Without question the mobile platform wars are over. iOS and Android have both won and have won in very different ways. Granted, with an eventual total mobile addressable market of over four billion people, there is room for more than just two platforms. However, when it comes to the largest installed base/ecosystem, I’m confident it will be iOS and Android for quite some time.
Android’s installed base will be larger than iOS — probably three times as large when all is said and done. But it is becoming increasingly clear each platform will be made up largely of very different customers. I outlined the beginning of this in the article last week about Google/Android and the next billion smartphone users but I want to dive into this a little deeper. My overall thesis is Apple will own the large majority of the most profitable customers and Android will dominate the the non-premium segments. Their strategies dictate this reality.
Two Different Strategies/Philosophies
Apple puts a premium on the experience. Everything they do — hardware, software, and services — will revolve around their strategy to make the screen smart. They will use their integrated operational posture to align everything from their custom built SoC, to the internal hardware and components, to uniquely tuning iOS to the hardware, and couple cloud services as the glue to tie it all together. This will continue to attract buyers who value such things.
Google is focusing on smart cloud. While they view hardware as a necessary part of their ecosystem, it is better for Google if the value is to be found in their smart cloud rather than the hardware itself. To put it simply, Google’s strategy is dumb glass + smart cloud. Apple’s strategy is smart glass + deep cloud integration/synchronization. This is the clear departure in hardware philosophy the two companies will take. And it will dictate the types of customers each ecosystem has.
Dumb Glass + Smart Cloud
As Google dominates the landscape for devices outside of the premium segment it has implications on the customer base on Android and the business models that surround the Android ecosystem. The most pertinent is my earlier point that, for Google, it is better for them when value is in their smart cloud and not in the hardware. Google wants to push the hardware cost to zero because it is easier for them to get more eyeballs to feed their smart cloud. This changes the dynamic of the ecosystem. It makes it harder for the value chain to make money, thus altering the business models within the ecosystem. It will certainly help get billions of new eyeballs, but all with a lower average revenue per user as a whole. This is why the overall business around the Android ecosystem is destined to change. Money may not be in apps, or even in-app purchases any longer. Money may be in ads — not much but at least some. Money may be in services, like micro-transactions on payments or other digital and physical goods. Wherever money is found in the Android ecosystem, it will differ greatly than how money is found in the iOS ecosystem.
Smart Glass
Highlighting my thesis again, Apple will control the large majority of the premium segment. They do today with nearly 70% of the premium market in every category they compete and there is no reason to believe this will change. In fact, with much of what Google is doing strategically, they are making it easier for Apple to control the high end of the market. What we don’t know is how big this market is in terms of the total users in the ecosystem. Even though they have 800m iTunes accounts, their monthly active user base is lower than that. Apple’s monthly active users for iOS is likely between 500-600m — roughly half of Android. We know Apple can and will continue to grow this base. What is unclear is what number this base can grow to assuming their current pricing strategy holds. Regardless, Apple will maintain their near 70% share of the premium smartphone and tablet market and may very well grow it as well. When it comes to the premium segment, it is only Apple and Samsung and with Samsung facing pressure from every area in mobile, continuing to compete in premium will be tough. Samsung is tasked with the challenge of differentiating Android from the low end — a task Google will make continually difficult.
The fundamental point to all of this is Apple owning the majority of the most valuable customers. Owning this segment opens up an entirely different set of business models. Ones that appeal to those willing (and able) to spend money on hardware, software, services, accessories, content, and more. And in many cases lots of money on these things. The most innovative hardware always commercializes in the high end and then makes its way to the rest of the market. This means some of the most innovative advances in hardware will happen on iOS first. Already, some of the most innovative software/apps happen on iOS first since it is a known fact iOS is where money can be made by the ecosystem. This will not change so long as Apple dominates premium. As long as there is room for hardware innovation, it plays into Apple’s favor to continue to own the high end.
One last point on this. Just because Apple is focusing more on the smart glass, it does not preclude them from also including smart cloud in the future.
