27 December 2010 by Published in: iphone, rants 1 comment

There’s been a lot of talk this week about $100 Android phones:

What’s most interesting is that unless Apple (AAPL) has a plan to keep up, their iPhone, once one of the only usable smartphone games in town, may wind up back where most Apple products are slotted– at the top of the market, affordable only to those willing and able to pay a premium for Steve Jobs’ aesthetic sensibilities.

Gruber’s rebuttal piece gets a lot of things right.  He’s right when he says that phone purchases are often based on emotion and also right that $100 phones are likely not to have much of an impact on Apple’s bottom line.  But he’s missing two super-important things.

The first boat he’s missed is that–unless you are Google or Apple–whether iOS or Android “wins” for some definition of “win” (whether marketshare, total dollars, some contrived idea of “upper-end” market, apps downloaded) doesn’t matter one jot.  This is not VHS vs. Betamax where only one can win.  Everybody can still keep their phones whether Apple has 5% marketshare or Apple has 50% marketshare.

Now if you are a developer, it does matter whether or not you can make money on the platform.  It matters terribly.  But this question is almost totally orthogonal to which platform “wins”.  In fact, my experience in the market tells me that the platform with the least marketshare will inevitably be more profitable.  This seems counterintuitive if you are not intimately involved in the finances of the market, so I’m going to do my best to explain it; but even if my explanation doesn’t make sense, take my word for it as an app developer:  today iOS is 95% of the time more profitable than Android for the same app.

First of all, you have the problem that purchasing anything in the Android app store is a terrible experience.  I’m not a professional Android developer, but my very limited understanding of the situation is that the user experience is poor, the market is not available in all countries or on all carriers, and there is no way to do an in-app purchase which tends to drive a lot of iOS revenue.  These are all serious problems, but they are solvable problems.  In fact, let’s assume they are all solved!  There still remain unsolveable problems.

Suppose for a minute that the Android purchase system was awesome and way better than iOS.  Android still has an impossible hill to climb.  Why?  Self-selection.

When you rent an apartment, you do not pick the absolute cheapest apartment.  You do not even pick the best value.   Suppose you have two apartments, A, and B.  A and B have an identical floor plan.  They have identical appliances, paint, molding, repair facilities, etc.  But B is 10% more expensive than A.  It might surprise you to learn that, for many people, B makes much more sense to rent.  (what you say!!!?) It’s a simple matter of self-selection.  The people who live in apartment complex B are less sensitive to price.  You will have better-quality neighbors.  Your stuff is less likely to get stolen.  It will be safer.  So it makes a great deal of sense to pay a little more than you have to in rent.

Now when you are buying a phone, the higher-income status of other people who own the phone may not be very important to you.  But if you are a developer, selling your app to higher-income customers had better matter to you.  People who have purchased an expensive phone have self-selected.  They have much higher disposable incomes and are much more likely to purchase an app.  Therefore, it makes much more sense to develop for a more expensive platform than for a cheaper one, even if they have exactly the same magically great purchase experience and all the rest.  This is why, on iOS, $10 is a moderately expensive app, whereas on Android, $.99 is considered an expensive app.  It’s a totally different mindset.

However, there’s a second, deeper, degree of self-selection, that is even more counterintuitive than the first one.  It goes like this:  Given that you have spent a lot of money on something, that something is important to you.  I am not making any claim as to which comes first: the money or the importance.  It seems to me that with certain things, like fitness clubs and university tuition, you spend money so that something will become important to you.  If you are spending $30/month to join a fitness club, you can use that fact to guilt yourself into going.  With other things, like engagement rings, the thing is important to you to begin with, and so you spend money on it.  iPhones seem to me to be more like the latter than the former, but for some people it could be the other way.  The point is that people who buy more expensive phones (iPhones) care about them more, on average, than people who buy cheaper Android phones care about their cheap phones.

