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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?
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.
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.
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.
On Monday, (Google) published a “tablet app quality checklist” on its Android Developer website that urges developers to build tablet-optimized apps… ~ Wired
I’d like to applaud Google for this move, I really would. But let’s put this in context:
— Google should have done this when Samsung introduced the Samsung Tab some two years ago or, at the very latest, when they introduced the tablet-friendly Honeycomb Android operating system in February 2011.
— Google should have done this long BEFORE Microsoft introduced Windows 8 tablets. Microsoft gave Android tablets a two year head start…and Google frittered it away.
— Google should have done this BEFORE they changed strategies, introduced the Nexus 7, and made it nearly impossible for any other Android manufacturer to compete in the Android tablet space.
For the past two years, Google has, at the very least neglected, at the very most sabotaged, their Android tablet efforts. Now they’re asking developers to dedicate their time and their resources to creating tablet specific apps. It’s a great message delivered far too late.
It seems like you can’t go anywhere in Silicon Valley without hearing about someone who’s making an app. Apps are all the rage these days and software engineering is one of the hottest jobs all over the world. But in the not too distant past, there wasn’t this much excitement around software.
In fact, I have heard from many executives who have been around a while that the excitement around software and apps today reminds them of the same excitement around software when personal computers were first gaining steam.
Although there are some similarities between the industry today and the PC software industry when it was first getting started, the excitement around software today is taking place on an entirely different kind of computer. The excitement around software today is entirely focused on touch computers like smartphones and tablets.
Smartphones are contributing and are the device that began this new app economy but tablets are where the next real software innovations will be focused on in my opinion. I say this because I am a big believer in the tablets ability to take significant time away from the traditional PC. Our research indicates that consumers are comfortable doing the vast majority of tasks they used traditional PCs for in the past on their tablet. Because of that point we feel the tablet represents one of the most exciting platforms which will lead a new software revolution.
I think a strong case could be made that much of the focus of the software industry over the past few decades has been on professionals and the workplace. In my opinion, only in the last five years have we had what I would consider a pure, mature consumer market. The maturity of the consumer market for personal computers is the foundation that has led to the rebirth of the software industry. If the first phase of the software industry was focused largely on businesses, then the next phase will be largely based on consumers.
Although we can articulate what is happening by proclaiming that the software industry is being reborn, in all actuality it’s starting over. The first software phase was all about creating software for desktops and then eventually laptop computers. Both were driven primarily by mouse and keyboard input mechanisms. The software generating all the excitement today is fully around touch as an input mechanism. Given the drastic differences between touch computing and mouse and keyboard computing, software developers are reinventing or at the very least re-imagining their software around touch computing. It is this reinventing and re-imagining of the software industry — brought about by touch computing — that leads me to believe it’s almost like it’s starting over more than it’s being reborn.
New Hardware Is Driving New Software
This rebirth of the software industry is being driven primarily because of new hardware that’s selling like hotcakes to the masses. Although it’s easy to get excited about all the shiny new smartphone and tablet hardware, it’s important to remember that hardware is only as good as the software it runs. I could own the most amazing and elegant piece of hardware, but if it runs poor software, it’s no better than a paperweight.
When I speak with software developers who are driving this new phase of software, they’re largely focused on the iPad and the iPhone. These two platforms are giving software developers valuable experience in gaining expertise, making the next generation of touch software much more personal. This is important because new platforms incorporating touch are on the horizon based on Windows 8.
Windows 8 presents a radical departure from the normal desktop/notebook operating system that Microsoft usually churns out. Windows 8 will be the first OS to combine a touch-based operating system (called Metro) with a mouse-and-keyboard operating system and a familiar Windows interface. These two experiences combined together will lead to a new generation of notebooks, desktops, and tablet-notebook hybrids, all with touch interfaces.
Regardless of your opinion about Microsoft’s approach with Windows 8, the reality is that over the next few years, touch computing is coming to a wide range of laptops and desktops.
That’s a great question, and my answer may surprise you. I believe the next big software craze will be around television. I know it may seem crazy to think about running apps on your TV, but that’s what I think is next. Google is already going down this path with Google TV, letting software developers make apps for the big screen; Samsung is also doing this with its line of Smart TVs. And there’s speculation that Apple has big plans for the TV industry — if that’s true, I believe apps will be a part of the strategy.
Even though there are products on the market that let you run apps on your TV, those developers have yet to re-imagine their apps on the big screen. Just as software developers are having to re-imagine their software for touch computing, they will have to do the same thing for the TV.
