Talk of mobile dominance is bunk

I’ve been asked in comments on this blog who will win the “mobile war”.

I use two analytical tools to answer this question: (1) history (2) value chain analysis.

History shows that operators are very important and hence very powerful in this market. That makes sense on many levels. They control what phones you get to buy, they decide the pricing and they decide frequently how you can use the phone. This is because the networks are expensive to build and maintain and there is an implicit bargain struck that the user and device should conform to the operator.

Value chain analysis tells me that as networks are not good enough, tight integration of the business models of the phone vendors and the operators is necessary to climb up the trajectory toward good enough as quickly as possible.

Therefore, given the distribution of value/bargaining power in the chain, it’s reasonable to assume that it’s operators who will decide which platforms win/lose and to what degree.

That simply means that no single platform can win a disproportionate share because it would threaten the balance of control the operators require. So talk of “dominance” of one platform or another is hyperbole. The most likely scenario is an even distribution of share between 4 or 5 competitors, so I expect iPhone and Android to get 20% share each.

This is not “fair” or economical or efficient, but it’s the way it’s going to be for a long time. If you’re a fan, don’t despair. In a few years, it still means hundreds of millions of units a year for each platform.

If you want to dream or hope for a more efficient outcome, you’ll have to look outside the cellular network model. I.e. think how iPod/iPad and Android tablets will evolve into communications products.

(thanks to M for asking).

  • GoodyBird

    But isn't that only/more true for the american market?

    outside of the us operators are less powerful
    (hence Nokia ruled in the Voice/SMS phones era)
    consumers are less keen to buy the latest phone,
    and when they do, because they are less inclined
    to live on debt, they will more likely to buy the device themselves.

    I don't have any statistics, and the differences can be minor,
    But it's a question to be asked.

    • In all major markets this is the case. Consider the largest, most populated regions:

      In Japan operators have stronger control (DoCoMo)
      In China the government meddles (arbitrary regulation)
      In Russia ditto
      In the middle east there are all sorts of hurdles (e.g. RIM)
      In India the regulations and infrastructure can derail the best strategies

      I know things are changing but very slowly. Just think of the fact that most people in the world don't have credit cards. How can the App Store even work there?

      • GoodyBird

        Point made.

        But what about the EU,
        that's a leveled playground, isn't it?

      • Tom Ross

        I'd say we should watch how this develops over the next few years because it's quite hard to predict. A couple of factors that may loosen the carriers' grip:
        – LTE is unifying the US handset market, thereby bringing more direct competition.
        – Emerging mobile devices like iPad and Kindle use mobile data, yet they don't follow the traditional carrier business model, turning the carrier into a dumb pipe. Nobody knows how many of these device each of us might carry in a few years.
        – US government regulation is still somewhat active and may bring improvements.

      • Europe varies. There is more consumer protection and some countries even ban exclusivity and device locking (you go Belgium!) but there have been regressions. A few years ago it was illegal to subsidize phones in Finland, but operators used the guise of "3G" to push through a model of price obfuscation and locking. At least there are protections with respect to getting your phone unlocked after the contract period expires.

  • Joshua

    The difference though is that because Android is Open Source it can be co-opted by the network operators, further tilting the playing field in their favour.
    They can cripple certain features, preload with a bunch of crap, and brand it however they like. They don't even have to ask Google. With Apple though, you've got to negotiate with Steve Jobs, and he drives a hard bargain.

    Sure it won't necessarily have the Google apps, but the networks don't care. They'd much rather go back to the days where the OS was irrelevant, and they could pretty much ignore their customers.

    • Tom Ross

      Android marketshare is meaningless for Google if it doesn't come with Google ads.

      • Joshua

        The question isn't whether it is meaningless to Google – you're assuming that the adoption of Android is purely driven by Google. Horace's analysis suggests that it is the Network Operators effectively control market share, and they will ensure there isn't one strong player in order to protect their interests So, the question is whether it is meaningless to the Operators. My point is that Android can be effectively controlled by the Operators, so they have little to fear from an overweight of market share for Android.

        It's a minor point, but the OS flavour is largely irrelevant to Google. If a device has access to the web there will be Google ads.

      • In other words, to Google, a fragmented OS in a widely distributed but broken product is better than having a strong relationship with the best phone. Good luck with that.

      • Joshua

        I agree, but I'm wondering how long that "stong relationship" with Apple would have lasted. I'd suggest that at some point Google was always going to get nasty, pulling data from the device in terms of location and other usage and mixing in with what they already know about us.

        I don't think Apple could have abided with having their customers abused like that via their product and things would have turned sour at some point.

