Google, Android, AOSP, iOS and the Global Smartphone Market

Hopefully you have read several posts I have posted this week. This one on Microsoft and Android and this one on Google vs. Android. These posts are building blocks for a foundation I am laying to help our readers understand critical things about this market going forward. The smartphone market is the single largest product market in terms of annual sales so it is important to understand.

As I articulated in the article about Google vs. Android, we must understand Android as a platform that enables the creation of other platforms. OEMs may take Android AOSP and build relevant things on top of it. This is what Amazon and Xiaomi do and expect others to follow suit in 2014. While Android AOSP means Android Open Source Project the reality is that that what is open is not the Android code base but rather the services layers. Therefore I would define it more as the Android Open Services Project.

To start off what we need to know is what the projections are of price bands as a percentage of forecasts for the next four years. Here is what that looks like.

Screen Shot 2014-02-13 at 8.00.47 AM

The most important observation is that we are adding the vast majority of new smartphone owners in the mid-range and the low-end of the smartphone segment. More than half of the next billion new smartphone users will come from devices costing less than $200 wholesale. The mid-range will grow and is growing. Those consumers who are in replacement cycles now are often going up stream. The issue is there is still a limit to the price band they can afford. This is why I pointed out in an Insider article a few weeks ago that should Apple continue its path of staying in the high end of the smartphone market their TAM will simply be smaller than if they addressed the mid-range.

Given what is clear now about Android, the question has to be asked if the handset makers who are focusing largely on the devices costing less than $200 and the consumers who will buy them even care about Google’s services. An interesting report came out today in the Wall St. Journal (behind the paywall) articulating the hardware restrictions Google places on OEMs in order to receive certification. This is nothing new and Microsoft has done this with PC OEMs for some time. Google wants to make sure there is at least a minimum bar when it comes to specs to run their version of Android. They want an experience to be preserved and they need to keep a limit on the hardware varieties that enter the market for their software developers. But those OEMs from China and India who are looking to enter high growth markets like Latin America, and Africa, will be looking to cut costs. This does not favor them jumping through hoops to meet Google’s Android certification tests. That is why AOSP is becoming a competitive platform to Google.

Take a look at this chart that I have compiled using both public and private resources to generate the per quarter share of Google’s version of Android vs. AOSP for the past 5 quarters.

Screen Shot 2014-02-13 at 8.10.42 AM

What you will notice is that AOSP is gaining as a percentage of the install base against Google’s version of Android with their services integrated. I only expect the mix of AOSP to grow given the growth of the low-end in key markets. Here are some important points about AOSP by the numbers.

  1. In terms of quarterly run rates, it is the second largest platform
  2. In Q4 2013 AOSP outsold the iPhone
  3. In Q4 2013 AOSP sold more than the total install base of Windows phone each month
  4. Google’s version of Android sold 573m units and AOSP sold 175m units in 2013
  5. AOSP is growing faster per quarter averaging 55% quarterly growth compared to Google’s Android average of 23%

Given everything I am seeing these are fascinating trends. It seems as though everyone believed Google has no competition in core services like search. Yet their own platform is being used to compete with them as local companies take advantage of Android and create or integrate their own services for their region. So where does this leave Apple?

During Tim Cook’s interview with the Wall St. Journal he said something very telling.

I look at the mobile phone market as having three kinds of phones: feature phones, smartphones that function as or are used as feature phones, and real smartphones. I care about the market share of the last one. I don’t care how many feature phones are sold. The more that are sold I look at as good because those are all potential future customers for real smartphones. The same thing goes for the second category. I’d like to convert as many of those as possible to real smartphones.

Now, while phones like Xiaomi, ZTE, Huawei, Micromax and even Samsung’s mid-range phones are actually real smartphones and used as such, Cook’s statements point out something about how Apple views competing for new customers. The key is in one single word that he used–convert.

It would be a mistake for Apple to attack the low-end. It would even be a mistake for Apple to attack the lower tiers of the mid-range price category. What is clear is that Apple will target a price bar that they believe is low-enough to compete for customers who are mature smartphone owners in a replacement cycle, but priced high-enough to capture the ones who view what their experience and ecosystem as valuable. The key for Apple in emerging markets is to set their targets on the segments of the market who are existing mid-range owners (the blue bar in my first chart) and compete to convert them in the replacement cycle.

The reality in China is that Apple is competing with AOSP Android not Google’s Android. A bear scenario can be created from this due to the implantation of AOSP devices being more tightly integrated with local Chinese services than iOS. Apple is playing the long game in China and other emerging markets. As long as Apple’s focuses on supporting and in some cases integrating Chinese services providers into their version of iOS for China then they are on the right track to do well in that region. Perhaps their strategy in China can also be used as a template for other markets.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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