We live in extremely exciting times and things will get even more exciting. I firmly believe we will see more fascinating innovations centered around personal computing hardware and software over the next 10 years than we ever saw in the past 30 years of the PC of the industry, and I’m glad that we’ll get a chance to observe them firsthand.
Last week in my Friday column I outlined a few of the challenges that I think Microsoft has in front of them with Windows 8. I cited lack of Windows momentum in the market along with changing software and app economics that are going to challenge Microsoft in ways they have never had to deal with. That being said I am rooting for Microsoft on this one as I have followed every major release since Windows 95. Although, I am not sure I have ever analyzed a release where I personally have had so much uncertainty about its chance of success.
Why I am Excited About Windows 8
Before I hit the larger direction behind this column, I want to make a few points about why I am excited and optimistic. What has me excited about Windows 8 is the kind of hardware innovation we are going to see because of it. Intel is helping this hardware innovation around Windows 8 with their UltraBook initiative and many of the products that will hit the market later this year and next are very interesting. Tim wrote earlier in the week about a category we are looking at heavily called “hybrids” which are tablet first hardware designs paired with a keyboard for when a consumer may need or want it. This is just one of many hardware designs that I think are very interesting and I am anxious to see how the market responds to them.
We write frequently about how the technology industry moves in cycles where a clear and obvious value shift moves from hardware, software and then to services. This example is clear in Apple’s ecosystem where hardware remains relatively constant and the major value has moved to software and now creeping into services.
Windows 8 because it is new and blends two unique experiences together will ignite a short term value trend where we will see new and innovative hardware built around the operating system. Inevitably, however, many of the designs we will see in hardware may not stick and the market will dictate which Windows 8 form factors are the winner. Because of the speed of this market and how mature the Apple and to a degree Android ecosystems are Microsoft–and partners– can not simply rely on the hardware and Windows brand alone to give them momentum in this market. Rather, for Microsoft to have a shot when they launch they need to get their apps together.
More than Hardware
To my point above of how the value chain evolves, it is as if, for Microsoft with this release, they need to come to market with as mature an ecosystem as Apple and Google in terms of apps and a software developer community. This, in my mind, is one of the most important factors necessary to truly evaluate and form an opinion of how successful the Windows 8 launch may be.
Microsoft needs to learn from Google on this one as the utter failure of Android tablets to gain any real traction is due to the lackluster apps built for tablets. Microsoft is in a similar position with Windows 8 Metro Apps. Of course Microsoft has legacy apps to fall back on but I still question how valid that really is in pure consumer markets.
My Techpinions colleagues Steve Wildstrom and Patrick Moorhead have already covered some of the potential legacy hardware issues with Windows 8 and perhaps some of the challenges Windows 8 faces on non-touch notebooks or desktops–which will still be a healthy portion of the market. I agree with and share their concerns in those areas but I am mostly concerned about what new and exciting software that will be waiting for consumers when they purchase these new Windows 8 devices.
To use a video gaming industry analogy, Microsoft needs a title franchise to drive the hardware. They had this with XBOX and Halo where many consumers bought the XBOX simply for this title– it was that valuable. There has to be something that grabs consumers attention and appeals to them in a way that no other platform can.
This is clearly one of the strengths of Apple as they continually put products on the market both in hardware and software that drive demand. Microsoft and others lag in this category and it needs to change fast or they will face and even tougher uphill challenge than they already do.
As I stated earlier, we are rooting for Microsoft. We need healthy competition in this industry. However, our expertise in being industry and market analysts gives us insights into the challenging road ahead. To be fair, this is one of the riskiest things Microsoft has done in a while. Taking risks can bring great reward or fail miserably. Let’s just hope Windows 8 is more like the Windows 95 launch in terms of success and less like Vista, or even worse, Bob.
With the news today that Google is re-branding the Android Market as Google Play, I am forced to wonder what that says about their strategy. Is playing all Google is really focused on? I also wonder if this branding is not more confusing to consumers than the clearer Android Market brand.
I don’t disagree that what they are doing to unify their store per-se is a bad idea. I am only questioning the branding behind it and what having something loosely called “Play” says about Google’s strategy. If nothing else I think it makes it clear that Google with Android is 100% focused on consumers. Something that I somewhat disagree with especially given the BYOD trend within corporate IT. If Google devices, or at least a large percentage of them, are not even options for IT to support than it will preclude consumers who need IT support from buying them. Granted that is not everyone but it is certainly a healthy fraction.
