakers on the HTC One are incredible. Hands down the best speakers I have ever encountered on a mobile device. At first, I was impressed at the sound quality but questioned how practical the feature was. After a day or so, I quickly changed my mind and realized the feature was incredibly valuable. I started listening to music in more locations, contexts, and situations than before. Although I own the Big Jambox by Jawbone, I don’t always have it with me. Even when my family and I go to the beach or the park, we always try to pack lightly. Bringing the Big Jambox is not always an option. But I always have my phone with me and with the HTC One it’s like having a boom box with you at all times.

HTC includes the Beats audio feature which is a hybrid software and hardware audio processing solution. This feature worked well on the phone but interestingly the Beats audio feature was applied to audio that was being streamed to other devices. I stream music from my phone to my cars speakers frequently and I noticed the audio coming through my cars speakers was benefitting from the Beats feature.

HTC positions the enahnced audio and speakers on the One by calling it BoomSound. I’ve used many portable audio solutions and the distortion at high to full volume on many devices makes them simply unusable in louder or outside environments. This was my primary knock on the smaller JamBox. So I decided to test the HTC against other devices and this is what I found.

The iPhone 5 has great speakers but its max volume is 65 db and at that volume has minor distortion. My Retina MacBook Pro at full volume hits 95 db with excellent audio clarity and no distortion. The HTC One’s max volume hit 85 db with excellent audio clarity and no distortion. Suffice it to say, impressive for a mobile device.

Those stats aside, whenever I gave a demo of the speakers to friends and family, they simply said “wow.”

Camera

I think we would all agree that the camera on our smartphones may be one of the most valuable features. Every generation smartphone manufactures look to integrate better optics, sensors, software, and capabilities to the camera function. The processor and the camera are the two features that annually get signicant performance bumps.

HTC has always been pushing the camera envelope, mostly around megapixels, but you won’t find megapixel claims much with the HTC One and for good reason. Megapixels no longer matter. What matters now is what you do with those megapixels. HTC has packed a number of relevant features into the One that are typically rerserved for high end point-and-shoot and mirrorless DSLR cameras. The result is the best low-light pictures of any smartphone I have used. Low-light images are the trickiest to shoot with a mobile device and I generally travel with a DSLR for this feature alone.

Bottom Line is that the HTC One will rival many mid-range point and shoot cameras. Impressive for a smartphone.

Software

I’ve always appreciated HTC’s attempt to add value on top of Android. Their strategy with the Sense UI has been solid since the beginning. As Sense evolved, it got more refined and more polished. The hardcore tech community has generally bashed Sense in this regard because HTC is not targeting the hard core tech community with Sense. They are targeting your casual smartphone users who don’t want to fuss with their smartphone but favor ease of use over heavy customization and software tweaking.

Many of the UI changes HTC made helped Android get out of the way rather than get in the way. And for the masses that is a good thing. I have not been shy about my frustration with Android as a UI but HTC has done much to add elements of simplicity and convenience to the platform. HTC’s much simplified app launcher is a great example of this placing most recent apps, a search bar, and quick link to the Google Play store all near the top of the app drawer.

HTC has easily created the best Android phone to date for the mass market. Its uses for portable sound and image capture are best in breed of any smartphone. Considering how the masses use their phones, those two features alone will stand out.

The HTC One will distinguish istelf from the pack with the hardware alone. The key for HTC and the carriers that carry it is to market it appropriately. If they can do this, then I think HTC could have a winner on their hands.

My personal preference is still to iOS. Using the HTC One with its larger screen size and iPhone like design convinces me even more that I want iOS on a larger smartphone screen than 4-inches. In fact several times I remarked to people that I wanted iOS on the HTC hardware. Specifically the speakers and the camera.

I give many technology recommendations to friends and family alike. I recommend different devices depending on the type of consumer they are. However, If someone were to come up to me and ask my advice on which Android smartphone they should get. I would tell them without hesitation, the HTC One.

Facebook Home: The Death of Android

Facebook Home Chat-heat (Facebook)As a core operating system, Android is thriving. As a brand–and a user experience–it is dead. Facebook just killed it.

Android’s brand demise has been coming for a long time. Phone makers have been taking advantage of Android’s open architecture to install their own modified versions, such as Samsung’s TouchWiz. The most recent Android launches, the Samsung Galaxy S 4 and the HTC One, have barely mentioned Android. And in announcing Facebook Home, Mark Zuckerberg talked about Android only to say that Facebook was taking advantage of the openness of both Android and the Google Play Store to let anyone with a fairly recent Android phone replace the Android experience with the Facebook Home experience.

I dont know how many people will want Facebook  completely dominating their phone experience. I’m out of  the target demographic by more than a generation, so I’m probably a poor judge. But I’m pretty sure Facebook’s announcement won’t be the last of its sort. Maybe we’ll see a Twitter Home, or a Microsoft Home built around a growing suite of Windows/Skype/Xbox/SkyDrive products.

All of this seems to leave Google in some difficulty. Facebook is a direct competitor to Google’s primary business of delivering customers’ eyeballs to advertisers. Google’s considerable difficulty in monetizing Android just got considerably worse, and things are likely to go downhill from here.

Of course, one thing Google could do, at the risk of being evil, is lock down future releases of Android. That, however, might well be locking the barn door too late. Open source and free (as in speech) versions of Android are out there and Google action might well be viewed as just another fork of Android.

Google never seemed to know just what it wanted to do with Android. Now it may be too late to figure it out.

Tablet Trifurcation

images-46Yesterday, Tech.pinions columnist, Patrick Moorhead, discussed the implications of the growing popularity of the 7 inch tablet form factor.

Schism

I think that Patrick’s analysis of the schism between Apple’s iOS tablets and Android tablets was spot on. While Apple encouraged their developers to create apps that were optimized for the larger 10 inch tablet form factor, Android eschewed optimization and encouraged a one-size-fits-all approach. The resulting “stretched” Android phone apps worked poorly on the larger tablet form factor. However, “stretched” phone apps seem to work well, or at least adequately, on the slightly smaller 7 inch screens.

This divide in approach between iOS and Android tablets has at least two major implications. First, Apple’s iOS tablets will most likely continue to dominate the 10 inch tablet form factor. In fact, Android has all but ceded the 10 inch form factor to Apple.

Second, because both Apple’s 10 inch iPad and their 7.9 inch iPad Mini run optimized tablet apps, the iPad will most likely become the “go to” tablet for high end users. This means that professionals, businesses, government entities and educators will gravitate towards the iPad. And as the virtuous cycle of developer/app/consumer continues the spiral upwards, the high-end iOS applications will make iOS optimized tablets even more appealing to high-end consumers and even less approachable to Apple’s competitors.

Trifurcation

It seems to me that the tablet market is trifurcating. Apple’s iOS is taking the larger 10 inch form factor and the up-scale markets. Google’s Android may command market share in the mid-level markets. And forked or non-Google Android tablets will take the low end of the market. All can survive, but only Apple has proven that it can profitably thrive in such a setting.

Android’s Penetration Vs. Apple’s Skimming Marketing Strategies

images-45Technology pundits and press, alike, seem obsessed with market share. But obtaining large market share is just one of many successful business strategies. Android follows a penetration pricing strategy. Apple uses a skimming strategy. Neither is inherently superior to the other. Like any strategy, each has advantages and disadvantages and their ultimate success often depends upon both circumstances and execution.

Penetration Pricing

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize brand recognition and goodwill. ~ Stan Mack, Demand Media

Price Skimming

A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, a cell phone company might launch a new product with an initial high price, capitalizing on some people’s willingness to pay a premium for cutting-edge technology. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers. ~ Stan Mack, Demand Media

Apple has added a twist to the skimming strategy. Rather than introducing their products at a high price and then lowering their prices later, Apple stakes out a price and then maintains and defends that price by significantly increasing the value of their products in future iterations.

For example, over the past six years, the average sales price of the iPhone has remained remarkably stable with the subsidized price remaining at ~$200 and the unsubsidized price hovering around $650.

Advantages and Disadvantages Of Price Skimming

Price skimming offers four major advantages…. It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage, such as proprietary technology.

The argument against Apple’s price skimming strategy is that the competition has caught up with the iPhone and Apple is no longer able to compete unless they lower their prices. But do the facts support this argument?

First, the iPhone has received 8 (EDIT: make that 9, as of March 21, 2013) straight J.D. Power and Associates awards for customer satisfaction and Apple reported that four times as many iPhone users switched from an Android phone than to an Android phone in the fourth quarter of 2012. Clearly Apple’s cachet is not on the wane, at least not in the minds of phone buying consumers.

Second, in 2012, Apple garnered 69% of all mobile phone profits. Further, they did it with only 8% of the total market share. That means that the remaining 92% of the market provided only 31% of the sector’s total profits. That’s price skimming at its finest.

Conclusion

The current meme is that Apple MUST abandon their skimming strategy and pursue a price penetration strategy instead. However, the facts simply do not support this contention. Apple could, of course, “buy” more market share simply by lowering their prices, but this has two major disadvantages. First, the market share that they would be buying is worth far less than the market share that they already own. Second, a lower price would lead to lower profits as well. It is obvious – or rather it SHOULD be obvious – that this could be counter-productive.

There’s nothing wrong with market share and I’m quite certain that Apple would be more than happy to expand their market share – but not at any price. For example, Apple has some 70% market share in iPods and around 50% market share in iPads. Yet they are doing this while still maintaining their price skimming strategy.

Price skimming is neither the only strategy nor is it the only superior strategy. It is just one of many marketing strategies. However, Apple is executing the strategy of price skimming brilliantly…even if Wall Street and the pundits stubbornly refuse to acknowledge it.

The App Developer Dilemma

A lot of great data came out yesterday that I believe is worthy of a deeper look. In my opinion, this data begins to shed light on some of the key questions I have had around platform engagement.

Flurry released some very insightful data that dug into the vast platform fragmentation across platforms. This data helps us draw clean conclusions around why it is very difficult for small to mid-size developers to survive if their goal is to have an app on as many devices as possible. To highlight this, Flurry makes the following point:

(for a developer) to ensure that your app is optimized to function well on 80% of the individual connected devices currently in use. How many different device models (e.g., Kindle Fire HD 8.9″ Wi-Fi, Galaxy S III) do you think you need to support? (the answer is) 156.

A developer would need to index and code for the different variables for 156 different devices just to cover 80% of the current connected devices in use. That sounds like a lot of work.

The Flurry data goes on to focus on more reasonable device coverage and estimated that if a developer simply wants their app to run on 50% of connected devices in use, it means supporting 18 devices. If you know anything about how app development, testing, troubleshooting, etc., works then you know this is a problem.

