Categories

The Android SKU paradox

Next month will be the 24th since the first Android device launched in October 2008. The G1 was followed by another HTC device in February of 2010 and a few others in the spring. The summer of ’09 showed a steady release of up to four new phones every month. Since then the number of Android phone stock keeping units (SKUs, uniquely identifiable stockable products) increased dramatically, with the release rate increasing to 26 per month during July of this year (source: pdadb.net).

Altogether, there are have been 166 Android phone SKUs in the market with another probable 25 or so ready to launch in the next few months.

Now this may seem like a large number of different phone models in a short time, and it is, but Windows Mobile was even more proliferated as a licensed OS. At its peak over 50 new devices were released every month. The total now is over 1700 and it’s still growing.

The 183 known Android devices are distributed among 10 principal vendors with another 18 minor vendors. The 18 “other” vendors (see footnote 1) have either one or two devices in the market.

The vendors or original design manufacturers list ranked by most devices follows:

I broke out the devices also by the number of operator branded devices designed by the same manufacturer (green) and any devices designed and built by one vendor but sold under a different vendor’s brand (orange). It shows how, excluding “other”, HTC is the most prolific Android builder (and seller) but also how it still depends a lot on Operator branding.

The proliferation of Android devices is indeed striking, but as I’ve pointed out before, the licensing model for Android is symmetric with that for Windows Mobile with the exception that Android is both open source and cost-free to license. This should make it highly disruptive to the paid-license model that Microsoft worked so hard to implement. It should be no surprise then that the adoption dynamics for the platform are very similar, with the same licensees that took Windows Mobile a few years ago embracing Android today.

The proliferation still has a while to go. There is production capacity for over 2000 SKUs among all the vendors in the market (especially the “other” category) and it’s only been two years since a stable version of the OS has been available. So it would not be surprising if the total number of licensed Android products will overtake the 1700 or so Windows Mobile SKUs.

So what’s the paradox?

The question that should jump out from this data is what’s the value to the participants in this, or any mobile OS licensing model? When I analyzed the Windows Mobile field in 2007 or so, it was pretty evident that very few vendors other than HTC shipped enough volumes to make a product profitable. In fact, I coined the phrase Pocket PC Paradox to describe the situation where hundreds of vendors would line up to make undifferentiated products competing for a shrinking pie. This went on first with Pocket PC PDAs, then repeated with Windows Mobile and is now repeating with Android. Nobody ever made money except for HTC, not even Microsoft.

It’s still a mystery to me why any manager would decide to make the (n+1)th Android/WinMo phone. It must be difficult to make market projections that justify the cost of developing and marketing this new product.

But here’s some help: The total number of Android phones sold through the end of last quarter was about 23 million units. The total number of SKUs launched to date then was about 118. That means that the average Android phone SKU sold 200k units (2).

Now this may seem comically low, but I will again bring up history and point out that while the WinMo bubble was in its zenith, the average Windows Mobile SKU had 50k units sold. With the SKU count increasing more rapidly than the sales rate (40% more SKUs since June) it’s very likely that the average units per SKU is dropping. So by my reckoning there’s plenty more in the Android bubble to go.

—–

(1) The “other” category includes the following vendors:

  • Lenovo
  • Gigabyte
  • Highscreen
  • Notion Ink
  • WayteQ
  • Forsa Posh
  • Inventec
  • Kyocera
  • Pantech
  • TechFaith
  • Saygus
  • Sharp
  • Ziss
  • Alcatel
  • General Mobile

(2) I’m fully aware that the distribution of sales over the products is not even and very likely exponential, but there is no way to predict whether a given new product will be a “hero” or DOA. The dream for every manager must be that his product will be a star, but the odds get worse and worse over time and the average units sold has to be considered as including these odds.

  • Ben Rosengart

    "It’s still a mystery to me why any manager would decide to make the (n+1)th Android/WinMo phone."

    Well, what are the alternatives? Compete at the software platform level with Google and Apple? Leave the smartphone market to one's rivals?

    • Jason

      Those are exactly the alternatives. Competing with Apple & Google on the platform level would require a sizable R&D as well as time investment but selling another Android phone doesn't differentiate yourself in the market. The only way is to create your own product. The problem for the manufacturers here is that they lack the quality and expertise to adequately pull this off. Proof of this are Android additions like Sensé that haven't been very well received. The manufacturers who don't/can't step it up will have a hard time once the market gets saturated with Android devices just like the PC market in the early/mid 2000's.

