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Android's Pursuit of the Biggest Losers

The mobile phone market is intertwined with the telecommunications industry which is vast and there are numerous competitors which are much more dynamic and better capitalized than the moribund PC or music player vendors. It’s also a regulated and fragmented global market with 1.2 billion units and 5 billion consumers—far greater than any of the markets Apple played in for its first 30 years.

Nevertheless, the iPhone has had a huge impact on the industry. To show just how much of an impact, I dove in and pulled over 500 data points on three years’ financial performance of seven competitors responsible for 80 percent of units being shipped today. The time frame covers the iPhone’s participation in the market so it allows for “before-and-after” comparisons.

I divided the findings into five articles:

  1. Unit Volumes. The evolution of market share.
  2. Revenues. The shift in where dollars are spent.
  3. Selling prices. The tale of ASP erosion.
  4. Operating margin. Profitability ratios over time.

Now I turn my attention to draw a bottom line from all the data above, namely the operating earnings (EBIT or Earnings before Interest and Taxation).

The first chart shows the EBIT from the top seven vendors of mobile phones since the quarter when the iPhone launched. I annotated Nokia and Apple’s bars to give perspective.

The total available profits in the industry dipped to a bit under $4 billion at the trough of the recession, and have recovered to nearly $6 billion in the holiday quarter last year. However, not all vendors are profitable. As you might expect from looking at the operating margins, Motorola and Sony Ericsson have been generating losses for most of this time period. They have both reached profitability in the last quarter, though at very low levels and after having lost a large part of their sales. LG has turned negative this past quarter after being a modest earner for some time. Samsung has maintained a fairly even consistency in its profit capture, though with its expanding market share, it seems to have come at the cost of pricing.

Finally, looking at the pure smartphone vendors RIM and Apple, the picture is nothing short of astonishing. This before-and-after share-of-available-profit chart shows that the two entrants went from about 7% profit share to 65% in three years.

Apple in particular is capturing about half of the available profits with three percent of the units. It dwarfs all the other vendors, more than double the nearest (Nokia). All that in three years and with the added burdens of only three models, a recession and limited distribution.

What does it all mean?

Here are my conclusions, enumerated:

  1. The lack of a real response. The recurring theme in this series of articles has been that giant multinational incumbents in a vast and rapidly growing industry, enjoying all the advantages that size and incumbency, have had their profits taken from them. And they don’t seem to have put up much of a fight.
  2. It’s all wealth transfer. Note the total amount of profit available has not increased markedly; this is not about incumbents growing the pie. Two thirds of what should have rightly been theirs moved from the incumbent shareholders to the entrant shareholders.
  3. Speed. This shift of profit occurred over an unprecedentedly short period of time.  Three years is no more than two product cycles in the industry and it’s an order of magnitude faster than what happened historically to other industries.
  4. Disruption is the diagnosis here. The incumbents were caught in the headlights. Disruptive innovation leads to asymmetric competition and this is what we just witnessed. History has shown that the shift of profits is usually the last stage of disruption and is usually irreversible because the change in business models cannot happen at the rate of change of profit transfer.

Which leads me to one final point.

When analyzing the potential for challengers to the new winners, the most cited is Android. Can Android affect this redistribution of profit once again? And to whom?

If Android is to become the dominant platform, does it depend on the success of its licensees? Who are these licensees and what are the chances that they will be able to align their businesses to what Android offers (a new revenue model based on services and advertising).

One problem I see is that Google is making a bet on those same vendors who are now squeezed in the middle of that last pie chart: Samsung, LG, Motorola and Sony Ericsson. Nokia, Apple and RIM will certainly not take the OS over what they already have as it dilutes their differentiation and margins. That means Android is aligned with the biggest losers in the industry.

So how likely are these disrupted ex-giants to recover and take Android forward? My bet: slim to none. Android does not offer more than a lifeline. It is not a foundation for long-term profitability as it presumes the profits accrue to the network and possibly to Google. Profit evaporation out of devices to Google may be a possibility at some time in the future, but only if the devices don’t need too much attention to remain competitive. But because they’re still not good enough (and they won’t be for years to come), it’s certain that attention to detail is what will be most important to stay abreast of Apple.[1]

So here we have the real challenge to Android:  partnership with defeated incumbents whose ability to build profitable and differentiated products is hamstrung by the licensing model and whose incentives to move up the steep trajectory of necessary improvements are limited.

In other words, Android’s licensees won’t have the profits or the motivation to spend on R&D so as to make exceptionally competitive products at a time when being competitive is what matters most.

[1]: I would argue the same lack of symmetry with licensed software vendor Microsoft is what led the the failure of the same incumbents to make a dent in the industry with Windows Mobile [2003 to 2010].

  • Paul

    I'm just wondering where HTC fits in all of this. They're the biggest Android OEM, but you haven't mentioned them at all.

    • http://www.asymco.com asymco

      I've wanted to keep HTC with the other seven companies but it's very difficult to get full financial data on them. Remember that my intention is to discuss five factors over a three year period:

      1. units sold
      2. average price for those units
      3. total sales (1 * 2)
      4. operating margin
      5. EBIT (3 * 4)

      HTC analysis problems begin with the fact that most analyst companies do not count the units that HTC produces that are branded by another company. HTC sells products with "white labels" to be re-branded. This leads to problems with ASP: Those units are then valued differently because the brand on the box receives compensation for some of the sales and support costs, so HTC does not get full end-user value nor bear all the costs (i.e. beyond R&D).

      These issues with branding have been subsiding as the company turns more toward its own brand (and has recently eliminated fully owned brands like Dopod which used to be HTC China.)

      However enough holes exist in the historic record that I did not feel comfortable with having a complete picture.

      I do recognize that HTC is a pioneer in Android (and was in the case of Windows Mobile and will be with Windows Phone) but on the other hand its hybrid OEM/ODM model does not lead to a consistent performance in the market. Their fortunes have waxed and waned over the years.

      http://www.google.com/finance?chdnp=0&chdd=1&chds

    • http://www.asymco.com asymco

      I should also add that there are many other smartphone and phone vendors. They are "others" and are responsible for about 20 percent of the unit market. Their profitability is murky and, except for HTC, they tend to come and go. For a good list of all vendors in the smartphone space check out http://www.pdadb.net. Their database lists over 2500 smartphones (the vast majority being Windows Mobile at over 1700–talk about a droid army).

    • http://www.asymco.com asymco

      Another thought on HTC: their dependence on Windows Mobile made their move to Android the most desperate of all. Unlike the larger OEMs they are completely dependent on a smartphone OS vendor and when WinMo was showing signs of crisis in 2007, they were the first to flee to Android (think of why they would risk the wrath of Microsoft for something so fragile as Android in '07).

      Nevertheless, my definition of "loser" in this article is a company that lost a significant part of its core business so by that definition HTC is not one of them. It's a well run company with a clear vision. Their SenseUI development shows that they are sensitive to the dependency on outside OS vendors and I would not be surprised if they launched their own OS soon.

      • Rob

        The author is arguing that Android faces an uphill battle in challenging Apple's dominance in the smartphone O/S space because it must rely on the success of smaller, less successful rivals who lack the resources or motivation to compete. A couple points:

        1) Android's success is OBVIOUSLY tied to the success of the smaller incumbents and new entrants. It cannot be any other way given the current market structure (one exception is if NOK were to flip).
        2) New entrants will play an increasingly important role in the smartphone market (e.g., Dell, Acer, etc.). The smartphone market is following the trajectory of the PC market as specialization develops around the key inputs – hardware (QCOM, INTC/IFX, STM, etc.) & software (Android, Win Mobile, etc.). Making a smartphone will look more and more like box making as the sophistication and ease of implementation of the underlying components (hardware, software) improves. This will pressure the overall profitability of all OEMs as margins shrink w/ increased competition.
        3) The success of Android is not neccessarily tied to the profits / financial health of the handset makers . Boeing and Airbus make a very good business out of selling planes to an industry that has probably operated at negative profits over its entire lifetime. So long as Android's partners can operate at least at break-even, then they can remain viable. Plus several of the smaller incumbents are also tied to larger corporations w/ deep pockets (e.g., Samsung)

        It's always a dangerous game to proclaim the end of history. While Android clearly faces an uphill battle, the dominance of AAPL may actually serve as a catalyst for the 2nd tier OEMs as well as new entrants to rally around and champion Android as a counterweight to the Cupertino juggernaught.

  • JonathanU

    Excellent analysis. Really can't wait to see how this all plays out… probably one of the most interesting markets to be following at the moment, given its size, pace of innovation and profitability for the winners (AAPL, RIMM etc.).

    One point I think you might elucidate is that if your growth rates for the iPhone does hold true, and Apple is selling 100m+ phones per annum come 2013, the EBIT for the entire phone market will have dramatically increased… you mention how profits for the entire market have pretty much remained constant for the last 3 years, and that profits have just been transferred to the new entrants. However, if 100m+ iPhones are sold in a single year, the market will assuredly have to increase in size. Or will the iphone suck even more of the profits away from the other vendors to the point that they own 70-80% of the EBIT share?

    One edit though – EBIT stands for Earnings before Interest and Taxation, not income tax.

    • http://www.asymco.com asymco

      Thanks for the edit on EBIT.

      • http://james.gameover.com/ James John Malcolm

        Quarterly numbers are unaudited, which means that firms have quite some wiggle room to influence numbers, especially any profit figures, as no accountant has to sign off on them.

        Any reason you didn't use EBITDA?

      • http://www.asymco.com asymco

        There are possible errors in the data. That is why it's better to collect it over a longer period. I will caution however that there is never certainty, even with audited accounts. I want to show operating performance from selling mobile phones and the effects of capital equipment amortization and depreciation may not shed more light on that.

      • http://james.gameover.com/ James John Malcolm

        Then go for more years. Also, Tax influences the result quite a bit when you're making a loss (or have made a loss, as you can carry it forward).

    • http://www.asymco.com asymco

      There is a secret to Apple's profit capture. What allows them to get the outrageous margin is that they dip (indirectly) into the service revenues of the carriers. What I really need to do is expose how Apple is using a hardware product to receive service revenues from mobile broadband carriage fees. To get away with this scheme, you need a product that compels people to move to higher ARPU and do so enthusiastically. There are a few pivotal moments in history when customers move to higher price points (think cable vs. broadcast TV and broadband vs. dial-up). Apple is able to essentially carve a piece of the service pie out.

      So the question on where the essential value is gives a clue to how the whole "device" EBIT pie will grow. Imagine a transfer of wealth from operators to (a) device vendor. Then you start to see the bigger picture.

      • Jay tyler

        While this was the case when iPhone was unsubsidised this is no longer true. This changed when the iPhone 3G was released in July 2008. The unsubsidised model where Apple took a share of the contract revenue applies to the original iPhone only. As such, the profit made by apple must be attributable to something else.

      • Tom Ross

        Jay, It's true that Apple does not take a direct revenue share for the vast majority of iPhones in use today (ie everything sold after June 2008). What asymco was referring to, however, is the oversized subsidy many carriers are granting to iPhone customers.

        Consider that AT&T is still offering a $450 subsidy on the iPhone, in exchange for adding a data plan priced at ~$20 per month or $360 over 18 months when the customer already eligible for your next iPhone subsidy. The subsidy is higher than the total cost of your data plan. No other phone gets such high subsidies.

        Thus, you see the latest Android phones that, without contract, are $200 cheaper than the iPhone ($450 vs $650), selling, with contract, for the same $199 as the iPhone.

      • http://www.asymco.com asymco

        The iPhone ASP is $635 across all 8.4 million units sold world-wide last quarter. I'm pretty certain that the vast majority of those were not sold to end users at that price which means that the vast majority of buyers (operators) sold service with each phone.

        http://www.asymco.com/2010/08/11/is-an-iphone-wor

        70% of iPhones were sold outside the US but I would also guess that the price to AT&T is very likely to be the same as the price to every other operator (AT&T charges $200 to the end user and typically pays Apple an additional $450, making Apple's revenue $650). The slightly lower $635 is due to a mix of older 3G products sold alongside the 3GS.

      • Hamranhansenhansen

        > There is a secret to Apple’s profit capture. What allows them
        > to get the outrageous margin is that they dip (indirectly) into
        > the service revenues of the carriers

        This may be true in the US, but not elsewhere. All iPhones are open phones, not carrier phones. In the UK, you buy your iPhone for full price at the Apple Store and you choose from 5 carriers. There are 2 in Canada, and I think there are 6 in Australia. In the US, there is only one open carrier (AT&T) so they seem like just another closed carrier. If Verizon were a standardized open carrier, the iPhones at the Apple Store would be $499/$599 and would come without a SIM and there would be AT&T and Verizon stores right next door to every single one.

        The main reason Apple is more profitable than their competitors is Apple makes highly-profitable software and services, not just low-profit hardware. This is the same as the reason Apple is more profitable than HP … Apple takes both the HP part of the profit on a PC and the Microsoft part of the profit on a PC, and in some cases, the retail part of the profit. The stupidity of PC pundits who whine about "Apple's high margins" is nobody, but nobody has high margins like Microsoft.

        Another reason Apple is more profitable than their competitors is they take better advantage of economies of scale. They have only a handful of products that each sell in great quantity, so they buy components in massive quantities. Except for iPhone 4, all iPhones and iPod touch use the same display for 3 years now. They have 5 notebooks and 3 of them all use the same 13-inch display. Something like 75% of the CPU's they have used in the past 5 years are Intel Core 2 Duo, and the rest were Xeon, with the exception of the recently added i series. Similarly, they use the same OS X core operating system on all of their devices. The kernel in iPhone 4 on an A4 chip is the same kernel as Mac Pro on 12 core Xeon. When they added Exchange to iOS, it showed up in Mac OS in the next release because they had actually added it to OS X, which is under both iOS and Mac OS. Huge economies of scale.

