Opinion

Felix Salmon

The winner-takes-all smartphone

By Felix Salmon
December 21, 2009

Baruch reckons that Apple has pulled off something very clever indeed: a “phase transition” in the mobile-phone market.

Before Apple came along, he says, phones were a bit like PCs, or blenders: a handful of different manufacturers would fight for market shares which had a tendency to mean-revert. But the iPhone has changed all that: because the iPhone is much more about software than hardware, the market-share characteristics in the smartphone space are going to look much more like the kind of markets dominated by Google or Microsoft or Autonomy or Oracle.

Apple’s achievement has been to shift the focus of the high-end handset market from voice to apps and browsing. Any old hardware would do for voice and SMS… now it is how nicely your phone can email, surf the web, and most of all, how rich and easy is the ecosystem of applications, that determines whether people buy your product or not. That’s software; precisely the type of market where monopolies or duopolies emerge.

You can see why Joseph Menn says that the iPhone app store “might prove to be the most important thing Apple has ever created”. It locks people into an Apple-controlled ecosystem, just like the iTunes Music Store did with iPods.

The app store isn’t perfect: the system for getting apps approved is lengthy, capricious, and bereft of accountability. And for all the obstacles which exist before your app is approved, Apple never seems to unapprove an app if the quality of service suddenly falls off a cliff. (It’s a bit like the ratings agencies in this respect: you have to sweat and pay to get a bond rated in the first place, but once the rating exists, it’s rarely revisited.)

But then again, no one ever said that Windows or Office was perfect, either, and both of them retain their cash-cow monopoly status to this day. The iPhone will always have competition, of course. But will it fight for every percentage point of market share, eventually ceding ground to a better product? Or will it end up dominating a new category — what David Pogue calls “app phones” — in much the same way that Google dominates search?

My feeling is that Baruch is right, and the latter outcome is likely to prevail. Consumers are lazy: outside the hard core of gadget geeks, people don’t spend a lot of time worrying about whether they’ve got the best phone on the market: instead, they’ll just buy an iPhone and be done. Assuming, that is, that Apple drops its exclusivity arrangement with AT&T. Because that really can be a dealbreaker.

Comments
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Apple has created something great, but I don’t think it’s going to be the long term standard. The iPhone SDK (with its one-phone market and App Store limitations) cannot compete with HTML5 in the long term (every phone can support that and no permission from Steve Jobs necessary). Apple will lose to the Web (over time) just as Microsoft is losing (slowly). And that’s ok for Apple because ultimately they’re a hardware company. They’ll make their money selling iPhones long after web-apps become the center of gravity in the development space.

Posted by Anonymous | Report as abusive
 

But…doesn’t Apple risk repeating its mistake in computers (with Google being Microsoft)?

By have the best OS, and the most apps, Apple has built an initial lead in its category. However, it’s stll relatively early in smart-phones and Apple’s OS is only available on Apple phones…meaning yes, there are a group that’s captive but it’s a (relatively) small subsection.

If Google can make Android broadly comparable (note, not better!) and get numerous manufacturers to use it as their standard; it becomes far more attractive for app (i.e. software) writers as the pool of potential users will be far larger. It will also appear better for users, as they can hope from phone to phone…but keep their apps, etc!

Posted by OurManinNYC | Report as abusive
 

Google dominates search and is the main contender in apps. So those were really rather weak arguments from Baruch.
He calls google’s strategy crazy and desperate. Essentially the argument seems to be that what google is doing is crazy because it will piss off the big oligopolistic phone carriers, and nobody should ever dare do that.

There are severla obvious gaps in the argument. First, it omits the fact that T-mobile will be a very happy and willing google/android partner, and more importantly that google may be willing to subsidize unlocked devices — which consumers can then take to work on whatever network the choose. AT&T can’t stop me from using an unlocked GSM Android on their network, not unless they want to lose me as a customer.
And sure Verizon/Motorola may have been “demoralized” that google is helping support the launch of new android phones, but honestly I’m sure they long ago understood that many, many more android devices would soon be hitting the market. .

Another gaping omission is that a very large fraction of iphone users are already essentially using the device most of the time to check their gmail, gcal, google maps and other google services and they are already frustrated that Apple is crippling their phones by refusing to allow Google voice to work (which is itself a game changer).

