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When markets are supply constrained purchase decisions are not based on product performance

The difficulty in analyzing the smartphone market lies in its extremely rapid growth. With the market growing at 90% (and 400% in some areas like China) the forces of demand and supply are disconnected. It’s impossible to discern whether a purchase decision is made from a choice of comparable alternatives or if it’s made from a choice between buying nothing and some alternative.

Furthermore, another problem lies in distribution inefficiencies. The global phone market is nominally serving 4.6 billion consumers but they are not all participating in the same market.  Devices and the services they are bundled with are not fungible globally.  You cannot buy a phone is one country and easily couple it with service in another. You can’t even transfer one bundle from one owner to another within the same country. Products are available only in some countries or some operators and not in others.

Commentators focusing on mobile OS platform shares assume a zero sum game and a liquid, efficient market. Both assumptions are false. They also assume that the platform is a basis for the choices made (rather than the device, the pricing illusion attached to the device, the service plan, availability, point of purchase and network switching costs, etc.)

There is data where competition for a single purchase decision by two comparable products with comparable specs and price plans can maybe show a preference. However that data is not public. Only an operator like AT&T who sells both Android and iPhone through the same channel has that data and they’re not sharing.

The closest I came to analyzing this was in a blog post last May. However, that data is obsolete. Since then Android growth has accelerated rapidly as vendors who were not making smartphones (Samsung, Asian second tier, Motorola and Sony Ericsson in that order) began making smartphones in volume. Their only choice in entering the market was Android. This supply-side view of the market is much more relevant than demand-side assumptions because the market is supply constrained.

Another way to see it is this: If there is a shortage of bananas, you can’t make a case for Costa Rican bananas being preferred over Honduran bananas. People will buy whatever bananas they can get (even if one may be preferred over the other). If Honduras can produce twice as many as Costa Rica then they will sell them all and it says nothing about their quality or end user preference or whether that volume advantage will be sustainable once the shortage abates.

  • WWP

    As always what a Great Article! I think it offers a very valid point! Right now we cannot compary any growth within the smartphone markets, partly because of supply contraints… I think if we were to ask Apple right now, they would say something like… we've sold every iPhone produced so far. Can imagine them even selling record number during their last iPhone 4 quarter, if they release the White version then…In Germany people at O2, Vodafone are getting desperate waiting for months already for the iPhone 4… I'm having the feeling that Apple wants to say something like "We have sold the max. # of iPhones we could create! With iPhone 5 we will try to make even more customers happy, by expanding our supply"… it's always great to create a feeling of scarcity… people get even more hyped. :D

  • JP Chicago

    It amazes me how some market research these days is founded on an uncritical examination of the facts. Your blog, thankfully, rises above the noise.

    I find market share to be a measurement that suits Android's business goals better than Apple's. If I were Apple, I would measure net profit share, as an indicator of relative performance. I wonder what Google's profits are as a percentage of total industry profits.

    A handset count works in favor of Android, because of the supply-side unevenness you observed. Apple would rather maximize shareholder value over growing the number of units sold.

    The clearest fact for me is that Apple has a product pricing strategy that focuses on maintaining product value and margins over time. They could sell everything half off if they wanted to beat Android in the marketshare game.

  • Woochifer

    Thanks as always for cutting through the noise and hype that seems to pass for analysis with the tech press nowadays.

  • OpenMind

    As you described, smartphone market is not inherent efficient. In an inefficient market there always are opportunities to exploit profits. Who are in the position to benefit?

  • http://twitter.com/tommy4490 @tommy4490

    As always, the question for an android phone owner is this:
    What will be my neXT phone?

  • Joe_Winfield_IL

    Great post, and the banana analogy works beautifully…at the time of initial purchase. Most smartphone users are replacing a non-smartphone, so they all look like bananas. The issue is that users get accustomed to a certain device or UI, and that they load up their phone with app purchases and media. The next time around, they are choosing between the banana they know and the plantain that looks similar but might not be as sweet.