      • Tom Ross

        Hamranhansenhansen,

        Do you live in Canada, the UK or Australia? This is not how people buy phones there. 80+ % are still buying subsidized phones from the carrier. And in most countries iPhone is getting higher subsidies than the Android clones, because Apple's brand is worth it to the carriers.

      • roz

        Uh, all devices indirectly into the service revenues of the carriers – that is the whole idea behind the subsidy. It's just a question of how much subsidy the carriers are willing to tolerate. In terms of Verizon, maybe they pay less per unit for Droids but they are also spending a ton marketing the Droid. It's a brand they will own so maybe it is a good investment for them but its spending they would not have to do if they sold the iPhone.

        It seems that in the US market Apple is getting a higher subsidy that other device makers but they also were subject to an exclusive deal – so of course they are going to get higher margins. How are they treated in other markets?

        I don't get why so many times we read about the iPhone as a premium priced product. The iPhone is the same price as other smartphones. Even when it was first released, while the press on it was all about how expensive it was, it really was the same price as other smart devices on the market. I remember I paid $399 for my Palm Treo 650 on Verizon – that was the subsidized price and may data plan was around $35/month. My iPhone cost me $299 and my data plan was $20 / month with 500 text messages. I paid a lot less for the iPhone.

        I do see your point in terms of driving people out of basic phones and into smart phones. That is a major step up and people are paying more for access to email and web on mobile devices than they would have previously. I think you did start to see a lot of Moms walking around with Blackberries before the iPhone was a hit. Today you see lots and lots of people carrying iPhones who might have had a simple phone before. Still, can you really say that this is the same product? Seems like typewriters compared to PCs.

      • http://www.asymco.com asymco

        I'm in violent agreement. Apple did not pioneer subsidies (and is actually a reluctant participant in the scheme) but the subsidy's scale and the enthusiasm with which a large portion of the population will adopt a high data ARPU is in no small part due to the ability to utilize its products. The magic here is that the iPhone compels you to mobile broadband. I know that there are vast numbers of smartphones (mostly Symbian and outside the US) which are used without data plans. Those devices are not competing on the same basis as the iPhone. That's the world that operators were used to before the iPhone changed the *mass market* perception of what a phone could be.

      • Tom Ross

        The comparison between AT&T's iPhone subsidies and Verizon's Droid marketing campaign is interesting, but I think AT&T's cost per phone is still higher. Verizon's campaign cost $100 million, and the've sold – how many? – let's say 3 million Droid branded phones in the first six months. That's just $33 per phone, and they get to keep the brand.

    • http://twitter.com/megachan @megachan

      To get to those numbers I'm guessing that's why Apple is rumored to be developing a low cost iPhone. Just as the iPod line is segmented to different form factor and pricing so will iPhone follow to broaden mass appeal.

  • Jon T

    Incredible reading, thank you.

    Between Asymco and RoughlyDrafted I have all I need to remove the opaque nonsense one reads most everywhere else.

    Android has it's -highly vocal- followers, but then they are the same cheerleaders as we have had to put up with over the years of Linux… Hardly a ringing endorsement.

    App development issues, fragmentation issues, and patents issues will all make the losers alliance not become the next Windows.

    • Shaun

      Roughly Drafted? Really?

      It's always come across as blatant Apple cult fandom of the highest order to me. Far from objective.

      • gctwnl

        Roughly Drafted is indeed a fan of Apple. And it is a blog, so written with a sharp pen. But it's analyses and insights are often very sharp (and often far before anyone else, e.g. on the position of Windows Mobile) and Daniel knows his history (including NeXT etc.) and the role it played to get Apple where it is now. Being a fan does not per se equate being stupid. You can be a fan of something pretty good and you can be right and ethousiastic at the same time. Roughly Drafted is a pretty good source for knowing why Apple is doing so good. It is only very rare that I get the feeling that he is searching for something positive to say about Apple where there isn't anything positive really. By far the best analyses I have read over the last years.

      • Tom Ross

        Roughly Drafteds posts are overly long, and while he (like asymco) is producing ambitious analyses and conclusions, those are often based on embarrassing factual errors.

        One of his classic blunders: He once stated that (paraphrasing) since Apple has 4 % of the PC hardware market and 4 % of the PC operating system market one should rightfully reward them 8 % of the total PC market.

        Add some Apple grandiosity on top of that, and I think that Roughly Drafted (Daniel Eran Dilger) is a closer match to Tomi Ahonen, not asymco.

      • frac

        Really?
        '…. ambitious analyses and conclusions, those are often based on embarrassing factual errors.'
        I can't think of one – having avidly devoured every one of his articles – not because he is a fan of Apple, which he undoubtedly is, but because nowhere else in the comment(re)tard world is there any original thinking. Elsewhere there is wholesale repetition of (mostly) anti-Apple fluff that is only there to generate page hits with no regard to facts or common sense.
        I often don't agree with his conclusions but am never less than stimulated to go get more information.

        'One of his classic blunders: He once stated that (paraphrasing) since Apple has 4 % of the PC hardware market and 4 % of the PC operating system market one should rightfully reward them 8 % of the total PC market.'
        …and there you go, falling into the classic trap of skim reading without considering the article's meaning which was that the (to paraphrase) majority of the uninformed blogoshere generally conflated MS Windows AND PC shipments(including dumb terminals, photobooths, fridges etc to historically write down Apple's share of the computer market. if you can't understand simple rhetorical questions, you have no business commenting on the value of Roughlydrafted content.

        I'm with JonT – Asymco & Roughlydrafted are a matched pair for those interested in the facts behind the usual marketed drivel.

    • Sevket Zaimoglu

      The difference with the Linux fanboys and the Android fanboys (who might well be the same guys) is that in the case of Linux, they were trying to convince people to *give up* something that they had already settled on, that is, their existing OS, Windows. The Android fanboys, by comparison, have a far easier job. They don't need to ask people to give up anything, because for the vast majority of people, an android phone will be their very first smartphone. Most people will not shed a tear to leave their Nokia 1600 for a Motorola Droid or HTC Desire.

  • Bob

    RIM is on the way down, I honestly don't feel that blackberry has any long term strategy to compete with IPhone and/or Android. What is the USP of RIM ? email ? it is a joke of the century. Practically no USP compared to IPhone except for maybe lower price. It has some remnant brand value, go and check its P/E it is less than 10 currently. And you forget one more thing, practically all integrated companies have failed except for Apple. Nokia profits are falling down so fast that it is shocking, Palm went bankrupt and was bought by HP where it will fail again. Sony has failed with its integrated strategy.

    • Shaun

      Nokia's smartphone business is in 'holding pattern' waiting for Symbian^3 and Meego. Despite shipping record units, they've been lower priced models. It's too early to count them out but they certainly need to deliver some better products soon or they'll be irrelevant to application developers and therefore irrelevant as a smartphone.

      Here's some good analysis of their last results for reference.

      http://www.allaboutsymbian.com/news/item/11852_No

  • Rob
    • http://www.asymco.com asymco

      As I pointed out in previous articles in the series, Android has been the salvation of both Motorola and Sony Ericsson and it's the lifeline that LG is reaching for. That's the whole point. The more distressed the company is the more likely it is to grasp Android. There is talk of RIM getting that desperate some day.

      • Mike

        RIM switching to android! I live in waterloo, aka the birthplace of RIM. RIM is doing very well, and it has been for many years. Yes they are losing market share, but apple does not have the business services that RIM does.Rim offers secure corporate services. They have been all over the news because places like India, the black berry is too secure and the governments want to see what people are doing hut can't. Rim has the deep and long term business clients. They will and are losing market share with consumers, but they will always have a decent market share. They will not switch to android because they have their own great os with is being improved (see their tablet). For them to switch, they would have to be in deep trouble, which won't happen in the next decade.

  • Bob

    I like how financial analysts always compare IPhone to comet strike of 65 million years that wiped out the mighty dinosaurs ha ha there are so many holes in that comparison. First of all not all dinosaurs are not dead, they are alive. Look around you, birds are dinosaurs and they survived and are prospering. And besides the most dominant life form on earth(by biomass) are not humans or any of the complex animals or even insects, it is bacteria(their biomass is the highest) nothing ever happened to bacteria. They will be the last to die long after all complex animals die lol.

  • Bob

    Hardware is a commodity and it is being commoditized fast. Apple cannot stop that phenomenon.

    • http://www.asymco.com asymco

      If by hardware you mean the components in a phone, then that point of commoditization has been reached long ago. This has been the case for over a decade. For evidence, look up the financial performance and value of the supply chain to the mobile phone vendors. There is very little profit to go around there.

      If you're saying that phones themselves are commodities, I'm afraid it's already too late. The vast bulk of phones sold are indeed rapidly eroding in value, a trend that's been around for a long time as well. (Something I show in the article Profitability ratios over time.)

      If by hardware you mean smartphones then there are indications that's already happened. Buy one get one sales are all the rage and prices are slashed all the time.

      However, I would add that mobile operating systems are even more commoditized than any of the above. There has literally been zero profit since the first mobile OS shipped. PalmSource, Windows Mobile and Symbian have all failed to generate any value for their owners. Not only that, but Android itself is free and there is no more obvious signal to the market of a commodity status than a price of zero.

      So I agree that mobile hardware is a commodity but mobile software is even more so. But you should be asking what are all these profits shown in the graph above rewarding?

      It turns out that since the mobile software is a commodity, the app store is a break-even proposition, the components a bereft of profit then an iPhone generating 50% gross margin is indicative of a value in the entirety of the package.

      • JonathanU

        Not to mention a huge amount of intangibles such as branding and marketing to boot…

        Apple = cool, reliable, branded as best in class etc. People will always pay rents to those that have these sorts of intangibles. You need look no further than Coca Cola to see how excess profits can be derived from selling completely and utterly commoditized products (fizzy flavoured water!).

    • Hamranhansenhansen

      > Hardware is a commodity and it is being commoditized fast.
      > Apple cannot stop that phenomenon.

      Why would Apple want to stop that phenomenon? It works for them, not against them.

      What you may not understand is that because Apple only has a few products that each sell in huge numbers, they buy very few components in massive, massive quantities. So when component prices fall, that benefits Apple much more than their competitors. Before iPhone 4 which shipped just recently, Apple had only used one (1) phone display, and they used it again in iPod touch. They probably bought 100 million of that exact same display, and they are still buying and using them right now in the low-end iPhone and the iPod touch. They paid much less per phone for the display than what the display cost on any other phone, which typically sell less than a million devices each. The 90 Android phones are each a custom job, much more expensive, much less profitable.

      So Apple is actually the commodity vendor. Not, for example, Android device makers.

      Also, Apple is not a hardware vendor per se, they are more like an I-T consultant. That's why Apple Store is so successful. In a way, Apple Store is their primary product, like GAP stores are really GAP's primary product. The user walks in with a problem, and Apple provides a solution made up of a combination of hardware, software, online services, support services, training, accessories, and even culture. Apple users pay for that entire package. If the hardware is commoditized and cheap, that means more profit for Apple, not less, because they are the hardware *buyer* not seller. They buy the hardware on behalf of the user.

      Compare to Motorola, who only make hardware. When hardware gets cheaper, Motorola's revenues fall.

      The thing you have to remember is this is the "new Apple", not the bad Apple of 1986-1996 who milked the Mac and drove it into the ground while Windows flourished. So when you think "commodity hardware; disadvantage Apple" that is irrelevant to today. Apple is exploiting commodity hardware better than anybody else.

      • Tom Ross

        Can you prove that all iPod Touches and iPhones up to the iPhone use the exact same screen? I've read otherwise. Apple does have economies of scale, but they are not exceeding those of Nokia and Samsung.

  • FalKirk

    "Hardware is a commodity and it is being commoditized fast. Apple cannot stop that phenomenon."-Bob

    I do not agree with this statement, although it's possible that I just don't understand it.

    Hardware is like the ingredients of a recipe. Everyone uses the same ingredients. It's how one puts it all together that makes the difference. A great Chef can use the same ingredients as a housewife and still make a meal that is one hundred times more valuable. Simiarly, Apple can keep thier products from being commoditized by combining thier hardware in such a way as to make the whole more valuable than the sum of it's parts.

    • Grwisher

      Don't know about this one:
      "Hardware is like the ingredients of a recipe. Everyone uses the same ingredients. It’s how one puts it all together that makes the difference."

      Apple has its own SOC (system on a chip), battery technology, unibody construction, etc. which give it an edge in portability, battery life and speed.

  • bob

    Hi, I really enjoy this site, you have some excellent analysis here. Thanks & keep up the good work.

    Have you had a chance to read the recent Zero Hedge article on Android and Apple? They claim that Android is causing Apple's market share growth rate to slow and plateau. What do you think of their analysis?

    • http://www.asymco.com asymco

      I tried, but I could not understand that article.

      • Tom Ross

        I think he's using the iPhone's quarter over quarter growth instead of year over year growth, claiming that the market outgrew Apple while the opposite is true. This will of course make Apple look bad over the last 6 months, and will blow up in his face within the next 6 months.

  • bob

    (PS: asking about the Zero Hedge article, is a different "Bob" than the other one above)

  • Iphoned

    That zero hedge article is just the usual anti-apple bs by Regie Middleton.

    • JonathanU

      Haha god, Reggie Middleton is such a dweeb. Having read a number of his articles in the past has only highlighted his complete lack of knowledge of the tech market…

      Not to mention his charts don't look anywhere as cool as Asymco's LOL…

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  • http://lowendmac.com Tim Nash

    Android will soon reach the point where it is no longer free as there is no patent pool behind it to force cross-licensing from major patent holders. Microsoft has already forced HTC to license certain patents, Oracle is suing Google over Android's use of Java patents and Apple is trying the International Trade Commission route against HTC . Indeed if Apple succeeds it has said it won't license the patents.

