Android: Winning the Smartphone Battle, But Losing the Mobile OS War

Earlier this week I received a long-awaited text message from Verizon Wireless notifying me of a credit I had available towards a new phone if I renewed my contract for another two years. After 9 ½ years of BlackBerry devices (my first BlackBerry actually ran on the Mobitex network, for the old-school mobile-types out there) I’m ready for a change. With a relatively paltry selection of native apps and a mobile web surfing experience reminiscent of dial-up internet access circa 2000 the question I’m left with is which smartphone do I go with- one from Android or Apple?

With the Android-based Motorola Bionic delayed until the second half of the year and rumors of the iPhone 5 shipping anywhere between September and the next year, the immediate decision seems to come down to whether I should get the 4G LTE network-enabled HTC Thunderbolt or iPhone 4. But is this the real question I should be asking myself?

The speed of Android’s rise to prominence in the U.S. smartphone market has been nothing short of amazing, growing from a 9% market share in February 2010 to 33% in February 2011, vaulting Android’s operating system from 4th to 1st place in the process according to comScore. Over that same period of time Apple’s U.S. smartphone market share has stayed flat at 25%. This had led to people like venture capitalist Fred Wilson of Union Square Ventures to suggest that developers should build for the Android operating system first.

What Fred’s analysis, this market share data and my question fail to address though is the broader market dynamics of mobile. The battle everyone is focusing on is Android versus iOS smartphones- and why not? With 70% of the U.S. still using feature phones, according to the same comScore data, the market opportunity for smartphones remains massive. Even so, the war between Apple and Google is actually taking place at a much broader level, as decisions made by consumers like myself and developers alike will decide who the eventual market leader will be for the entire mobile operating system (OS) market- not just smartphones.

While Android might be winning the smartphone market share battle, it’s at the mobile OS level that iOS holds the advantage over Android. Google’s primary market for distributing its mobile OS is the smartphone via HTC, Motorola, Samsung and other handset manufacturers. Apple on the other hand distributes iOS across three markets through its own devices- handheld entertainment devices (via the iPod Touch), smartphones (iPhone) and tablets (iPad). Because of this Apple’s outlook is much broader in scope- to get its other iOS devices into the hands of the 80% of the market (70% of the feature phone users in the U.S. plus the 1/3rd of the smartphone market not on Android or Apple smartphone) not using an Android or iOS smartphone. By getting consumers to purchase an iPad or iPod Touch, Apple can create a barrier to entry for Google through high switching costs.

With every app install, especially paid ones and those that can be used across device types, consumers increase their switching costs for leaving Apple’s ecosystem. So when the time comes for iPad and iPod owners to upgrade their mobile phones, the iPhone is the natural choice since these users are already familiar with Apple’s App Store and iOS user experience. With the iPod’s market share pegged at 70% of the digital music market last year according to NPD and iPad’s at 85% of the tablet market in 2010 according to ABI Research, Apple has a huge advantage over Google in getting consumers onto its mobile OS platform through these types of devices. As iPod sales begin to decline though, the growth in iPad sales will be the key complimentary product in Apple’s effort to gain market share in the smartphone market.

According to a different study released by comScore earlier this week, there is evidence to corroborate iOS’ network effect for Apple in the U.S. iOS’ reach is 59% greater than that of Android when you combine iPad, iPhone and iPod users. This translates into approximately 38 million iOS users overall in the U.S. versus nearly 24 million Android users. More importantly though, in looking at iPad sales specifically, BlackBerry users account for the second highest percentage of iPad owners, behind iPhone customers, followed closely by Samsung and LG. This represents a great opportunity for Apple to convert these users into iPhone customers once their contracts are up or they ready to switch to an advanced smartphone. Update: comScore just released a similar study for the European market showing Apple’s reach being 116% greater than Android in France, Germany, Italy Spain and the UK- albeit on a smaller user base (29 million consumers) than in the U.S. As it relates to iPad adoption, Nokia users closely follow iPhone users in iPad ownership, providing Apple with a huge opportunity to take market share from the largest mobile handset manufacturer in the world.

So how can Android better compete with iOS at the mobile OS level?

