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Are the Latest 10”+ Android Devices DOA?

I’ll admit it, I have a love-hate relationship with Android. I love it as a phone choice, love it on 7” tablets, but think it provides a lousy experience on anything 10” display and above. I’m not alone as Android has captured 75% of the smartphone market but hasn’t had big success in the 10” and above category. Companies like Acer and Asus are now venturing into some very dangerous territory and some of their new Android products risk ending up like previous 10”+ Android devices. I’d like to begin with some Android tablet perspective.

It’s hard to believe that up until a year ago, Android had no tablet market to speak of. Android tablets had really been defined by market debacles like the Motorola Xoom. Samsung cranked out some interesting, high-res 10” tablets and Asus delivered some inspiring detachables, but none of them sold very well. Then came Google IO 2012 and the introduction of the Nexus 7, which redefined the volume tablet market. As Apple and Amazon followed with their new 7-8” offerings, the entire tablet market swung toward smaller screens and cheaper tablets. Even though there some excitement around the Nexus 10, on the whole, 10” Android tablets continued to sit, uninspired. What’s going on here?

The challenge with 10” Android tablets is all about apps, which goes all the way back to the first Android tablets. In fact, there are so few tablet apps that there isn’t even a way to segregate the app store to do a decent count of them. That’s when you know very few apps exist. This is a bit of a chicken and egg problem and Google hasn’t yet dug itself out of this hole yet. So why aren’t devs creating apps for the Android 10” platform?

Devs right now are confused about the Google large display ecosystem. I say “Google” and not “Android” because some devs see what Google and partners are doing with Chrome and need to first decide between Chrome and Android. They see Chrome notebooks selling well on Amazon but they are not seeing big optimism on 10”+ Android devices. Developers are confused and when it gets to the point of lock-up, stick with the safe bet, iPad.

In the end, it’s the consumers who suffer. You can install a 4” Android app on a 10” tablet, but many times it gets stretched to the point where the app is unusable. Imagine how that 4” app looks on that 20” display. Well, about twice as bad as the 10” display. All kidding aside, it is the consumer who feels the pain after they get home and try it out and expect an experience that just works. For users who stay in email, the browser, and a few optimized games it’s probably fine, but for those users who use many apps, the experience will be suboptimal. This brings us to the new Acer and Asus SKUs.

Acer has launched a 21.5” all-in-one with Android 4.0 (ICS) with a very slow OMAP 4430 that’s in the Kindle Fire tablet and Google Glass and 8GB of storage. Given what is under the hood, I can only imagine how anemic this system will be, regardless of the lack of apps. Asus has launched the “Transformer Book Trio”, a 12” two operating system (Android/Windows), dual architecture (Intel Haswell/Intel Clovertrail), tri-modal UI (Metro/Desktop/Android), and tri-modal physical (tablet/notebook/desktop). This is clearly not for the technology weary as bundles nearly every possible confusing variable to a general consumer. Aside from these variables, like the Acer AIO, it will stretch many 4”-designed apps to 12”, providing a less-than optimal user experience. Let me close in on answering the original question.

Are the latest Android 10”+ devices DOA? Yes, they are until Google can motivate application developers to create more Android apps that work well, and not stretched from 4” to 10” to 12” to 21”.

4 Mobile Business Models, 4 Ways To Keep Score

The hundred meter dash, archery, weightlifting and the long jump are four very different Olympic sports with four very different methods of keeping score. The hundred meter dash is scored on speed. Archery is scored on accuracy. Weightlifting is scored on strength. The long jump is scored on distance. You don’t judge the participants in the hundred yard dash by how much weight they can lift. That would be the wrong way to measure them.

“…looking at ‘smartphone share’ or ‘profit share’ or ‘platform share’ all tell you something about the industry, but all three metrics mislead you if you try to treat them as a way to see who’s ‘winning’, because ‘winning’ means different things for Apple, Samsung or Google. After all, Google may well still make more money from searches on iOS than it does from searches on Android.” ~ Ben Evans, On market share

Hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms are four very different business models and they have four very different methods of keeping score too.

You don’t take the metrics used to measure one business model and apply them to another business model. That would be the wrong way to measure them.

Each business model demands its own specific forms of scoring. The goal should be to devise, discover, or discern a form of measurement that properly and accurately reflects how a business is performing in the business model in which it is participating.

Biathlons, Triathlons and Decathlons are all unusual Olympic events in that they group together several disparate sports and then determine an overall winner. Think of Apple, Google, Samsung, and Amazon as Olympic teams that compete with one another in the four interrelated mobile business models – hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms – a sort of Quadrathlon. Each team has its strengths and its weaknesses, each team wants to win the events that they’re best at and maximize their score in the other events in order to win the overall Quadrathlon.