    Since so few of the manufacturers are making money, the Android lifeline may be very temporary until either Microsoft or Nokia/Intel provides a real alternative. The only real market for Android may end up being China, which has its own version but whose activations are probably included in the Google numbers. More details on problems for the Android market in http://lowendmac.com/nash/10tn/has-google-lost.ht

    • bob

      That is an excellent point. Several folks I consider knowledgeable think that Oracle has a surprisingly solid case against Google over Android and in the end (probably 2 years from now) will be able to extract a significant settlement or licensing fees or possibly even both. I think that will completely change the entire market dynamics.

      Will you please do a piece on how you think that will play out? In essence Android might no longer free to the handset makers. For example, if it was 1/2 the cost of WP7, how much would that eat into handset maker's margins? Would Google be on the hook for that? Would they indemnify the handset makers?

    • http://ARMdevices.net Charbax

      You wish. Java has always had a totally open GPL2 fork of it. Google and anyone else is totally free to take Java and do whatever they want with it within GPL2 rules. If Sun didn't want Java to be an open platform, then Java would never have been as big as it was.

      This is a case of Oracle desperately trying to get some of its 6 billion dollars back that they over-payed for Sun.

      • Hamranhansenhansen

        > You wish. Java has always had a totally open GPL2 fork of it.

        My understanding is the case is not about open source or open source licensing at all, and not really to do with Java per se. The issue is that Google reverse-engineered Oracle's patented Java Virtual Machine. Just because some code is licensed under GPL that does not release the copyrights to it and does not void the patents on the technology.

        What Google is facing with Oracle is similar to what they are almost certainly going to face soon from MPEG-LA over Google's WebM and associated codec. Oracle's Java Virtual Machine is patented and MPEG's H.264 is patented. They are licensed for very broad use, even free of charge in most cases, but you cannot clone them to avoid those rare circumstances where fees apply. In the case of the Java VM, if you put it on a handset, fees apply. In the case of H.264, if you sell an encoder or video file, fees apply. These instances are supposed to fund all the free use. Google took the free use and then took the paid use for free also, and then sold ads on the result.

        It's one thing if you make an original product that infringes on a patent someone else holds. You may or may not get sued. But when you clone someone else's patented product specifically to route around the revenue stream that supports that product, and then establish your own revenue stream on the cloned product? C'mon.

        Ironically, Oracle is anti- software patents. I think they are primarily motivated by the fact that what Google did was "rude" by Silicon Valley standards.

    • Kane

      No, the Google number only includes those that are activated through their system (GMail). Chinese variant of Android does not do that, and is therefore not included in the 300K activations number.

      You just wish that it is.

  • Iphoned

    If I was Verizon, I'd be nervous obout the cloud of litigation around my only hot smartphone.

    • http://www.asymco.com asymco

      Does anyone else wonder why Verizon is not part of the Open Handset Alliance?

      http://www.openhandsetalliance.com/oha_members.ht

      • http://lowendmac.com Tim Nash

        Verizon sees its future as LTE. Since LTE is compatible with GSM handsets, Verizon will go for the best possible handsets to get the best return on its investment.

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  • Adam

    Great post once again. One minor nitpick: Why do you use nearly the same shade of blue for both Apple and Nokia in your bar chart? And why are the colors from the second chart not consistent with the colors from the first? You do such a good job with the visual display of your data but then overlook these important details (SJ would not be happy!). Also, the charts are so small that it's nearly impossible to read the legends without popping open a new window. Can't you make layout wider? I think it would really improve the impact of your articles to have nice large charts.

    • http://www.asymco.com asymco

      Adam, thanks for the input. Some things like colors can be improved (I rely on Numbers to do it for me but sometimes things change unpredictably as charts get edited). I will experiment with sizes for charts as there seems to be a way to fit larger images into the posts.

      • Tom Ross

        I'd suggest that one more thing one may need to look at in Numbers are the vertical axes, which often have odd steps, like 1.5 in this case, instead of 1 or 2 which would be a lot more helpful.

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  • poru

    Just my 2 yen but that is an excellent analysis — thank you. I found this site through Gruber IIRC and you're don't some great work here.

    • poru

      ooph… that was meant to be "you're doing some great work here"!

    • tmay

      via John Gruber as well.

      John would probably add that Apple has two other iOS devices, the iPod Touch (due for a refresh anytime) and the iPad, that are absorbing profits from other segments of consumer electronics; music, casual gaming, and soon, photography, video, and in the not too distant future, near field wireless.

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  • RonR

    All I know is my daughter-in-law is (a) smart – Yale, mathematics, (b) worked at Microsoft 15 years, (c) has used a Blackberry for years and (d) dumped her Blackberry and bought an iPhone 4 last week.

  • Edwin

    All hail Apple – to compete is futile.

    • Hamranhansenhansen

      It's not futile to compete with Apple, it's just that nobody is actually doing it. They are all making platforms for advertisers or hardware makers or wireless carriers instead of making the best consumer product. Only Apple actually knows who their customers are.

      I think Apple has done an amazingly good job over the past 10 years, but I also think their so-called competition has done a terrible job. When iPhone came out, Steve Ballmer said "I'd rather have my software on 70 or 80 percent of phones rather than have the 3 to 5 percent Apple will get." He was playing a game of Monopoly, not making great products. He was trying to make part of a future product for his hardware maker customers, while Apple tried to make 100% of a current product for actual users. Apple's task is just much more realistically achievable. They had the humility to say making a great phone is hard, we are going to have to make only one.

      • John

        This is a very important point. It is amazing but for the longest time it seemed that only Apple "got it" in the sense of designing for and selling to end users. Most of the others were calling the telecos customers and catering to them.

        Apple doesn't actually spend that much on R&D nor do they have huge staffs of engineers. Another company could compete with Apple by choosing a segment of the market and catering to them. (I make it sound easy sitting in my office.) The thing is that Apple has been fine tuning their business and their marketing ideas for about a decade. Everyone else is starting nearly from scratch.

        In a sense the Droid is marketed this way. The commercials seem aimed at nerdy young men. Don't know if this was intentional or not but they have targeted a customer group slightly different from Apple's.

      • Edwin

        You're right, come to think of it, Android is kicking Apple's ass.

    • http://www.asymco.com asymco

      Symmetric competition against entrenched incumbents is futile. It's like charging across an open field into artillery. As a French officer remarked after witnessing the Charge of the Light Brigade "C'est magnifique, mais ce n'est pas la guerre." ("It is magnificent, but it is not war.") He continued, in a rarely quoted phrase: "C'est de la folie" — "it is madness."

      http://en.wikipedia.org/wiki/Charge_of_the_Light_

      In contrast, asymmetric competition is enormously powerful and the only way to compete as an entrant. [You may notice that "asymmetric competition" has something to do with the name of this weblog.]

    • Jim

      I'll bite…you're right. Excellent point. :-D

  • FalKirk

    Asymco: Congratulations on being highlighted by John Gruber in Daring Fireball. You're about to get a whole lot of new fans. http://daringfireball.net/linked/2010/08/17/asust

  • Landon

    These conclusions hold unless you consider Android itself to be a disruptive technology. Just as the disruptiveness of the inferior PC as a relatively open platform killed other closed business models, so too can the openness of the Android platform kill other more closed, if superior, competitors.

    Case in point, IBM was able to capitalize on the disruptive PC market even in the face of its threatened mainframe business.

    • jbelkin

      The Android is disruptive in the sense of Linux. It makes 3% of the OS tinkerers very happy but as a business model? Not so much.

    • Hamranhansenhansen

      > Case in point, IBM was able to capitalize on the disruptive PC
      > market even in the face of its threatened mainframe business.

      IBM never capitalized on the PC market. They shipped PC hardware down their monopolized corporate sales channels and then Compaq and other hardware cloners and ultimately Microsoft capitalized on that installed base. And they were given a dramatic assist by the Apple of 1986-1996 who failed to capitalize on the Mac.

      Anyway, PC's are the wrong comparison for smartphones. The right comparison is iPods.

      PC's cost thousands of dollars for almost their entire history, and they were mainly purchased hundreds at a time by I-T departments at corporations who wanted compatibility with the de facto IBM/Microsoft standard, deployed like furniture, and they were used by office workers who were very nerdy by today's standards (command line!?) iPods and smartphones cost $100-$200, they are mainly purchased 1 at a time by the actual user, who wants compatibility with actual open standards like GSM and MPEG-4, deployed like jewelry, and they are used in almost any situation by almost any kind of user, mostly users with no technical skills.

      Where PC's and smartphones are most alike is developer support and 3rd party native software platform. However the Web acts as a common 3rd party software platform for all devices today, leveling the playing field, and when it comes to native apps, Apple has an incredible lead. They have fully native desktop-class object-oriented C apps including many ports from PC's and game consoles, and they have a vast and thriving market. Android has baby Java apps with much lower quality and selection and almost no financing at all.

    • http://www.asymco.com asymco

      I do consider Android as a potential disruptor, but my thesis in the article is that Android will fail to disrupt if it aligns itself with the incumbent vendors and operators. This was also the disruptive promise of Windows Mobile: move profits from hardware to software but, again, they fell to temptation and hitched their wagon to telecom incumbents.

      What Google should have done is worked exclusively outside the cellular space. Nurtured small Asian manufacturers with what turned out to be Facetime–SIP based communications. It would have taken over a decade, but that's the only way.

      • http://bernardmoon.blogspot.com Bernard Moon

        Small Asian manufacturers? Interesting statement since Samsung is 2nd in the world with 19.5% marketshare of mobile handsets and LG is 3rd with 10.1%.

      • http://www.asymco.com asymco

        Precisely, Google should shun both LG and Samsung and work with vendors untainted by market share.

  • Gr@w/!x

    Whilst it's tempting to assume Android is already 'saving' some of these OEMs, two questions arise:
    ☎ How much of their recent smartphone hardware development is being funded from their waning legacy handset income?
    ☎ How much longer can they afford to iterate new smartphone handsets – especially as the multitude of Android handset makers compete with one-another for share of Android's share?

  • Jeff Sanders

    Good analysis, but aren't some of your conclusions a bit premature? I'm an Apple fan and iPhone user, but Android really hasn't entered the marketplace in force until the second half of 2010. Also you're assuming consumers will continue to favor iPhones and RIM over the dozens of new Android entrants, but it seems there is a slow shift.

    And I don't understand your assumption that large conglomerates, such as Samsung and LG, don't have the motivation to spend on R&D. These companies are not like Nokia or RIM, which are primarily handset makers. They have a much larger resource pool.

    • http://www.asymco.com asymco

      My analysis is not much more than pattern matching. The observation that Android appeals to failed device vendors is one thing, the other is to say that those vendors will not carry Android forward because they are not themselves in a position to disrupt. It is early to say this but I have a theory I lean upon that has been well tested. Users will move to and fro, but Apple is motivated to keep moving up the trajectory that matters to them.

      Samsung and LG have so far shown little in investing in mobile software (Bada is their first foray in this are). Nokia, on the contrary, has spent billions (as has Microsoft) on mobile ecosystems. In the end it's not about resources however. The point is that strategically, anybody who stakes their future on Android today is doing so because they have no in-house alternative. Will Samsung put Bada on all its phones? So far they have indicated that they plan to support a large number of platforms. If they do abandon Android then it's a sign of strength and I would be bullish on their prospects.

      • Tom Ross

        Samsung does put TouchWiz on all their phones, so they would certainly be ready to move from Android to Wave. I do think the Galaxy S is performing very well, however, and Samsung will probably be the number one Android vendor by the end of this year, ahead of HTC. They may choose to stay on Android.

  • http://ARMdevices.net Charbax

    Apple, RIM, Nokia are being completely destroyed by Android's enormous expansion on the smart phone market.

    RIM and Nokia can be considered glorified feature phones any ways, and feature phones are being replaced by Smart phones as those are lowering their prices.

    Android enables a formidable complete disruption of the smart phone industry. What happens, within months, the price per iphone will have to go from $650 to $400, as loosing the exclusivity with AT&T, Apple iwll be forced to say goodbye to half their profit margin per iphone.

    Android forces lower prices across the whole industry, that is good for the consumer. Android brings more competition, that is good the consumer. Telecoms will also have to loose their grip on their huge smart phone revenues, as Android makes it possible for pre-paid plans to include full Android options, soon to be sold at $99 and $199 without any 2-year contracts required. The Android smart phone replaces feature phones on all pre-paid plans. That will be one of the biggest disruptions of the mobile phone market in the months to come. As nobody will sign any $2400 2-year agreement when they can get a similar phone for $99 and only need to use cheap pre-paid data/voice/sms plans on that. The pre-paid Android phone literally feels like it is 25 times cheaper than an iphone.

    • RattyUK

      "Apple, RIM, Nokia are being completely destroyed by Android’s enormous expansion on the smart phone market."
      Perhaps you'd like to explain why Apple's sales went up even with the deliberate leak of the next iphone and national coverage of the thing a good three months before the release of the iPhone 4 if you are insisting a complete destruction…

      "What happens, within months, the price per iphone will have to go from $650 to $400" Er that hasn't happened. In a market where Amazon are selling android phones for a penny and everyone else is doing a buy one get one free campaign there have been no deals on the iPhone. And people keep buying them. When times get hard people are willing to pay for products that actually work as advertised rather than jump on the smartphone of the month from the in-fighting of the competitors who keep upping features to one up each other without considering what is actually needed by the customer.

      "Android forces lower prices across the whole industry, that is good for the consumer. "
      But this hasn't happened. And despite your fanboy ravings it ain't going to happen in the next 6 months. So keep drinking the GoogleAid and hope everything works out for you but your predictions of complete destruction are a bit premature.

      • http://ARMdevices.net Charbax

        iPhone growth has very sharply slowed down these past 9 months specifically because of Android. Android is taken only those 9 months to completely overtake Apple in the US market by selling 4 Android phones for every one iphone sold, and Android has even overtaken iPhone on the worldwide market where only fewer Android phones are yet being sold by carriers.