      • Sevket Zaimoglu

        Actually, major producers stand a very good chance of developing differentiated android phones catering to different sectors. Sony Ericsson is working on an android phone that will also carry the coveted Playstation branding. It would be very attractive to the young people who already own a PSP or Nintendo DSi. Another company may partner with a reputable lens maker, say Carl Zeiss, Nikon or Canon, and come up with an android phone that excels at imaging. That said, Sony Ericsson's Experia series already offers one of the best camera phones in the market. For price conscious consumers, entry level android phones give manufacturers a chance to move their dumbphone buyers to android. Apple's iphone simply cannot offer a desirable solution under these alternative scenarios.

      • yowsers

        "Apple’s iphone simply cannot offer a desirable solution under these alternative scenarios."

        I re-read your arguments leading up to the last sentence, but I simply can't see how you arrived at this conclusion. Could you expand? It seems to fly fully in the face of market evidence.

      • Sevket Zaimoglu

        I mean can you get an iphone that is primarily geared hardware-wise towards gamers? No. Can you get an iphone that has, say, 3x optical zoom? No. Can you get an iphone with a gold case? No. Granted you can't get either of these phones in android, but I argue that in very near future, you might just, and then you probably will.

      • ChuckO

        Those specialty phones you described will have VERY small audiences especially the super camera phone. The Playstation phone also will have a very hard time gaining traction against the iPhone for games at this point.

      • Sevket Zaimoglu

        Why should a super camera phone have limited appeal? Nokia N95 already had Carl Zeiss optics and it was one of the prime selling points. Samsung produces digital cameras itself, so it could conceivably bring in expertise from its camera division to its phones. As for the games, many companies developing games for iphone are already offering android games, for example Gameloft.

      • http://www.asymco.com asymco

        One may hope that there are economies of scale in a vast market, but unlike the car industry, phone distribution and use cases are far more concentrated. The one size does not fit all assumption about phones may or may not be true (personally I don't think it is) but the fact is that almost all the Android devices are very narrowly clustered in features and use cases. Using the car analogy, the market looks much more like 500 mid-size sedan models competing than a truly broad portfolio.

      • Sevket Zaimoglu

        Here is a review of Sony Ericsson Experia Mini that highlights the point I have been trying to make, that is, Android gives the phone manufacturers an excellent platform to come up with products, in different form factors and targeting different needs of phone users:
        http://www.engadget.com/2010/08/27/entelligence-w

      • http://www.twitter.com/michaelklurfeld Michael

        I don't see how developing a platform is necessary to growing one's business. Dell was founded on selling affordable and (though it may be hard to see now) high quality computers. Why not try to be an OEM for phones?

      • yowsers

        Low margins. High costs, for added fun.

        I've been in businesses like that. It requires a tremendous amount of work and investment (keeps everyone busy), with a never-ending emphasis on cost cutting, for mere increments of market share. You never do really "win". You just pull ahead ever so slightly one year, and then watch your competition do the same in response the next year.

        As some blogger (forget who – Pogue?) pointed out, OS platforms and product ecosystems have become the new table stakes. If you don't have it, you're really not in the game because the other guy has a potential edge on you that you have no answer for. That edge may not work out for him (look at any go-nowhere mobile OS you won't develop for), but you've got nothing to respond with against those manufacturer's who do.

    • ChuckO

      One big problem for me is Apple has about 5x that number of iOS products sold at this point. All that profit goes to Apple and all those products support R&D for the next generation of iOS products. Apple is also a monster at both OS and hardware design. Google doesn't have much OS experience and the Android partners don't appear to have any hardware design that can compare and THEY HAVE TO SPLIT THE PROFITS out there for Android sales. Apple and iOS looks like a juggernaut to me.

      • Tom

        I must agree. Up til the last few articles, especially this one, I considered Android phones the juggernaut. With dozens new Android phones released each month, and with the sales volumes off the chart, it seemed they were it! But that is short sighted of me to think this way. With so many manufacturers dividing up the android profits pie into smaller and smaller pieces, each has less and less resources to face Apple's R D, distribution expertise gained from years of iPod growth, and now 4 generations of iPhone work in the markets.
        It is Apple that will push forward with more and more differentiation. They are the juggernaut.