From the get-go my analysis has highlighted that developers would continue to commit the bulk of their resources to support iOS due to the minimal screen size and OS generation discrepancy that exists in Apple’s model. From the many startup briefings I am having with software companies in Silicon Valley, the iOS first mantra still rings true.

The next bit of data worth highlighting is around application engagement in iOS and Android. Flurry’s data highlights that even though Android has a greater number of people using the platform, iOS has a significantly greater application engagement level. iOS users engage an application 14 times more frequently than a user on Android.

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Flurry even analyzed the data further and decided to look at application engagement not just of Android but by specific device brands running Android. The bit that stood out to me was the data around Samsung devices running Android. Flurry’s data returned that iOS (iPhone and iPad) users engage applications 7.7 times more than users on all of Samsung’s Android installed base.

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This one has always been a puzzler for many of us because we constantly see the data (from many sources both public and private) telling us that iOS users are far more engaged with software on their smart devices. So with all the data pointing in this direction, we are faced with the question of why? I attempted to shed light on this with my column on iOS and sophisticated simplicity. My core conclusion is that iOS makes it easier to engage more with the software, but this point is subjective so let’s look at more data.

The Flurry data should shed some critical light on the development challenges facing many developers. The bottom line is for developers this is an issue of massive strategic proportions. comScore also shared some of their data, also targeted at developers, with the goal of highlighting some core differences between Android and iOS customers.

The main point I found interesting in the comScore data was their findings that the extremely high satisfaction rate of the iPhone leads to much higher device loyalty. Something I believe many in the media who write their famed “I’m switching” articles fail to realize is that the mass market simply doesn’t change for change sake. If they are happy and satisfied, then churn is rare.

Another bit of interesting data is related to the average income of consumers of both platforms.

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As you look at the chart above, you may be tempted to look at the lower part of the Android graph. That isn’t the one I want to focus on. I want to focus on the bottom part of the Apple graph. If you would have seen data going back a few years that looked at average income per platform, you would have seen that most Apple users skewed higher overall on the average income level. What we are now seeing is the iPhone growth, which led to 3.5% gains this last quarter, and caused Android to lose 1.3% market share, being a result of Apple growing their share of the lower end of the market. So what do you think will happen when a new iPhone comes out and the iPhone 5 becomes $99?

The Flurry article brings up an important point facing small to mid-size developers. Where should the focus their time and financial resources? This group is where true software innovation often comes from. Rather than spread themselves thin supporting a fragmented device universe, it seems wise that they focus on the customer base and platform which will reward them financially so they can keep innovating. This decision is of monumental strategic importance.

The Invasion of Cheap Tablets

Fotolia_42210115_Subscription_Monthly_XXLGiven the massive market demand for tablets and the fundamental shift in consumer sentiment from PCs to tablets, it was only a matter of time before the tablet race to the bottom took place. I wrote about how this was happening in China at rates hard to fully comprehend. It looks like 2013 will be the year cheap tablets start showing up in numbers at retail in mature markets like the US and Europe.

The precedent for these products was already set by the Nexus 7, which has likely been the most successful Android tablet to date. The last data checks I saw at the end of 2012 suggested that the Nexus 7 was selling around 1 million units a month. That may have slowed as of late but I’m sure it is still selling well.

It seems that the sweet spot for Android tablets has been in the sub 8-inch screen size and I don’t see that changing in the short term. At MWC 2013, Samsung and HP have just added more flame to the fire of Android tablets. Samsung is coming out with an 8-inch version of their Note product line and HP is bringing their first Android tablet to market with a 7-inch device called the Slate 7. Pricing and availability is yet to be disclosed on the Samsung Galaxy Note 8.0 but I expect it to be in line and most likely slightly less than the iPad Mini. If it costs more, it’s DOA. HP on the other hand chose to be very aggressive with the pricing of the Slate 7 and will bring it to market at $169 and will be available in April. These are the first of many Android tablets I expect to see in 2013 with 8-inch or smaller screens and at lower cost price points.

The Role of Cheap Tablets

Believe it or not, I believe these products have an important role to play. They will help mature the market for tablets and they will bring low-cost entry points to the Internet into the home.

The market for tablets is still immature. Even though there are now well more than 150 million tablets (mostly iPads) out in the wild, there are still many consumers who have not owned a tablet nor have they deciphered what their needs, wants, and desires are with such products. This understanding is a critical part of the adoption cycle and it requires an understanding of what a product means to a consumer. This is also something that only comes with ownership. Having a plethora of choice around tablets, from small to large as well as varying price points, is a healthy part of product market maturity.

The other role I think these devices play is one of low-cost Internet access points. I’ve stated in previous columns my belief that some tablets in the home will not be personal but will be communal. They will be products anyone can pick up and use and will be likely not tied to one person but perhaps more tied to general entertainment, media, automation, or other general cloud services relevant to the household as a whole rather than one specific person.

Last Friday I pointed out how I am doing this now with more than a dozen tablets in my own home. Everyone has their personal one, which they have customized but since we don’t carry them around with us everywhere, we have communal tablets one can use for web browsing, streaming media, playing games, etc, lying around the house for free access. Low-cost tablets will make experiences like this more a reality.

Winners and Losers

The arrival of low-cost tablets from major brands (especially legacy PC ones) will certainly impact many players in the technology industry–some more than others. In the case of HP, I found this strategy interesting because one of the things a low-cost sub 8-inch tablet does is it continues to emphasize dependence on a traditional PC form factor. By keeping this particular tablet in the low-end both in terms of price and experience they are not in danger of cannibalizing their PC sales, even still, others may cannibalize it for them. Regardless, I actually think this is a smart move for HP in the short term. They need to figure out their software and services add value on top if they want to stay relevant in the long term.

Samsung will keep doing what Samsung does, which is offer a wide range of devices in all shapes and sizes and price points.

The real loser in an invasion of low-cost tablets, in my opinion, is Microsoft. They are just getting started and they have no intention of allowing their customers to compete in the lower end of the tablet spectrum (they don’t even have a 7” tablet offering near coming to market). I expect these low-cost tablets to hurt the adoption of Windows 8 tablets initially but not necessarily in the long run.

Of course that leaves Apple. I’m sure the Apple naysayers and critics will look at all the cheap tablet buzz and assume that this means danger for Apple. I certainly don’t believe that is the case. Apple has no intention on competing with the lowest end of the market. They chose to compete on experience and have proven they can do it extremely well. I also believe they don’t want to price themselves out of the market and will do anything necessary to keep their products affordable. There is a market for cheap but there is also a market for high-value products which are affordable. There is a big difference between cheap and affordable. This strategy alone for Apple can keep their profit share high even if they have smaller market share.

We will see how this all plays out. I’m not sure the degree the current tablet forecasts took into consideration the size and scale of the potential cheap tablet invasion. My gut tells me all the current tablet forecasts for 2013 are still much too conservative.

Does The Rise Of Android’s Market Share Mean The End of Apple’s Profits?

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It’s an article of faith in the Church of Market Share that Android is nearing a tipping point where its market share lead will inevitably turn into a developer share lead, too. ~ John Gruber

Matt Asay, writing for Readwrite Mobile, puts this argument into words in his article entitled: “As iPad’s Market Share Falls, Must Profits Follow?

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. Profit share follows market share…

Only, here’s the thing. I HAVE been paying attention to the smartphone market. Perhaps more importantly, Horace Dediu has been too. And as his chart, above, demonstrates, the facts belie the argument that profit share follows market share. Even as Android’s market share has grown by leaps and bounds, Apple’s iPhone profit share has grown too. How can this be?

What’s Really Happening

Here’s what the facts are telling us. First, Android’s growth has not hurt Apple’s profit share. Instead, Android gobbled up all of the profits from the other smart phone manufacturers. Second, Samsung subsequently gobbled up all of the profits from the other Android manufacturers. Samsung now makes as much profit share as the entire mobile industry did five years ago. Third, the iPhone has not only survived the growth of Android’s market share, it has thrived, growing its profit share from 21% in 2008, to 50% in 2010, to 57% at the start of 2011, 73% at the start of 2012, and 72% at the end of 2012. And since the pool of profits has grown dramatically over the past five years, Apple’s profits have too.

What will it take to get Apple’s critics to acknowledge that Apple’s iPhone strategy is actually a raging success rather than the raging failure they constantly portray it to be? Does Apple need to take in 100% of the profits in perpetuity for them to be convinced?

Faulty Analysis

The problem with our obsession with market share is that it rests on two faulty foundations. First, it assumes that every product sold within a category is always just as valuable as another. Second, it assumes that every customer who buys a product is of equal value. These two premises are laughably wrong.

It’s A Mistake To “Pool” all sales together

Are all smartphones or all tablets of equal quality or used in the same way? Hardly. No knowledgable person would argue that they were. Yet when we use market share as our metric, we assume exactly that.

Kiddie pools and above-ground pools and in-ground pools are all considered to be “pools”. But does the sale of one necessarily impact on the sale of another? Sandals and dress shoes and winter boots are all considered to be “shoes”. But does the sale of one necessarily impact the sale of another? Similarly, when we lump all types and makes of phones or tablets together, we create a false basis of comparison. Is the iPhone or the iPad really competing with the gray market phones and tablets being sold in China anymore than in-ground pools are competing with kiddie pools or dress shoes are competing with sandals? Just because two products fall within the same category, does not necessarily mean that they are in competition with one another.

Not All Customers Are Equal

“(T)he fundamental flaw in the Church of Market Share doctrine is the assumption that users are users. That one platform with, say, 40 percent market share, must be in a stronger position than another platform with, say, 20 percent market share, simply because a larger number of users is better, period. What Apple has shown with the Mac, and now with the iPhone and iPad, is that all users are not equivalent. Counting only the Mac, Apple is not the biggest PC maker by unit share. But it is by far the most profitable, quarter after quarter, year after year. What’s more important than a company’s share of the overall market is the company’s share of the profitable side of the overall market.” ~ John Gruber

The fact that customers are not of equal value is so fundamental that I shouldn’t even have to say it. There are whole industries and entire fields of learning devoted to the art of finding the right customer for the right company or product. Not only do companies target preferred customers, but they actively shun customers who are counter-productive too. Yet when we use market share as our metric, we assume that a customer is a customer is a customer. Nothing could be further from the truth.

For example, I might be an ideal customer for Krispy Kreme Donuts. But I might be a lousy customer for Victoria’s Secret. (This is because I stopped wearing frilly lady’s underwear years and years ago. You can confirm this with my parole officer who will totally back me up on this.)

Being a bad customer is not the same thing as being a bad person. Good people can be bad customers. But being a customer is not the same thing as being a good customer either.

Does Market Share Matter To Apple?