        Basically, all the growth that Apple could have had with the iPhone, has totally been taken over by Android and all the growth that the market in general is getting (all new smart phone users), most of them, 90% of them are buying Android and not iPhone. In fact, most iPhone 4 buyers are repeat Apple buyers (= Fanboys) which is also why you see stats of iPhone users being more satisfied, it's complete BS. iPhone buyers also tend to waste more money on crap in general, which also totally skews that "how much s¤x" each user has depending on what smart phone they have.

        Every Apple fanboy is desperately cheering for Verizon to take the iPhone in. Fact is Verizon is currently paying less than $400 per Android super phone on its network. Fact is AT&T is paying over $650 per iPhone sold on its network. The second the AT&T exclusivity is finished, both AT&T and Verizon will sell iPhone, but they won't need to be paying anything more than $400 per iPhone then. Cause why would carriers even want to sell the iPhone at all, if they can profit more by choosing to sell Android phones instead. Also, you have to consider AT&T will start selling plenty more high end Android models the day their exclusivity deal with Apple is finished. In fact, it more likely that AT&T will sell more Android phones than Verizon will sell iPhones as soon as the exclusivity is over.

        The cheap Android phones are coming. The reason we haven't seen $99 unlocked Android phones yet, is because few Android manufacturers have been colliding with telecom companies to inflate their prices and make as much profits as possible. With plenty new smart phone manufacturers joining the party, as HTC/Samsung/Motorola can't be the only ones selling Android phones any more, when Dell/Acer/Asus/Lenovo/Huawei/ZTE/Sharp, when all those new people join the Android party, you will see much lower cost Android options, those that will be absolutely and totally sold for $99 without any 2-year contracts required, such Android phones that simply use pre-paid data/voice and sms.

      • jbelkin

        I think EVERY company would take 100 million fanboys – especially one willing to pay $299 (subsidized) to over $700 for a product, ANY PRODUCT. Android's main success is on Verizon whose users now have a choice of Android, RIM, Palm & WIN for the smartphone choice – so Android wins by default but even now, pricing does not hold up on Android phones – after a few weeks, it falls into into the BOGO free bucket because that's ALL the deamnd there is – you think Verizon would to give one away? Consumers are not dumb. They are WILLING to pay FULL VALUE for the iPhone (even on AT&T) whiel the Android phones are not worth FULL VALUE so to keep up demand, they quickly fall to BOGO get free – thsi will be more true when Verizon gets the iPhone – anywhere from 30-80% surveyed Android users would switch to an iphone while only 3% of iphone users would switch to an android – that is the difference between an OS that changes with every phone and every telco and the rock solid ONE OS & ONE iTunes iPhone. Nothing wrong with a cheap, free OS but don't confuse tap water with the bottled water market.

      • Tom Ross

        I wonder why people make such a big deal about the BOGO offers. It's still another $2000 contract people would have to sign up for to get their free phone.

      • RattyUK

        Because Tom, the phones are being given away. The iPhone has never needed to have been given away. If you give stuff away people will "buy".

      • AdamC

        Cheap android phones may benefit the consumers but not the manufacturers. Let see how long they can stay in business before throwing in the towel.

      • http://www.opineapple.com Mark

        @Charbax says:
        "In fact, it more likely that AT&T will sell more Android phones than Verizon will sell iPhones as soon as the exclusivity is over".

        I know this will be hard for the US market to comprehend, but down here in Australia all the major carriers have had the iPhone (and Android) from day one – but iPhone still outsells Android by a massive factor. Catch a train, ferry or bus into Sydney and you'll see iPhones and BlackBerries everywhere. Maybe a ratio of 12 iPhones : 7 BlackBerries : 1 Android phone.

      • Shaun

        ZTE *have* entered the Android market. The ZTE Racer sells in the UK for about £100 PAYG (no contract). It's dismal.

        It's also about £40 more expensive than Nokia's much better 5230 which has a higher res screen, better battery life and includes things like Ovi Maps. If you want you can use Gmail, Google Maps and pretty much all the Google services on it.

        In the cheap smartphone market, one of the other things that is useful to consumers is the ability of the phone to not have to rely on hefty data contracts. Android phones rely on an almost constant online connection whereas Symbian is much less reliant on a connection.

        IMHO, Symbian is a better choice if you're looking at the budget end of smartphones.

    • jbelkin

      I know it;s hard for you to grasp but in smartphones – market share does not equal profits – but as you in that android point out, you buy by price for budget reasons and that is the growth in the android market – people switching from $19 Nokia phones to Android $49 smartphones so there's growth but NO PROFITS. That is not a market Apple cares about. People who want to buy a smartphone but cannot afford a full phone nor a full phone package – that's NOT Apple's market. Maybe someday but not now. Apple is interested in the 500 million FULL PAYING mobile customers who can afford their iphones. Google is interested ONLY in whether you can surf the web using their search bar – what do they csre about design, security, apps, battery life, etc … or that every telco has its own skin – if the search bar works, they are done … so just know the difference, android is a free useable OS – the iphone is a full featured professional mobile OS – that is the difference between a $99 throwaway customer and the iphone customer.

      BTW, someday you will learn the difference between value & price … good luck with getting through college.

      • http://bernardmoon.blogspot.com Bernard Moon

        "android is a free useable OS – the iphone is a full featured professional mobile OS"

        seriously, what apple kool-aid are you drinking? have you ever used an Android phone for more than a day? i have Samsung's Galaxy S and my iPhone. what is the difference in performance and "professionalism"? nothing.

        simply an ignorant comment.

      • Tom Ross

        GPS is completely broken on the Galaxy S. Otherwise it's the best Android phone out there, true.

    • anonymous

      "The pre-paid Android phone literally feels like it is 25 times cheaper than an iphone."

      Because it is. From inconsistent-lookings slapped-together feel of its software, down to the neglected appstore, full of legal IP issues.

      Google said on their last conference call that the cost of Android is not material. Well guess what. It shows in the product.

      The PC market is a graveyard of manufactures who tried to sell crappy products on the cheap. Yet Apple is still with us raking in profits at high margins and gaining share. Apple will do even better against Android manufactures in the Phone market, because estetics (sp?) and usability are even more important there. Just look at how well Android phones are doing on ATT where they actually have to compete withe the iPhone. Besides Android is just one injunction away from shutdown. (Oracle, I believe, asked for "destruction" of the code in their lawsuit. And we'll have to see how Apple's defense of IP against HTC plays out.)

      Good luck to those betting on the Android.

      • Horse

        The PC market is a graveyard of manufactures who tried to sell crappy products on the cheap. Yet Apple is still with us raking in profits at high margins and gaining share.

        Thanks to being propped up by Microsoft in the 1990s and on even to the present day, given that for "professional" use, Mac purchasers are all buying Office for Mac while they show off and badmouth Microsoft.

        What happened was that Apple's executives finally figured out that they'd never dominate the PC industry – something that Dell, HP and Acer have been able to figure out, by the way – and so went on to sell "boutique" products to people who like to overpay for stuff.

        But by all means keep it up with that overactive imagination of yours and its tendency to airbrush history.

    • http://www.asymco.com asymco

      Your assumption that Apple's ASP will change with the end of exclusivity is wrong. Exclusivity is only maintained in 3 large markets. There are 151 operators carrying the iPhone.

      See: http://www.asymco.com/2010/04/23/tim-cook-on-ipho

      ASP analysis before and after changes in exclusivity has shown no price erosion.

      Additionally, Apple has explicitly stated that their price is not in function of exclusivity. In the earnings conference call of October 2009 Tim Cook, Apple COO, was asked about the difference in pricing between exclusive and non-exclusive.

      When asked more pointedly, “So when you go from exclusive to multiple, you don’t change the charge to the carrier?” Cook answered, “Correct.”

    • Tom Ross

      Your numbers are really bad. Android is not outselling the iPhone in the US by 4:1, but merely 1.5:1. Over the last 9 months, international iPhone sales were up 100 % compared to one year earlier (from 13 million to 26 million), so Apple is still growing very fast. If competition in the US forces Apple to drop their ASP from $650 to $450 it will certainly not bankrupt them. It may even benefit them overseas.

      A (usable) $100 Android smartphone is a pipedream and at least 5 years away. Today $100 don't even cover half of the bill of materials. $250 is currently the price floor for clunky last-gen clones like the G1 or Hero, $400 for a decent device that is comparable to the iPhone. And because of their OS architecture, Symbian and RIM will be able to reach the $100 line much earlier than Android.

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  • Jer

    Amazing article !

    The only caution I would add is that you assume current iPhone users will remain loyal. This currently true (and I dont see any reason it change anytime soon).

    But in case it changes some day, overall distribution might move quickly.

    @Charbax: re-read it all, you didn't understood the study. It's all about margins.

  • jbelkin

    Great analysis. It's very simple. Yes, hardware is essentially commodized but of course, only Apple can assemble them into a world calss leading design – then add in the state of the art software OS and iTunes and you have an undefeatable combination when it comes to PROFITS. Revenue, sure, as the Android market proves, you strike the price low enough, people will choose you over Symbian, WIN, Palm and even RIM but at the end of the day, a free OS is worth to the cosnumer the price of a free OS – good enough to use today but not brand loyal.

  • RattyUK

    I have responded at the bottom of the page as the gradually thinning replies were making it impossible to complete a point.

    @Charbax
    C'mon charbax we had this debate over at AllthingsD about a month ago. Yes Android is doing well in terms of market share but your opinion that it will steal Apple's customers is disingenuous to say the least and shows a pathetic misunderstanding of why Apples products sell. Market share is irrelevant profit is the only thing that keeps companies going.

    "iPhone growth has very sharply slowed down these past 9 months specifically because of Android. Android" Er, nope. You are taking the result: Q2 Android growth was terrific and putting your spin on what had happened. Please come back in three months when we see next quarter's results before dancing on Apple's grave.

    "most of them, 90% of them are buying Android and not iPhone."
    And millions more are buying Nokia phones world wide. But that is not the point. You are taking a set of results and skewing them to prove your point where in fact you are looking at it wrong or even holding it the wrong way.

    "Every Apple fanboy is desperately cheering for Verizon to take the iPhone in." Again no. Actually I think with the Google / Verizon deal to sort out the Internet on mobile devices I doubt that an iPhone on Verizon would ever happen. So you little rant about Verizon not paying the money wanted is kinda irrelevant. The fact is though that a large number of people buying Android on Verizon are doing it because they can't purchase an iPhone on Verizon and they'll "make do" with Android.

    "The cheap Android phones are coming." They are all ready here. Amazon were selling Android phones for a penny. Not the current batch but still at a penny they are actually being given away. If you give something away you will gain market share. But do you gain happy customers? Do you gain repeat business. Do you gain any money? Er, that would be no.

    "Dell/Acer/Asus/Lenovo/Huawei/ZTE/Sharp"
    And they will be fighting each other for recognition in a mire of me too. And you will see cheap phones. And they will sell. But the people who want quality and ease of use will still shell out money for an iPhone. Because it is an iPhone. And whatever the Fandroid pack do they can never have that. They can never achieve that level of brand loyalty, and frankly, once you have invested money in the iPhone ecosystem you will stick with it. None of this "damn my phone is a month old and still out of date". I have noticed that competitors are now actually leaking specs of the NEXT Android phone before the competitors launch. They used to leave it a day or so to give the others a chance but this is a cutthroat world.

    "you will see much lower cost Android options, those that will be absolutely and totally sold for $99 without any 2-year contracts required, such Android phones that simply use pre-paid data/voice and sms."
    And people will still chose iPhones. Frustrating isn't it?

  • Lee Penick

    As was said earlier: "Between Asymco and RoughlyDrafted I have all I need to remove the opaque nonsense one reads most everywhere else."

    I agree, you two are at the top.

    Are you going to monetize this site, or does share appreciation tide you over nicely?

  • anonymous

    @Charbox

    "iPhone growth has very sharply slowed down these past 9 months specifically because of Android."

    Not so. Android growth is on carriers where iPhone is not present. So any effect on iPhone is tangential at best. Wait to see what happens when iPhone moves to these new carriers.

    • Tom Ross

      "Not so. Android growth is on carriers where iPhone is not present."

      I think that view is outdated. It was accurate when Android sales exploded on Verizon in the fourth quarter 2009 and first quarter 2010. But Verizon and the other US carriers are not responsible for Android's jump from 5 million to 10 million in the second quarter 2010. That is something that happened to a large part in China (LePhone) and for the other part in all those international markets where Apple is already present on multiple carriers and where it's Android catching up in terms of distribution channels, not Apple. Android is indeed growing on carriers where Apple is present.

      • Tom Ross

        OPhone, not LePhone. Sorry.

    • RattyUK

      Of course the Ophone has had all the Google elements of Android taken out. So every oPhone sold is less market share for Google in China. Although Google do make a bit of money on the ads in Apps in the iPhone in China. Ironic, isn't it?

  • anonymous

    @Charbax

    "The second the AT&T exclusivity is finished, both AT&T and Verizon will sell iPhone, but they won’t need to be paying anything more than $400 per iPhone then. "

    Won't happen. Think about it. Any new carrier taking on iPhone will subsidize to $199 or whatever they negotiate with Apple to get the iPhone. Now if ATT reduces subsidy, and sell iPhone at higher price, well, customers will gravitate to the other carriers where they can get iPhone cheaper.

    It won't happen for just that reason. In fact there is already empirical evidence that it doesn't happen. Apple clearly said so on one of their conference calls – where they moved from exclusivity to other carriers, that did not affect profitability.

    • Tom Ross

      Apple said so for the past. They did not claim anything for the future, and I have a hard time believing that AT&T $450 subsidy is sustainable once the iPhone won't attract new customers anymore, given that AT&T just lowered their data plan prices by $10 per month and the subsidy now costs more than the data plan is making. As a consumer I hope that these insane subsidies were AT&T's lust hurrah before exclusivity ends and that a Verizon deal in January will portend a global $100 price drop for the iPhone.

      • kevin

        @Tom: Since the carriers pay a subsidy on featurephones and smartphones other than iPhone, you can only look at the difference, which is likely $100-150 when compared to other smartphones. That amount is less than the $360 received for the data plan over 24 months.

