In a recent New York Times article, Kathryn Huberty, a Morgan Stanley analyst was quoted suggesting that Apple’s iPhone is the key catalyst for an important new technology trend. “Applications make the smartphone trend a revolutionary trend – one we haven’t seen in consumer technology for many years.” This argument rings true in that the “after iPhone” smartphone market is dramatically more interesting than the “pre-iPhone” smartphone market. Later, Ms. Huberty made an even bolder statement, “The iPhone is something different. It’s changing our behavior…The game that Apple is playing is to become the Microsoft of the smartphone market.” Or perhaps not.
Many analysts and bloggers have worked hard to position “iPhone vs. Android” as the title fight of the decade in the technology industry. It is an easy comparison to want to make. Both phones use rich microprocessors, are graphical, both have GPS and Wifi. They both run a sophisticated operating system, and they both give you access to thousands and thousands of third party applications. In most practical ways, they seem similar. However, there is one fundamental difference – business model choice.
When Apple launched the iPhone, it was able to secure an unprecedentedly strong business relationship with AT&T. Not only did Apple want control over the user interface, something carriers had been extremely reluctant to cede, it also wanted previously unrealized economics for a handset or OS designer. Apple insisted on upfront revenue dollars as well as a cut of the cellular service stream. AT&T, desperate for a win vs. Verizon, acquiesced. The product was launched to rave reviews from analysts and consumers alike. It really was a brand new market and a brand new product. As noted earlier, we only “thought” we had seen smartphones before the iPhone. This market, as Ms. Huberty notes, looks like one that is Apple’s to lose.
With the iPhone’s massive success, it would be hard in retrospect to challenge the thinking behind Apple’s business model choice. After all, it will always be true that Apple was the company that “cracked open” the famed Walled Garden of carrier-land. They also did it with style, demanding golden economics as it disrupted a previously obstinate industry. And although AT&T may have become “comfortable” with its choices as a result of the iPhone’s success, other carriers suddenly had an “iPhone problem.” Enter Google.
If Apple’s business model is aggressive relative to the carriers, in contrast Google’s seems unrealistically accommodating. You want to control the user interface? No problem. Want access to the code? We’ll make it open source. What kind of economics do we want? Nothing at all. What the hell, we will pay you! That’s right. Google will give the carrier ad splits that result from implementing the Google search box on any Android phone. FBR Capital Markets suggests that Google is taking this idea one step further in its November 24, 2009 report titled Implications of a Potential Share Shift to Android-Based Wireless Devices. “Recent support for Android-based devices appears to be correlated with significant up-front financial incventives paid by Google to both carriuer and handset vendors.” FBR goes on to suggest that these incentives may be as high as $25-50 per device. This is simply an offer that no carrier can refuse, particularly when U.S. carriers are currently in the habit of paying $50-150 per handset sold in subsidies.
While Apple may have opened the proverbial Walled Garden, it is Google, with its aggressive Android offering, that aims to obliterate it. Make no mistake about it; Apple was the pioneer with the amazing revolutionary product. Also, with no iPhone, there is no Android. This is not to say that Android copied iPhone, but rather the impetus to adopt and trust Google’s Android offering was driven by a market dynamic that resulted directly from the iPhone’s success. Without the iPhone, it is possible that most carriers might have opted not to use Google’s OS solely for the reason that letting a powerful company like Google in the front door can be a risky strategic bet.
All of this is now history. The iPhone does exist, and it is wildly popular. There are an estimated 55 million iPhones in use around the world. Despite this remarkable success, history will also show that Apple intentionally chose a business model with plenty of room for disruption underneath its pricing structure. It also chose a single carrier as a partner, which resultantly threatened others. Then Google built a product and a strategy that allayed the carrier’s relative fears. Google gave them what they wanted, and then even gave them money. It could afford to do this because Google aims solely to protect the great business they already have in advertising, not to make money directly from the product (HW or SW in this case). Microsoft Windows, Internet Explorer, and Mozilla’s Firefox represent choke points on the personal computer whereby Google could lose search share, or at least be forced to pay a toll. In mobile, they see a chance to potentially eliminate the toll-takers.
With a business model that allows for much broader distribution and price points that are well beneath the iPhone, Google’s Android won’t compete directly with the iPhone. For the iPhone loyalist, like Stewart Alsop who railed against Android, Android is simply not an option. This price insensitive user demands the very best experience they can possibly have and this is still the iPhone. Users won’t switch in mass from the iPhone to the Android. It’s the other 3.95 billion cell phone users that are highly likely to consider Android a step up from their current feature phone. The Android strategy results in phones at much lower prices with much more diversity which will hit a braoder set of demographics. Apple can and will quintuple its current market share and still have a small portion of the overall cell phone market.
This is why the two products do not compete head to head. With its super aggressive model, Android will be the choice of the masses, and with its sleek design and non-compromising price point, Apple will rule the high end. Many have suggested that Apple is perfectly happy with its high-margin spot at the top of the food chain. They are doing exceptionally well with that position in the personal computer market – in fact, they are currently gaining share at an accelerating pace. So no need to worry about Apple, they are doing just fine (as their stock price suggests). They are just not currently executing a model to become the “Microsoft” of the smartphone market.
Some will argue that the best product will win the market and that Apple will still dominate the smartphone market. The history of the personal computer market is no omen for this thesis. If you think about it, the people that know this better than anyone are the exact Apple loyalists who have been frustrated for years at Apple’s lack of dominance in the PC market. Disruptive business strategies can and have trumped better products. And with no change to the current market, the Android leveraged position in the market could result in staggering unit share gains. This is not to say that the Google Android is better than or as good as the Apple iPhone. The key point is that it does not have to be. It only needs to be dramatically better than the current feature phone. Which it is.
While Apple will be fine as Android gains steam, the amount of shrapnel flying around this new marketplace is immense, so expect innocent bystanders to be compromised. Recognize that as Google’s play here is as much defense as offense, they have less of a need to “make a profit,” at least right out of the gate. This type of attitude always makes for a messy competitor. Also, because of the sheer breadth of the effort in terms of number of handset makers and number of carriers, Android will be marketed extremely aggressively. Lastly, the early application leaders are beginning to believe it’s a two horse race. Currently the iPhone is priority number one. That said, increasingly these application vendors are seeing Android as the primary second platform to support. Others are falling further and further behind.
Also, Android doesn’t appear to be an OS that stops at the smartphone market. Expect much experimentation with a variety of hardware manufactures and almost any and every embedded device market from navigation devices to e-readers to tablets and beyond. Android gives every Korean, Taiwanese, and Chinese manufacture whoever wanted to approach these markets a huge head-start. Additionally, the more of these vendors that build on Android, the more Android will evolve for the better. The number of applications will increase, and the problems will get worked out. Just like Microsoft worked its way from Windows to Windows 3 and eventually to Windows 7, Android will improve with time as well.
With its disruptive and leveraged strategy, it is Google that is attempting to be the Microsoft of the smartphone market. Perhaps ironically, Apple is well positioned to be the “Apple” of the smartphone market.
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