Absolutely. Take a gander at this critique of Apple from Steve Jobs:

“At the critical juncture […], when (Apple) should have gone for market share, they went for profits.” ~ Steve Jobs

Steve Jobs wanted, and Apple wants, market share. But they want the RIGHT market share. Apple wants customers who are willing to pay for their products. And Apple wants customers who are good for their platform. In other words, Apple wants market share in their target demographic. Based on the fact that Apple is taking in 72% of the mobile phone profits with only 8% or 9% of the market share, it sure sounds like they’ve aquired the right market share to me.

Does the rise of Android’s market share mean the end of Apple’s profits? Hardly. You can argue as loudly as you like that developers and profit share must necessarily follow market share. But the facts will shout you down.

The Galaxy Note 2: One Giant Step for Android Phones

DSC_26921If you have read much of what I have written here or at TIME, then you may be surprised at some of the conclusions my analysis of the Samsung Galaxy Note 2 have yielded. I have not been shy about my affection for the iPhone. The iPhone is by far the most elegant, the most simple, and the most sophisticated mobile phone I have ever used. However, to keep a keen eye on the mobile landscape, I try and use all the flagship Android phones for a period of time as my primary smart phone. Up until the Note 2, I have never felt that Android, or larger phones for that matter, every really presented any significant value to me over the iPhone. That is until the Note 2.

I wrote a somewhat detailed analysis of Apple’s 4” iPhone vs. Android 4.7” phones last year. My conclusion from that analysis was that an Android phone in the 4.5-4.7” range did not present enough value for the tradeoff of one handed navigation. My conclusion is different since using the Note 2.

Related: Apple’s 4″ Plus iPhone 5 vs. Android 4″ Plus Devices

In that analysis I did with the 4” iPhone vs. a 4.7” Android phone I looked mostly at how information was presented. I looked at the web, email, twitter, FB, etc., and found that in most cases the amount of information displayed between the two OSes and screen sizes was roughly the same. The only major difference was that on the 4.7” screen the information was slightly larger. Again my takeaway was that although most information was larger, I didn’t see the value in the tradeoff of one handed navigation and or the robustness of iOS. It simply wasn’t a big enough difference in my opinion. That analysis led me to the conclusion that Android devices between the range of 4.5-4.7 inches were not worth the trade-off of one handed navigation.

Size Does Matter

This realization became clear to me in comparing the Samsung Galaxy GSIII to the iPhone. I used the GSIII for a few weeks but had the same feeling as I did when I compared the iPhone 5 to the Galaxy Nexus. Conclusion being the value of the larger 4.7″ screen was lost on me and it wasn’t worth the trade-offs. However, the Galaxy Note 2 is a different story.

After a few days of using the Note 2, I was struck by how good the experience of Android was on a phone over 5 inches. Oddly enough, it was a similar feeling to how I felt with the Nexus 7. Then these two experiences collided in my mind and I made a realization. I genuinely dislike Android on devices smaller than 5-inches and larger than 10-inches. Yet I like it a great deal on it on devices between 5-7 inches. It is an anomaly I know but that is exactly how I feel. It is almost if Android’s clearest differentiated value over the competition is in the 5-7 range. Both size ranges where iOS is not. Granted the iPad Mini comes close to the Nexus 7 in size, and the iPad Mini is significantly better than the Nexus 7 in my opinion, but I can see why people like and choose the Nexus 7. It is a good value and good experience for the price. Not the best, but for the price, good enough.

The Note 2 size range, however, feels to me like the area where Android really has a clear and distinct differentiated advantage. Again, part of this has to do with the fact that Apple does not offer an iOS device in this range so it is hard to compare. But its still a significant point from a competitive analysis standpoint.

The One Handed Mode Tradeoff

The strongest argument against these size phones is the one-handed operational trade-off and it is a very strong point. If one handed operation is important to you then stay away from devices 4.5-inches and above unless you have Lebron James size hands. But the key conclusion I made is that the trade-off of one-handed operation feels like less of a trade-off with the Note 2 than with any other 4.5-4.7” Android phone I have used. Any phone larger than 4.5” is going to require a trade-off of one-handed operation anyway so why not just go larger and get more value.

Interestingly, I had discussions with folks who owned the Note 2 and specifically many women. They told me that since they have smaller hands, most phones were already hard to use with one hand and therefore they simply wanted the biggest screen possible because they found that valuable. Many were overwhelmingly pleased with the Note 2. This makes my point that if one handed navigation is not that important to you then the value of the screen size experience of the Note 2 is significant.

Although much of my analysis of the 4.7” screen holds true with the Note 2 about information displayed, it is with the Note 2’s size range where bigger actually does feel better. Take Facebook for example. Comparing the Facebook app experience on the iPhone 5 vs. a 4.7” Android phone yields only slightly larger photos and media making the size difference moot in my opinion. However comparing the Facebook experience on the iPhone 5 vs. the Galaxy Note 2 yields much larger photos and media which resulted in quite a different experience. An experience that was definitely more tablet like than phone like.

Web browsing is another good example. I pointed out in my screen size analysis the web experience was nearly moot with the iPhone 5 and other Android 4.5-4.7” devices. However, with the Note 2 the difference in web browsing was significant. Not only were mobile sites larger and easier to read but so were full desktop sites. In fact with the Note 2, I set it to always bring up the desktop site. Never before have I done this on any non-iOS devices. Here is a side-by-side screen shot to scale of the Note 2 and the iPhone 5.

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It was examples like these where the bigger screen truly brought value. What really struck me is that the experience with the Galaxy Note 2 is more tablet like than phone like. This is probably a key point in why I think this form factor is so interesting. It is also one that makes it very hard, for the first time, to actually compare an Android phone with the iPhone.

Samsung has also done some interesting things in software to enable more ease of one hand use which led me to the conclusion that larger phones present the most opportunity for new hardware and software innovation.

Conclusion

In all the cases where I found the value of the Note 2 clearly differentiated was with regards to media. Photos, videos, games, social media apps, and other places were media was a key part of the experience. This is a key point because the use cases I identified where value is clear in a giant phone are exactly the ones that matter the most to the mass market.

My personal conviction is that the value of the 5” plus phones are worth some of the trade-offs of one handed navigation where 4.5-4.7″ devices are not. The primary point being that for devices where one-hand navigation is already difficult like ones above 4.5”, consumers are better off going larger in my opinion.

5″ smart phones are an are where a lot of innovation in hardware and software exists. Perhaps more so than any other smart phone form factor. Particularly around voice automation, smart sensors, gestures, and software.

So am I leaving the iPhone? No, for reasons I finally believe I can articulate and will share in a column soon. However, after using the Note 2, I can honestly say it is the best Android phone I have ever used and the only one I could identify tangible differentiated value.

Related: Apple’s 4″ Plus iPhone 5 vs. Android 4″ Plus Devices

For some deeper audio context to this column, click the play button below to listen to my interview on the Galaxy Note 2 and whether Apple should make a larger phone.

Android, China, and the Wild Wild West

Last week, I talked about the importance for us industry observers, analysts, media, etc., to have a more informed discussion when it comes to Android. I think it is important when we analyze, from an industry and market viewpoint, that we do so with a holistic viewpoint.

My key point in last weeks column was to address the issue of Android platform forking. Android in its purist definition only refers to the AOSP or Android open source platform. Something anyone on the planet can take for their own and fork it, thus differentiating their Android platform and in many cases using the core Android source and making their own platform. Therefore, as it currently stands we have Google with a platform based on Android, we have Amazon with a platform based on Android and we have Barnes and Noble with a platform based on Android. Each of these platforms is their own unique ecosystem.

I make this point because when we say Android has X% market share we are talking about the total including all the forks. This is a key point, because when many make the claim that Android is winning the market share game, they often make the mistake of assuming that Android equals Google, therefore assuming that Google’s version of Android has the total Android market share. This is of course false, as Google’s version of Android, the one that benefits Google in a monetary or data gathering way (a.k.a a business model), has only a fraction of the overall Android market share numbers being referred to. Exactly how much we are not sure because even Google refers to Android falsely making it sound like the total installed base of Android devices on the market have some business benefit to Google and of course that is not true. My gut tells me that if Google did release the numbers of the global install base of Android devices tied to their services, thus qualifying as a Google Android device, the picture would not be as rosy as many make it out to be. No where is that more the case than in China.

The Wild Wild West

As I have been studying the Chinese Android market, the only way I can describe it is the wild wild West. Android is fragmented, un-unified, inconsistent, and otherwise fundamentally fractured in as many ways a platform can possibly be. In fact it is hard to even call Android a platform in China, and there is certainly no Android ecosystem there. There are dozens of app stores, tightly controlled ISP and heavily differentiated experiences and services bundled on the vast majority of Android devices, half a dozen different payment mechanisms, and a general lack of standardization.

The top app stores come from the likes of Tencent, 360, 91, UCWeb (which is a browser) app store and a number of other tier two heavily localized app stores. If I was an Android developer focused on China, I would have my work cut out for me making sure I was present in all the various app stores, or try to go direct to consumers (as many are trying to do), or working as close as possible with the ISP and carriers themselves. This model is somewhat feasible by the larger developers but very difficult for the upstarts and other smaller developers.

What is also very interesting about the Chinese market for Android devices is that the vast majority of the 38 million Android devices sold in China last quarter were extremely low-cost entry level devices. Now, in most cases, this is exactly the kind of scenario that Google would hope for. Google’s mobile business model depends on install base and the best way to do that is to have a plethora of cheap devices so hundreds of millions of people can jump on your platform and you can make some mobile search and ad revenue. The only problem is Google is not benefitting from Android’s success in China in even the slightest way.

The challenges of Google with China are well documented. Over the past few years Google has continually been closing offices in China and largely abandoning the region. Android has not helped relations or Google’s strategy–or lack of strategy–in that region and it doesn’t appear that it will anytime soon. The vast majority of Android devices sold in China have been stripped of all services tied to Google in any way. Here are some key points.

– Local browsers dominate the web browsing landscape
Google search engine market share is less than 5%
– 90% of new Android devices sold in China do not have the Google Play store on them.
– Many developers are choosing local in app advertising solutions over Google’s

China, and in particular the low-end Android segment, is one of the fastest growing segments in mobile. Every day China is accounting for more and more of the Android activations. Android in China has simply become such a customized and regionalized OS that I’d argue the point that Android in China should be considered its own fork. And due to the extremely fragmented and lack of standards around app distribution, I’m not that confident that Android has a sustainable position in the region outside that the devices are cheap. The vast majority of low-end Android consumers in that region are not investing into any specific ecosystem other than the likes of someone like Baidu, for example, which offers their services on a range of platforms, Apple’s included.