        Another variable is Apple handles all TV marketing and warranty/support costs for iPhone; not sure if that is included in iPhone subsidy and/or how that is broken out/billed for other mfrs.

        And Apple is also getting a sign-up fee for new accounts acquired via the Apple Stores, and that is included under iPhone revenue. The sign-up fee is the same fee that Amazon.com, Wirefly, Best Buy, Costco, Walmart, etc get.

  • anonymous

    @Charbax

    "Cause why would carriers even want to sell the iPhone at all, if they can profit more by choosing to sell Android phones instead. "

    Sprint and T-Mobile would do whatever it takes to get the iPhone and they will.
    Verizon has a bit more negotiating power, but at the end they need iPhone more then Apple needs Verizon, and they too will pay whatever it takes.

    Just imagine Verizon being the only major carrier without the iPhone, staking their smartphone game on a platform one legal decision away from an injunction? No responsible carrier CEO would put themselves in this position.

    They will take the iPhone on Apple's terms.

  • Scott

    While a very interesting analysis (although the lack of HTC's numbers over that time period makes it also incomplete) it's also very unconvincing when discussing the current or future "dominant" platform. While I agree that Nokia's position is probably irreversible, and RIM has perhaps one more shot in 2011 to hold on to (or increase) their share of the pie, when using handset profits as a proxy for the dominant platform you have already committed the mistake that Apple made that has cost them the game (yes, already).

    Specifically, the profits from Google's POV come simply by spreading the Android ecosystem, and the profits of the various handset makers who want in (and who are NOT the biggest losers, those would be Nokia SE by your own numbers) come by getting easy-access to a slice of the pie they otherwise can't compete in. In this sense it really is like the original PC wars, and the fact that Android has already blown by iPhone sales numbers in Q2 shows the long term irrelevancy of the profits Apple made this year and last.

    Apple took high subsidizing and short term profits and exchanged it for exclusivity in the largest smartphone market, and it's already cost them their lead. Even if they do get a Verizon iPhone out in early 2011 (and I doubt it) it's too late. There are more than a half dozen high end and very desirable smartphone handset launches belonging to Android between now and then on VZ alone (not to mention entry level ones), and the hardware specs being leaked for many of those phones are well beyond what Apple has in the iPhone4. Meanwhile, the pace of innovation in the OS by Google (who doesn't have to co-develop the hardware…ring a "PC-wares bell?") is simply out pacing them, and the rapid expansion of the platform has brought in equally formidable allies. Even with a "best possible scenario" launch of a Verizon iPhone in 2011, Apple will now be facing not just Android phones from multiple vendors that outgun their hardware, not just another version of Android that focuses on UI development, they will be facing a Playstation-branded mobile gaming experience on Android, a completely revamped app market with a simpler to use development ecosystem, the easy transfer of all Adobe AIR apps to those phones (which not only further diversifies the development ecosystem but also "retro-fits" a lot of already existing content), Flash content on all current and future phones, a new music system supported by a music industry that feels it gave away too much to Apple when they negotiated the original iTunes deal, and TV content, from FioS to other (yet unannounced) TV deals (many of which will cosign with GoogleTV).

    It's not a question of "can Android catch up"…Android is already winning. The question is, can Apple do anything to stem their hemorrhaging of marketshare, and the answer is most likely: Not anymore.

    I'm not even sure it makes sense to try at this point. "Trying" would entail going back to Adobe with your tail between your legs (and still being 6 months behind), letting lots of people you can't control have access to development, generating more entry-level handsets that you market at middle America (at a greatly reduced profitability margin), buying AT&T out of the last year of their contract and not getting any more subsidized deals so they could sell iPhones everywhere, and generally slashing profits to try and gain back marketshare they already turned their backs on. If they did this, the battle would be longer and uglier, and Apple would stand a chance, but also would see some ugly quarterly results in the nearer future, and might loose anyways.

    I suspect instead Apple will choose to ride another year of cushy profits, I expect they are launching a Sprint-based CDMA iPhone in mid 2011 that will help pad their margins to get access to an iPhone (and in the short-term supply another market to get a bump in market share) and otherwise hold on to the profit margin as they settle into another 6-15% marketshare holding pattern like they did with PCs. I'd also imagine that the executives and board will have sold a lot of stock in the 16 months after the Sprint phone comes out.

    • Roel

      Dear Scott,

      Sorry to rain on your parade, but corporations exist to make money. The charts on the article show exactly who is winning in the only race there is, which is to make the most profits for the good ol' investors. Market share is not the objective.

      Come to think of it, and Apple is winning in the PC wars too.

      Now come to your senses, do yourself a favor and go buy some Apple stock.

      • Scott

        Sorry to rain on YOUR parade, but you apparently missed the entire point of my post (or else you failed to read it and just wrote a knee-jerk reaction). The point is that those charts only show profit from handset sales, thus ignoring the majority of the profits that can stem from the mobile ecosystem.

        Because Apple tied themselves to the myopic view espoused in those charts (thus repeating the mistakes they made in the 1980s during the PC wars…which, by the way, Apple lost so badly they almost went out of business from in the 1990s…the fact that Microsoft totally missed the boat on the next round of computing wars doesn't change the fact that they crushingly won the previous round). Apple has maximized their profit margins to the exclusion of marketshare…but marketshare brings its own profits in other ways). In doing so Apple has chosen to win a short-term battle but has already lost the long-term war. It's over. Apple already lost badly to the Q2 sales numbers of Android, and will lose in every quarter from now on.

        It's over. They went for the fast and easy money and ignored marketshare when they could have grabbed it. Now they would have to sacrifice current profits to try and get marketshare back when they're already behind, period. There's no magic third-way forward here, and all of Apple's actions suggest they are going to continue to pursue higher margins rather than do what would be needed to become the dominant mobile computing platform.

      • http://www.asymco.com asymco

        There are no substantial profits from mobile ecosystems. In fact, there are substantial accumulated losses. By far the largest value today is captured by operators, followed by device vendors. The assumption that there is going to be a monopoly in mobile phone platforms is also a flaw in your thinking. Operators are inviting (or commissioning) Android devices and promoting them for the same reason they did so for the RIM clones: they don’t want a single supplier to dominate. (Ask yourself why AT&T, which has a hugely valuable exclusive franchise, is commissioning and ranging Android *and* DOA Windows Phone 7 devices. You might also guess that Microsoft itself is still in the game because operators already assured them a portfolio slot.)

        Long term I expect four to five platforms to equalize in share over time. This is simply a consequence of the distribution model in phones today. I suspect Apple knows this which is why they are implementing a profit skimming strategy rather than a deep penetration strategy with the iPhone. The present approach is absorbing the profit pool in devices sold through the channel. The non-cellular iOS devices are targeted at other forms of computing.

        I quoted myself from another comment in this thread: http://www.asymco.com/2010/08/02/android-global-s

      • Scott

        "There are no substantial profits from mobile ecosystems."

        I'm sure, much like search engines…

        The revenue from mobile search is already far exceeding the cost of developing the ecosystem. And while you are right that traditionally-speaking carriers have controlled market share of OSes to a large degree, you seem to be mistaking the disruptive nature of what is happening (which seems odd to me, since you so clearly grasp the disruptive nature of what happened in the previous cycle with Apple and RIM). Note that Apple controls AT&T to a degree never before seen, and AT&T rode with it until they pretty much had to face the music that it was over. And it's not just over because Apple will probably opt out of their contract (or more precisely, sell it to Sprint next year), but because even if Apple stayed it out they have 18 months tops to diversify their smartphone produce portfolio…and they can also see the writing on the wall with Android.

        Carriers can't make monetize their bandwidth as effectively (even if they win their "precious" temporary lack of mobile net neutrality from Congress) without a mature and stable ecosystem. Apple did a good job of pulling together (copying, as some here would say) existing ideas into the first example of a coherent mobile ecosystem, and they and AT&T are currently reaping the (short-term) rewards. But Apple acted more like a consumer electronics company than a software company, and as a result the badly misjudged the degree of ecosystem monetization associated with dominant marketshare. Verizon will continue to support Android (and other companies will follow suit) for the simple reason that it will make them more money. Sure, there will be defectors and upstarts…even Dell put Linux on a couple of laptops and netbooks when it grew frustrated enough with Microsoft, but the profits inherent inmobile gaming, in productivity, in consuming media content, etc will in short order be more important than the monthly fees (or rather, those monthly fees that carriers charge will be seen as access tickets to the larger ecosystem).

        What you are suggesting (that carriers will ignore this market pressure and profits) would be like saying that carriers would only sell so many smartphones while artificially maintaining feature-phones sales in their stores (and by selecting how many of each phone were available). Of course that won't happen, because it's unstable and would cost them sales to the first carrier that pulled their heads out from where the sun doesn't shine. Carriers will follow growth markets and profits when it comes to smartphone OS just like they have been with handset sales. The thing is that for all of its design ingenuity (and Apple does some great design) Apple has badly misjudged the market forces of the present and future while maximizing current margins.

    • http://www.asymco.com asymco

      Many of these benefits of Android were initially proposed as the reasons why Windows Mobile would win in 2003. They ended up with up to 30% share in smartphones from hundreds of vendors (and over 1700 phone models). In fact, that model was what was also proposed as the answer to the iPod: Microsoft's PlaysForSure ecosystem. Oh, and it was PalmSource's business model and Symbian's too.

      • Scott

        I agree. And it did help propel MS to what could have been a commanding position, but they were not nimble, they were pursuing a plan based on their monolithic Windows desktop software and failed to see how mobile computing would have to be different. Palm simply failed to transition to smartphones as well as RIM did, and Symbian was incredibly successful with the same model initially, but in the end they were left mostly just being Nokia, stuck with similar one-company problems (also, none of those OSes managed to open up the development ecosystem until after Apple did).

        Don't get me wrong, Apple did a LOT of things right. Their concept of apps basically reinvented the marketspace. Their emphasis on touch interfaces, and the short learning curve they built into their devices all are exemplary. Apple got itself into a pretty commanding position by around this time last year, and they did so by making lots of good decisions with their design. But they also made lots of decisions that are bad for the long slog for marketshare by giving up accessibility to the iPhone in trade for a padded exclusivity deal. To be fair, it may be that no one (including Apple) could have forseen that the market would change this much in that first 5 years, but had they demanded a little less control and kept their ecosystem a bit more open while also getting on more phone companies they would have had a far better chance.

        BTW, in interviews (like the one in Wired) with Apple execs, it's clear that last part was never a plan. They considered going with Verizon first, and even after the deal they considered several times whether they should dump AT&T for Verizon, but they apparently never thought that the real solution was to stop being exclusive to a carrier until very recently, when Android's growth trajectory became more clear.

    • Priit

      Scott,
      "a new music system supported by a music industry that feels it gave away too much to Apple when they negotiated the original iTunes deal"

      So you think that when music indusry think's they gave too much to Apple, then they will give even more to Google? Why?? Or perhaps less? If less, then how is less an advantage?

      • Scott

        The music industry will give less to Google, I'm sure of it. They will want a larger cut of the digital music revenue, and perhaps demand stricter DRM on streaming music. Don't get me wrong, the music industry has some deserved skepticism of Google (and really all internet companies) due to fears about copyright infringement and file sharing (largely unfounded fears IMO, but that's a different topic).

        I'm also not saying the music industry is ant-Apple, they emphatically are not. But they clearly see the benefit to them of having competing platforms (they can then renegotiate deals more easily).

        As for what is the "advantage"? Apple's pre-existing iTunes ecosystem is one of the major driving forces that make the iPhone appealing. A ton of people already use it for their music because they own(ed) iPods of some sort. Even on forums that cater to Android users there are dozens of threads asking how to sync their iTunes music with their phone (luckily there are several ways). Providing a music system that can be used just as easily reduces one of the ways Apple has tried to lock users into iOS products.

        But there's another side to this. Google is (of course) going to make cloud-based music a large part of their product. Apple sees the writing on the wall and understands how distributed music can trump the current iTunes implementation, and they are certainly working their butts off trying to get a version of their own going (that's been in the news too). Whether they can do that particular type of service as well as Google I have some doubts about, but regardless, what Apple needs to do is get theirs out first, and be at least close to as good. But the music industry isn't going to let them get there first, because it's in their interest to let Android launch first so that it's a credible competitor. And that will be a HUGE market advantage in Q4 this year.

        Besides, Google can afford to make less per song…they make their money from advertising. You may have noticed that their search engine is free…but it still generates $30 billion a year in revenue…

      • yowsers

        I worked in a small digital music tech boutique back in 2003-2006. We did a fair portion of the encoding of music that eventually formed the content for iTunes. We later attempted some turn-key music stores for Windows-based vendors who wanted to play in the legit music download market (it failed – valiant attempt, but failed).

        The thing I recall thinking at the time about iTunes was how *late* they were to market. And they were!

        The minute you could rip a CD, or a single track from a CD, was the minute that you wanted to buy a single track online. We all remember the days when you were forced to buy a mediocre CD (at best) that had only 1 or 2 good tracks on it, gunked up with 3rd rate filler songs, had crappy artwork to boot, and gouged $14.99 or $17.99 for the privilege .

        I felt that quite acutely in the 90's. Apple coming to market with iTunes in the early 2000's meant they were late. It was an obvious thing to do.

        But I didn't feel the indictment rested with Apple. They were a computer company, not a music retailer. The indictment (incompetence, cowardice, failure to comprehend, failure to seize an opportunity, lateness) rested with the major labels and other major retailers.

        If Apple was late to market with iTunes, but was one of the few to show up with a workable and obvious solution, what did that say about the people that should have owned that market, should have been the ones defining that market?

        Warner, EMI, Universal, Sony, the Orchard, etc. — were the high-handed players at the time. You could feel the denial in the air, though, and you could sense their insecurity. You saw it in the budget cutting, the lay-offs, the desperate attempts to find solutions in subscription models, the avoidance of the inevitable (iTunes and single track non-DRM downloads).