  • Regarding your supposition that iPhone and Android will each have 20% of the market at some more steady state point in the future and that there will probably be 4-5 players at that time, well, if iPhone and Android are 2 of those players that leaves 2-3 other players to take on the other 60% of the market. The implication is that those other players will be just as big as iPhone/Android (if there are 3 other players splitting up 60% of the market) and slightly larger if if there are only 2 other players splitting the 60%. Did you really mean that? Who would have a larger share than Apple/Android? Who will even be even with Apple/Android?

    I've been supposing that Android will have just over 50% of the market at some fictional future steady state point but if you're right and I'm wrong, boy is Google in trouble. With Android at only 20% of the market and RIM now looking to buy Milennial Media (and presumably RIM will still be one of your 5???) and assuming the deep pockets of Microsoft will make sure they're one of the 5 and they sure won't be letting Google do display ads on their phones, then Google Android experiement is going to be, dare I say it this way: FAIL. And leading on from that, why would Google bother with Android at that point?

    • First of all, remember that this would be 20% of a very, very large pie. Assuming that every cellphone customer will sooner or later be a smartphone customer (not a long shot), then you're talking about 20% of a five billion device market, given that there are currently roughly 4.6 billion cell phone subscriptions. That number dwarfs the roughly 1 billion PCs – so even a 20% market share would be equivalent to every PC running in the world at present.

      Second, Google will likely pick up decent revenue on other platforms too. While its opportunities for in-app advertising may be limited (although there's reason to doubt that either Apple or MS would be able to keep them off in the long term), they would still pick up money from web apps – and those are likely to be increasingly important in the future.

      • Tom Ross

        "and those are likely to be increasingly important in the future."

        That's Google's mantra, but do you have proof? We've heard this pretty much since the 90s, but native platforms, through constant innovation, have always kept the lead. Today CocoaTouch is several steps ahead of HTML, and do you see HTML catching up, technologically? Quite the opposite I would say. Not to mention monetization and security.

      • Tom, I don't have proof but cite two points. First, remember, in the beginning there were only web apps for the iPhone and Steve has consistently pointed out that Apple supported web apps and the app store was not the only way to run apps on the iPhone. Secondly Apple have done some programming work to demo that HTML5 apps can be quite powerful, eg, iAds are HTML5 and Gruber has pointed out that Apple's iPhone documentation is done as an HTML5 app and looks and acts like a bespoke app. If they wanted to downplay HTML5 they wouldn't have done this IMO.
        It strikes me that over time app stores will become meaningless because every useful app on Android will be developed by someone for iPhone and vice versa. And as I've pointed out before, when Adobe makes a serious online Photoshop I'm sure they'd rather code once for an HTML5 app than code separately for iPhone, Android, WinPhone7 etc.

      • Ian, I agree with your analysis that 20% of the smartphone market will be a huge unit number and remain a huge profit centre for Apple for a long time to come and I've written about that on my blog. My point in the post above was that Asymco's numbers of 4-5 players and Android and iPhone share at 20% implied that other vendors might do just as well or even better. I was just trying to get clarity on his thinking. Whatever the final numbers I see Android being having the largest OS share with iPhone a distinct second. I suspect from a handset maker's point of view Apple will still lead.

        IMO Google really needs more than decent revenue from wireless devices which I guess explains their sell out on the net neutrality issue. I also agree with you that web apps will grow in use though how that plays out for Google advertising remains to be seen.

    • Relentless,

      I'll agree that 20% is arbitrary. It could be 40, even 50, but I don't see 80% share for a single actor. I'm going with a conservative estimate to calibrate my sanity check.

      With respect to Google, remember that (if) their intention is to avoid a Microsoft-like monopoly in the market, then a fragmented market is a success for them. Their dreams of vast revenues from Android or mobile in general are speculative at best. More tangible is the threat of being excluded.

      I've been critical of Android as a strategic mistake because iOS is a very good platform for Google's services, which, being in the cloud, never needed a whole OS behind them. Antagonizing Apple will cost Google more than what Android will return.

      • I agree with you that the early iPhone coziness between Google and Apple suggested a profitable relationship for each without Android. But in a typical Freudian projection scenario I think Schmidt was worried that Apple would dominate smartphones just like they dominated music players and then, Schmidt being Schmidt, worried that Apple might see the goldmine they were sitting on, throw Google off the iPhone by closing the system and starting their own advertising to compete with Google and then where would Google be. Did he have justification? I don't know. I've read confirming statements of my analysis in the press but who knows what that means these days.

        So then the calculus at Google must have been what percentage of the market could they get with Android and would that be enough of the pie to support continued large revenue growth. I too doubt they thought they could reach 80% which anyway woudl bring too much government scrutiny with it. I think they need 65% and could get by with 55%. I don't think they expected Apple to close off the iOS devices so robustly but again that's just supposition on my part.