Let the games begin!

Hardware Manufacturing

Last week I tried to explain how using only market share to analyze mobile hardware manufacturing was not only the wrong way to keep score of that business model but that it was actually obscuring the real score.

“The truth is that focusing on market share as the primary metric is the only way to paint the iPhone as anything other than a roaring success.” ~ John Gruber

I suggested an alternative measurement known as the “Fair share profit analysis,” in order to generate some perspective but, truth be told, the only real way to accurately “score” who’s winning in hardware manufacturing is with net hardware profits. When it comes to selling mobile hardware, do Apple, Samsung, HTC, Motorola, etc. really care what their market share is? No they do not. That’s the top line, a means to an end. The only thing that matters when they are selling mobile hardware is profit. That’s the bottom line, the end for which the means were made. Market share is all well and good but only if it brings home the profits. Keep your eyes on the prize – and profits are the prize.

So who’s winning the medals in the olympic sport of mobile hardware manufacturing?

Source: “Who’s Winning, iOS or Android? All the Numbers, All in One Place”

Awards Ceremony: Apple walks away with the Gold (both figuratively and almost literally), Samsung takes the Silver and no one else even medals. The Bronze podium stands empty.

Advertising

The only proper way to score advertising is net advertising profits retained. Market share and platform may be used to garner advertising revenue but they are only the means and they should never be confused with profit, which is the end.

Today, there are three great truths in mobile advertising:

1) Google is killing it in mobile advertising.
2) Google is killing it in mobile advertising…but mobile advertising is still relatively small; and
3) The vast majority of Google’s mobile advertising revenue is generated on the iOS platform, not the Android platform.

1) Google is killing it in mobile advertising.

Google dominates the mobile search market with 93% of US mobile search advertising dollars, according to eMarketer. Facebook is at No. 2.

2) Mobile advertising is still relatively small.

The mobile ad market alone stood at roughly $4.1 billion at the end of last year, up from $1.5 billion at the end of 2011. Google, currently has more than half the mobile ads market with annual revenues of around $2.2 billion.

Just to keep things in perspective, mobile ad revenue only accounted for 9% of all online ad revenue last year, although the percentage of mobile ads vis-a-vis other online ads is rapidly growing. And mobile ad revenues paled in comparison with mobile hardware sales. While it took an entire year for ALL mobile ad revenue to reach $4.1 billion, Apple alone, and in 90 days, and in what many considered a down quarter, brought in revenues of approximately $31.4 billion just from iPhone and iPad sales.

3) Google is making its advertising money on iOS, not Android

“(I)t’s Android’s large market share that is the winner for Google. The more Android devices being used, the more Google services with Google ads are being used.” – Virtual Pants

Actually, not so very much. Most of Google’s advertising dollars are generated by iOS’s relatively smaller market share, not by Android’s massive market share.

Source: MoPub

Take a good hard look at the chart, above. The iPhone ad spend doubles the ad spend share of ALL of Android. The iPad almost matches ALL of Android BY ITSELF. And even the lowly iPod has one-quarter of the ad spend that ALL of Android does. Market share is all that matters? I don’t think so. That’s like arguing that acreage is all that matters in real estate. The size of the lot does matter in real estate but location, location, location matters more, more, more. And market share does matter in mobile advertising but it is the location of the market share that matters even more.

— Apple’s iOS Mobile Ad Metrics Dominates Android

— Why 75 cents of every dollar spent on mobile advertising is spent on iPhone and iPad

— iOS leads Android in mobile ad revenue

— Apple’s iPad dominates online shopping traffic & revenue generation

— iOS Still Top Platform For Monetising Mobile Ads, Opera’s Q1 Study Finds, iPhone Also Beating Android For Generating Ad Traffic

— iPad Still Dominates Tablet Ads With iPad Mini Gaining, Velti Finds

“My belief, though, is that what Google is winning with Android is a booby prize — overwhelming majority share of the unprofitable segment of the market.” – John Gruber

When it comes to ad revenues and profits, we shouldn’t be counting Android as a single entity anyway. Ad revenues don’t help Android, the platform. They help specific digital stores. Ads going to Amazon, Google, and the various stores in China and elsewhere need to be broken out separately, not lumped together.

Awards Ceremony: Google wins the Gold and they win it going away. But they receive their Gold medal standing on the Apple iOS platform, not the Android platform.

Silver and Bronze? I’ll let you decide if it’s Facebook, Yahoo, Microsoft’s Bing or someone else. They’re all so far back that it doesn’t much matter now anyway. That may change over time but we’ll have to wait and see how this market develops.