Other than Android devices being extremely low-cost, I’m not convinced, based on the data I have on the region, that Chinese consumers are loyal to the regional Android fork. A point, that offers more hope for standardized and unified platforms from competitors like Apple and Microsoft or even some platform not yet released.

The bottom line is, for now, Android is alive and well in China. It represents one of the fastest and the largest growth sectors for not just Android but the mobile market at large growing at about 300% year-over-year. Android is being taken by the natives and customized / implemented to benefit themselves and their heavily regional services. The vast majority of these devices have little to no benefit to Google. Android is doing well in China, Google is not. Something I find fascinating.

I paint this broad picture of Android in China for the hopes that we can have a more informed discussion when we discuss Android. Too many people associate Android’s holistic global success with Google and that is a disingenuous analysis. I’d love to be able to break out the individual Android fork market share, including the regional forks like China, India, and now Africa, but when the handset OEMs–and Google–are not sharing specifics. A situation I find entirely suspect. Although, the more I learn the truths about Android holistically across the forks and the regions, I am getting a sense of why the details are not being shared with us.

Google’s Directionless Map Strategy

Marco Arment on Google Maps:

What this timing (of Google Maps) really shows is how much Google needs to be on iOS. They’re primarily in the business of reaching as many people as possible so they can build up as much data and advertise to as many bodies as possible. Android is an insurance policy against their profitable businesses being locked out of other platforms, not an important profit center itself.

Google’s Android strategy is inconsistent and incomprehensible. Apple never would have created its own mapping program at all if Google hadn’t denied Apple audible turn-by-turn directions. Now – after Apple has integrated their own maps into their iOS operating system – Google gives Apple everything they ever wanted. How does that make any sense?

If Google wanted to deny Apple access to features that were on Android, then they shouldn’t have created Google Maps for iOS. If they wanted iOS eyeballs, then they should have given Apple turn-by-turn directions BEFORE Apple effectively un-integrated Google maps. The whole affair was completely counter-productive for all involved.

You can’t have it both ways. Either Google should be in the business of being on every mobile platform or Google should be in the business of Android. Trying to pursue both strategies is like trying to keep one foot on the dock and the other on the boat. You can’t get anywhere and it’s going to sink you sooner or later.

Toward a More Informed Discussion on Android

There are a lot of things that bother me about the discussion among the pundits related to Android. John Kirk has done a great job looking at the business issues around Android from a business perspective so I am not going to rehash those points. You can read them all eloquently stated by John in his series which you can find here. Rather, I would like a take a deeper look at the platform truths related to Android.

Who Cares About Market Share?

The first thing I want to talk about briefly is the pundits and the media’s obsession with market share. There was a time when market share mattered and it was during the maturity cycle of the PC industry. The reason we cared about market share, and in this case Microsoft’s, was because the market was maturing and thus needed a standard to center around, build hardware around, build software and accessories around, etc., in order to mature it. Now that the market is mature, market share is less important than people think to the overall industry. Primarily because there will no longer be on single OS dominating the landscape but rather there will be many which together equal the whole pie. Many ecosystems and platforms can and will continue to co-exist. How many? As many as developers will support and write software for.

As long as developers can make a healthy living supporting a specific platform, no matter how large—or small—its market share, that platform will exist.

From what I can gather there are two groups to whom any bit of market share discussion is relevant to, developers and those who wish the demise of competing platforms. It is unwise and uninformed to be in the latter.

What Do We Mean When We Say Android?

This is the core of the issue that I think gets overlooked. Android is in no way shape or form the same as OS X, Windows, iOS, Windows Phone, or RIM’s Blackberry OS. When we speak of those operating systems we are speaking of a unified platform controlled by one company whose platform share represents the total addressable market, via single SDK, for developers. Should a developer want to develop for any of those platforms, all they need do is get the SDK for that single platform. Android, however, is an entirely different beast.

Because Android is open source, all the term Android refers to is the AOSP, or Android Open Source Project. Anyone can take this core code and create their own custom operating system using Android as the core. Google created and manages the AOSP but also has their own version of Android. Amazon does this and has their own version of Android. Barnes and Noble does this and has their own version of Android. I would not be shocked if new entrants as well take the Android platform and make it their own for their own needs as well. Android is not actually a platform, it is an enabling technology that allows companies to create platforms. A commenter gave the smart analogy a few weeks ago that Android is more like a BIOS.

All of this is fine and good and to be honest I am glad Android exists for the reasons that great companies can take it and build exciting hardware. Whether or not this is why Google released Android into the world is an entirely different discussion. What’s more to the point is that when we talk or read about Android market share, we need to understand that number only applies to Android as it relates to an underlying open source framework.

The reality is Android’s market share is broken up into the many different versions that exist, all with separate developer SDKs. So If I was to actually break the market into the computing platforms which exist for developers the list would look like this:

Proprietary Platforms
– OS X
– iOS
– Windows
– Windows Phone
– Blackberry OS

AOSP Platforms
– Amazon Kindle Fire platform
– Barnes and Noble Nook HD platform
– Google Android Platform
– Other

All of those platforms I just mentioned (including other which I will address in a moment) have their own app stores and/or their own developer SDKs.

So what is other? Other represents the incredibly complex and nuanced regions like China, India, and other emerging markets. These regions have a rapidly increasing number of Android devices in them, yet they have no unified app stores and no benefit to any of the players mentioned above with AOSP versions of Android, including Google.

Now when it comes to smartphones, for now it’s Google’s version of Android vs. other, since neither Amazon or Barnes and Noble make a phone—yet. So to dive deeper into a recent market share estimation that Android has 75% of the smartphone market, means we need to understand what percent of that is Google Android vs. other. Which would be a whole lot easier if Google would tell us, which they won’t.

The fascinating part of this is related to China. Consider this a first in a two part series, where in the next one, which will come next week, I will take a deeper dive to the complex environment that is the China market for smartphones and specifically what is happening with Android in China. China is the wild wild West at the moment and a fascinating market to study. Until then, however, I leave you with a few articles.

The first is by Ben Evans and his recent Forbes column entitled:
Android, China and Addressable Markets

The second is an article in TechAsia entitled:
Chinese apps are bypassing Google’s Play Store, giving Android apps straight to Users

I highly recommend those articles as a primer for what I will dive into next week.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

iOS Is Winning The Profit Battles

Everyone concedes that Apple’s iOS is currently winning the mobile profit battles. However, many pundits still contend that Apple is losing the mobile wars because Apple does not have the most market share. How can this be? In almost every industry in the world it is profits – not market share – that matters and profits – not market share – that matters most.

Tiffany’s does not care how much costume jewelry their competitor’s sell. Nor do we judge the sales of cars, blue jeans, steaks or any other good or service soley by its market share. Companies like Best Buy, Radio Shack and K-Mart stand as stark testaments to the fact that the one with the most stores or the one that sells the most low cost items is seldom the one with the best prospects.

Does Platform Matter More Than Profits?

Ah, but apparently in a platform war it is platform – not profits – that matters most because it is platform – not profits – that inevitably leads to profits. And it is market share – not profits – that matters most because it is market share – not profits – that inevitably leads to platform victory.

John Koestier of Venturebeat puts it this way:

“As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

Dan Lyons, writing for ReadWrite, goes even further:

If this sounds familiar, it’s because we’ve seen this movie before, only in the original version Apple was losing out to Microsoft in personal computers. Now Google is using the same game plan in smartphones: Come in late with an alternative product and gobble up market share by licensing the OS to loads of hardware makers instead of trying to do everything yourself.

Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.

And Henry Blodget attempts to spell it all out:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

iOS Is Winning The Platform Battles Too

Only there’s one little problem with the theory that market share matters most in a platform war. By every imaginable measure and in every way that conceivably matters, it is iOS – not Android – that is winning the platform wars. And it isn’t even close.

A computing platform is made up of any number of attributes. Some examples of those attributes are:

adoption of operating system updates; accessories; advertising revenue; app primacy, quantity, quality and profitability; business adoption, BYOD, commerce; consumer assurance, entrustment and confidence; content revenue; control of the platform; credit card numbers; culture; demographics; developers; ease of use; eCommerce; ecosystem; education adoption; engagement; enterprise adoption; government adoption; in-app commerce; integration; lock-in; loyalty; monetization; profits to developers, content providers and publishers; popularity with teens; re-sale value; reliability; repeat customers, retention; safety; satisfaction; security; shopping; stability; stickiness; store quality; switching costs; trust; usage; video views; web traffic.

In every platform attribute listed, it is iOS – not Android – that is leading and in many cases it is iOS that is dominating.

Market Share Does Not Equal Platform

The pundits got it halfway right. Platform matters. But market share does not equal platform. Not by a long shot.

How can this be? The equation of “market share equals platform” is the foundation of the Network Effect – the idea that the value of a product or service is dependent on the number of others using it. Only here’s the thing. In computing platforms, it’s developers and dollars – not units and users – that count towards market share.

This just isn’t that hard. The two basic realities that matter most to a platform are that developers get paid to develop more and better apps and that consumers get incentivized to buy more apps and pay more for those self-same apps.

When the facts do not fit the theory, you either question the facts or you question the theory. The theory that “market share is all that matters” is flawed because the opposing facts are incontrovertible:

1) Developers are deveoping for iOS first;
2) Developers are making more money via iOS;
3) Consumers are downloading more content and apps, engaging in more eCommerce and consuming more advertising via iOS; and
4) Consumers are spending more on the content, apps and items they buy and the advertising they consume on iOS.

The Network Effect that John Koestier, Dan Lyons and Henry Blodget are banking on is alive and well. But it is iOS – not Android – that is reaping all of its benefits and rewards.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

Again, from Henry Blodget:

The biggest and most important difference between the PC market of the 1990s and the mobile market today is that many of the most common smartphone “apps” are available on all phones, regardless of platform. These include:

Phone
Email
Web
Texting
Popular games and apps

What this means is that you’re going to get most of your smartphone functionality regardless of which platform you use.

Ironically, spot on.

The pundits – including Henry Blodget – have it exactly backwards. You don’t HAVE to have a great platform to be successful in mobile. Android is living proof of that. Remember, when Android first emerged, it was iOS that had a 200,000 app head start. If platform was all that mattered – if we were re-living the PC v. Mac wars – then Android would have played the role of the Mac – or worse, the Amiga – and never have emerged from its nascency.

The bottom line is that there are really two smartphone markets. Android is an excellent smartphone. iOS is an excellent platform. Both can, and do, co-exist. And therein lies the answer to the seeming paradox.

