Categories

What has Android done for Apple?

One of the most popular themes running through the mobile phone industry this year has been the unprecedented growth in Android adoption. I’ve argued that the adoption was initiated on the supply side by vendors and operators, but demand has certainly manifested itself.

Android is almost viral in the way it spreads. With no constraints on intellectual property, pricing, contracts, modification or terms of distribution, the incentives to push product out are phenomenal. It even works, mostly.

One hypothesis of the consequences of this viral adoption is that there will be a “commoditization” of smartphones with rapid price erosion to follow. This in turn might even lead to lower margins for Apple and RIM and most major vendors, including those selling Android itself.

In order to test this hypothesis, we need to look at what has been happening to prices. If prices have started tipping down at more than their usual rate then maybe commoditization is happening.

We can begin this test with the industry’s canary in the coal mine: RIM. RIM has been struggling for growth in the very market where Android has been growing the fastest. Is RIM’s pricing under pressure?

Interestingly, no. Their ASP (average selling price) decline, from an average of $350 to $310 in late 2009, came before the Android avalanche. During this year, the ASP has held steady, even rising in the last two quarters to $315 while Android activations reached 300k/day.

So I don’t see a big problem with RIM, yet.

What about the industry as a whole? Can we see patterns that suggest imminent commoditization? Using the top 8 vendors (Nokia, Motorola, Samsung, Sony Ericsson, LG, RIM, Apple and HTC) and using volume-weighted ASP (total device sales divided by total units sold) we have the following chart:

Since the second half of 2007 the “industry ASP” (blue line) has actually increased. This is even though there was a huge recession in the middle of the time period.

This should be only slightly surprising. If you suspected that the iPhone may have a lot to do with that, you would be right. If you remove Apple from the mix, the second line (in orange) shows that the top vendors (ex-Apple) had some, but quite quite mild erosion (from an ASP of $133 to $129)[1].

This is far milder than what’s been happening in the PC sector where prices are dropping catastrophically (According to NPD the average selling price of all Windows portable PCs has fallen from $659 in Oct. 2008 to $519 in Oct. 2009).

So Apple was a big contributor to the industry increasing its pricing power.[2] but even without Apple the industry has been holding on.

But is this just a lull?

Is Android going to stop the growth?

We can look at the pricing data one more way: If we separate the eight companies into two cohorts, the “diversified” vendors who sell both smartphones and regular phones vs. the “pure play” smartphone-only vendors, we get the following price history.

What is happening is that the diversified (Nokia, Samsung, LG, Sony Ericsson, Motorola) saw modest price declines (from $128 to $114) while the pure-players saw price appreciation (from $378 to $449). This is with the early impact of Android priced in. Unfortunately I don’t have a chart showing non-smartphone prices in isolation, but I would be willing to bet it would be a significant negative slope.

In these two lines Android is not an independent variable. Android was adapted by some of the diversified vendors (all but Nokia), but in different ways. The thing is that Motorola and Sony Ericsson had great increases in ASP with Android. Among the pure-play vendors only HTC adopted Android and its performance is undistinguished vs. RIM which didn’t.

So what, if anything, has Android done to pricing?

I argue that there is no evidence in the pricing data of a coming commoditization of smartphones. Android vendors were able to use the platform to move to higher pricing and the more they switched their portfolio to Android the more they got a better average price. At the same time those vendors who built smartphones without Android also saw strong price supports.

The only correlation with pricing power is whether you build smartphones or dumb phones. The more smartphones you build, the more price you can charge. This is regardless of platform.

The reason for this is that the smartphone market is growing so rapidly (90% y/y). There is limited direct competition between smartphones and a lot of competition between non-smartphones and smartphones–a battle smartphones are winning handily, irrespective of price. Smartphones seem to be what everyone wants.

So the real question that should be asked is:

Why do vendors bother making any dumb phones at all?

If you look at the third chart above you can see how attractive it must be for the diversified vendors to abandon the non-smart market to ZTE, Huawei et. al. Perhaps Nokia can still make a small profit there but to do so you need to run faster and faster toward extraordinarily low costs and prices. A point where phones cost less than everyday consumables. What keeps Samsung and LG in that game? Motorola and Sony Ericsson left once they hit profit warnings. Is that what it takes to drop what seems to be a loser business? I think not.

My bet is that by the end of 2012, it will be hard to find any branded phones which won’t run a smartphone OS. Demand and supply of smartphones will race each other to overwhelm portfolio logic at the largest companies. The zero (visible) cost of Android will snowball this effect. What’s even more provocative is that I believe the “others” will follow and abandon voice-oriented phones for smartphones almost immediately after the larger group.

So what have the Androids ever done for us?

I’ve long argued that the phone market should be studied as a whole because the competition is not between platforms but between smart and non-smart. Pricing is a leading indicator of what drives decision making inside vendors and it leads margin, and thence portfolio discussion. Android is expanding the market without crushing pricing. The margin expansion is what attracts more vendors and creates more demand. It’s a virtuous cycle.