“Razors-And-Blades” Content Sales

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies…” ~ Wikipedia

The “razors-and-blades” business model is tricky to score.

— Hardware revenues and profits mean NOTHING in the “razors-and-blades” model. In fact, it’s not unusual to LOSE money from hardware (razor) sales.

— Market share means both nothing and everything in the “razors-and-blades” model. It means nothing because it doesn’t actually generate any profits but it means everything because it is a prerequisite to generating profits. In fact, the only reason you’re giving away your hardware in the first place is to acquire massive market share which, in turn, will hopefully lead to massive profits.

— Ultimately, the only way to measure the success of the “razors-and-blades” model is on the net profits generated by the sale of the complementary goods (razors). In mobile, the complementary goods are content such as music, video, books, etc. and apps. Amazon also has the added advantage of being able to sell everything from their sprawling retail catalog.

As I tried to explain in my tersely titled article: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“, the “razors-and-blades” model makes no sense in this market space. At least it makes no sense to me. In the “razors-and-blades” model, the complementary sales – whether it be blades for razors, or ink for inkjet printers or games for gaming consoles – must be proprietary and must command a premium price. That’s the whole point. Give away the razor, make it back – and more – by selling the blades at a premium.

If you’re selling content, you want to be platform agnostic so that you can sell as much content as possible. This, in my opinion, should be Amazon’s strategy.

If you’re giving away hardware in order to sell content, then you want that content to be tied to your hardware product so that you can monopolize the sale of the complementary product and command a premium price.

In the mobile space, the complementary sales ARE NOT proprietary, they ARE subject to competition and they DO NOT command a premium price. Amazon and Google don’t sell content that is any different or superior to that being sold by Apple and other content providers and their content isn’t being sold at a premium. In fact, Amazon often sells their merchandise at a DISCOUNT which – in the “razors-and-blades” business model – is completely bat-manure crazy. ((Then again, we all know that Jeff Bezos is crazy like a fox.))

So who’s winning in the “razors-and-blades” business model? Why, surprisingly, it’s Apple and it’s Apple in a runaway.

— Google Play now at 90% of iOS app store downloads; iOS still holds a 2.6X revenue lead

Despite growing competition from other tablets, Apple’s iPad still accounts for a whopping 89.28 percent of e-commerce website traffic, and also rakes in more money on a per-user basis than any other platform. ~ Monetate

Distimo reports that iOS App Store revenues were 430% larger than Android during 2012. ~ Apple F2Q13 Earnings Call

“…iTunes inclusive of Apple’s own Software generates as much as 15% operating margin on gross revenues. That’s over $2 billion a year.” ~ Asymco, So long, break-even

Source: Canalys

Apple sells their content, not in order to make money but, in order to make their hardware more attractive so that they can sell ever more hardware and make ever more profits. With regard to tablets, Apple is playing the OPPOSITE game that the Amazon Fire and the Google Nexus are playing. While Amazon and Google subsidize their tablets (razors) in order to make money on the sale of their content (blades), Apple should be subsidizing the sale of their content (blades) in order to make money on the sale of their hardware (razors). But that’s not how Apple rolls. Instead, Apple sells their hardware at a premium AND they sell their content at a premium. That’s not supposed to happen but that’s just how good the Apple ecosystem is.

It’s like a walk-on winning the Olympic marathon while everyone else is stuck in the starting blocks.

You can say that it’s elitist or arrogant to argue that iOS users are better customers than Android users. But you can also say that it’s the truth. ~ John Gruber, Church of market share

One last thing. If Amazon and Google have an incentive to sell discounted hardware and premium content and Apple has an incentive to sell premium hardware and discounted content, one of those business models is going to fail and it’s going to fail hard. Since Apple is, so far, successfully selling premium hardware AND premium content, I’ll let you be the judge of how this is going to play out.

Awards Ceremony: I’m tempted to award all three medals to Apple just for having the sheer audacity to win a game that they didn’t even enter. But I guess Apple will have to console themselves with just winning the Gold.

And the Amazon Fire and the Google Nexus tablets? Disqualified for not understanding the rules of the game that they were playing.

Remember, Amazon and Google sell their hardware at cost. They don’t make a penny off those sales and they might even be taking a loss.