The Right Diagnosis But The Wrong Prescription

Let’s re-review Henry Blodget’s argument:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

Henry Blodgett’s diagnosis – that platform matters – is entirely right. His prescription – that market share cures all ills – is entirely wrong. Android can continue its unit and user market share dominance without impinging on iOS’ platform dominance because it is developers and dollars that are the only market shares that really matter.

— It is iOS – not Android – that is attracting the third party companies to build products and services on top of their platform.
— It is iOS – not Android – that is becoming more valuable with greater customer lock-in.
— It is iOS – not Android – that developers, content providers, advertisers and eCommerce sites are standardizing around.
— And it is Android – not iOS – that is in danger of having the value of their smaller platform collapse.

Conclusion

Don’t get me wrong, Apple has plenty of things to worry about. But a flawed theory regarding platform and the Network Effect isn’t one of them.

Let’s stop focusing on market share without context and let’s start focusing on what matters. Market share does not necessarily equal profits. Market share does not necessarily equal platform. And in the long run (and in the short run too), market share that doesn’t ultimately lead to profits is meaningless.

Anyone can get market share. All you have to do is give away your product at cost or, better yet, for free. But you can’t beat Apple’s iOS just by losing money. Somewhere, somehow, sometime you’ve got to make a profit. Let’s stop pretending that market share is the bottom line or the only thing that matters. Profit and platform matter. Let’s focus on them, instead.

Why Android Is Winning The Battles But Google Is Losing The War: Part 5

A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

Series Schedule:

  • Mon: The Battle for the PC
  • Tue: The Battle for Mobile Phones Won
  • Wed: The War for Mobile Phones Lost
  • Thu: The Battle for Tablets
  • Fri: Picking Your Battles Is As Important as Winning Them
  • 5) Picking Your Battles Is As Important as Winning Them

    Recap

    “If we are victorious in one more (such) battle…we shall be utterly ruined.” ~ Pyrrhus

    Google, inarguably, won the war for the desktop. Their search strategy was brilliant, brilliantly executed and brilliantly successful. But they knew that mobile was the future and they knew that they needed to find a way to extend their business model to embrace mobile or they would eventually be isolated on the desktop with ever decreasing customers and ever decreasing revenues.

    Android was Google’s answer to how to monetize mobile. It would serve two purposes. It would transfer Google’s successful desktop search paradigm to mobile devices and it would disrupt the incumbent mobile operators.

    DISRUPTION

    In the latter, Android was entirely successful. The one-two punch of Apple’s iOS and Google’s Android demolished the then crown princes of mobile computing. Palm is gone. RIM is on its last legs. Nokia is no more than a vassal of Microsoft. Windows Mobile was utterly destroyed, its replacement, Windows Phone 7, has come and gone, and Microsoft is now rebooting the franchise for a third time with Windows Phone 8. Seldom, if ever, has an industry been turned on its head quite so thoroughly and quite so fast.

    PROFITS

    However, with regard to transferring Google’s desktop search model to mobile, Android has utterly failed. Google search on the desktop is one of the most profitable businesses in the world. Android on mobile is not only virtually profitless but, if your subtract the extraordinary expenditures involved in creating and supporting it, it is almost certainly a net loss for Google.

    SEARCH, APPS AND PLATFORM

    There are at least three reasons why Android is failing to serve Google’s purposes: search, apps, and platform.

    When Google created Android, they didn’t know, and probably couldn’t have known, how ineffective search would be on mobile devices. For a variety of reasons – but mostly due to the small screen size – search simply does not work on mobile devices the way it does on desktop devices.

    The popularity – and the peril – of apps was probably another unforeseeable development. In 2006, and long afterwards one could have, and many did, make the argument that web apps were the future. It just didn’t work out that way. Apps have proven to be far more successful than anyone could have predicted. And apps are a direct threat to Google’s search model since they can’t be “crawled” by Google’s search engines and since they entirely bypass Google’s advertising business model.

    Yes, search and apps were threats that Google may not have been able to previse, but their real failure was a failure to understand what platform was all about. To be fair, most industry analysts and pundits still, to this day, seem blinded as to what truly makes a platform successful.

    Units and Users vs. Dollars and Developers

    When it comes to platform everyone is focused on units and users. What they should be focused on is dollars and developers.

    A consumer who is willing to spend $100 is 100 times more important to developers, retailers, content providers and advertisers than is a consumer who is only willing to spend $1. More importantly, a consumer who is willing to spend $1 is infinitely more valuable than the consumer who spends nothing. Unit sales and users are important to hardware manufacturers like Samsung and Apple because hardware manufacturers get paid up front when the purchase of the hardware is made. But so far as a platform goes, the consumer who consumes nothing is a non-entity – they might as well not exist.

    All that market share that Android has? Toss it out. Start counting again and this time, instead of counting units and users, count the dollars that those users spend. If you do that, suddenly all of Android’s seeming paradoxes quickly dissipate.

    — Users who don’t spend money don’t attract developers, retailers, content providers or advertisers.

    — Users who don’t buy into the platform have no loyalty to the platform. They’re not customers for life. They’re customers until they get their next mobile device.

    — Users who don’t spend money have no network effect. Non-using users are not a boon to a network, they’re the bane of a network.

    Why Don’t Android Users Spend More Money?

    This all begs the question: “Why don’t Android users spend more money?” I know this is going to be dismaying to read, but I simply don’t know.

    I find all the current theories unsatisfying. Many of them are undoubtedly true. And some of them explain some of why Android owners spend less. But none of them – even in concert – fully explain to my satisfaction why Android users spend so very much less.

    I think that I could make a pretty good case that Google’s inattentiveness to their platform is the biggest culprit. And even Google seems to be waking up to this fact. Last month they initiated new guidelines for creating tablet optimized apps. Yesterday they modified their legal agreement with developers working on Android apps to specifically prohibit them from any action that could contribute to further fragmentation of the mobile platform.

    Will this be enough to increase user spending and purchasing? Who knows. For now we simply have to live with the fact that Android owners do not spend money and the consequences of that fact. The rationale for why it is so will have to wait upon further analysis.

    The Trojan Horse

    As I discussed, above, Android was terribly disrupting to the mobile device industry. Industry stalwarts such as Palm, RIM, Nokia and Microsoft Windows are either gone or are on the ropes. But Android may have been disruptive to at least one other company too – Google.

    There’s no evidence that Android is contributing to Google’s success. On the contrary, Android appears to be cannibalizing Google’s profitable businesses without generating any profits of its own. Android thoroughly destroyed the business models of the previous mobile moguls but it did not stop there. Android has now turned on its creator and it is destroying the value in Google’s advertising business, virtually eating the company up from the inside out.

    Picking Your Battles Is As Important as Winning Them

    The story of Android is still being written but the story being told by most pundits and industry observers is very different from the one that is actually occurring. Android has won the battle for market share but it is a Pyrrhic victory because it is coming at the expense of Google’s current profits and future prospects.

    Like Pyrrhus of old, Google, needs to learn that winning isn’t everything. Picking your battles is as important as winning them because each battle has a cost and some victories come at too high a price. In spite of its perceived success, Android is not serving Google’s interests. Its march needs to be altered else its victories will ultimately prove ruinous to the victor.

    Of Tablets, Phones, and Apps

    iOS 6 and Android logos (Apple/Google)This began life as a reply to a comment on Part 4 of John Kirk’s “Why Android Is Winning the Battles, But Google Is Losing the War,” but quickly got out of hand.

    John’s post sparked a discussion of Apple’s and Google’s different approaches to developing apps for tablets vs. handsets. Commenter rj said that Apple’s approach is to favor development of “Universal” apps that will run on either the iPad or iPhone. This is correct, but it rather misunderstands what a Universal app is. If implemented following Apple’s user interface guidance, a Universal app will effectively create two different versions in a single package.

    The Android guidelines focus heavily on scaling and are marked by a belief that, at worst, developers need make only modest adjustments to phone apps to make them suitable for tablets:

    Provide different layouts for different screen sizes

    By default, Android resizes your application layout to fit the current device screen. In most cases, this works fine. In other cases, your UI might not look as good and might need adjustments for different screen sizes. For example, on a larger screen, you might want to adjust the position and size of some elements to take advantage of the additional screen space, or on a smaller screen, you might need to adjust sizes so that everything can fit on the screen.

    Apple is much more concerned with the need to redesign apps for different display types:

    Ensure that Universal Apps Run Well on Both iPhone and iPad
    If you’re planning to develop an app that runs on iPhone and iPad, you need to adapt your design to each device. Here is some guidance to help you do this:Mold the UI of each app version to the device it runs on. Most individual UI elements are available on both devices, but overall the layout differs dramatically.

    Adapt art to the screen size. Users tend to expect more high-fidelity artwork in iPad apps than they do in iPhone apps. Merely scaling up an iPhone app to fill the iPad screen is not recommended.

    Preserve the primary functionality of your app, regardless of the device it runs on. Even though one version might offer a more in-depth or interactive presentation of the task than the other, it’s important to avoid making users feel that they’re choosing between two entirely different apps.

    Go beyond the default. Unmodified iPhone apps run in a compatibility mode on iPad by default. Although this mode allows people to use an iPhone app on iPad, it does not give them the device-specific experience they want.

    But reading the two sets of programming guidelines, I noticed a much deeper difference. Both, of course, are intended as developer references and contain a great deal of nitty-gritty information about APIs and how to implement specific features. But the Google version is full of code snippets and parameter definitions while Apple’s approach is much more concerned with reminding developers that what matters is the user experience and how good app design contributes to that experience. The Google approach is more practical, but Apple’s may be more useful. I don’t want to read too much into a couple of pages from developer manuals, but at least to me, they do sum up important differences in how Apple and Google approach the world.

     

    Why Android Is Winning The Battles But Google Is Losing The War: Part 4


    A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

    Series Schedule:

    • Mon: The Battle for the PC
    • Tue: The Battle for Mobile Phones Won
    • Wed: The War for Mobile Phones Lost
    • Thu: The Battle for Tablets
    • Fri: Picking Your Battles Is As Important as Winning Them

    4) The Battle For Tablets

    If Android’s battle for phones is a Pyrrhic victory, Android’s battle for tablets is a flat-out ignominious defeat.

    Android’s Strategic Tablet Blunder

    The tablet’s larger screen size demands that developers create apps optimized just for its form factor. This makes tablets a seperate platform all its own. Google’s big mistake in tablets was that they either didn’t recognize or refused to acknowledge that fact.

    Google just saw tablets as big phones and acted accordingly. Rather than focusing on the creation of tablet optimized apps, Google encouraged their developers to create one-size-fits-all apps. Developers were encouraged to focus on scalability rather than optimization.