    Fortunately for Apple, all indications and polling indicate that iPhone users are more prone to the type of behavior that makes for repeat purchases, as compared to Android or anything else. I just worry that over time, convenience begets comfort with a "good enough" product.

    • dms

      I'm not too sure that Android presents the consistent user experience that you are suggesting. Handset makers are motivated to differentiate the user experience, not to mention the fact that you may see totally different forks of Android in countries like China.

      I also think, given the nature of the Android app market (free, ad-supported apps), that Android users are not particularly VESTED in the platform. The Apple-iTunes ecosystem, however, is much more difficult to exit from, once you start to buy into it.

      In short, I think it's quite easy for consumers to leave Android. Easy-in, easy-out. iOS is a different story. That's why the brand loyalty survey results are so different between the platforms.

    • SubGenius

      I have spent $ 200-300 on iPhone apps. My investment in great software ties me to the iOS. I could not conceive of switching.

      If I had an Android phone, my guess is that I would have spent $ 0-10 on apps. I would not have any considerable financial investment in the Android platform that would lead me to only look at Android devices.

  • davel

    Very Good points.

  • yet another steve

    There's a real convention wisdom assumption that this is Windows vs. Mac despite countless ways in which the situations differ. And data are being skewed toward that conclusion. The very comparison of iOS phones vs. Android-based phones is colored by that assumption. If comparing phones (hardware), why not by manufacturer or model. If comparing OSes, why not by total devices, or other measures of ecosystem health or size?

    And the answer is: because only the comparison they use supports the conclusion that the "know" is right.

    In fact this is all being played on Apple's home turf and Steve Jobs is no Steve Ballmer. And Apple has superpower like firepower. It's going to be fun to watch.

    I like to think of it this way: What problem was iOS created to solve? I think the answer was the fulfill the promise the Mac never could: true appliance computing. If you get out of the tech bubble and open your eyes, this is the great unmet promise of tech. And iOS has barely scratched the surface.

    Now what deep problem was Android created to solve?

    • Davel

      Ur point that iOS solves a problem that the desktop can't is well taken.

      As we all know iTunes is the key here for Apple. Sometimes Apple is a bit slow to market for some of us, but overall they have done a great job in the recent history.

      What problem does Android solve? Who cares? They are reactive. Google is not thinking in the same way Apple does in this regard. Their thinking is simple. Give manufacturers a platform to compete with the standard bearer in a way that maximizes their revenue. To wit, more devices – phones, tablets, etc – so more customers can search and have adds served to them.

      It is a much easier chore as a phone is simple. The real estate is limited and well defined, so you are focused on what you copy. You offer the great tools you have in your arsenal, some of which was rejected by Apple and you are done. Creating an OS is not that hard. There are plenty of programmers who can. Unix gives you a great headstart for the basics are already written.

  • FalKirk

    I too find the analogy of the bananas very "a-peel-ing" (groan), and I assure you that I will soon be using it to great effect in many of my future posts. :)

  • skips

    "a liquid, efficient market" is the real hooker in most market share discussions. Most retail markets are neither. This fact is one of the primary reasons that "blitz" advertising works. People seem to have a great tendency to buy what they think will work and about which they know something. This tendency generates "brand loyalty" even if the brand is not the best (in either price, value or capabilities).

    It is my guess that the statements by Google, Microsoft and other manufacturers about how Apple will end up being a niche player are all based on the assumption that shelf space rules in retail. (i.e., If you dominate the shelf space, you will dominate the market.) If Apple releases 2 models per year, which sell very well, they will still lose to 20 manufacturers releasing 200 models per year. Each of those models will have an initial surge of sales as it is the latest and greatest. When the sales begin to slacken, the manufacturer will simply release the next model to pump up sales again.

    As for the cellphone marketplace, it cannot be efficient until someone forces the carriers to reveal the true cost of ownership. Buyers simply do not have the necessary information in an understandable form.

  • Iphoned

    The bananas analogy is great, even if a bit slippery.