Market share? Yes, they have taken some minor market share…in a market where they are GIVING AWAY THEIR MERCHANDISE. And market share is not how you score in the “razors-and-blades” game. While the press and the pundits fawn over the market share of the Amazon Fire and the Google Nexus, what they’re entirely missing is that in the “razors-and-blades” business model, market share should be a GIVEN. I mean, honestly, if you can’t obtain overwhelming market share when you’re giving away your product at cost, then you should be ashamed, embarrassed, abashed, chagrined, humiliated and mortified ’cause you’re doing something terribly, terribly wrong.

You win the “razors-and-blades” game by scoring the most content profits. All those Amazon Fire and Google Nexus market share numbers that the analysts are always going gaga over? Meaningless. They should be removed from the count. They’re probably not hurting the sales of the other available tablets and they’re not helping the bottom lines of their makers either. There is zero proof that Amazon and Google’s hardware giveaways have led to increased retail sales which, after all, in the “razors-and-blades” model, IS the point.

And if you’re going to prophesy that market share alone gives Google data that will someday, somehow, be worth something to someone, then you need to go back and re-read how the “razor-and-blades” business model is scored.

What we desperately need in analyzing mobile computing is far more attention paid to profits and far less attention paid to prophets.

Next Time

Next time I will finish with the “mother” of all business models – platforms – and do the medal count.

Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

Read Part One of John’s column entitled: Android’s Market Share Is Literally A Joke

Read Part Three of John’s column entitled: Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

The author would like to gratefully acknowledge the contributions of Ben Bajarin and Steve Wildstrom. All the great ideas, that you agree with, were theirs. All the bad ideas, that you disagree with, were mine.

Android’s Market Share Is Literally A Joke

This is the first of three articles looking at how we measure – and mis-measure – who is “winning” in the mobile sector. Article one focuses on market share and was inspired by an article written by Bill Shamblin, entitled: “Chasing Smartphone Market Share Is A Chump’s Game.” Article two will focus on the proper way to measure or “score” mobile hardware manufacturing, mobile advertising and the “razors-and-blades” content models. Article three will focus on the role that market share plays in the network effect and will examine the proper way to measure or “score” how well a platform is doing.

The Joke

Have you heard this one?

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

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

Or how about this one?

Android is winning because they got a bigger truck.

The Joke Is On Us

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

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

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

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

TechCrunch sums up the thoughts of many this way:

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

ReadWrite takes it one, final step further, stating:

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

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

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

No, of course not.

Quiz #1: Market Share Alone

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

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

The Wrong Way To Calculate Who’s Winning

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

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

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

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

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

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

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

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

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

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

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

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

Quiz #2: Market Share or Profit Share

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

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

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

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

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

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

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

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

Source: Asymco, Escaping PCs

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

Profit share always follows market share? Not hardly.

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

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

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

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

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

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

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

Grading The Contestants

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

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

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

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

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

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

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

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

As Daniel Eran Dilger puts it:

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

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

Source: Ben Evans, Mobile is eating the world

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

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

Price Elasticity

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

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

Summation

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

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

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

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

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

Next, I’ll talk about how market share affects hardware manufacturing, advertising and the “razors-and-blades” content models. The series will conclude with a discussion of platforms and the network effect.

Read Part Two of John’s column entitled: 4 Mobile Business Models, 4 Ways to Keep Score.

Read Part Three of John’s column entitled: Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

How Android Vendors Can Compete With Samsung

The initial title of this article was going to be “How HTC can compete with Samsung.” Then I decided to branch it out and make a point that is relevant for HTC but also for all Android handset vendors looking to compete with Samsung.

The public learned this week that HTC is losing key personnel at a rapid rate. Through friends of mine that worked there ((They no longer work there)), I had a sense this was coming for a while. For the past few years I have been watching the numbers of all the handset vendors and HTC was one that concerned me the most given the trends.

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

That is why in 2010, I wrote an article stating why I felt Microsoft should buy HTC. ((I still feel this is a good idea and likely)) I had concluded at that time HTC was in trouble. If I was them, or any other mainstream Android OEM looking to make a dent in Samsung’s 95% of the Android profit pool ((It is impossible for Android handset makers to survive competing for only 5% of the profit pool)) this is what I would do. [pullquote]deeply embed every one of their core services as if they literally own you[/pullquote]

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

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

This is a template that could work for HTC but could also work for others. The bottom line is the current strategy being employed by Samsung’s Android competitors is not working. Stock Android is very good and arguably always the best Android experience ((As much as I applaud and appreciate the attempts to differentiate Android, I prefer stock Android every time)). If needed there is room to add some better apps, like a better exchange email app for example, but don’t change the interface and leave the rest to Google.