There’s a second way to see the same thing:  look at how people buy things that don’t matter to them.  My mom does not care one whit about electronic devices, whether TVs, cameras, phones, etc.  When she goes to buy a TV, the only factor she cares about is price and perhaps some overrated spec (look, it’s 19-inch!).  Doesn’t matter if the color reproduction is any good, the company is reputable, the viewing angle is any good, it has the right number of inputs, it has a reliable service record, it is easy to set up.  This Christmas she went from store to store looking for the largest TV for the smallest amount of money.  Turns out that it’s smaller than the existing TV (which had a 1:1 aspect ratio instead of 16:9, tricky manufacturers and your diagonal measurements!), and that the only way to hook it into the cable box is in standard-definition, and that it’s a no-name Korean company, and that the picture looks awful, but that stuff barely matters to her.  It’s the same story for still and video cameras, computers, accessories, etc.  Buy something cheap with a nice-sounding spec on the box and don’t think too much about it.

The point of the anecdote is not to bash my mom–not everybody likes to research their electronics purchases.  (I don’t like to research my furniture purchases.)  The point is to say that, if you are selling TV accessories, HD cable service, Blu-Ray movies, Apple TV-like set-top boxes, or anything that’s high-end or even medium-end and related to TVs, the very last thing you want is a customer like my mom.  She doesn’t want Blu-Ray, DVD is just fine.  She doesn’t want HD cable, basic cable is just fine.

My mom is in the market for an Android phone.  Any day now, it’s going to happen:  there will be a Black Friday sale, it will be cheap, it will have a slightly larger screen than the iPhone, and for the next year she will complain about the build quality and the ease-of-use bitterly.  If she buys an Android app (a big if), it will be the absolute cheapest one, it will be some buggy thing written by unprofessional people, and she will call support and complain for an hour about the $0.99 app she bought to a call center in India.

Alarm bells should be going off.  This is not the customer you want!  The price is too low, the support burden is too high, the customer has limited experience on the platform, they have no interest in software quality, they are unable to evaluate the difference between you and your competitors meaningfully!  If you are a developer, you should be running screaming from this type of customer, and as Android handsets become cheaper and cheaper, you get more and more of this type of customer.

The end result is that, today, with slightly-cheaper Android handsets, it is moderately more difficult to extract revenue from Android than from iOS, guaranteed.  If you have a smash hit, sometimes you can do well from advertising on Android, but you cannot do well on advertising if you have a niche application, and nobody is going to pay $5/license on Android to fund your niche application development (whereas they will on iOS–it is completely possible to have niche apps that bring in a few hundred dollars a month every month for years).  This is why on Android everything is either a hit and advertising-based or monetized via some kind of service outside the platform (Evernote, Dropbox) and why things like Omnifocus or Omnigraffle (high-quality, expensive niche apps) don’t exist on Android.  The customers just don’t exist.

That’s today.  Let’s run with the trend.  Suppose that Android handset costs go to zero, and they fix the awful app market fragmentation and they introduce in-app purchase and push notifications and Game Center and all the great Apple services (which I think is impossible unless Google starts charging a lot more for Android), better native code support, a more consistent hardware baseline, consistent GPUs, and all the other technical things people trot out as Apple’s upper-hand.  If you’re an Android developer, what you’re going to have as a result is a lot of uneducated, whiny, price-sensitive customers with an enormous support burden and a bunch of cheap, finicky devices to support.  Basically, a nightmare scenario.

Apple has never been about mass-market products.  It just so happened with iPods (and now, with iOS devices) that a strong early lead combined with some strongarm vendor lock-in tactics turned into a largish marketshare.  But Apple has never been afraid to send all the bad customers to its competitors, whether with Macs, with iPods, or with iOS devices.  Even before iPods caught on, people were saying “Apple doesn’t sell very many computers, but it makes a lot of money” and this has always and forever been its strategy: make money, not units.  I don’t understand all the doom-and-gloom journalists coming out of the woodwork saying Android marketshare spells the end for Apple: quite the opposite, it spells the end for Android, in the same way that ThinkPad marketshare spelled the end for the ThinkPad, in the same way that Dell marketshare spelled the end for Dell.  And if not the end, then irrelevance.