As I stated, unifying the different elements of their store is a good idea. I am just not sold on the branding and whether or not it is more or less confusing to consumers. I thought Android Market made a lot of sense and was clearly differentiated from other stores or services on other platforms.
This also takes Google one step closer to browser based computing paradigms we have been watching. Now that the Google Play is becoming increasingly more browser based as a part of the experience, it opens the door to more hardware agnostic experiences. I can already access my Google music through any browser regardless of my hardware and now books and perhaps in the future apps build for Android may be accessed and perhaps even used in this strategy.
I have often said that in the future we won’t install software or services we will simply access them. Perhaps Google’s strategy with Play is in line with my vision.
Blogs are unforgiving. The entire world can see that I expected the highlight of Apple’s iPhone 5 introduction last week to be a kumbaya love fest between Apple and Facebook. Facebook is number one in mobile social media apps. Apple is number one in smartphones and tablets. Yet even after 18 months, there was no official Facebook app for the iPad.
So, other than the fact that there was no iPhone 5, and that no one at the Apple event even mentioned Facebook, let alone invited Mark Zuckerberg up on stage, my blog post was … well, pretty much in English.
But today, Facebook finally announced its Facebook app for iPhone and iPad.
According to the blogosphere, the hangup was caused by “negotiations” over who would be allowed to make money from apps sold by developers through the Facebook platform on the iPad. (You know, the developers who sell apps like Angry Birds, Hipstamatic, FarmVille, weather, etc.)
Thirty percent on all paid apps, on all in-app purchases, and on subscriptions.
(Google has a variant on this revenue model for its own developer ecosystem: We take 30 percent but we’re not evil, bitch.)
Facebook sees that Apple and Google are rolling in clover, so it tells Apple it wants to create a separate revenue platform for mobile apps called Facebook Credits, and it wants to build it into Facebook apps that run on the iPhone and the iPad, which would bypass the Apple 30 Percent Bitch system and send that money directly to Facebook. Negotiations must have gone something like this:
Apple: ”You know what we think of Facebook? We own the operating system and you don’t, and just to make that point absolutely clear we’re choosing Twitter over Facebook as the social layer of the iOS 5 operating system. We have more than 200 million registered users on the iTunes store and we have their credit card numbers, and we make buying apps completely smooth and painless and frictionless, and Facebook doesn’t.”
Facebook: “Oh yeah? Well, in that case, we’ll develop our app for HP’s new TouchPad. How do you like them apples?”
Apple: [30-day pause] “And how did that work out for you?”
Facebook: “Never mind. But we still have the most popular social platform in the universe, with 750 million users, and the only third-party Facebook apps you’ve got now on the iPhone and iPad basically suck. Even so, more than 250 million people use Facebook on a mobile device today.”
Apple: “True, but don’t forget, we have ‘Ping.’”
So it appears they have reached a compromise: Apple gets 30 percent, bitch, on all Facebook for iPhone and Facebook for iPad apps developed for the iOS operating system. Developers who want to create apps for Facebook on the Web, in HTML5, must use Facebook’s virtual currency, Credits.
Folks, what we have here are the latest salvos of a global war to create a new type of currency for online transactions, one that will rival cash and credit cards. Microsoft wants to be a player. PayPal (a division of eBay) wants to be a player. All of the mobile phone companies want to be players. When I walk down University Avenue in Palo Alto to get a cup of coffee, I pass what seems like 50 online payment startups that want to be players. The market for mobile apps and virtual goods sold through social networks and app stores is huge, and hundreds of millions of people are already opening their virtual wallets.
The Apple-Google-Facebook mobile app revenue models appears to be evolving along the Mastercard, Visa, American Express models. Developers who want to sell apps or virtual goods online can choose to whom they want to pay, except that the bites are larger by an order of magnitude. Apple wants 30 percent, Google wants 30 percent, and now Facebook wants 30 percent.
Aside: Will you trust Facebook Credits as your medium for buying things online? Google Wallet? A couple of months ago the marketing and advertising firm Ogilvy & Mather commissioned a survey on which brands consumers would trust with their money. It looked like this:
Anyway, I’m so glad that Apple and Facebook have decided, at last, to “friend” one another. I wonder how long they’ll stay friends?
I think this is going to be a very interesting battleground. But hey, I’ve been wrong before.