Divergence in Business Models
All of this wraps up with the key realization the business models for the value chain, meaning the developers, hardware companies, service companies, etc., will look very different than the business models in the iOS ecosystem. Which leaves me wondering if, since we will see different monetization tactics in each ecosystem, will we also inevitably see entirely different and separate players in each ecosystem? (Beyond hardware of course)
Apple’s ecosystem, being made up largely by premium customers, opens up the opportunity for the value chain to compete for share of wallet. Android’s ecosystem, largely made up by the non-premium/mid-low end segment of the market, means the value chain must compete for share of eyeballs — and against Google.
One ecosystem has massive volume and the other the most profitable customers. Both are valid, both will demand different strategies. The next ten years are going to be fascinating to analyze.
My first question is then what about the midrange, phones costing around $350-400? Apple doesn’t sell a model at this tier except in China. Most of the flagship android phones end up selling in this tier after they undergo mid-life price cuts.
In other words, has apple indeed vacuumed up _all_ of the most valuable customers, or are there customers of interest to Apple who are nonetheless somewhat budget concious and unwilling to spring for a $450 phone two-year old phone.
Is Apple simply not interested in marketing to those customers (with say a 3 year old model), or are they just stuck on finding a way to market to them when the next tier up is already ‘free’ on contract?
Apple’s recent price cuts and introduction of low end models in the Mac line suggest that they think there are customers of interest to them at lower price points. Add to that the Cracks showing in the current subsidy model (t-mobile, other attackers). If it becomes more standard to break out the cost of the phone and give customers with a paid-off phone a discount on their monthly bill, then apple may finally shift their pricing and-or introduce a lower tier phone. At which point the name brand android vendors are going to become even more stressed.
Blasted discus hates mobile safari. Can’t edit long comments.
“Even more stressed” – because the mid tier is where most of the brand name android flagship phones actually end up selling. If i remember correctly.
In a year and a half, the iPhone 5c will likely be a mid priced, entry level iPhone. I think Apple designed the 5c with this in mind. They could keep it in production for many more years, perhaps with occasional internal upgrades.
“In a year and a half, the iPhone 5c will likely be a mid priced, entry level iPhone.”
The 5c is last year’s model reskinned. If Apple keeps to their pattern, it will become free on contract this fall ($450 off contract) and be pulled from the market except maybe for China next fall. I fully expect that this fall the 5s will be reskinned into a plastic housing and become the 5sc, for $550 or $100 on contract.
But we don’t know when/if Apple offers a phone for $350 off contract, or free plus something (one free month, free credit on the App store, whatever) on contract. Even lowering their prices by $50 (off contract $400, $500, $600) will enable them to snap up a chunk of the midrange market that’s currently being served (IIRC) mostly by reduced price 6 month old Android flagship phones. Whether they *want* to have a chunk of the lower end of the high end market is another question.
I’m part of the market i’m talking about here — my spouse and I buy a lot of apps, we do a lot of shopping on our Idevices, we are valuable members of the ecosystem, but I don’t have a smartphone yet because I can’t afford one. And we are unlikely to buy new tablets until some app comes along that we badly want but that won’t run on an Ipad 2.
Don’t forget about the 8GB 5C – it is the first time Apple has introduced a new model outside the USA, and it is priced lower than the 16GB 5C (which is the cheapest model in the US). This fall the 8GB 5C will most likely be $400 internationally, and could indeed fall further to $300-$350 next year.
“The 5c is last year’s model reskinned. If Apple keeps to their pattern …”
If Apple kept to their pattern the 5c would not exist. Since it does exist, It’s proof that Apple has already changed their pattern. Just how much changing has occurred remains to be seen.
I don’t think Apple has a choice. The subsidy model only works in selected countries that are now saturated. To go forward, they need the next billion.
And so Apple makes money from their hardware, I don’t see why they would not be interested. The problem they currently have is releasing a good phone that’s cheap and with a 50%+ margin
” The most poignant is my earlier point that, for Google, it is better for them when value is in their smart cloud and not in the hardware”
I think you meant pertinent there.
I think that what you are saying here is extremely important. Instead of listing the cloud services where Google is strong, you have given billing and e-commerce services as examples, both of which are not Google’s strengths.
And I agree. In fact, I think carriers are the best positioned to provide these services.
What this means is that even though Google is aggressively commoditizing hardware, Google itself may not be the beneficiary, at least in a financial or market power sense.
Ben, what is smart cloud?