In a way, this is all good news–even for Apple. A world full of smartphone users is a better addressable market for iPhones than one filled with voice products. iPhone’s traction was always in markets which had been seeded by some smartphones: the US with RIM and Europe with Symbian. Such a smartphone-soaked world will have better mobile broadband infrastructure, users with more demanding tastes and awareness of the value that a smart device can bring.

[1] The effect of “other” vendors not among the 8 listed is a big unknown. It’s been estimated that they now make up as much as 30% of total volumes and that they are beginning to ship significant volumes with Android. Without visibility into that part of the market, we should be cautious. However, the eight vendors sampled here are still a significant cohort and the conclusions still appear reliable.

[2] This industry had, until 2007 suffered from chronic price erosion. Each sustaining innovation drove a mild burst of pricing power but it never seemed to last. From color screens to bluetooth, to 2.5G to 3G to MMS, to cameras to music playback, each hardware advance was not enough to keep the erosion away. The tipping point seems to be the iPhone and the shift to software as the component that drives price power.

  • bbajarin

    I agree Horace and this will probably remain true for at least a few years as we see the market for smart phones to grow. As long as it is growing we won't see too much price decline except for later generation devices.

    The smart phone segment is following the PC sector only much quicker. There was a time where the latest generation PC's demanded premium prices, that however is changing and I assume at some point in time, especially in the Android space we will see the price of hardware possibly commoditize unless they find a way to differentiate. We have to remember that Google's Android platform does not exist to help anyone make money but Google and that will always be the case.

    This will put extreme pressure on those who use the platform to innovate as well and many of them are not positioned to challenge Apple in anyway. If I was Motorola I would be especially concerned with my tight relationship and commitment to Android.

    • BenHill123

      motorola had no choice but to adopt android. Motorola going alone would've killed motorola.

  • The Crypticum Keeper

    That data may not show it YET, but smartphone commoditization is ultimately inevitable. Who will manage it best?

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

      Agree. Too early to show price erosion while the smartphone market is growing and not penetrated the mid tier. Commoditization in android world is going to happen, it is just a question of when. If I were Nok I would buy MOT mobility to win the NA market get the android integration skills and leverage the massive volume to become the lowest cost producer of android Smartphones for the masses. Too bad Nok is too busy adding "value" on top of his hw by badly execcuting on devices, os and developer ecosystem.
      Furred analysis at http://www.thefabio.wordpress.com

    • asymco

      So what happened to the MP3 player market? Did it commoditize?

      • Joe_Winfield_IL

        In the defense of those arguing commoditization…for mp3 players THE killer app was iTunes, and it was proprietary. There was not a 3rd party, universal, commoditized media store. Also, Apple was revolutionary in hardware with its clickwheel. Competitors had to choose between blatantly ripping off the clickwheel (making a poor man's iPod) and offering an inferior UX. I feel like capacitive touch is not nearly as unique as the clickwheel was in its day, and many users are happy with good enough (Android)

        However, I'm still with Horace on this one. Apple is the only maker today with enough walled-off users to reinforce its own proprietary software and media licensing. The absence of Flash could kill a nascent OS, but Apple gets away with it because iOS offers so much uniqueness. As long as Apple has significant share, they don't need to dominate the way they did with iPod. The user base is so invested in Apple that it would take a very long time for commoditization to occur.

        Eventual price erosion is another story…

  • Narayanan

    It is still early days. As @bbajarin said the market is in expansion and the data points too few to draw firm conclusions. But as the Chinese clones start to flood the market, the trends should be clearer.

    • CndnRschr

      Doubt the Chinese clones (or any other clones) will do much to the branded smartphone market. If anything, they'll steal from the dumbphone/feature phone market. The largest cost for smartphones is their dataplan so saving a few bucks on a crummy device that doesn't have access to the best apps, etc., makes little sense unless you just want to look as though you have a smartphone.

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

    Even assuming ultimate commoditization of the smartphone market, is there any reason to expect Apple NOT to pursue the "high-end" pricing strategy that it uses in the wasteland that is the PC market?

    Apple has proven that it can sustain revenues with its smaller percentage of total market sales. So in the event this happens, I don't see how Apple's consumer image or their bottom line would suffer anymore than they do in other commoditized markets (that is, it doesn't seem to).

    If Apple really is good at producing innovative products, they'd probably just move on to the next market-forging idea, and then the cycle would hypothetically repeat itself for another turn or two.

    • dchu220

      Apple pursues the strategy in PCs because it knows it can't compete with Windows otherwise.

      Apple has no problem going for marketshare when it can, such as in MP3s. To sum up Apple, they try to make great products at a good price.

    • famousringo

      I can think of one reason why Apple may not be content to hoover up only the high-end profits: Software.

      Apple has a tight grip on the mobile software market, estimated to be 10-20 times larger than its nearest rival. With proper guidance, it might be possible to extend this software dominance into a Windows-like monopoly on the mobile computing.

      But Apple's low-end model isn't a phone, it's the iPod Touch. Apple's fighting this platform war on a completely different level than its handset rivals.