Microsoft has been trying to recapture momentum in mobile after ceding the early market leadership it had 5-6 years ago due to its lack of adequate investment and resultant inability to stay competitive. And its renewed focus and execution over the past 1-2 years is indeed enabling it to make progress. But behind the scenes Microsoft has a strategy to become a driving force in the market and will likely produce more profits than many of the handset manufactures. And this is regardless of whether Windows Phone is successful.
Microsoft makes no mobile hardware, and licenses its OS software to several handset manufacturers (e.g., HTC, HP, Samsung). Its latest version of Windows Phone 7 (Mango) is refreshingly competitive and shows a lot of promise. And its distribution partnership with Nokia could propel it into a leadership position (although we remain skeptical that it will happen as quickly as some predict). Many observers focus on Microsoft’s attempt to gain ground on the competition by increasing its anemic smartphone OS market share. But the number of smartphones now being sold with windows mobile or the newer Windows Phone 7 is pretty small (various estimates are less than 5% of the market). Even at an estimated $10-$15 license fee per phone, the stakes are pretty small for a company the size of Microsoft.
But licensing the OS should actually be Microsoft’s back-up position. Frankly, there is far more money to be made other places. First, Microsoft is now putting a squeeze on all of the Android handset makers by enforcing its patent portfolio and claiming all such manufactures must license Microsoft IP to prevent infringement. And the handset makers are coming on board. Deals have been struck with HTC to start, and negotiations continue with others (e.g., Samsung). It is quite likely that Microsoft will be able to extract licensing fees (eventually) from all the manufacturers. And at $5 per handset produced, that is a staggering sum.
Adding to this revenue stream is yet another lucrative deal for Microsoft. Virtually every smartphone made (including Apple and Google Android, but with the exception of BlackBerry) licenses ActiveSync as the way to both connect to email (via Exchange) and to control the device (e.g., kill, provision). Microsoft controls 80%-85% of the enterprise email market. Without ActiveSync capability, the devices are unable to work in the business world, and what high end smartphone maker wants to be excluded from the corporate world? So licensing fees of $3-$5 per smartphone device for ActiveSync licenses has huge potential.
So what does this mean for Microsoft’s revenue streams?
Currently, all versions of Microsoft powered phones sell about 12M units per year (based on smartphone sales of approximately 400M worldwide estimated in 2011*, and 3% market share for Microsoft). That amounts to $180M best case (at $15 per device). There will be an estimated 140M Android phones (based on 35% market share) and 80M iPhones (based on 20% market share) sold this year worldwide. That amounts to $660M – $1.1B for ActiveSync licensing. And it’s likely that Microsoft will get many (if not all) of the Android vendors to pay royalties, so that’s another potential $700M (at $5 per device). This is not guaranteed, given it has not yet signed licenses with many of the vendors and some vendors in emerging markets may not care if they are infringing. But even if Microsoft only generates half of this amount, it’s a substantial sum. The OS revenues look paltry by comparison to potential IP revenues. And IP doesn’t require the substantial investment in updates and improvements that the OS does, making it even more lucrative.
Further, the smartphone market is likely to at least double over the next 3 years when we expect Microsoft to capture 15% of the smartphone market (primarily with Nokia). So 15% of an 800M device smartphone market = 120M devices and at $15 per device for licensing the OS = $1.8B in revenue. But the number of devices to be sold on Android = 45% of the total or 360M and on Apple = 15% or 120M. And at $8-$10 license fee per Android device and $3-$5 per Apple device, that’s $3.2B – $4.2B in revenue.
And moreover, even though Bing is currently way behind Google search in market share, it is now the favored platform for phone manufacturers distancing themselves from Google’s dominance. We expect Bing to capture 25% of mobile search in 3 years. This represents a huge revenue opportunity for Microsoft, although it’s hard to quantify at this point.
Microsoft can generate a lot of revenue from its deal with Nokia. But even if it doesn’t, the number of licensees of its IP will guarantee Microsoft a sizeable chunk of the mobile revenue stream. And that doesn’t even include the potential for revenues generated by cloud-based and Bing centered services. So Microsoft stands to gain handsomely from mobile, whether it succeeds with its own OS or not. It really can’t lose.
*Market Statistics and Projections (compiled and adapted from various estimates):
Approx Shares: Android = 35%, Apple = 20%, RIM = 15%, Symbian (Primarily Nokia) = 25%, Windows Mobile = 3%, Other = 2%
Shares: Android = 45%, Apple = 15%, RIM = 15%, Windows Phone (Primarily Nokia) = 15%, Other = 10%