        Yes, they're still the big names, but that's all I see: big names. They're increasingly a shadow of their former selves, just as the book publishing and the movie studios are.

        To answer your question: just like authors have received less and less editing and marketing support from the publishers each year — going on decades now — so, too, have the musicians received ever decreasing support in terms of production and marketing from the labels. Most successful working bands don't look to CD sales for income (the labels get all that), they look to what they earn performing (which is why their touring schedules are so horrendous and have been so for a long time — they don't get paid unless they play.) Authors and musicians are finding the publishers and labels offer little to no value, and haven't for a long time. The new tech and platforms have given them opportunities they didn't have before.

        In short: what the music labels have (aging catalogs) is an iceberg floating away — it continually melts. Each day, each year, what they have to "give" (that is, what they control) melts or evaporates. If they still have a case to make, they better make it quick. They were even more late to the game than Apple was in 2004 when iTunes got rolling, and they haven't shown anything interesting since. In a decade, they won't matter.

      • http://www.asymco.com asymco

        Following the money, it's pretty easy to see that the recorded music industry is already a hollow shell. The market cap of WMG which represents somewhere around 20 to 25 percent of the market by revenue is worth $690 million (In Oct 2009 Warner raned third among the four major labels with a 20.7% market share, according to Nielsen SoundScan. In December Edgar Bronfman reported 21% share in the US). Assuming 5x represents the whole industry, then it's probable that recorded music has a net present value of $3.4 billion. May be a big number but it's less than what Apple put away as cash in the last quarter ($4.1 billion). Keeping in mind that most of the value is in the backlist catalog, new acts are probably not being valued at much more than zero.

    • Tom Ross

      So long term, are you giving Apple 6 or 15 %? That's a hell of a difference. Assuming the mobile phone market doesn't turn into a crippling monopoly like the PC market, more than 10 % market share would be excellent for any company. For example, Toyota is the number car make in the world, and they're holding 12 % market share. In fact, only 3 car makers are having more than 10 %: Toyota (12 %), VW (10 %) and General Motors (11 %).

      • Scott

        Right…except that you're making the same mistake as this column did in thinking that most of the profits long-term come from sales of handsets. Cars have fairly stable margins, because they are expensive durable goods. Handsets are already well into the usual tech-gadget curve where products start out with high margins and less sales and transition to lower margins with higher sales. In 5 years many of the large markets will have hit the saturation point on smartphone sales growth, and emerging markets will never have the margins we see now on product. Notice even today that Nokia has more than twice the marketshare worldwide that Apple does (and RIM is well above Apple in the U.S.) yet both companies make a lot less money because they've already had to sacrifice margin to try and hold on to marketshare (which ultimately they are losing anyways).

        If in 5 years Apple has 15% of the market, they will only do so because they moved towards commodity pricing and will be making much less then they are now. Making less = losing your market capitalization in todays business world. If Apple eschews fighting for marketshare and just holds onto a highend niche then they will be lucky to have 6% of the market; now I grant you that much like with computers today Apple's profits _from hardware sales_ will be higher than other handset manufacturers (much like the situation with today's PCs), but they will be missing out on all of the other revenue that comes from creating the dominant ecosystem, and will probably lose other revenue streams. In particular, their entire media content empire (iTunes) is at risk, not because they don't make some of the best mp3 players, but simply because mp3 players as stand-alone devices are at the end of their life cycle. Mobile computing devices (smartphones) are already displacing sales of standalone portable music devices, and this trend will accelerate as smartphone sales penetrate further into the cell phone market. If Apple has 6-15% of the market for devices that play music, they will be losing a ton of revenue compared to their near monopoly the last few years.

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  • Nitin

    Agree that iPhone and RIM are capturing the majority of the profit available in the market and that Android is largely being pursued by peers who lost their earlier mindshare. That said, I think the end-game of Android is very different.

    Money from handsets will shift from handset makers to service providers and that's where the competition is between Apple, Google and Microsoft. Go figure which has best chance here.

    From what i understand Android is attempting to do is marginalize both the hardware and software; instead making money on the services. Apple has a viable platform to make money from services but RIM will have to rely on enterprise segment alone (which uses it only because of its physical encryption server giving CIOs a sense of added security).

    That said, between Google and Apple, I think Apple is stronger in media (iTunes) but not in other services. Application count will become irrelevant in a few years. Apple's datacenter will help bridge the gap a bit but looks focussed on media consumption. Google on the other hand is tying up with Amazon, allowing ISP billings and more open to wider variety of media availability in addition to its already strong portfolio of other services.

    Where does it leave handset market. Android has proven that it is equal if not better in terms of driving data traffic. Operators will increasingly become less interested in giving away higher subsidies for smartphone. This will put pressures on ASPs and margins across the value chain. Apple's attraction for ISPs will continue to wane and thus Apple wont be immune.

    • Oluseyi

      > From what i understand Android is attempting to do is marginalize both the
      > hardware and software…

      Disastrous for the hardware manufacturers, no? They get to be HP and Dell all over again, while Google plays Microsoft. Why should they aid their own demise? (Answer: because they're too dumb to do otherwise.) I am curious what services Google/Android is so much better positioned to deliver than Apple/iOS in your estimation, though.

      > Where does it leave handset market. Android has proven that it is equal if
      > not better in terms of driving data traffic. Operators will increasingly
      > become less interested in giving away higher subsidies for smartphone.
      > This will put pressures on ASPs and margins across the value chain.
      > Apple’s attraction for ISPs will continue to wane and thus Apple wont be
      > immune.

      Interestingly, both Apple and Google tried to upend the operator subsidy model when they launched their devices, with Apple offering the iPhone at cost and in their stores sans activation while Google did the same with the Nexus One, albeit exclusively online (no retail presence). Both can be said to have failed in the short term, with Apple first eliminating the home activation on iPhone and then embracing carrier subsidy and Google dropping the Nexus One entirely. A future without carrier subsidy doesn't sound frightening to either one, especially Google since it doesn't make the damn phones, it just sucks up all their data.

      • Nitin

        "I am curious what services Google/Android is so much better positioned to deliver than Apple/iOS in your estimation, though."

        – Gogole Maps
        – google mail
        – google sync
        – google voice
        – google youtube
        – Google Translate
        – Google docs

        going forward
        – google music
        – operator billing
        – carriers get portion of app sales
        – largest collection of free ebooks
        – searchable index to pretty much anything

    • http://www.asymco.com asymco

      The mobile platforms will still depend on operators for a long time to come (see Nexus One). Operators will influence ecosystems by the portfolio of devices they carry and the level of promotion they apply. As long as this intermediary exists, there will be no mobile platform monopoly or even duopoly.

      • Nitin

        The issue i think is not operator model being upended but being tweaked
        Currently operators are putting their subsidy (so called customer acquisition cost) towards smartphones.. The idea essentially is lock-in

        Once in places like US where smartphones will reach 70-80% of units (Verizon expects in 2 years) from current 30-40%, smartphones will no longer be the attraction for consumers/operators. Instead customer acquisition costs will go towards bringing monthly charges down. Lock -in effect will still remain as you will get lower bills only for long-term contracts.

      • http://www.asymco.com asymco

        The future of smartphones should follow the path of plain phones and feature phones. Once they reach saturation the subsidies decline and the ARPU drops. Each improvement in devices for the past decade or so has been sustaining to the operator business model and that includes the iPhone and Android (despite attempts by both Apple and Google to disrupt with first generation iPhone and the G1/Nexus One). What sets Apple apart here is the other iOS devices. I will be watching Facetime on iPod/iPad very closely.

  • Oluseyi

    @Charbax:
    > You wish. Java has always had a totally open GPL2 fork of it. Google and
    > anyone else is totally free to take Java and do whatever they want with it
    > within GPL2 rules. If Sun didn’t want Java to be an open platform, then
    > Java would never have been as big as it was.

    Java has never truly been open, though. Yes, there's a GPL fork of the JVM, but the underlying Java specification is controlled by the JCP, which Sun reserved exclusive power to veto at any time for any reason.

    Plus Google doesn't want Android to be completely under GPL, anyway, given that Android Market and the Google Apps (Maps, Voice, etc) are proprietary and must be licensed at cost by OEMs.

    @Hamranhansenhansen:
    > The issue is that Google reverse-engineered Oracle’s patented Java Virtual Machine.

    No, actually. Google wrote its own virtual machine, Dalvik, that does an end run around Sun's (now Oracle's) JVM entirely. The issue is that Sun prohibits the use of any standard library other than its own, or injecting any new types or functions into standard packages. Google merely uses the Java language syntax, which is un-patentable and un-copyrightable, but actually uses its own compiler to emit its own bytecode for its own VM. (Caveat pedant: Yes, the actual process does use the JVM as an intermittent form, but it'd be relatively simple for Google to engineer that part out.)

    All that techno-legal mumbo-jumbo said, asymco's analysis of Apple and RIM dominating profit share is unassailable. And since Google and Android licensees are unaligned in terms of objectives (Google is actually better served by a decline in their ASP to effect greater marketshare), this is not in their interest. I, too, look forward to a future analysis after a year or more of Windows Phone 7.

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  • Iphoned

    @Scott

    "I suspect instead Apple will choose to ride another year of cushy profits,"

    Yes, just like they've been riding another year of cushy profits in PCs/laptops fo over a decade while losing (not) market share.

    • Scott

      "Yes, just like they’ve been riding another year of cushy profits in PCs/laptops fo over a decade while losing (not) market share."

      Just not true. I recommend you check out the profit/growth chart on Wikipedia here: http://en.wikipedia.org/wiki/History_of_Apple_Inc… and a chart of their stock prices like here: http://finance.yahoo.com/echarts?s=AAPL+Interacti

      Apple almost went out of business in the 1990s, but even after Job's came back their initial bout of revenue growth (and stock price increase) was hamstrung in the first half of the last decade, as they just couldn't make enough off of their small share of the market to show the kind of growth that investors want. It was the second half of the decade that saved them, and that was entirely their shift to mp3 players and media sales that drove that growth. And that's why having 6-15% of the mobile computing market 5 years from now will not suffice to sustain their current profits, let alone revenue growth.

      • anonymous

        Dude. You need to look at their financials, not the stock price history. The Mac business is thriving.

      • Scott

        Sigh…the first link gave the financials summary. They are in tune; stock prices is just a proxy for the former, and no, the Mac business was NOT booming in the first half of the last decade; what has causes a mini renaissance the last 4-5 years was their domination of the consumer mp3 space and more recently their success with the iPhone. They introduced people to their ecosystem in a positive way (and did so right as Microsoft totally flubbed Vista) and that helped grow sales a bit, mostly with laptops. But as their marketshare shrinks (and it's most certainly shrinking right now: http://i.zdnet.com/blogs/mobile-os-share-recent-2… ) they will also lose the platform-based sales growth they've seen in their mac line.

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  • Iphoned

    @Scott

    "the fact that Android has already blown by iPhone sales numbers in Q2 shows the long term irrelevancy of the profits Apple made this year and last."

    It shows that Android can compete with Rimm and Win Mobile devices, by copying iPhone. The true test will come whe Androids have to compete side by side with the iPhone on same carriers.

    • Scott

      Sigh…Android is really not very much like iOS at all in its details. Apple did do some things very well, like how they made the touch interface work (note that this was not their invention, they just did it better then anyone had at that point). And while Apple did not invent the idea of aftermarket apps (they copied others!) they definitely were the ones that made the marketplace sit up and take notice of their implementation. So to the extent that Android can support a touch-screen-only phone, and that they (like everyone else) have an app market, then yes, they are "copying". There are also lots of very innovative things done by Android that Apple has tried to imitate, but none of this really matters in this discussion because the issue is whether it will matter to the market now. Android sales aren't exactly hurting on AT&T now that they finally released a high end handset. The main advantages Apple has had was the fact that their phones have a shorter learning curve (the "it just works" concept) and the pre-existing iTunes ecosystem. We've already hit the point where some people purposely pick Android over an iPhone because the closed-garden "it just works" concept also translates to "it just doesn't work" if you want to do anything that Apple doesn't want to let you do (even little things, like customize your phone's screen appearance). But again, it's not that Apple is doing it bad, their designs are very good. But they have to do both the software and the hardware, and they simply are not keeping up (and won't be able to). Google will release a major overhaul to Android again this fall (the second this year and the third major OS update in 12-13 months) that is designed to make the OS even more user-friendly, while handset manufacturers like HTC and Motorola are already taking samples of phones that are literally twice as fast as what Apple is shipping. The rate of innovation is faster, the public perception of the two platforms is already pretty much equal, and so even if Apple gets a Verizon handset out in early 2011 (which I doubt they will) they will be placing an iPhone4 up against phones that are faster, have more storage, a richer development ecosystem (lack of Flash and Adobe Air might not seem like a big deal now, but it will in early 2011 when high quality Air apps start getting retrofitted rapidly for Android phones). Lots of people like iPhones just fine, and they are certainly good little devices, but they are already at parity in terms of general market appeal to most people, and in the next 6 months Android phones will receive another major OS upgrade, another round of newer and sexier hardware, a new high-profile gaming system developed with Sony, the first streaming music system, etc., while a Verizon iPhone4 would just be 6 months more behind.

      It's too late. Had Apple decided to actually put the iPhone on all the carriers two years ago this might be a very different story. But no they are just closing the barn doors after the cows got out…it's almost certainly too little too late.

      • kevin

        Before and after iPhone arrived, cell phones (even smartphones) had all these features that few used. They had 3G, cameras, and videocalls, and yet few used them or were willing to pay for data. So yes, all those hardware mfrs are "innovating" but without the right software and UI, who will use them much? Google will have to keep up and match the hardware since they still control Android releases, but can they? (And most people think Google UI – see Gmail GoogleDocs, Wave – is just average.)