With Google abandoning hardware … whipping up demo products counts for nothing … it has abandoned the “stack.” Only Apple delivers top to bottom UX.
“Money may be in services, like micro-transactions on payments or other digital and physical goods.”
Since retailers already dread giving up any more dollars to the banks, credit card companies, and other intermediaries, tech companies or telecoms will need to offer something much more significant than an alternative payment scheme to get those dollars. Retailers will want some cost savings through fraud reduction or revenue gains through improved marketing, or something else along these lines.
On the other side, many say that from the consumer’s point of view, the payment system isn’t broken, or even inconvenient. So it will take major improvements to get consumers to replace their credit cards (or cash), especially if it isn’t free. I think the solution would have to be comprehensive and perceived to be secure and private enough to allow people to get rid of their wallet (which holds more than just credit cards and cash).
The Android ecosystem has volume (lots of users) in its favor. But we’ve already seen the lack of much impact of Android NFC and Google Wallet (for online payments). So who in that ecosystem is going to execute a broad and integrated solution, especially for physical retailers?
I agree with your conclusion. I don’t necessarily agree with how you got there. Combine this article with Tim Bajarin’s and you get a good picture of what could be offered. No doubt there will be many fast followers to Apple’s solution should it take off (whatever it may be… or not).
One of the largest costs to running a business is personnel, right? That’s way many large stores, like department stores, always seem to be thin on people who can actually ring up a sale. I remember two Christmas’s ago trying to pay for some luggage I wanted to buy at a store. It took almost an hour—twice as long as it took me to figure out what I wanted to buy (which I also did on my own).
I would bet there is a lot of frustrated lost money, just walking out the door, because of lack of an effective payment system.
But then look at the grocery store attempts at self-check out. I am a fan of that system for small purchases, but at a certain point I do fall in line with most results from that experiment that ultimately people like to interact with people when making a purchase at a local store. (Although I contend that the negative results are mostly due to negative experiences with a faulty system).
Apple B&M stores seem to strike a great balance between personal personnel and convenient payment system. I’ve always believed the store environment is one of the best kept innovative secrets. If there is another company out there that does it like they, I would love to know so I can shop there, too. It may not lower personnel costs, but I would think at some point increased sales transactions, instead of frustrated customers who leave, would make up for that.
Joe
Spot on. To challenge existing payment network effects, you need to immediately scale on both payer and payee sides to have the opportunity to short circuit the ‘traditional’ 4- sided network. Part of this is standardization – not sure how Google can achieve a high level of standardization (% of installed base) worldwide.
Apple has and will press this advantage for payments (in addition to others). Google is stuck with advertising still – no easy way out.
What you say is perfectly true, … in the US.
However, I think that Ben is talking about the “next billion” customers who don’t have credit cards.
Even in developed countries like Japan, credit card usage is nowhere near the US and as a result, NFC-based “wallet”-like solutions are rather popular on feature phones. Many Android phones sold in Japan have domestic “wallet”-like solutions on them.
I imagine that emerging countries have even less credit card usage and no NFC. M-pesa is a rather famous system that has gained in popularity in these countries. http://en.wikipedia.org/wiki/M-Pesa
Talking about the “next billion” is going to be difficult because we will have to understand the wide variety of situations in each region.
“Without question the mobile platform wars are over. iOS and Android have both won and have won in very different ways”
I disagree. It’s still early to count MS out. They have an excellent hardware design with the Nokia acquisition and their cloud / datacenter infrastructure is every bit as a good as Google’s. Windows Phone 8.1 is a great release of Windows Phone and nearly as feature-rich as Android & iOS. When MS competes as the underdog, they can march with the best of them. I give MS at least 2 to 3 years before we can say that Android & iOS have won the mobile wars.
“The most pertinent is my earlier point that, for Google, it is better for them when value is in their smart cloud and not in the hardware.”
Corollary : It is quite alright if Samsung just competes on price, distribution and hardware quality and nothin else.
comScore data is in for May 2014. Considering how different these two business models are and how the smartphone market has been commoditized, it’s amazing that one phone can hold 41% share of a market while outselling entire platforms of competing devices: http://halifaxbloggers.ca/straighttech/2014/07/smartphone-market-matures-heats-up/