    Google made their mind set clear by refusing to even establish a separate tablet-optimized classification for their store. While their nearest competitor highlighted the fact that they had 250,000 tablet optimized apps, Google categorically denied that there was any difference at all between phone and tablet apps. The result has mostly been a lot of Android phone apps awkwardly stretched to fit the larger tablet screen. Even big name apps like Twitter and Rdio looked unwieldy on Android tablets.

    As recently as June 2012, when the Nexus 7 was introduced, Google Senior Vice President Andy Rubin reaffirmed that Google was sticking with its strategy of encouraging developers to write a single app for both phones and tablets.

    “I don’t think there should be apps specific to a tablet…if someone makes an ICS app it’s going to run on phones and it’s going to run on tablets.” ~ Andy Rubin

    Google’s policy was focused on the developer, not the consumer. It allowed developers to create apps that worked on more devices, but it did so at the expense of the user experience.

    Andy Rubin went on to admit that he was upset that Android tablets weren’t selling. After looking into the reasons, Rubin declared that Google had discovered the reason for the lack of sales. While hardware really mattered on phones, consumers bought into content ecosystems with tablets. Rubin said that Google had lacked some of the ecosystem pieces that were necessary – such as TV shows, movies, magazines, etc. – to make people want to consume on a tablet.

    “I think that was the missing piece,” Rubin said.

    Do you hear what Rubin was saying? In his mind – and presumably in the mind of all of Google – the reason that Android tablets weren’t selling was because of a lack of compelling CONTENT. Tablet optimized apps never entered into the proposed “solution” to Android’s tablet woes. The Nexus 7 was all about content delivery since – in their minds – it was content, not apps, that was the missing piece.

    Finally Google reversed course. On October 18, 2012, Google published a “tablet app quality checklist” on its Android Developer website and began to seriously urge developers to build tablet-optimized apps.Two and a half-years late and 250,000 iOS tablet optimized apps later, Google finally gets it – tablet optimized apps DO matter.

    Or do they get it? Google STILL isn’t asking developers to make separate phone and tablet versios of their apps. And they STILL don’t separate phone apps from tablet apps in their store. And when asked why there still aren’t many tablet-sized apps for Android, Director for Android Partnerships, John Lagerling, said:

    But before, I’ll be honest and say, yes, there was a lack of tablet apps that supported bigger screen real estate. But I’ll add that, I know we talked about the Cupertino guys, but obviously people who have smartphones are a huge target for us. If you look globally that’s something we worry more about, not so much about competing with other smartphones, but more about, how can we get more people onto the Internet on mobile phones? And that’s a big deal. That’s why low cost is so important.

    Translation: Smartphones are more important to us than tablets and market share is more important to us than anything.

    No wonder Android’s tablet efforts continue to languish.

    Android Tablet Sales

    So how is that one-size-fits-all, let’s-not-optimize-apps-to-the-tablet strategy working out for Android? The results speak for themselves.

    At last report, tablets were just 5.38% of Android’s daily activations. And Nexus 7 sales – although constantly referred to as a “success” in the tech media – have been humble, to say the least.

    Mark Mahaney, who follows Google for Citi Research … thinks Google sold about a million units of their tablet (that is made by Asus) and that accounts for about $200 million in revenue.

    Ben Schachter of McQuarie Securities agrees and estimates that Nexus 7 sales accounted for probably $150 million to $200 million…in… revenue.

    Piper Jaffray’s Gene Muster estimates that Google sold between 800,000 to a million units, while Doug Anmuth of JP Morgan says Google sold about 700,000 units of Nexus 7 tablets.

    Asustek CFO David Chang told the WSJ that the company was selling—not just shipping—500,000 units a month initially, when the Nexus 7 launched in July. Figures bumped up to 600,000-700,000 in the following months, and in “this latest month,” Google and Asus have sold close to one million units, said Chang.

    Let me put those numbers in perspective.

     

    • REVENUES

     

    The Nexus 7 may have made as little as 200 million – in revenue, not profit – in an entire quarter. That’s pathetic.

     

    • PROFITS

     

    And we know that Google didn’t make any profits from the sales of the Nexus 7 because they told us so.

    “When it gets sold through the Play store, there’s no margin,” Rubin said. “It just basically gets (sold) through.”

     

    • UNITS

     

    But revenue and profits really don’t matter in a subsidized model. The concept is to get as many units on the market as possible in order to enhance the opportunities to sell content and advertising. So let’s look at the Nexus 7’s sales numbers.

    The Nexus 7’s sales are either as high as 1 million units a month or as low as 1 million, 800,000 or 700,000 units a quarter. And the reason we’re relying on estimates is because Google refuses to release actual sales numbers – which is telling all in itself.

    By way of contrast, Apple sold a total of 3 million iPad Minis and iPad 4’s in their first three days of availaility. At its current pace, the Nexus 7 would take between 3 months to 3 quarters to even match, let alone exceed, the number of tablets sold by Apple’s first 3 days of sales.

     

    • SUBSIDIZED BUSINESS MODELS THRIVE ON VOLUME

     

    Those sales numbers are bad enough, but for a subsidized product, they’re gawdawful. Remember, the Nexus 7 is being given away at cost. Can you imgagine how many more cars or televisions would be sold if they were being sold at cost? The Nexus 7’s should be selling like crazy, not badly trailing competitive offerings that cost $300 more.

    This is a give-away-the-razor, sell-the-blade business model. (See my article entitled: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“). Giving away the razor does not guarantee the sale of the blade but NOT giving away the razor DOES guarantee that the blades won’t be sold. Simiarly, volume sales of Nexus tablets do not guarantee that Google will profit from the sale of content and ads but low volume sales DO guarantee that they will not.

     

    • FUTURE SALES

     

    Pundits are opining that the Nexus 7’s lower price will make it a hot selling item for the holiday quarter. And I have no doubt that sales will increase. But if Google was having trouble selling the Nexus 7 when its only competition was the 7 inch Kindle Fire and the 10 inch Apple iPad, then why does anyone seriously think it will do significantly better now that it also has to compete with the Apple iPad Mini and the Microsoft Surface?

    Android Irony: Tablets Are Where The Ad Revenue Is

    The irony in all of this is that tablets are where the ad revenue is. Android has fought and won the battle for phones but phones don’t produce much ad revenue. Meanwhile, Android has ignored tablets and tablets hold the prize that they were so desperately seeking all along. Like a General who is a great tactician but a poor strategist, Android has won all of the battles that they’ve fought, but they’ve fought all of their battles in the wrong places.

     

    • TABLETS ARE MORE VALUABLE

     

    Studies have shown that tablet users are the more valuable consumers for advertisers to reach compared with PC and phone users. Tablet users spend 30 percent more time on sites and have 20 percent higher engagement.

    “We found it interesting that tablets also had a smaller percentage of users who adopted ‘do not track’ settings compared to PC users,” Mr. Barnette said. “Mobile had the highest percentage of users who adopt do not track at 60 percent.”

     

    • APPLE IS DOMINATING TABLETS

     

    And while tablets are dominating mobile revenues, Apple is dominating tablets.

    The iPad accounts for between 91% and 98% of web traffic for all tablets. That only leaves 2% to 9% total web traffic for every other type of tablet combined.

    And Apple dominates tablet downloads too.

    We estimate in the first half of this year the iPad saw over five times more app downloads than all Android tablets combined.”

     

    • TABLETS AD SPENDING OUTWEIGHS SMARTPHONE AD SPENDING

     

    And in the absolute kicker, it is anticipated that tablet ad spending will outweigh smartphone ad spending this holiday season.

    Think for a moment just how crazy that is. The ads for all the Android, iOS, Windows Phone 7 and every other smartphone combined will be outsold by the ads sold on tablets this holiday season. Wow.

    Next

    Google has won the battle for the desktop. Android has won the battle for the phone. But Google’s prospects are possibly worse today than they were when they embarked on their Android strategy. Tomorrow we sum it all up and look to the future in the final article of the series entitled:

    “Picking Your Battles Is As Important as Winning Them”

    Why Android Is Winning The Battles But Google Is Losing The War: Part 3

    A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

    Series Schedule:

  • Mon: The Battle for the PC
  • Tue: The Battle for Mobile Phones Won
  • Wed: The War for Mobile Phones Lost
  • Thu: The Battle for Tablets
  • Fri: Picking Your Battles Is As Important as Winning Them
  • 3) The War For Mobile Phones Lost

    Mobile Search Is Not The Same As Desktop Search

    THE PLAN

    Google’s plan was to transport their highly successful desktop search strategy to the phone. This only made sense. Search worked on the desktop. Mobile was the future. Therefore, Google’s future would be search on mobile.

    MARKET SHARE

    Google’s problem is not a lack of market share. eMarketer notes that Google’s share of mobile ad revenue is 55% and it controls 95% of mobile search ads. No, Google’s problem is that search doesn’t work the same on mobile as it does on the PC. In fact, it barely works at all. On the PC, search rules. On the phone, apps rule and search is the court jester.

    SIZE MATTERS

    When it comes to ads, size really do matter. One of Google’s strenghts when advertising on the desktop was that they would unobtrusively place relevant ads next to and above their search results. On a phone, this was not possible. There simply wasn’t enough screen real estate to display both search results and advertisments.

    “Size absolutely does matter,” says Christine Chen, director of communication strategy at Goodby Silverstein & Partners, an ad agency in San Francisco. “If you look at the real estate available on a smartphone, it’s really sad compared to not just banner ads on the Web, but also to TV, print and outdoor advertising.”

    “The evidence is telling: advertisers are willing to pay much more to reach a thousand pairs of eyes gazing upon a computer or tablet than a thousand pairs looking at a smartphone screen.

    INVISIBLE OR IGNORED OR INVASIVE

    Mobile ads are relegated to a tiny portion of the screen and are often invisible or ignored by consumers.

    It’s a double-edged sword that cuts against advertisers both ways. It the ads aren’t big, they’re invisible. If they’re bigger, they’re seen as intrusive.

    Phones are seen as very personal. Users to not want to be tracked. Interestingly, while 60 percent smartphone users do not allow themselves to be tracked only 7 percent of tablet users and 18 percent of PC users reject tracking on their devices.

    NO OPTIMIZATION

    For both technical and privacy reasons, advertisers lost the ability to know who they were advertising to. On the desktop, cookies were the standard. On the phone, such technology was either unavailable or seen and intrusive or even offensive.

    “What makes Web ads so attractive to advertisers is the ability to track actions and optimize accordingly,” . Because a smartphone cannot use the same technology “your ability to track and optimize is much more blunt, or in some cases nonexistent.”

    This makes phone advertisments much less valuable that desktop advertisments. A banner ad on a Web page that costs $3 to $5 for every thousand impressions may cost only 75 cents or $1 for a thousand impressions on a smartphone.