Microsoft is Missing Apps the Same Way They Missed the Early Internet

It seems odd to me that Microsoft of all companies is so drastically behind the curve when it comes to apps for Windows 8 and Windows Phone. When you think about it, Microsoft of all companies was in the best position to create a better software buying experience, via an app store than anyone. Windows had 97 to 98 percent market share for the bulk of the PC era and software played a key role in that dominance. Why was there no Windows app store until the end of last year? ((Updated: There was a Windows Marketplace but came no where close to the app stores I am talking about)) It just makes no sense.

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

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

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

The Network Effect

Both Palm and Apple achieved the network effect.

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

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

Interestingly, despite Microsoft’s position in PCs, I would argue they never achieved the network effect. ((Happy to debate this point.))

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

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

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

Long Tail Developers

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

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

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

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

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

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

Google’s Android And The Path Not Taken

Yesterday, Google held its I/O keynote address. Ben Thompson of “stratēchery” has written an excellent article entitled: THE ANDROID DETOUR. I highly encourage you to take the time to read it. I’m going to re-state and build upon his thoughts here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Definitive Answer Guide to Which Smartphone You Should Buy

Forget all the rumors of an Apple iWatch. Ignore the surprisingly good reviews of Google Glass. Neither of these will come close to replacing your smartphone. Not for many, many years; probably never. The question is not whether you will buy a smartphone – you will. The question is: which smartphone should you buy?

I am here to help. Don’t worry, I promise this will be painless.

I’ve traversed two decades in the telecommunications industry and have spent ridiculous amounts of time over the years testing and sampling various smartphones across just about every single platform, price point and form factor. If it means anything to you, I even own a MeeGo. Looks great, but unfortunately it works about as well as your four-year-old netbook.

Let’s begin.

Dear Brian…

Which smartphone should I buy?

The iPhone 4S.

Perfectly designed, flawless to operate, affordable. Apple offers the best, most robust, most pleasing ecosystem of apps, games, content, payments, customer support, product integration and accessories. I cannot say exactly how many billions Microsoft, Google and others have spent over the years attempting to equal the iPhone’s operating system – iOS – but I can say that none have yet met the challenge.

Apple’s iPhone repeatedly tops the competition in customer satisfaction ratings. iPhone users are much more likely to stick with iPhone compared to Android users. That should tell you all you need to know.

Done! That was easy.

What? You have more questions? My singular advice simply not enough? Fine. What else?

Why not iPhone 5?

There is a reason why the iPhone 4S continues to sell so well around the globe: on form and function, ecosystem and compatibility, the 4S offers the best bang for the buck of any smartphone on the market, bar none.

Yes, the iPhone 5 is a great device. It has superior hardware specs to the 4S. In my opinion, however, it feels too delicate. It’s design is not perfect. iPhone 5 is too long and narrow. For many people, particularly women, they can’t control the entire screen with a single swipe of the thumb.

I hate Apple!

No, you do not. Besides, Apple, just like Nokia, Google, Samsung et al is a giant, for-profit corporation unaware of your existence. This is not about them, this is about you – and the best smartphone for you. Get the iPhone 4S.

Don’t care. I refuse to buy an iPhone!

Fine. Buy an HTC One, it’s a good phone.

You’re saying the HTC One is better than the Samsung Galaxy S4?

No. I think the S4 is slightly better. But if you buy the S4 all your friends will think you did so only because of all those Samsung commercials.

Not a Droid or LG?

No.

Shouldn’t I just wait for the latest model?

I cannot recommend that which does not exist.

I read that Android has surpassed iPhone. True?

After years of slavishly copying iPhone, the Android UI inexplicably remains almost willfully confusing. This is compounded by the greed and short-sightedness of carriers and handset makers. However, Google nearly makes up for this with great search, maps, Google Now notifications and other services optimized for Android. Plus, many handset makers like Samsung put amazing hardware into their devices. If you simply cannot bring yourself to get iPhone, an Android is a suitable alternative.

What about all the “phablets” I keep hearing about? Should I get one of those?

No.

But…

Do not be swayed by that big screen – even if you can hold the device in one hand comfortably. Smartphones are not televisions. You take your smartphone with you everywhere. You use it constantly. A phablet is almost certainly not right for you. Form is a primal factor in choosing the right smartphone and the phablet form is an evolutionary dead-end. The one thing it does well – offer a very large display – simply cannot overcome all that it does bad. Phablets are too big, too wide, too heavy and not optimized for the role they attempt to fill: a multi-purpose, always-on, fully mobile personal computer.

I’m going to buy a phablet anyway. I like the big screen.

If you insist, then I recommend you get the new Samsung Galaxy Note II. You will regret this.

You obviously hate Windows Phone.