    • http://appleincanalysis.blogspot.com/ Lee Penick

      Managers don't always do what's in the best interest of the company or shareholders. Some managers will come up with the 1,001st Android phone idea, realizing it will sell poorly, but it will keep them employed and feeding their family. So they sell the idea to higher management, with lofty marketing projections.

      Sort of like over-leveraged investment banks. If the 30-1 leverage works out, great, you make money…if not, you blew up the company and shareholders, but you still got paid and maybe got good bonuses for awhile.

      It's not a moral way to operate, but "rice bowls" are common.
      Good upper management and the board of directors need to see through the rice bowls.

      Android has probably become a rice bowl for most of the companies using it. Little profit, but keeping people employed for now.

      Like Google AdSense, who makes money/benefits, Google.

  • Sevket Zaimoglu

    The number of different models may seem indeed high, but how different in reality are they? From a hardware perspective, Google's Nexus One and HTC Desire are almost identical. Samsung's Galaxy phones are sold in Europe as Galaxy S and Vibrant in the US. By similar reckoning one might argue that the automotive sector suffers from a similar model proliferation, but I think both the autumotive and Android phone companies can achieve economies of scale.

    I agree with you from the consumer perspective. If you want an iphone, it is very easy to decide which iphone to buy, there are just one or two alternatives. But if you wanted to buy a Nokia phone (dumb or smart) there were so many choices that making an informed decision would drive one crazy.

  • Ben Rosengart

    I'm not saying I approve, just that it doesn't seem like such a mystery. As you say, these companies don't have the capabilities to go up against the big two, even if they had the money and the courage.

  • Iphoned

    Doesn't sound like a big paradox. Sounds a lot like the Windows PC market in the early days. Basically everyone is trying things out believing they can find a niche or a dominant position, before market is settled.

    Besides, what's the alternative for these vendors? None, except Windows Mobile7 later. Most can't develop proprietary OS (although the largest players may try – HTC, Samsung).

    It is looking more and more like it may end up like the PC market but perhaps with a handful or OSs gathering respectful market shares instead of just two.

  • poru

    Don't forget the developers trying to come up with apps that will run on a few dozen different hardware designs (a few dozen at a minimum) in terms of screen size, resolution, keyboard layout etc. What a nightmare that would be! And going to an App store and having to ensure one's own handset meets the criteria (and Android version number)… The tyranny of choice and its blowback.

  • Tom

    Remembering too: Apple has a patent infringement lawsuit against htc et al, and oracle has a licensing lawsuit against the sale of the android os with their open source code. What Google has done is take something like a creative commons music file and sell it for profit. This is a no no….
    If either wins, android as we know it today would cease to exist.

    • http://, Iphoned

      The Apple's lawsuit if successful could really dent Andorid. But Oracle's won't, because Oracle doesn't want to kill Android, but just profit from Andorid's success.

      • Yowsers

        Are you envisioning a future 2 years from now where Google will have to begin charging licensing fees for Android, and then MSFT WinPhone 7 will have a more even playing field against Android?

        2 years is way fast for a patent lawsuit and settlement. No doubt the market will considerably change out from under them in that time. Maybe Chrome Mobile or whatever they call it will be ready.

    • Sevket Zaimoglu

      And then HTC fighting back with a counter patent suit over Apple in May… How about Nokia's patent suits against Apple?

      I am inclined to see these patent suits as just one more aspect of competition, though an unpleasant one, and I don't think they have the potential to be gamechangers.

  • Iphoned

    @Yowsers.

    Yes, I envision Google having to charge royalties from manufactures for Android. Even if they defend successfully against Oracle, I can't imagine they can continue subsidizing Android development. The cost will likely rise sharply if they want to keep Android competitive. There is no free lunch.

    On side note. The payback (so to speak) to Google for such disruption will be that AdMob will get locked out of every other smartphone except Android. I can see Rim, Nokia, and indirectly Microsoft locking out Google out the same way Apple is doing on the iPhone. Eventually, Google search may get pushed out as well on these devices.