    CONTEXT

    Context is important too. People surf the web for long periods of time on their tablets and on the desktop. They use their phones in bursts. Trying to promote ads when the user is attempting to grab a quick bite of information is annoying and counter-productive.

    ENGAGEMENT

    Finally, the engagement levels for smartphone users are lower, reflecting the slower speeds and smaller screens on smartphones.

    Android Doesn’t Monetize Ads Well

    How much of a problem is all this for Google? Huge. Android is so bad at monetizing ads that a study done on Opera placed Android in third plce behind BlackBerry on value for the money.

    Let me say that again. Android’s ads were in third place. Behind Blackberry.

    Apps Rule

    Google didn’t know that search on the phone wasn’t going to work the same as search on the desktop. Another thing they didn’t know was how important a role apps would play in both search and advertising.

    Smartphones were made for apps. People love to use apps on their smartphones. If they want the time for the next train, they use an app to tell them rather than doing a search. If they want to find a restaurant, they might do a search but they’re even more likely to use an app.

    Google’s problem is that apps are not searchable by web crawlers. If Google can’t search it, they can’t sell ads against it. For Google, apps are like a large and ever expanding black hole in their advertising universe. And as that hole gets bigger and bigger Android’s advertising opportunities get smaller and smaller.

    Android App Apathy

    But Android has apps. 700,000 of them. As many or more than any other operating system. So why isn’t Google making money from the sale of apps and app advertising?

    Take the University Co-op Society, which sells University of Texas merchandise via stores, the web, an m-commerce site, an iPhone app and an Android app. When it comes to m-commerce, Apple rules.

    “IPhone app sales are about 25% of our total mobile business and Android app sales are less than 10%,” says Brian Jewell, vice president of marketing. “That leaves a big chunk of sales that come directly from the mobile site. People entering our address directly or coming to us via a search engine or also possibly clicking through from an e-mail blast.”

    And on the mobile site, Apple dominates. Today, 50% of mobile traffic to the University Co-op Society’s web site stems from iPhones, 25% from iPads, 20% from Android devices and 5% from devices running other mobile operating systems.

    Retailers of all stripes tell similar stories, which is why retailers building mobile apps invariably have started with an iPhone app. Android is an afterthought.

    “Android users do not buy. IPhone users buy,” says David Sasson, president and founder of overstockArt.com.

    Android advocates bristle when confronted with the suggestion that Android owners do not buy content or consume advertising on their mobile phones. They say it is insulting.

    First, I’m not insulting anyone. If anyone is insulting Android owners, it is the facts, not I.

    Second, Android owners are not required to buy aps and content or consume advertising. It doesn’t make them bad people. It just makes them bad customers.

    We can argue all day as to exactly why Android owners aren’t buying. There’s lots of theories. The one thing we can’t argue with is the facts. Android owners aren’t buying. And that single fact turns all the market share numbers and the arguments for Android’s dominance on its head.

    ‘Cause you see – and this is the key point missed by most pundits – developers, advertisers, retailers and others don’t follow unit sales – and they don’t follow customers – they follow the money. And until Android owners are induced to part with more of their money, their overwhelming market share numbers mean little.

    The Future

    The future of mobile advertising doesn’t look any brighter for Google either. Voice search poses a huge threat as voice activated searches, like Siri, simply bypass Google search altogether.

    And then there’s always the ultimate threat that Apple will simply purge Google from its system by making Bing or some other brand the default search engine. It is reported that Google pays Apple $1 billion to be its default search, and earns about $1.3B from searches on Apple mobile devices. In the near-term, it seems unlikely that Apple will remove Google search. But there’s no love lost between the two companies and the long-term remains uncertain. Apple made the difficult and painful decision to remove Google from their Map application. Changing the default search carrier sometime in the future seems like a very real possibility.

    It’s A Trap

    All of Android’s mobile activations don’t add up to a hill of beans if they can’t be monetized. And Android simply isn’t doing the job it was born to do.

    It’s a classic tech trap. Google provides a rapidly growing service that is popular with non-paying users while it constantly becoming less and less valuable to Google’s paying customers – the advertisers.

    The result is pernicious. More and more time, money, energy, attention and resources are devoted to Android while the return – a 15% decline in the price advertisers paid per click on a Google ad – continually becomes less and less.

    Next

    Android is struggling to monetize phones, but there is more to mobile than phones.

    Tomorrow: “The Battle for Tablets”

    Why Android Is Winning The Battles But Google Is Losing The War: Part 2

    A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

    Series Schedule:

  • Mon: The Battle for the PC
  • Tue: The Battle for Mobile Phones Won
  • Wed: The War for Mobile Phones Lost
  • Thu: The Battle for Tablets
  • Fri: Picking Your Battles Is As Important as Winning Them
  • 2) The Battle For Mobile Phones

    The Battle Plan

    Tech insiders have been predicting that peak search would happen for some time, as people shifted from using websites – where search is a natural activity – to using mobile apps.

    Google was far from unprepared. They knew that mobile was the future of search and they carefully crafted a plan:

    Step 1: Create a (putatively) open source mobile operating system called Android.

    Step 2: Give the Android operating system away for free.

    Step 3: Sell mobile ads and other mobile services on those mobile devices running Android in much the same way that they were currently selling ads and services on the PC.

    A Glorious Tactical Success

    Parts 1 and 2 of Google’s plan worked to perfection. In fact, Android was more succesful than anyone, including Google, could have anticipated or even imagined. Internal Google documents revealed at the Oracle v. Google trial show that Android’s growth far exceeded even what Google had projected or expected.

    Just five years after its debut, Google‘s Android mobile operating software now claims 75% of smart phones shipped, according to a new report from market researcher IDC. A simply stunning overall achievment.

    A Glorious Public Relations Success

    And don’t think that Android’s spectacular rise has gone unnoticed:

    CNet:

    “Android’s ascension to glory has been incredible to behold.”

    Dan Lyons:

    “Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.”

    CoolSmartphone:

    “Why Android has won”

    CEO Nathan Eagle

    “Why Android Has Already Won the Global Smartphone Race”

    Joe Wilcox

    “Android wins the smartphone wars”

    Chris Pirillo

    Android is the New Windows (I mean that in the most polite way, too)

    Venturebeat

    “As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

    An Inglorious Strategic Failure

    “Another such victory and I am undone.” ~ Pyrrhus

    Every report, every study shows that Google got it right. More and more ad revenue is moving to mobile. An analysis of the mobile traffic from a cross section of advertisers reveals up to 25-30% of all paid search traffic is now mobile. And more and more mobile phones are powered by the Android operating system. It’s only logical to assume that the more people buy and use Android phones, the more money Google will make from the sale of search, content and other services.

    Only that’s not happening. That’s not happening at all. Android appears to be an overwhelming success in every way. But it turns out that it is only an overwhelming success in one way – market share. In every way that matters – and especially in profits – Android has been a dismal failure.

    Unexpected, exponential user growth is usually accompanied by a dramatic positive improvement in the finances of a company and a higher return to shareholders. The curious aspect of Android’s success is that it has not had an impact on either. ~ Horace Dediu

    Yearning For Earnings

    During the Q3 2012 Earnings call, Google announced that it had a run rate of $8 billion from its mobile business consisting of revenue from ads, apps and content. That was contrasted with a $2.5 billion run rate of a year ago. CFO Patrick Pichette added “Ads continue to be the bulk of [the $8 billion], the vast majority of it.” Sounds like good news, right?

    The problem with the $8 billlion number is two-fold. First, the increased revenues appear to represent more of an reshuffling of assets than actual growth. Second, despite the presumably large increase in the run rate, Google declined to disclose Nexus 7 sales, app sales, content sales or ad sales and they stoutly refused to address mobile margins and profits.

    What we do know for sure is:

    — Cost-per-click (CPC) was down
    — Traffic Acquisition Costs (TAC) were up
    — Profit from Android was un-reported and possibly non-existant

    Upon revealing the numbers, Google’s stock tanked. With Google’s stock falling a shocking $68 or 9% in a matter of hours, Google was desperate for good news to give to its shareholders. If there was ever a time to reveal Android’s profits, that would have been the time. Instead, managment adamantly refused all requests for specifics on mobile sales, margins or profits.

    With their stock plummeting, you can bet your bottom dollar that if Google had garnered any profits from Android, they not only would have revealed them, they would trumpeted them as loudly as possible. After all, it’s not like Google doesn’t like to brag about Android. They tout their Android activation numbers all the time. The fact that Google did not reveal any good news regarding Android can mean only one thing – there was no good news to reveal.

    After all, there is simply no good reason NOT to reveal Android’s numbers and associated profits. You could argue that Google is being coy and hiding numbers for competitve advantage but what possible competitive advantage could there be?

    Further, there is every reason TO reveal profits. If the numbers are rising at an appreciable rate, that would be an exciting development that Google would want to reveal. It woud prove that their strategy was correct and that Android was winning. It would put to rest any lingering doubts, questions or suspicious that things with Android might not actuallly be as they seem. It would be a demoralizing blow to their competitors and a shot in the arm to their stockholders. And perhaps, best of all, it would be an incentive for their customers to increase their ad spending and hop on board the Android gravy train

    It is, in fact, almost a certainty that Android DOES make Google a profit. But that profit must be so embarrassingly small that it would be counter-productive for Google to announce it. Doing so would not help Google’s stock, it would hurt it as the revelation would expose exactly how little Android has actually accomplished.

    Pyrrhic Victory

    Android has overwhelmingly won the battle for marketshare. But the purpose of market share is to get more developers, more apps, more advertising eyeballs, more content, to deliver more revenue – and most importantly – more profit for all involved. Android isn’t delivering any of that.

    This is a classic Pyrrhic Victory. Android is winning the market share battles but Google is losing the profit war.

    The irony here is poignant. In a reversal of the famous Rolling Stones song, Android got what it wanted – market share – but not what it needed – profits.

    Next

    How could this be? How could there be such a disconnect between the number of Android users and their value to Google?

    Tomorrow: “The War for Mobile Phones Lost.”

    Why Android Is Winning The Battles But Google Is Losing The War: Part 1

    A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

    Series Schedule:

  • Mon: The Battle for the PC
  • Tue: The Battle for Mobile Phones Won
  • Wed: The War for Mobile Phones Lost
  • Thu: The Battle for Tablets
  • Fri: Picking Your Battles Is As Important as Winning Them
  • 1) The Battle For The PC

    A Glorious Victory

    Google began in January 1996 as a research project by Larry Page and Sergey Brin. While conventional search engines ranked results by counting how many times the search terms appeared on the page, they theorized about a better system that analyzed the relationships between websites. They called this new technology PageRank, where a website’s relevance was determined by the number of pages, and the importance of those pages, that linked back to the original site. via Wikipedia

    The Battle for search on the PC (notebooks and desktops) was a glorious victory for Google. Seldom has a company come so far, so fast, made so much money and so utterly anihilated their competition. By 2006, Google dominated search and was one of the largest, fastest growing companies on the planet. Their PC search strategy had proven to be brilliant and they were virtually printing money.