How Nokia could have blown through two plus years of development and delivered only the Lumia 920 and the 928 (soon), is beyond my comprehension. Windows Phone deserves a far better flagship device.

But I do not hate Windows Phone – the operating system. It’s a beautiful, reasonably intuitive, highly customizable UI that delivers real-time updates probably better than any other platform. The problem, though, is that Microsoft simply made the wrong UI choice. I suspect they will never recover from it. Singular, static apps really do work better for smartphones – as iPhone has proven repeatedly – than the “live tiles” format that Windows Phone adopted.

My daughter loves Facebook. Should I get her one of those HTC Facebook Phones?

No.

But she really loves Facebook.

Get her any other (non-Windows Phone) phone listed here. I promise you, she will be fine.

I think you’re wrong about the iPhone 5.

The iPhone 5 was a very clever attempt by Apple to build a device with a larger display – as the market demanded – while maintaining all the benefits of their app ecosystem. Apple can and will do better.

I cannot afford any of these devices.

Whatever smartphone you choose, assume you will have it for between 1-3 years. The cost of the device itself will almost certainly be less than the cost for voice, data and texting services. Plus, you will buy apps, music and other content, and accessories – such as a car charger, stereo speaker and case – for your smartphone. Factor all of these costs into your decision.

If you still decide to go with a low-priced device, get last year’s top-of-the-line Samsung: the Galaxy S III. If you can get a refurbished model, this is a truly great buy. If you cannot afford this, I would encourage you to not buy a smartphone at all. Get a quality feature phone with a physical QWERTY keyboard. There are many options available.

My company doesn’t allow me to use iPhone or Android.

Delta doesn’t allow me to have my smartphone running during take-off. That’s never stopped me.

I can’t possibly type on that touchscreen. I need a real keyboard.

You will learn.

I refuse.

Then, wait. Very soon you can have a BlackBerry Q10. I think you will be impressed. (Note: do not get the BlackBerry Z10)

Which carrier should I go with?

That I cannot help you with. They all have their own unique set of faults.

Apple Is Playing Chicken With The Mobile Carriers

“The game of chicken, also known as the hawk-dove game or snow-drift game, is an influential model of conflict for two players in game theory. The principle of the game is that while each player prefers not to yield to the other, the worst possible outcome occurs when both players do not yield.” ~ Wikipedia

800 Android Carriers vs. 240 iPhone Carriers

“The narrative has been focused on the consumer demand, and the narrative needs to shift to the operator…” ~ Horace Dediu, former in-house analyst for Nokia

Android sells devices through almost all of the world’s 800 carriers while Apple sells the iPhone through only about 240. (Only about 500 of the world’s global operators have the network capabilities needed to handle the iPhone, but that number is quickly increasing.)

The reason for the discrepancy between the number of carriers supplying Android and the iPhone is that Apple prices their phones above $600 and places sales quotas and other requirements on the carriers before they are permitted to sell the iPhone. Potential partners must determine whether taking on these obligations is worth the benefit of offering the device.

Examples of holdouts are China Mobile Ltd., the world’s biggest phone company, and NTT DoCoMo Inc., Japan’s largest mobile carrier. On the other hand, other companies are succumbing to Apple’s demands. T-Mobile added the iPhone to its lineup in April and they announced that they have sold 500,000 iPhones in just under a month. And U.S. Cellular (USM), had long contended that the iPhone cost too much, yet last week they announced that they had agreed to sell $1.2 billion worth of handsets over three years, after conceding that their failure to carry the iPhone was costing them customers.

Are The Carriers In Control…

Adam Satariano of Bloomburg reviewed the current carrier impasse and concluded:

“Apple Inc. (AAPL) is missing out on a chance to court as many as 2.8 billion new smartphone customers, many of them in Asia, as wireless-service providers balk at conditions imposed by the iPhone maker and drag their heels in signing on as partners.”

“Carriers are starting to question Apple’s pricing strategy and are supporting multiple other platforms,” said Shah at Strategy Analytics. “They no longer need Apple.”

…Or Is Apple In Control?

The unasked question here is: If Apple is losing the opportunity to sell more iPhones because of their onerous conditions, then why does Apple continue to impose those conditions? The unstated answer should be – but apparently isn’t – obvious.

Clearly Apple – unlike the vast majority of tech pundits and Wall Street Analysts – does not see a pressing need to acquire additional operators at any cost. Of course Apple wants more customers, and that’s only going to happen if Apple expands its carrier base. However, unlike most of the rest of the world, Apple feels that they can patiently wait until the carriers come to them and meet their terms. Does that make Apple arrogant and out-of-touch with reality or does that make them master negotiators?