  • ALex

    Some interesting points, as usual, but the reference to handphone makers who didn't use to make smartphones entering the market surely shouldn't include SonyEricsson – they've produced smartphones for ages, and I saw quite a few of the UIQ devices out in the wild. (Not so sure about Motorola – the two phones I had the misfortune of having to use for a while put me off the company enough that I've never bothered to check anything they do out again.)

    • asymco

      Sony Ericsson started making smartphones with the first Symbian phone in 2002 or so. I would be the first to give them credit for pioneering work in smartphones. But that does not mean they had significant volumes. By 2009, Sony Ericsson was shipping very few smartphones. They had abandoned UIQ, had switched to Windows Mobile for their Xperia line and were in a state of disarray. Their portfolio was heavily stacked toward feature phones that were recycling Sony brands like Walkman and Cybershot.

      I should have been more clear in saying that SE used Android to "get back in the game" rather than simply getting in. By the way, the same is true for many of the other Android vendors. They were all shipping Windows Mobile devices. As that platform failed, their smartphone businesses stalled. Android was the means to recovery.

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

    End users are not generally bothered about where their bananas come from. A banana is a banana is a banana.*

    That's not really the case with smartphones. Each brand is quite different with different features that solve different problems. It's er, more apples and oranges. :)

    If you fancy some fruit but the grocers is out of apples, you'll maybe buy an orange to satiate your fruit requirements.

    * leaving aside fair trade and organic.

    • unhinged

      So how does this refute the post's point that current sales figures do not represent consumer wishes because the supply constraints are a major factor in the decision-making process?

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

        Supply constraints obviously are a factor since it seems NONE of the manufacturers individually can make enough but there's no shortage of smartphones in total. I can go to the shops and buy any number of smartphones.

        If I couldn't get a Samsung Galaxy, I could buy an HTC Desire. That matches up with Honduran v Costa Rican bananas in the analogy. The problem I had was that an iPhone is not a banana (it's an Apple) and an N8 is a strawberry. Smartphones are not all the same fruit. They all taste different.

        If I wanted strawberries, which are in short supply at this time of year, being offered a banana as a substitute isn't going to work.

  • timnash

    Even in a supply constrained marketplace, smartphones need an OS and apps that are 'good enough'. It will be interesting to see how soon Windows Phone 7 gets above that bar.

  • gctwnl

    Brilliant analogy! There is indeed a lower treshold: rotten banana's will not be sold. But in general, the analogy is perfect, every half-decent banana is sold in a supply constrained market. Insightful.

  • Capablanca

    An important factor always omitted from the commentator comparisons of iPhone/Android vs. Mac/Windows is the distribution channels. The differences could hardly be greater. Much of the PC war was fought in enterprise where IBM ruled. Network providers were not a factor whatsoever. And most importantly, the Internet, which is today a channel both directly and indirectly, did not even exist until after the war was over.

    Apple has better channel position this time around. Even if you were to completely discount it's brick and mortar stores.

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  • Wilhelm Reuch

    If you fancy some fruit but the grocers is out of apples, you'll end up buying a lemon …

    Sorry :-)

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

      (rimshot)

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

    this looks like a somewhat shrouded attempt to explain away the dizzying success of Android, often at the expense of IOS, but more so at symbian and blackberry os. the point is made that those who chose to develop for Android "had no choice". this is wrong in my book. in fact tough decisions were made, notably by SE and Samsung, which turned away from Symbian. And MOT, which could have gone with MSFT or did something completely different. The reason that Android has become a mammoth success is that the original plan made it the obvious choice for these companies who did in fact seize the moment. b=But they could have made the wrong choice. Making the right choice has been good for them and the platform. it's creating a virtuous circle, at least for now.

    • asymco

      SE and Samsung turned away from Symbian long before they adopted Android. There was never any traction for that platform with any vendor other than Nokia and the FOMA variants in Japan. Windows Mobile was simply not competitive and Microsoft chose to deprecate it. Even HTC who was selling 80% of Windows Mobile volume was compelled to move to Android. During the period of time 2008 to 2010 there were no alternatives for vendors who had no OS of their own. Android had, for all intents, a monopoly. (Some attempted to buy Palm, but HP won that asset.)