Yes, absolutely Apple produced a game changer, but the new game will be fought out between Iphone OS and Android OS, and the rules will change several more times yet. Apple apps do still hold a slight first-mover advantage lead, but all the essential apps are already out on Android, and more and more will be coming out tailored to the increasingly diverse set of capabilities of the hardware devices. That lead can and will shrink fast, and once they are playing on a more even playing field, google seems poised to capitalize and profit from the new competition while apple seems only in a position to be hurt.

In the standard analysis of oligopoly the would be entrant stays out b/c the incumbent can threaten to slash prices and drive the entrant’s post-entry profits very low or negative. But google is not the traditional entrant. They earn more the larger and the more competitive is the hardware marketplace. They don’t mind losing money on hardware or even on the sale of apps because ultimately they make money from eyeballs. And they already have most of the eyeballs staring at iphones..

So I really don’t see how you can analyze this market and argue that google is crazy or desperate.

They’re sitting high and pretty. They are at the VERY start and not at a midpoint in their product AN os innovation cycle and they are a mostly open rather than a closed system. If in 2010 they release even a fraction of the mobile innovations they released in 2009, they’ll be a force to be reckoned with.

And by the way, the device in my pocket now is by Apple. I have an Iphone and an Ipod Touch in the household (essentially an Iphone w/o the phone) and lots of money invested in ipod/iphone apps. But trust me I’m switching to a Nexus One the moment it hits the market, and I won’t be looking back. I’ll keep the Ipod’s in use as useful household remotes.

Posted by skeptical | Report as abusive
 

Apple isn’t going to dominate smartphones, because they won’t sell them cheap enough to maintain a dominant share. And they will be happy about that, because they will have the best margins in the industry – they would rather sell 10M devices with $200 gross margin than 100M devices with $50 gross margin, because it will cost so much more to sell 100M devices than 10M that the smaller, more profitable products will yield much better results.

Apple created ecosystems to make their hardware products more attractive and easier to use – they don’t make much, if anything, from itunes or the app store, but it sure drives sales of their hardware. Their phones will always be expensive, but enough people won’t care and will pay for them, because they like the UI and they like the applications that run on it.

Then you have the fools who believe that market share is the top priority. This is an obsolete business paradigm that is still sold like sugar water to big corporations everywhere (but mostly in the US), by business schools that churn out MBAs like cell phones and Wall St. analysts who have never run a company but think they know how do because they have an MBA. This “market share at all cost” mindset almost drove Motorola into oblivion, and they have only been saved (temporarily, at least) by Android (ironically enough from Google). This ideology, which believes that market share permits market leaders to set pricing and therefor guarantee themselves pretty profits, ignores the realities of technology – today’s Razor is tomorrow’s Palm Pilot, and tomorrow is only a year or two. That you sold the most phones this year doesn’t mean you will sell the most when next year’s model comes out.

Baruch, like a lot of people, doesn’t really understand Google. Android and many of Google’s free open source products aren’t designed to generate income. They are part of Google’s defensive strategy, which is to prevent any one company from becoming dominant enough to keep people from using Google services that do generate revenues. Android (and the iphone) has all but killed Windows Mobile, which they needed to do to keep Microsoft from dominating mobile devices like they have the desktop. They probably also wouldn’t want Apple to create a giant walled garden that locked out their applications. I don’t expect Google to make a lot of money, if any at all, from Android or Chrome (the browser or the OS), but they will stop anybody else from controlling those markets, and that makes those projects a great investment for Google.

Apple created ecosystems in the form of software and web services for the hardware they sell, and these ecosystems have made their products more valuable. Google, on the other hand, is creating ecosystems in the form of software and firmware, to make the services they sell more valuable, and ensure their survival. There is competition between the two companies, but they do not have the same goals – Apple is not going to sell advertising, and Google is not going to sell hardware (in spite of the rumors that insist otherwise). Unlike Microsoft, which viewed every company as a competitor, these two companies can co-exist (and thrive) while appearing to compete.

Disclosure: I own shares in Apple stock.

http://www.onthetimes.com

Posted by OnTheTimes | Report as abusive
 

I am totally impressed by what Apple has done. Really, I don’t know another company that has executed the way they have over the last ten years.

But the fact the Google is talking about buying Yelp right now shows how shallow Apple’s victory really is. Other companies will imitate Apple’s hardware – have you seen the HTC Droid Eris? In three short years, the current 3GS 16G functionality will be a $249 unlocked cellphone. Maybe $199.