One last thing just so we’re clear:  I’m not saying that Apple isn’t interested in remaining competitive on price.  I could easily see Apple being able to bring down the unsubsidized prices of tomorrow down to the subsidized prices of today.  That is, the top-of-the-line iPhone will still cost $400, but you no longer have to sign any contract to get it.  Entry-level iPhones could get down to $200 or even $100.  The cost of the hardware doesn’t matter to Apple so much as the price people pay.  It’s a psychological thing.  Laying down 2-4 greenbacks is about the right emotional commitment for a good customer to make, it means a high-status customer with a low support burden who cares about the right things.  Let me repeat this:  contract or no-contract doesn’t matter to Apple in the long run, but laying down a couple of hundred bucks does.  This is why, as the cost of hardware goes down, the carriers are getting cozier with Android: Apple’s marital bed with the carriers will last only until the hardware cost drops another $200 and then it can charge customers the same price outright.  Android wants to ride the subsidy all the way to free.

And this is another counterintuitive result:  a lot of the people who are really into Android like it because of unsubsidized phones and lack of vendor lock-in.  That is totally fair, for the record.  I’m also a big fan of unsubsidized phones.  But since Apple’s track record over its entire history has been 99% unsubsidized hardware, and all the Android handset manufacturer’s track records have been totally the opposite, I think in the long run Apple has a better shot at toppling this trend than the people who make Android handsets.  The contract thing is a big anomaly for Apple; you’ll notice that they tried the first time not to do it at all, against all sound advice.  Steve Jobs had balls of steel, but the phone was just too damn expensive.  I’m certain they will try it again once they get the cost down to $200-400.  Whereas I doubt HTC or Motorola is going to be interested in selling a phone for $200 when they could sell the same phone for free-with-contract through a carrier.  Except for the phones Google manufactures itself (which is barely a blip on the radar), I don’t think Android is going to have much impact on the subsidy equation in the long run.

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  1. oioioi
    Mon 03rd Jan 2011 at 12:22 am

    The author is too biased to offer any meaningful insights. He might have one of two points that are not completely off, but most of this article is simply wrong, and goes against what we already know about the business. Let’s face it, we’ve already been here before, and we all know how this is going to turn out.

    The main market (and the big money) is where the users are. To claim anthing else is ridiculous. It’s easier to make money creating software for Windows than it is for the Mac. That’s why there are at least ten times more program developers for the Windows platform. Apple is on a run right now (a run that started with the ipod, which came at a point when the company was about to close down the shop altogher; contrary to the authors fantasies, Apple was NOT making a lot of money 10-12 years ago…).

    If it’s all about developing for small platforms with high income users, the author should start making apps for the Blackberry. The average income of the BB user is way above your typical college student iphone user. Moreover, the author seems to think that ALL Android phones will be $100 phones. That’s just plain stupid. Just because you CAN buy a Windows computer for 1/3 of the price of a Mac doesn’t mean that there are no high-end PCs out there. Just as you can buy yourself a high-spec Alienware PC laptop for twice the price of a Mac, you will still be able to buy high-spec $400 Android phones in the future. That there will be low priced alternatives will not affect the high-end Android market any more than Hyundai car sales are affecting BMW’s high-end market share. The vast majority of the world’s population use PC (rich AND poor) and the vast majority of the population is also likely to eventually end up with Android (rich AND poor).

    It’s all repeating itself. Like the old PPC Macs, the iphone is relatively low-spec (compare the ip4 specs with the new Nokias for example), but it does run a great OS. There is no doubt that Apple makes a better operationg system than Android, just as MacOS 7.1 was a much better OS than Windows 3.1 back in 1990s. However, the high price for ONE rather lame phone with no options will be the end of the platform. Some people want a qwerty keyboard, others may want a better camera, dual SIM, a replacable battery, etc. People have different needs, but there is only one iphone.

    Take this example: the future market for smart phones is in Asia. How many iphones do you see there? The problem is that all the restrictions imposed by Apple on the iphone makes the excellent OS worthless to the average Asian user. The Japanese, Koreans and the Chinese have no interest in the iphone because they already make much better phones themselves, and they need to be able to put their own software on their phones, or nobody will buy them (e.g. Asian character recognition). The iphone works great in the US (which has always been the company’s main market), but without a more global vision the platform will not be able to compete with the more open Android platform. In the end, the iphone apps will grow old, and the users will grow bored, and the iphone will become the Apple Newton. A solid but somewhat boring product that very few people will use.

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