Four Realities That Favor Apple: Capacity, Real Growth, Retention and Profits

First, Apple was at their iPhone manufacturing capacity for much of the holiday quarter. It doesn’t make much sense for Apple to increase the number of addressable customers until and unless they have the capacity to provide those new customers with product.

Second, as you can see from the trajectory of the chart of the iPhone’s cumulative sales, above, Apple is still enjoying significant real growth in the sales of their phones. This truth is often obscured and overshadowed by market share numbers.

Third, as markets approach saturation in the U.S. and Europe, retention and churn become far bigger issues and when it comes to customer satisfaction and retention, Apple has it all over their competitors.

Notice how Apple started with only AT&T in the U.S., and then slowly and methodically ground down the opposition of the other carriers until Verizon, then Sprint, then T-Mobile, then U.S. Cellular and many other small carriers caved in as the churn caused by the iPhone crushed their sales and then caved in their profits.

Fourth, Apple takes in 57% of the profits in the mobile industry with only 8% of the sector’s market share. That is some serious leverage.

Apple is Enigmatic But Still Susceptible To Analysis

I contacted Apple to see what their actual negotiation strategy was but, oddly, they were not very forthcoming. Go figure. Tim Cook has failed to return my several calls (or even had the courtesy to lift the current restraining order against me) and my $605,000 attempt to have coffee with him failed when it was discovered that I had used a stolen credit card. C’est la vie.

So we’re going to have to use analysis (i.e., guesswork) instead. My best guess is that Apple’s strategy is to go after the whales and ignore the minnows. (The minnows will fall all over themselves to jump on board once the whales are lined up, anyway.) Apple only has so much capacity to manufacture phones as it is and they’d prefer to expand first in those markets that count and count the most.

Further, Apple is a damn patient negotiator. While the rest of the world is screaming at the top of their lungs that Apple has to “DO SOMETHING”, Apple is patiently waiting for the carriers to realize that they can’t compete without the iPhone in their mobile portfolio. And based upon the capitulation of Sprint, T-Mobile and U.S. Cellular, Apple may just be right.

So who will win this game of Chicken? Right now, Wall Street and a whole lot of investors are betting against Apple. But if you look at the history of Apple’s negotiations with the music labels, with AT&T and with all of Apple’s recent carrier acquisitions, you can see that Apple has played – and won – this game before.

Only time will tell us which side will blink first. But me – I’m not betting against Apple.

Are Google Apps On iOS A Trojan Horse Or A Concession to Apple’s Dominance?

Grin And Bear It

Aside from Google Maps and Google Now, many users would sooner tap on Gmail, Google Chrome, and Google Drive than the apps Apple would much rather you use, and the result is completely antithetical to Apple’s insistence of a controlled ecosystem and specific apps within a walled garden.

Google apps are besting the iPhone’s default software, and Apple has to grin and bear it. ~ Mike Schuster, USA Today

Apple has to grin and bear it? Do they? Or is it actually the other way round and Google is the one who has to grin and bear it?

App Revenue

Apple’s iOS ecosystem is crushing Google’s Android in dollars generated from App sales.

“Cumulative app downloads have surpassed 45 billion and app developers have made over $9 billion for their sales through the App Store, including $4.5 billion in the most recent four quarters alone. Canalys estimate the sales from our App Store accounted for 74% of all app sales worldwide in the March quarter.” ~ Apple Earnings Call

According to a new report from app analytics firm App Annie, the iOS App Store has maintained its lead in terms of monetization, earning around 2.6 times more revenue in the last quarter. During the holiday season – when users are receiving, activating and then filling new smartphones and tablets with apps – that lead was even higher, with iOS generating roughly four times more revenue.

Ad Revenue

Whenever it’s pointed out that Apple developers make far more income than do Google developers, Android advocates quickly point out that Google is an advertising company and that they and their developers make their money through advertising rather than through the sale of Apps. Only here’s the thing…

… 75 cents of every dollar spent on mobile advertising is spent on iOS, not Android.

“…iPhone, iPad, and yes, even iPod touch ad rates are much higher. While Android smartphones draw $.50 CPMs (cost per thousand impressions), iPhones pull in $.65 to $.88 CPMs, iPod Touches do $.74 to $.98, and iPads do between $.82 and $1.16.” ~ Venturebeat

As you can see from the chart, below, what’s utterly amazing is that the iPad alone makes almost as much advertising revenue as all of Android put together.

Convoluted Logic

I have heard it said that Google’s excellent iOS software is a Trojan Horse that will make it easier for iOS users to switch from iOS to Android. But I fail to see how Google’s efforts to improve their iOS software – and therefore improve the iOS experience – either harms the iOS platform or makes it more likely that iOS users will leave the platform.