  • First, Google needs to nail down agreements with the music industry’s four main record labels in order to launch its cloud-based music competitor to iTunes. This will allow manufacturers to create devices that can finally compete with the iPod and eliminate the biggest feature advantage of the iOS platform.
  • Second, Android tablets need to be synched with the smartphone’s OS platform. The Motorola XOOM, which launched with much fanfare towards the end of February as the first real competitive threat to the iPad (after winning Best of Show at CES in January), seems to have come up short. Sales of the tablet have been estimated at 100,000 devices in its first 5 weeks on the market compared to the iPad which sold 300,000 devices its very first day and nearly 5 million devices in the just announced second quarter. By running a newer and completely different version of Android than its smartphone siblings (Honeycomb 3.0 versus Android 2.0 thru 2.3.3) the device hasn’t been able to leverage apps from the smartphone Android Marketplace. According to Apple’s COO Tim Cook a fragmented ecosystem where Android tablets have less than 100 apps to choose from while iPad customers have 65,000. Without a cohesive OS platform across device types, Android will lack the switching costs afforded to Apple’s OS ecosystem.

For developers, the 189 million cumulative iOS devices sold through the end of March 2011 represents a huge market opportunity. Add in ease of monetization and payment mechanisms in addition to a formal app discovery process that is still lacking in Android’s marketplace, you can see why companies like Color and Instagram chose to launch in the iOS App Store first and why there continues to be more apps available for iOS than Android even though Apple has a more stringent app vetting process.

As for myself, the decision was easy once I took a step back and looked at the broader mobile OS ecosystem options. Even though I already owned an iPod Touch, I’ve decided to go with iOS primarily because I was planning on picking up a new iPad in the first place. So by default, the iPhone it is for me. With three different types of devices being tied to iOS when it’s all said and done I will be Apple’s ideal customer. The only question I have left? Do I wait for the white iPhone.

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Apple’s Game of “Heads I Win, Tails You Lose”

Remember as kids when you were given the know-how to always win at coin-flips? By uttering those 6 simple words “heads I win, tails you lose” you were able to set-up the rules of the game in a manner that seemed fair, in that it provided an outcome for both participants, but always resulted in you being the winner of the coin-flip and your opponent the loser (until of course they realized what was going on).

This is essentially the game Apple is playing in the tablet market right now. The company, which launched the industry with the unveiling of the iPad last April, has yet to see a truly competitive offering after selling 15 million iPad units in 2010. The only notable rival last year was Samsung’s Galaxy Tab. This Android-based tablet, which launched in November at a slightly lower price point than the iPad but at the expense of comparable features (smaller touchscreen display and less internal memory though it does include front and rear-facing cameras), has not met sales expectations.

The Motorola Xoom, which gets released today, is expected to be the first viable alternative to the iPad after winning Best of Show at CES in January. This device comes equipped with Android’s tablet-specific Honeycomb operating system and hardware specs to match current versions of the iPad, with the addition of memory expansion capabilities and front and rear-facing cameras, but accomplishes this at the expense of price (higher compared to iPads) and app offering (a handful versus the iPad’s 60,000).

In both of these instances, a trade-off between product and price had to be made by the manufacturer. To compete on price, Samsung had to sacrifice on product (i.e. screen size and memory). To compete on product, Motorola had to give on price (i.e. be more expensive). Throw in research that shows the iPad has 90% awareness among consumers, and you can see why tablet manufacturers must beat Apple on both product and price to beat the iPad.

Heads Apple wins, tails tablet manufacturers lose.

While Apple competitors might be able to match, or even exceed the design and hardware capabilities of the iPad at some point in the future, doing so at a lower price point would be challenging. Apple understands their strategic price advantage and is continuously looking to expand on it.

Case in point- based on iSuppli’s research, the single most expensive component in the iPad’s manufacturing process is the touchscreen display. So it’s no surprise that Apple revealed on its most recent earnings call that it has made long-term financial commitments of $3.9 billion dollars with three suppliers believed to be display providers. If correct, this means Apple would control 60% of the global touch panel capacity according to Taiwanese industry website DigitTimes. Controlling this amount of supply would have two major effects on the tablet market as (1) it would lock in favorable pricing and predictable supply for Apple going forward in manufacturing future versions of the iPad and (2) create supply constraints and pricing pressure on tablet manufacturers.

Once again, heads Apple wins, tails tablet manufacturers lose.

The concept of vertical integration is nothing new to Apple which acquired Intrinsity last year, a semiconductor chip design firm responsible for developing the iPad’s original A4 processor, in an effort to bring the skills and development costs in-house. This became another component cost advantage over the Motorola Xoom which leverages NVIDIA’s Tegra 2 for its processor.

With Apple’s event next week expected to showcase the next iteration of the iPad, which should once again place the product’s feature set ahead of its competitors, the question to Android, Tablet OS and WebOS tablet makers is: want to flip again?

Photo credit: Algie Moncrief/Flickr