    I can give Google no greater compliment than this: They make their money by distributing ADVERTISING, yet they are liked by most and even loved by many. The words “amazing” and “awe-inspiring” don’t even begin to cover that achievment.

    All Glory Is Fleeting

    Sic transit gloria mundi

    But Google had two problems, which were really one and the same problem: “peak” and “mobile”.

    Many of us are familiar with the concept of “peak oil”. It’s a term used to describe the fact that oil production had to, at some point in time, peak because there was only a finite amount of oil in the ground and once that peak was reached there must inevitably be a steady, albeit gradual, decline in oil production.

    An equivelent peak is occuring in computing. In fact, two peaks: “peak PC” and “peak search”, both of which raise serious issues for Google.

    For eight straight quarters, search was growing. Then for three straight quarters, that growth deaccelerated. Then last quarter, something happened that had never happened before. People searched less. We have reached peak search.

    Ben Schachter of Macquarie Securities noted this in a research note:

    Notably, total core organic searches declined 4 percent y/y, representing the first decline in total search volume since we began tracking the data in 2006. While this month marks the first y/y decline in total search volume, growth rates have been decelerating since February’s recent peak at 14 percent y/y growth (for the prior two years, growth rates were largely stable in the high single-digit to low double-digit range).


    Not only is search declining, the proft from search is declining too. “Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – is down. Way down. In its third quarter 2012 earnings, Google reported that its cost per click was down 15 percent.

    Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – has been dropping for the past four quarters, after rising for eight previous quarters. Surrounding circumstances make it clear that there is no reason to expect it to rise again.

    Why is peak search happening and why now?

    First, there are fewer and fewer PCs. Like peak oil, we’ve reached peak PC. The PC market is in permanent decline. In fact, the PC market is not only declining, it may be headed for a cliff. (See Tim Bajarin’s fine article on “How the iPad Mini Could Impact Future PC Sales.”)

    Second, the search market is maturing. The places where people are going online just don’t pay as much as they used to.

    Third, less and less people are doing their searches on their desktops and more and more peole are doing them on their mobile devices. When it comes to search, the portability of the mobile device trumps the power of the PC.

    Smartphones have been outselling PCs (notebooks and desktops) since the end of 2010 and by the end of 2012, tablets will make up over 25% of all PC sales. Further, well respected mobile analyst, Mary Meeker believes the global smartphone plus tablet install base will surpass the install base of the PC by the end of Q2 2013.

    Fourth, and finally, try this thought experiment. You’re standing by your PC. You want to know the weather, the score of the big game, where a movie is playing or a local place to eat and how to get there (GPS). Do you perform the search on your PC or on your phone? For more and more people, this is an activity that you do on your mobile device, even when your PC is readily available.

    AUTHOR’S ASIDE: Ya gotta love Microsoft’s play in the desktop search industry. They are losing BILLIONS on Bing, buying into the desktop search market just as it has peaked and started its decline. What a company.

    Now it’s not such a bad thing to be dominating a market that is just past its peak. It means that you’ll be getting great income – nearly as much as you’re getting today – for a long while yet to come. But it also means that your’ve got no longterm future. Unless you plan for one. Which Google did.

    Next

    Tomorrow: “The Battle for Mobile Phones Won.”

    Windows, iOS, and Android All Have Something to Prove This Week

    Prior to Apple developing iOS and over the last 25 years, there had never been much of a threat to the Windowsecolove ecosystem. With iOS, Apple proved many things, including the value of a holistic experience delivered through purpose-built combinations of hardware, software and content. Now in mobile, it’s Microsoft looking into the window wanting to get inside. After iOS came Google’s Android, which was focused on the same areas as iOS. This week, with multiple announcements, Windows, iOS and Android all have some things to prove and I wanted to dive a bit deeper into some areas.

    Windows 8 Launch

    For decades Microsoft has been the uncontested PC market share leader. Macs made a little bit of a dent, but for the most part, Microsoft ruled and for years it looked like Microsoft would have uncontested dominance. That was until the iPad. While the iPad isn’t trying to be a PC, it did provide an optimal experience for specific usage models the PC once delivered. Sure, you can surf the web on your PC, but when kicking back on the couch is it the best way to do this? Not for me and not for 100s of millions of other people. I still must have my PC, but I prefer my iPad for certain tasks my PC previously performed.

    With Windows 8, Microsoft hopes to bridge the gap between PC and tablet. They will attempt to do this by releasing Windows 8 on about every conceivable form factor possible and seeing what sticks. This is a huge risk in that they are also sub-optimizing the experience for desktop-only experience by adding the Metro layer and removing the start button. The Windows 8 experience is optimized for devices with touch and an accessible keyboard, turning the devices into a Swiss Army device. I have used my iPads for years with an extended keyboard, so I absolutely see the value here. This week, Microsoft must prove that flexibility of Windows 8 trumps the purpose-built focus of an iPad.

    Windows RT adds another proving ground. For decades, Windows equated to compatibility with the past, which is inextricable linked to Microsoft’s IT roots and the fact that many consumers are peeved about wasting a prior, large investment. I am not saying that consumers care less about backward compatibility, but they care more about what the device does today and in the future then the past. Unlike Windows 8, Windows RT will not run all the older Windows 7 desktop applications. Microsoft bridges the gap with some key Office apps, but forget about loading up iTunes or Quicken that you have. Hardware compatibility with USB devices is an unknown as well. This has never been an issue with the iPad, but then again, neither iPad or Apple stands for backwards compatibility.

    Finally, we have Microsoft Surface, the first Microsoft-branded PC that directly competes with its ecosystem. This test will take a long time to play out but rarely do these examples of suppliers competing with customers work out well. While we don’t know exactly how pricing and features will work out over time, few premium-branded Windows tablet makers are excited about this. If Ballmer’s email to its stakeholders wasn’t clear enough, future Microsoft does two things: devices and services, and those devices that its customers currently provide.

    While we will need to wait months and some cases years to fully understand how all these play out, the official launch for Windows 8, Windows RT and Surface this week will give better indications on where Windows is headed.

    Windows Phone 8 Launch

    Windows Phone was very respectable in the early days of smartphones and was one of the few phones until RIM’s Blackberry to be accepted by businesses. Then came the iPhone and iOS, which undoubtedly changed Microsoft’s mobile fortunes for the foreseeable future. Instead of a commanding 90-95%% OS market share like it does in PCs, in mobile, Microsoft is looking right now, at best, 3% share of the mobile market. Given how Windows Phone 7.X has done, there must be some huge change for Microsoft to start gaining share.

    Microsoft’s biggest challenge in smartphones is consumer apathy. Metro is differentiated, the maps are good and Nokia has some really good imaging but consumers are not yet all that excited about Windows Phone. Microsoft needs more black and white, differentiated, and demonstrable features to break consumers out of their addiction to iOS and Android phones if they are to make big progress.

    With the launch of Windows Phone 8, Microsoft could start to reverse its fortunes. If Microsoft can show that a Windows Phone 8 is a must-have device to pair with a Windows 8/RT PC or tablet and an Xbox, I do believe they can start to make faster traction with those audiences.

    iPad Mini Launch

    Apple, plain and simple, invented a new category with the iPad. Sure, there were previous Windows Tablets, but the biggest issues were a lack of apps, pen requirement and very high prices. Tablets , particularly iPads have started to eat into the PC market. It’s not that an iPad can replace a PC, but some consumers are choosing to buy the new category (and shiny thing) instead of buying a replacement PC.

    The iPad Mini will be interesting for Apple. Apple has always been able to command a price premium in, quite frankly, all devices. Whether it’s an MP3-playing iPod, iPhone, iPad, or Mac, consumers are willing to pay more. The iPad Mini will test this pricing elasticity more than ever. I believe to hit its profit goals, Apple will need to be priced at least at $299, which puts it into that 30-40% gross profit range. They could margin blend on the rest of the iPad line to get the price even lower, but that’s pushing it.

    With Amazon Kindle Fire at $149, a $299-349 price will be pushing the pricing power farther than I have seen in a long time. I do expect an iPad Mini to have a much better experience than a $149 Kindle Fire, but with many consumers just glad to be able to have an affordable tablet, many will opt for the Fire. Apple will sell truckloads of the iPad Mini this holiday season, but not nearly as many as they could have if the Nexus 7 or Kindle Fire didn’t exist.

    Google Nexus 10” Android Tablet Launch

    While Android has done well on smartphones and 7” tablets, anything above 7” has been a business and marketing disaster. Google had clearly deprioritized the 10” category as the smartphone market eclipses the size of the tablet market. At some point though, Google needs to bring their “A” game to large tablets and incent developers to create high quality tablet apps. Right now, Google does not allow anyone to easily count the tablet-specific apps as they number in the 100’s. Not 100’s of thousands, I am saying hundreds.

    Google is rumored to announce this week a Google Nexus 10” tablet with Samsung. Price is almost inconsequential in that without more native Android tablet apps, a new Nexus tablet could be worse than bad. I expect 10″ Android tablets this holiday to be relegated to the bottom of the pricing barrel below Windows 8 and iOS. Unless Google can pull off something completely amazing and unexpected, this Nexus 10” will sell as well as all the other Android 10” tablets, not well.

    An Amazing Week

    Yes, this week will be one that all the ecosystems will have something to prove. When I step back a bit, I marvel at the amount of innovation and competition that is happening and just know this will be great for consumers this year and five years into the future. Competition and innovation are important as evidenced more than ever by this week’s announcements.

    An Interesting Take on Android in China

    Android logoAndroid is doing very well in China. But in something of an exclamation point on John Kirk’s musings on Android’s contribution to Google’s bottom line, Android in China may not be doing at all well for Google.

    That’s the conclusion of a post at Telecomasia.net by Ovum analyst Siv Putcha (tip of the hat to Steve Crowley). Putcha argues that because the Chinese government blocks access to many Android services:

    Chinese device vendors are using Android for their own purposes, and are increasingly at odds with Google’s preferred vision of Android’s developmental direction. As a result, Android is fragmenting beyond Google’s control, and Google’s Android strategy is rapidly coming undone in China with no immediate prospects for correction.

    It’s not clear whether these millions of not-quite-Android phones being sold in China ever get registered with Google or count in Google’s activation total. But it seems certain that they are contributing little or nothing to the strategy of giving the software away and hoping to monetize services.