Google is not creating iOS Apps out of the goodness of their hearts. They make money when people use their apps and consume their advertising. And right now, the bulk of the app money and the bulk of the mobile advertising revenue is being made on iOS. If Google wants to stay in the game, then they’ve got to deign to play on Apple’s turf. It’s as simple as that.

Google “Plays” With Android Activation Numbers

“…there are now 1.5 million Android devices being activated every day, Google Chairman Eric Schmidt said Tuesday. That’s led to more than 750 million Android phones currently in use.” ~ Erica Ogg, Gigaom

Google changed their methodology to only count user visits to the Google Play store when determining which versions of Android are in use. So exactly how many of those 1.5 million daily activations and 750 million overall activated units have actually connected to the Google play store?

Google isn’t saying.

Now why do you suppose that is?

Google’s New Android Math Doesn’t Add Up

According to Gartner, Android sold 144,720,300 units in the fourth quarter of 2012. But let me ask you this:

Who cares?

Does Samsung care how many “Android” units were sold? No, they do not. They only care about how many of their devices they sold.

Do the various Android manufacturers in China care how many “Android” units were sold? No, they do not. They only care about how many of their respective devices they sold.

Does Amazon care how many “Android” units were sold? No, they do not. They only care about how many Amazon devices are being used to direct traffic to their web site.

Do Android developers care how many “Android” units were sold? No, they do not. They only care about those Android units that their software can address and, even more specifically, they only care about that portion of the addressable market that is interested in purchasing their product or downloading their product and consuming their advertising.

Does the Google Play store care how many “Android” units were sold? No, they do not. They only care about how much is purchased from the store.

Why Do We Count Android As A Single Entity?

“Android” is not a single entity. So why do we add all of the “Android” numbers together? We do it because we assume that higher numbers mean a stronger platform. We use it as a proxy for the strength of the platform. But it just ain’t so. Total numbers mean nothing. The only numbers that matter are those that strengthen the platform.

And do you know who agrees with me? Google.

Android’s New Math

Google reported that the number of Android units using Android versions 4.1 to 4.2 jumped from 16 percent a month ago to 25 percent this month. Impressive, no?

No.

The reason for the big jump was that Google changed the way they count the numbers. Previously, devices were counted when they checked in to Google’s servers. But Google is now only counting user vistits to the Google Play Store. Google argues that the data more accurately reflects users “who are most engaged in the Android and Google Play ecosystem.”

I agree. This is a better way to count the meaningful numbers rather than just the gross number of Android activations. However, did you notice the inconsistency in Google’s new math?

One Of These Is Not Like The Other

Google hasn’t recalculated and lowered the total number of Android activations.

In other words, when it comes to telling you how many activations they have, Google uses devices that check in to their servers. But when Google wants to tell you which versions of their operating system are in use, they only count user visit’s to the Google Play store.

Hmm. So we now know that versions of the Android pie are divided into different sized slices but what we don’t know is just how big that pie is. Exactly how many of the 144,720,300 units sold in the fourth quarter of 2012 are actually accessing the Google Play store?

We don’t know. Because Google isn’t saying. And until they do, those total unit sales and activation numbers have little meaning in determining the overall strength of Google’s portion of the Android platform.

Android’s Total Numbers Conceal Rather Than Reveal

“Android” shouldn’t be counted as a single operating system any more than Europe should be counted as a single country. Heck, Android doesn’t even have a “common market“.

If we’re going to use numbers as a proxy for determining the strength of various operating systems, then we have to use meaningful numbers. Perhaps we should be comparing the units running the latest version of iOS with the latest version of Android. Perhaps we should be counting the Amazon, Google, and the various Chinese portions of Android as distinct and separate entities. Perhaps we should even be counting that portion of the Android phones that run Facebook Home separately too.

What we most certainly should NOT be doing is lumping all Android sales and activations together and pretending that they’re one and the same and that their total numbers are advantageous to all of Android’s separate participants, such as Samsung, HTC, Amazon, Google, developers, etc. If an activation or a unit sale doesn’t count towards the strength of the whole operating system, then it shouldn’t be totaled. Totaling Android’s numbers together doesn’t make sense because there isn’t a single, unified Android platform.

Numbers should be used to reveal, not conceal. And Android’s numbers aren’t revealing its strengths, they’re concealing its weakness.

The HTC One: Setting a New Bar for Android Phones

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

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

Yesterday, 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

Technology 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.

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.

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.

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

Given 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?

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

If 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.

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.

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.

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

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.