        Second, does Apple not have access to those same faster CPUs? They buy millions of components from Samsung, LG, Qualcomm, Nvidia, etc. So of course they do, but Apple has seen an advantage in taking the path they took – an advantage that will soon be exploited by the OS that they develop specifically for it. The very fact that Apple is doing both software and hardware is an advantage in creating systems that just work and are easy-to-use, efficient, and secure.

        Third, why couldn't Apple evolve software (OS and apps) as quickly as Google? Are you saying there some advantage in software that Google has that can't be overcome? If so, what advantage is that? iOS and its apps are leveraged with Mac/iPad, etc. As smartphones become more powerful, like computers, Apple will be bringing to market much more powerful consumer productivity software, fitted just right to its hardware's capabilities. What competency does Google have in consumer software beyond web apps (and back end search/advertising software)?

      • Scott

        Ok, these are all good questions. First off, I agree that Apple pulled together disparate (but existing) features and certainly the ones that defined the early design and monetization concepts for mobile computing. No doubt about it, they were good. This really isn’t an “Apple sukzz!” issue. But to address your two main (and good) questions:

        1) why can’t Apple keep up with the hardware?

        Specifically, you asked if Apple wouldn’t have access to all of the same toys that other handset manufacturers do. And of course they certainly do. But there’s a reason why Apple does yearly refreshes. First, it gives them time to create a very polished user experience. Second, it pads margins since they don’t have to increase staffing in order to pump out more phone designs. The Android hardware vendors have had most of the burden of software removed from them (and aftermarket app sales, etc) and are instead are trying to capture marketshare and consumer loyalty while smartphones still have reasonable profits (i.e. before they reach true commodity pricing, the way feature phones have). The amount Motorola makes off of each Droid X is probably about the same as the sale of an iPhone4, but since Moto doesn’t have to develop much of the backend or OS, they can keep pumping out hardware designs while incurring a similar overhead cost for development. Throw in half a dozen companies doing the same on Android, and it doesn’t matter what Apple has access to, they simply can’t innovate and refresh at the same rate as the standalone hardware vendors without having to start charging more (they already do this to some degree with the money they get from AT&T for exclusivity) or else sacrificing their margins.

        2) Isn’t Apple just as good as Google at software?

        Honestly, when it comes to phone UI and ease of use, Apple is better. Really, they are. Google has some strengths, including data managing and mining, and of course search (which is strongly related), and Google has an advantage (right now at least) in developing cloud computing solutions, but for UI design Apple wins (if not by as large of a margin as they used to).

        But several things are at work here. First of all, Google benefits in a symetrical way to how hardware vendors do; Google doesn’t have to develop the hardware, they just work on the software. As a result, they can place more of their development costs into just software (i.e., they can hire more programmers for the same cost of development), plus they don’t have to tie OS development into an annual hardware refresh cycle, they can push out updates as quickly as they can code and debug them. Android 2.1 was really the first version of the OS that could compete with iOS in terms of feature parity, and 2.2 was the first one that demonstrated core advantages (to some users…not all). but withing a year of 2.1 they’ll be pushing out Gingerbread (3.0 in all probability) which will be aimed squarely at UI improvement and the user experience. That is simply a faster rate of innovation then Apple is showing; despite their excellent design team (and head start) they can’t keep as many people working on the software unless they are willing to eat into their margins.

        But there’s a second, possibly larger advantage (in the long run) that Google has, which is they aren’t insisting on controlling everything themselves. Apple has alienated many software partners that could have benefited the iOS ecosystem. I’m sure it seemed like a good idea 9 months ago to decide to totally cut out Adobe (who Jobs has a distaste for anways after the NLE wars) so they could supply the design tools for their ecosystem (and also therefore be the sole sellers of said design tools) but the problem is that he was acting like Microsoft before he had the marketshare hegemony that MS had when they started acting like jerks. This isn’t just about Flash (although I’ve seen mobile Flash, and it’s nice), but the entire Adobe AIR development ecosystem, which is very mature and has lots of existing content, is getting pushed to Android this winter. If you don’t know what AIR is I recommend googling (or “binging” or whatever) it, as it’s a very high quality ecosystem that will just be folded in to the competition against iOS. Moreover, Apple wanted to control iOS gaming (more money for them), but Sony, still struggling to compete with Nintendo’s mobile gaming platform, is therefore throwing its hat into the ring with Android (and for obvious reasons…this is a clear care where marketshare = direct monetization, and neither Apple nor WinMO wanted to share their pieces of the pie). So now Google will only have to improve the Android market (which they were already doing) and provide Gingerbread hooks to Sony, and Sony out of pure self-interest brings its formidable branding and gaming experience to bear against iOS. Not because Sony hates Apple (although they don’t seem to get along) or because they love Google…but because Sony loves Sony and it’s the easiest path to leapfrogging its competitors.

        Media consumption, content creation tools, etc. Companies in many diverse fields were tosses aside by Apple because Apple wanted to control the entire user experience. That’s fine, but it just means that many more companies that will spend their own dime to promote an ecosystem (Android) where they get a slice of the pie. That’s a lot more money, time, and talent then Apple or any other single company has.

        So yes, Android has clear cut strategic advantages in both hardware and software innovation that stems from their division of labor, and a willingness to spread the revenue around to others. And at least on the software side that advantage will only get greater as marketshare increases.

        Apple took the opposite tact; they wanted to keep more of the revenue and control more of the design process. To pay for that they willingly sold out to AT&T, nixing an ability to grab more initial marketshare in order to have their development costs defrayed by the exclusivity contract. Who knows, perhaps 4 years ago this seemed the only plausible way they could produce a product like the iPhone. Certainly they have shown the rest of the industry a lot of innovation when it came to touch interfaces, and they greatly refined the current app market model. But as we move forward those same decisions are what has already cost them the sales race this year, and that disparity will get worse as time goes on.

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  • Iphoned

    @Tim Ross

    "Apple said so for the past."

    Yes. That's why everyone is so busy copying them.

  • http://www.relentlessfocus.tumblr.com relentlessfocus

    I’ve said this many times but the future doesn’t have to resemble the past. There are several reasons for the explosive growth of Android, some are:
    1) As pointed out here, the handset makers how were being devastated by the iPhone were keen to get a full featured smartphone out and Android fit the bill wonderfully at the time. So as Asymco points out, all the handset losers turned to Android and as more and more join the fray around the world, Android sales have skyrocketed. Good for the whole Android ecosystem for the moment but…
    2) Microsoft had no creditable smartphone OS available for these same phone vendors making their turn to Android even more of a no-brainer. It’s my understanding that a software licence for a smartphone OS is about $10. In the overall price, $10 matters but is not an insurmountable issue if the OS is competitive on all other fronts or superiour. As things develop however (see points below) there may be reasons for the hardware vendors to turn to more differentiated options than Android which is after all a commodity.
    3) Mobile operators were keen to get competitive phones to stave off losing their customers to the iPhone sanctioned companies (this issue is changing everywhere and will soon change in the USA too I believe). This helped lead to the rapid rise of Android phones.

    But all is not set in stone. Handset vendors have been able to differentiate their offerings of Android by using custom OSs (motoblur, Sense, etc). Google is trying to create a universal Android UI which is too good to turn down because of the fragmentation issue and has hired a well respected OS specialist for the Android release 3 (Gingerbread). However this will be problematic for the handset vendors if they can’t differentiate on Android 3 or if Google pressures them not to or if customers demand they don’t.

    If Google is successful in their new UI endeavour it will mean that Android based handsets can only compete with each other on price, John Louis Gassé calls this the race to the bottom. The Android handset makers don’t want to be in competition with each other over price because it will kill their margins and kill their profits.

    As Android commoditises further handset makers will have to look for other alternatives or at least a mix of other alternatives, say MeeGo or OS’s not yet developed. This may well begin to negatively impact Android sales over the next 3-5 years as the market shifts from its rapid expansion stage into a more steady state phase with many players. Which players wind up successful in this are unknowable at present. Smartphone prices will probably start to decrease and Apple will always stay away from markets where they can’t add value. Adding value has always been Apple’s key selling point.

    Apple’s added value in this melee includes
    a) as hardware and OS vendor all in one they can focus their development money to produce exactly the phone they want. They have 2 world class fabless chip designers in house to design custom chips to suit exactly their own needs and a world class OS which they own, which is very popular and which they can inexpensively redeploy rapidly as the market changes. With only 2 models (last years and the current model) they have economies of scale which no other single handset maker has in terms of smartphones.
    b) Apple products form an interleaved eco system from iTunes, the App store and mobileme and the new cloud services coming on line through to computers to smartphones and music players and software (iWork, iLife, etc) and soon a tellie box. Each of these products boost the appeal of their partner products and couple that with the Genius bar and Apple stores and Apple’s world wide distro system and you have a powerful competitive advantage that nobody else matches
    c) Apple customers tend to be satisfied with their products. Not everyone to be sure but repurchase rates are high and Apple support is consistently highly rated. Apple works hard to create this customer relationship which outsiders misinterpret as fanboyism.

    For Google to be successful in the wireless market I think they’ll have to hit at least the 60-65% domination level which brings them dangerously close to monopoly oversight. But without that dominent player role, Android may do well but Google may not benefit. Google is not in the smartphone OS business to be nice, they’re in it to make money through advertising. To the extent that they don’t get 60% of the world traffic going through their net they’re going to be in trouble.

    Another issue for Google is the rise of non-Google related Android phones like the oPhone. The oPhone is a branch of Android which is totally devoid of Google hooks designed specifically for cheap phones for far east customers. Will similar cheap non-Google customisations appear for Latin America and Africa? If so then when Android numbers are bandied about they will be totally meaningless. This cohort of phone users will not likely yield the kind of advertising revenue that Google expects from more developed countries.

    It’s my feeling that long term analysis of the smartphone market based on today’s unusual conditions is not valid. Android is not crushing Apple despite its rapid growth. The future may not look like the past.

    • Scott

      I don't agree with your analysis…but this was by far the most cogent response I've seen on this board. The problem is that Apple's strategy of "value-add" with smaller marketshare already failed twice with PCs (once before Job's returned, and once again after the 2000 slowdown); they really only got back to major growth because they dominated a new growth market (mp3 players and digital media) and then parlayed that into another growth market (smartphones). Now, I'm not saying Apple won't go find another market (obviously they are hoping tablets will work out that way…although I expect that to be shorter lived for them); Apple has lots of good design teams and they may well find another "next big thing". Frankly, I hope they do. But they aren't going to be able to stay competitive in the smartphone market with their current strategy, and by all looks of market trends there's little they can do to change it now. iOS devices have already lost their shine in the eyes of many, and we still have over a dozen highend handset launches left in this year alone for Android. Moreover, the combined ecosystem of Gmusic, Playstation mobile gaming, GoogleTV, Adobe AIR/Flash, and what is quickly becoming a more developer-friendly OS isn't going to change, and there's little Apple can do about it.

      Also, while Google is (and will for some time be) primarily an advertising company, they will also be getting slices of the pie from media sales, probably from game and app sales, etc. They don't need to make very big slices of those pies, which is why Android is so much more attractive to powerful collaborators than iOS or WinMo7 is, but those will help pad Google's bottom line even if they only end up with 40-50% of the smartphone market (although I suspect that it will be in the 60-70% range in 5 years). Those types of deals are also why we won't see handset manufacturers run headlong to other OSes. The pie gets so big that Motorola, HTC, or whoever can offer access to services (Playstation mobile- compatible!) that offer additional revenue streams for them.

      I won't say Apple can't get back into the game, but I don't think they can without radically changing their strategy, and I don't believe they are willing to do that.

      • boo

        Why will they end up with 60-70% market share? That is a prediction based on?

        "Value add"?? with small market share? More like value creation for not-insignficant portions of the market.

        I don't believe anyone has to die for someone else to succeed, the steady state OS market share is not going to be lopsided in anyone's favor. Apple knows exactly what happened with the Mac in the 90s. If you could figure out that they shouldn't repeat that mistake, you think they haven't played that scenario out in strategy meetings over and over and over again? C'mon. Just because it is a significant change in strategy, doesn't mean it is not a viable option. Introducing a touch screen iPad was a HUGE bet, big change in strategy. Introducing a touch screen phone was a HUGE bet, big change to strategy. What makes you think changes in strategy to ensure relevance won't occur with these devices going forward as well?

  • anonymous

    To Scott:

    >>It’s too late. Had Apple decided to actually put the iPhone on all the carriers two years ago this might be a very different story.

    Right. I think you maybe confusing Android market noise with reality. Foxcon is hiring half a million people just to keep up with production. Korean' telco's ordering system just crashed on the first intro day, overwhelmed with iPhone orders. Apple can barely keep up with demand which continues to outpace their production plans. And I won't even go into the details of Android questionable business model, user experience, quality of apps, IP issues, and Google's motives which does not bode well for the device maker. Oh, yes the phone specs. Android phones do have great specs, like more pixels on the camera.

    If you are predicting Apples' demise, based on your analysis, good luck with that.

    • Scott

      I didn't predict Apple's demise, I predicted their defeat when it comes to dominating the mobile computing market. You can site all the numbers you want about how many iPhone4s are being sold, but it's still far less than the number of Android phones being sold. You may think the UI or business model is questionable, but less people are agreeing with you when they vote with their dollars. Your entire attitude is the same one Apple has, and the one that is losing them the market. "Oh look, we're making money hand over fist right now, and all we had to do was sacrifice marketshare and partnerships to get more profits from exclusivity contracts". And now that they realize that marketshare will be the final arbiter (and they have realized, just go back and rewatch all the non-marketing parts of Job's announcement this summer of the iPhon4) they think the answer is to control everything, which means they aren't just competing against Google, they will be competing against HTC, Motorola, Samsung, Sony (and its gaming division), LG, Dell, and Adobe and its entire development ecosystem, when the others are fighting for the same side. Sorry, but it's a battle of attrition, and in just a couple short quarters Apple has already fallen behind quarterly sales to Android by a large margin.