But Yelp will continue to grow at 30%/year for the next ten years. And everyone will use it, regardless of hardware. I know which asset I would want to own. So does Google.

Posted by Dollared | Report as abusive
 

Lock-in is partly up to the competitors. They can likely host most of the same apps and thus provide updates, syncing, etc. If they do this at full price, people may balk at switching – though the amounts of money sunk into apps are likely less important than the data and that may carryover in a switch to a new provider of the same app. I assume pricing would fall between zero and full for getting apps – and updates – you already have. Some of that would be a decision by the carrier / phone maker to subsidize payments to developers, unless they simply won’t get paid for a new download of an app already owned from a different source – which I hope won’t happen.

A more effective lock-in is hosting your data, which is why banks want you to set up bill pay through them instead of on each website.

Posted by jomiku | Report as abusive
 

To the first two posters – of course if the software writers and hence apps migrate to Android – Apple will be in trouble.
But what are the real chances of that happening?

Right now virtually no one has an Android phone.
Just releasing new phones won’t necessarily drive share, you have to have a compelling product.
Right now the compelling product has a key differentiator – APPS!!!
Android has no apps.
Without massive share gains, no one will develop apps for Android.

It’s a catch 22 and the winner right now is Apple.
As a developer, why on earth would I develop my next great idea for Android on the off chance they have some customers in a couple of years?
There are 60m+ customers RIGHT NOW on the iPhone.

Posted by TinyTim1 | Report as abusive
 

Who is this Baruch anyway? Someone whose opinion neither greatly matters, nor is open to innovation, would apparently be the short answer.

Anybody “ringside” hyping up a match which really hasn’t even begun yet between Apple and Google would not only be sheerly premature and queerly addicted to gossip, but also sensationally immature.

Fixating on the hardware, which is a minute fraction of what is at stake and also constantly changing, is an utter waste of discussion time. The Baruch view is Old-Economy oriented, rather than tuned to the very real possibilities of a New Economy approach. also taking for granted that no alteration in the PDA service industry landscape is likely – whereas a major shake-up in the shape of the market itself is long overdue, as well as highly probable.

So, to hell with Baruch. On with the show – Apple hasn’t revolutionized the smartphone sector nearly as much as it could have or ought to.

The Apple “synch” limitations are almost as bestial as the machinations of its billing partners at ATT. Users cannot properly use their iPhones or iPods as devices for real data handling. Users pay through the nose for “apps” that should by rights be billed per-use and not as though they were possessions, which they are not. The dead-end API coding structure of iPhone amounts to peonage of the developers in indentureship to Apple and is fundamentally unworthy of trade-law recognition.

End-users should never be chained to a carrier monopoly, as they are with iPhone. Most ridiculously, what’s the use of a camera-phone of any shape or form, one without a flash at that, when you can barely send MMS across the (ATT) network? And I haven’t even saddled my pony yet…

Apple began failing its “early adopters” before the iPhone market had come close to any acceptable form of maturity. Part of the failure is ATT, part of the failure is sales(un)manly pandering to the Outlook Express user market, yet another large part being the lofty Apple attitude that users will only ever want to “synch” a la Apple and not use a la carte the features and data items they’re likely to expect from their smartphones the moment they walk away from their static desk-side computers. It should never be about “that’s the way iPhone does it” so much as, “can I do it, yes or no?” with the honest answer on iPhone too often being “no, you can’t”. In the cold light of day, the lifestyle “convenience” of an iPhone simply isn’t worth a fraction of what it winds up costing.

Apple synching is restrictive, Apple’s MobileMe is inhibited and lame – more so than iDisk which it replaced – the iPhone user network isn’t nearly as stable or territorially uniform as ATT claims in its self-promotion, and the international iPhone user is in even worse shape than those who stay at home, that much closer to a land-line.

The fat lady hasn’t even got her lyrics onto iTunes yet, so there’s plenty of room for Google to clean up where Apple leaves off by not trying to bleed consumers dry at every turn, by not trying to make a quick buck when there are many more Billions to be earned in the longer run by satisfying modern communications market requirements with dynamic user customization and an open-ended library of pay-as-you-go services at fair market pricing.

If there’s a victory in this match, or a match at all, it lies somewhere ahead. In the long run, what works for consumers is what works best for developers too. Meanwhile, Apple fully satisfies neither.

The real revolution has yet to come. Open source and unlocked networking is the way of the future, with or without Apple and ATT in attendance.

Posted by HBC | Report as abusive
 

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