        Personally I still think there are some surprises left for us in the mobile market but I feel Apple are playing their hand well. Android obviously are doing well but they have yet to solve 2 key problems, fragmentation and hand set maker profit sustainability due to commoditisation when using Android in a world of Android phones. I suspect that Android market share will stabilise at some natural market balance point as you've pointed out because of various market forces but ultimately I think Android market share will start to shrink as handset makers find too little profitablity.

        I sure with these text entry boxes were a bit easier to use and the iPad keyboard had arrow keys for moving the cursor! 😉

  • Sam Penrose

    Have you looked at the possibility of WiFi or similar disrupting the current cellular market over the next 5-10 years?

  • Walt French

    EXCELLENT analysis, worth a very close study. I'd like to propose one way in which (I hope that) your thoughtful outlook might be violently disrupted.

    And that is your assumption that the oligopoly and resulting pricing power by the carriers, is locked in.

    The US carriers enjoy their power as a direct result of government regulation — the terms on the spectrum-licensing auctions — and your examples from other nations reinforce the idea that the oligopoly is everywhere held together by political, rather than technical, means.

    Femtocells demonstrate that the last mile need not be owned by a handful of carriers. Small tower companies could license the spectrum so as to allow the phone to choose between competing operators, for the user's desired cost/quality tradeoff. (Yes, even the dumbest of phones are capable of gathering and analyzing a local map for instant choices as location changed.)

    The actual national routing of calls, one of the great technological advances of the 50's, is something that our ultra-low-cost backbone internet now handles before breakfast each day. The carriers certainly have expertise and investments in place, but they have no monopoly on either, certainly not enough to justify keeping ambitious competitors out. And we already (seem to?) have excellent interoperability between various wireline operators; wireless wouldn't seem to be much harder.

    Econ 101 analysis demonstrates how it's in monopolies' best interests to raise prices and restrict availability, compared to competitive (“free!”) markets. (Business 101 recommends it for maximum profits, but it's called “product differentiation” there.)

    If the FCC were to open up the airwaves to real competition, we could have both much more capacity and a better ability to afford it. I think this would tilt the balance of power substantially back towards the OS and hardware innovators, exactly where free-market capitalists see the greatest value added and economists see the most societal benefit.

  • I'm not convinced the carriers have quite as much power as you are assuming, Asymco.

    Having played hardball with Apple, and lost, Verizon is now very keen to have iPhone in it's stable. And even though it's had a long term exclusive deal, AT&T has been spending millions to defend it's share of the iPhone market.

    Distribution is no longer king. The power lies with whoever has the hearts and minds of the customer.

    • The operators can't ignore user expectations. Those expectations are constantly being increased. Delighting customers is a nice to have for them but not a necessity. Conversely, disgusting their customers is undesirable but not fatal. Power is shifting, but not decisively.

      • My point was more aimed at your assertion that "no single platform can win a disproportionate share because it would threaten the balance of control the operators require".

        You seem to suggest the operators can manage distribution of share to ensure 4 or 5 competitors maintain meaningful share. I'm saying the operators have no such control. If any one platform provides a significantly superior customer experience, competition between operators will prevent them from throttling back sales to support the other four platforms.

        AT&T has proved that delighting customers is more than a nice to have for operators- and Verizon will benefit from AT&T's failure in that regard as soon as they carry the iPhone. However, the operator's ability to delight or disgust their customers is limited to the quality of their network. The customer's purchase decision includes broader considerations.

        The real formula driving smartphone market share is:
        (where Services = Network+Apps+Interoperability)

        I would argue that power has already shifted markedly.

  • Russell

    This is great thread. I realize that i'm not entirely comparing apples-to-apples here, but I must say that i never thought that anyone one company/individual could disrupt such an entrenched industry like music. Yet, Steve and Company throttled them by the throat and took them to the ground a few years back.

    So in hindsight one can say that power shifts can be dramatic and in fovor of a single player. However, you would assume that since this was a recent event, the advantages that operators control will be guarded even more so now. I do believe that a power shift can take place again, but perhaps not as dramatic as music industry went thru.

    Any thoughts on this angle?

  • Sevket Zaimoglu

    Back in 1996, I remember paying over 400 dollars to AT&T in a certain month, mostly for international calls I had to make to my relatives in my home country, over a US landline. Now, I only pay for a broadband connection, and whenever I need to make an international call, I either use Skype or msn messenger for webcam chat. Just until a few years ago, I had to pay outrages amounts of money just to send SMS messages, which cost the operator next to nothing? Now, an app called WhatsApp uses the internet connection of your cell phone, and sends SMS-like messages for free. It already runs on iphone and Blackberry, and will soon be running on Android and Ovi. My point is that the commodification of network access is inevitable and inescapable. Furthermore, interoperability will be the norm in future. Heck, if you dig deep enough, you can make a PHONE CALL and actually speak to the person you are calling no matter what handset, what operator and what network either of you are using!

  • thanks for this blog

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