      • http://www.asymco.com asymco

        Market share does not get you squat in this market. Symbian had market share coming out its nose. Windows Mobile ruled in the US for a while and even Palm's Treo was king for a day. It's a HUGE market with enormous regional, regulatory, technology and distribution barriers. At 5 billion consumers, it's actually the biggest market there is.

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  • Keith

    You are mixing up a lot of stats about mobile phone sales and smartphone sales. Separate the two and the trends will appear a lot different. It would seem to me that the initial clobbering that Apple doled out on other OEMs is starting to pass and several of them are starting to rebound quite strongly with the help of Android.

    Hopefully you'll revisit this article a year from now and re-examine your conclusions then.

  • anonymous

    Obviously, it too late for the iPhone as some on this thread have argued – here is the evidence.

    "Site crashes as iPhone fans make 130,000 pre-orders". And that's in the home-country of some of the best Droids (with bad GPS).

    http://www.koreaherald.com/national/Detail.jsp?ne

    Go figure. Just clueless fanboys drinking coolaid.

    • Scott

      http://www.t3.com/news/android-sales-to-top-55-mi… (Android sales to top 55 million in 2010)

      http://www.zdnet.com/blog/burnette/android-sales-
      (Android sales surge past iPhone).

      Might want to check your own drink there. It's nice to quote acontextual data, but no one here is arguing that iPhone don't sell well and made a lot of money. Nor am I (at least) claiming that the iPhone is a PoS. The point is that despite the good things about iPhones (and whatever bad things you perceive about Android phones) Apple has already fallen behind in sales in the first half of the year, and no one expects them to recover any time soon (Android is expected to beat Apples 2010 marketshare by 10%!).

      The reality is that many of the very decisions that Apple has made to let them control iOS, to pad their margin while defraying development costs, etc., are not sustainable over the long haul, and in many cases explicitly frittered away marketshare when they could have really jumped ahead. They realized too late that marketshare is where the long term money will be made, and their current business model is too diametrically opposed to react in time to correct their course.

      • http://www.relentlessfocus.tumblr.com relentlessfocus

        Scott,
        The problem in your analysis from my point of view is that Android is an OS which can't be sold separate from a phone but the iPhone is a phone which shares an OS with other products. So saying that Android phones outsell the iPhone rings hollow to me. It's cattle and oranges.

        If you compare phone sales by handset maker (HTC, Motorola, Nokia, etc) rather than the overly simplistic Android (OS) v iPhone (a phone) and even more importantly if you look at revenue from sales of smartphones you'll see that Apple is hardly defeated.

  • rob4rl

    Great article! Living in Europe, Nokia is much more relevant than on the US. I think your article lays out perfectly why Nokia will rather go bancrupt than adopt Android. Something that a huge number of media people just dont seem to get into their head.
    My question to you would be how you see Nokia competing. They obviously have suffered in the last year, but what sets them apart from the "losers" it their huge market share in dumb and smart phones (although admitedly the lower end of smart phones). With that market position and consumer reach, you would assume they will not go away or stop making any profit.

    • Scott

      The problem is that Nokia (or at least their mobile division) is going to get that wish; they are going to go out of business (or more precisely, they will be broken into constituent parts and sold off to more profitable companies). I'd guess this will probably begin when they get a new CEO (which most likely will happen 2-3 quarters after the launch of the N8). It will be portrayed as a "realigning" of their business strategy. In short, making the mobile division go away will be more valuable to stock holders than retaining it. Probably in the next 2 months.

    • http://www.asymco.com asymco

      Note that I did not count Nokia among the "losers". My definition of "loser" here is a company that has faced a long series of operating losses and has no viable software assets of its own. Motorola first, Sony Ericsson second and LG coming into the picture. Nokia has remained profitable so they have not yet had to face the abyss the others did. Same with RIM and Samsung. When/if they do have the near death experience, they might opt for the Android lifeline (flimsy as it is).

      However, the abyss is not necessarily imminent for Nokia. They have made significant investments in software (poorly performing, sure, but better than nothing). They still have a chance to maintain software independence.

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  • Bob

    All this analysis is leaving out one important point, you are leaving out dumphones. Dumbphone owners of today are smartphone owners of tomorrow. The OEM's who successfully transition their share from dumbphone to smartphone are the ones who will win.

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  • Lucian Armasu

    Could you have made a more biased analysis than this one? You not only not mention HTC who's been growing like 60% every year, mostly because of Android, but you also mention Sony Ericsson, LG and Samsung when they've barely introduced any Android phones into the market.

    SE had Xperia X10 but they were doing much worse before that BECAUSE they didn't adopt Android earlier. Their stubbornness to stick with their own in-house OS or windows mobile led to that fall. You don't expect one model alone to turn that alone do you?

    And LG is one of the manufacturers that adopted Android and pushed it the least. Only recently after seeing the high demand for HTC Android phones and Samsung's Galaxy S, that they are considering to push Android harder.

    Samsung has the big push with Galaxy S and they are doing very well with it, expecting 10 million phones by end of the year.

    HTC CEO has said himself that he sells his high-end phones for $400 to manufacturers like Verizon, while Apple sells iphone for $500 or $600 to AT&T, depending on the model. In other countries the iphone is sold at $1000 or more. So is there any wonder why Apple has profit 3x or more than any other manufacturer?

    All this doesn't matter anyway. It's going to be a platform game, and Android as a platform will win because everyone else is adopting it. Yes the mobile world is different than the PC world, but that doesn't change some fundamental principles in the market. Android will become the Windows of mobiles.

  • Tounao Mei

    Your comments on Android is right on target. however, I don't think the data you have supported your conclusion… If you look at market momentum of Android, it really started Q42009. Moto, LG and Sony E were not a significant player until this year. Therefore it is a bit a jump to claim that their problems are a result of Android adoption. As a matter of fact, HTC adopted Android back in 2008, they are doing ok. I think your assessment of Android is still valid, but I question the causal relationship here from the data alone…

    thanks

    • http://www.asymco.com asymco

      Tounao,

      Thanks. My claim is not quite what you suggest. I am stating that Moto et. al. adopted Android because they were in a difficult position financially and strategically. The difficulty was not caused by Android.

      • Tounao Mei

        Great. thanks for the clarification.

      • anonymous

        To Scott:

        >> It’s nice to quote acontextual data, but no one here is arguing that iPhone don’t sell well and made a lot of money.

        I think you are reading way too much in to Android latest sales numbers achieved before iPhone has spread to other carriers and is under severe production constraints. Once carrier channel parity is reached and production contraints lifted (which they will), you will see iPhone and its successors settle into the leading smartphone market position on for a long time to come.

        This is a good summary, of some of the reasons, although may be a bit technical.
        http://www.youtube.com/watch?v=FL7yD-0pqZg&fe

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  • mark

    Surely we have to look at timeings here. As we are talking about profits per handset we may as well just talk about smartphones. The non Apple smart revoultion has only just begun so you can't expect the numbers to be competing with the iPhone that blew every one away a few years back.

    But what I will say is now (in the UK) you walk down the high street and pass mobile phone retailers windows and you don't see 'I…something' you see a little green robot. You open a catalogue or read the paper and he is there again. And these are on premium priced smartphones not budget phones.

    6 months ago the average man in the street would not of heard of Android but know there is a far greater chance..ok not on a 'I' level but it won't be long.

    There is momentem there..I just think its too early to see it in the figures.

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  • http://davidjbradshaw.com David J. Bradshaw

    I think the interesting question on Apple's iPhone revenue, is how much do they charge the networks to licence the visual voice mail server software? Even a couple of dollars per user per month is going to give Apple an extra 50 dollars profit per two year phone contract.

    If you look at sim only iPhone plans in the UK, you can see this more clearly. For example on a sim only tariff O2 charges 7.50 per month for the stand smartphone data package and 10 pounds for the iPhone one which adds Visual Voice mail.

    Likewise o2 has a special Blackberry plan, so I expect RIM is also getting ongoing monthly revenue from the networks for every device in use.

    The other question is should App store revenue be counted towards iPhone profits? The networks used to think it was there place to sell phone apps, ring tones and music to their users, yet Apple has taken all of this from the networks who now struggle to build the bandwidth for users to download all these extra Apple purchases.

  • http://davidjbradshaw.com David J. Bradshaw

    I think the interesting question on Apple's iPhone revenue, is how much do they charge the networks to licence the visual voice mail server software? Even a couple of dollars per user per month is going to give Apple an extra 50 dollars profit per two year phone contract.

    If you look at sim only iPhone plans in the UK, you can see this more clearly. For example on a sim only tariff O2 charges 7.50 per month for the stand smartphone data package and 10 pounds for the iPhone one which adds Visual Voice mail.

    Likewise o2 has a special Blackberry plan, so I expect RIM is also getting ongoing monthly revenue from the networks for every device in use.

    The other question is should App store revenue be counted towards iPhone profits? The networks used to think it was there place to sell phone apps, ring tones and music to their users, yet Apple has taken all of this from the networks who now struggle to build the bandwidth for users to download all these extra Apple purchases.

  • Leonard Bix

    The maths are porbably correct. Before drawing a conclusion, just one point to clarify:

    Units of WHAT?

    Of touchscreen handsets with roudd edges, or what? What definition makes the Apple 'units' comparable with all the oranges and pears in the basket?

    Just a thought, before everyone takes your numbers as unshakeable as the Bible…

    • http://www.asymco.com asymco

      Units are mobile phones. This is data is reported by all the vendors in their quarterly earnings briefings. The common attribute between all these devices is that they have cellular radios and can be used to make voice calls over cellular.

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  • horsewhisperer

    @Horse,
    "…Thanks to being propped up by Microsoft in the 1990s and on even to the present day, given that for “professional” use, Mac purchasers are all buying Office for Mac while they show off and badmouth Microsoft."

    Are you still trotting out that old irrelevant myth. I thought that lame old talking point was taken out back and shot dead years ago. Where ya been?

    That infamous "prop" was a mere 150 Million dollars worth of NON-VOTING stock. Even in the lowest, darkest duldrums, 150 Million was hardly a life-line. Apple had a Billion in the bank at the time. Of course today it has 40 Billion in the bank.

    No, far from being a "prop" (in MS fanboys' wildest dreams), this was actually an unofficial SETTLEMENT that MS paid for infringements (sound familiar?). Of course, the court went with MS (basically due to Apple's naive goodwill and failure to write a clear contract) when dealing with an unscrupulous and unethical shark like MS, but what's new? Nevertheless, MS settled to sweep it all under the carpet. Really, is this news to anyone — isn't that what their huge "R&D" budget is really for???

    Part of the agreement was that MS would continue to develop Office for Mac for a further five years. At the time this was important to Apple. Not so much today (understatement). Of course, Office for Mac came before Office for Windows. It was a good example of the pro third-party you could get on a Mac with the graphical UI. Of course, Apple showed them how to develop for a graphical UI. Of course, MS took advantage of the open access to the Mac OS (which is what led to Apple suing them, but failing).

    Office for Mac was always profitable to MS, which is why threats to withdraw it have always been empty. This is largely because Mac users actually do tend to pay for their software — so don't criticize! Of course, now most of us are more than happy with iWork. But it looks like MS Office for Mac is finally back after some hiatus somewhere along the line. I suppose many "switchers" will still be willing to fork over and payout for the outrageous margins MS makes on their CashCow, no matter how bloated and screwed up it is. Every story I hear shows that Office for Mac users find they can give up their nasty habits easily enough, and wonder why they worried so much.

    Anyway, the measly 150 Million (IN NON-VOTING STOCK) is long behind Apple and MS, probably ten years behind us at least. MS has NO stock in Apple, voting or otherwise. And what they had, when they had it, was hardly a prop for Apple — it was a slap on the hand for MS.

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  • dontmatter

    Very good article Horace. Keep up the great work.

    @Scott: your posts were the most annoying to read and full of logic holes. AKA: you're not convincing. You're a shill for someone else. Especially your "although I must admit Apple has done a good job with XYZ". Yeah, we can see through that.

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  • http://twitter.com/tnleeuw @tnleeuw

    Great analysis, however, I do have some objections. I see both Moto & SE coming out with some really daring, high-end innovative hardware designs (Moto Atrix, SE Xperia Play) for Android.

    At least in the short-term, this negates your claims regarding Android licensees.

    How the Android market will play out in the long term, I don't dare to predict. I do share your fears that differentation in the hardware might become too costly to maintain, on the Android platform. However, I do still see the hopeful signs that there will be high-end, innovative Android hardware.

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  • http://twitter.com/JanCifra @JanCifra

    What I find striking is how smart Google is. They are developing Android and making some of the desperate players in the market build them a money making machine. The competition among the Android phone manufacturers will drive down prices, so that everyone will be able to afford one and as such provide Google a large platform of users for their online services/advertising but in the same move it eliminates any potential profit for the manufacturers. I think Nokia to a certain degree understood that if they would ally themselves with Google – they would become a non-player, a one of many entrants in the race to the free smartphone. With WP7 they are at least differentiated to a certain degree and do still have an opportunity to secure some profit. Google, whether intentionaly or not, is positioning the manufacturers for a low margin business with very little profit.

    • bitbucket

      Your final sentence doesn’t seem to support your first sentence.

      • http://twitter.com/huund Huund

        I can’t see how Google is making money either. They spend money on developing Android without earning license fees and were forced to spend $12.5b when acquiring unprofitable Motorola Mobility to fight patent claims. I believe Google’s revenue from ads and apps is in the order of $10/year per android device. If abut 100m devices are activated each year and all stay active, it would take at least 10 years to recoup the money. When the market is expanding maybe just 6.

    • Guest

      “Google, whether intentionaly or not, is positioning the manufacturers for a low margin business with very little profit.”

      Now all Google has to do is FORCE them to to manufacture Android phones, even as they lose money or make very little. Ooops, it doesn’t work that way.

      • http://www.asymco.com Horace Dediu

        Every business that loses money does so voluntarily, some do it enthusiastically.

      • Guest

        Until they wake up :). My point was that you need to leave /make it possible for the manufacturers get some crumbs otherwise they will not stick around.

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