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

    By the way, I don't see how the advent of iPhone has stalled smartphone price erosion. Software is an important value component of the package, but it's already established that Android doesn't actually cost anything.

    So while it can be seen as an experience differentiator, it seems kind of like a smoke-and-mirrors game — using Android doesn't actually justify higher smartphone prices, but I would say *because* the experience is anecdotally figured to be somewhat equivalent to the iPhone, manufacturers and carriers get away with higher prices by virtue of the public's opinion that the products are roughly equivalent.

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

      That is to say, iPhone should not have prevented price erosion for other manufacturers, who have no access to that software value. Android provides what is figured to be an equivalent value, but as it is sold for nothing, it seems to be a trick of consumer perception that the prices have not been forced lower — since nothing about the expense of creating an Android experience justifies maintaining higher smartphone prices.

      In that case, however, I would agree that it is the comparison of "equivalent value" to the iPhone itself that, for now, prevents the rest of the market from being commoditized.

    • Joe_Winfield_IL

      Android is designed to go into smartphones. To sell Android phones in developed economies, the big guys (Samsung, HTC, Moto, etc.) are racing to include expensive hardware features as a means of differentiation. Nominally free, Android itself doesn't justify the price premium, but it is the singular enabling factor that leads OEMs to manufacture really expensive devices. The iPhone as competitor forces manufacturers to also focus on build quality, which again adds costs that consumers are willing to bear.

      • ChriS

        Well yes, but for a manufacturer, Android is already requiring expensive hardware just to get it running.

        12 months ago you could deliver a decent user-experience with a 66MHz CPU on a closed platform.
        Today you need at least 600MHz to deliver the same experience on Android, targeting nearly the same audience as a year ago…

        Without Apple, and the operators craving for a slice of that content-cake, the market would have had no reason to move up in specification so fast.

        For the established manufacturers who built up the industry, Android is a curse. For everyone else its a opportunity.

  • Pingback: What has Android done for Apple? | asymco

  • WaltFrench

    Not sure what these comparisons show. Feature phones are established technology, available in high volume from established vendors, while smartphones use new technologies both in hardware (capacitive-touch screens, high-speed CPUs with a half dozen other dedicated processing units) and software (explicit OSs, apps, …).

    A new tech such as NFC might (soon?) confer an incredible advantage for a device that has it, while others will develop it less quickly and need to compete on price against devices that have it. That's certainly been the story for Apple: by developing and defining several critical technologies (iPod, app store, low-barrier-to-entry 3rd-party app development, etc.), they can charge premium pricing. Some of these are critical-mass type features and Apple will be very difficult to unseat; others are replicable by others given time.

    The rapid development in the "developing" world means that the market is rushing up-market into first, featurephones, and second, smartphones. There is still a lot of profit to be made by firms that are savvy about mass-market products. But the expertise that works there is a very different expertise than the smartphones require, and it will be the fortunate feature phone company that survives its market going towards smartphones while the smartphone leaders increasingly expand down-market.

    And, Horace, wasn't it you who pointed out that when there are supply constraints, pricing is a very unreliable signal? It seems we have a years or two for the high-end smartphones to settle down, with IP disputes resolved and capacity management. Only then, by your logic (which I buy into), will the Microsofts and Palms make informed decisions about what their market position is, and only then we be able to look at prices as a good signal of the relative attractiveness of smartphones and their less-smart brethren.

    • asymco

      That is very much my point. It's too early to call the end.

  • Tom

    My question for android owners: what will be your NeXT phone?

    • barryotoole

      HaHa. Funny!

  • Davel

    Nice post.

    Where are these numbers coming from? I have looked at a number of company reports and found no breakout of phone types. For example htc does not break out android sales. Unless the data is in the conference calls which I did not see how are you getting the numbers to make this very nice analysis?

    Thanks

    • asymco

      I did not break out Android sales. I am only tracking ASP for vendors in general. What we do know is that some vendors make only smartphones and some make both smartphone and non-smartphones.

      • davel

        Sorry. I guess I did not read it closely enuf.

        thanks for the clarification.

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

    What about the carriers in this equation?
    That approximately $300 Blackberry is small fee compared to the $2,000 I'll be *forced* to spend with AT&T over a two-year contract. Even if we remove subsidies in the US market — which is not going to happen soon, there are only a few legitimate wireless carriers that can meet my needs. Their cost structure, access requirements and hold over that last mile give them significant value in this equation. If I'm paying AT&T $2,000, then I'm going to choose a slightly better $300 smartphone than a $250 one, for example.

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

      No connection with that "world tweets" thing below.

  • Pingback: World Tweets 2010-12-20 « Android Fun!

  • Rob Scott

    The issue with price in mobile devices like smartphones is that the end users do not see the actual cost of the device especially users on post- pay (carrier subsidies). For example ALL smartphones in our network are FREE on contract. FREE as in no pay-in. So an uninvolved customer does not know the actual/relative cost of the iPhone vs. BB 9800 because they are both FREE on contract and depending on the proposition the monthly subs might be the same or very close. This is what is protecting avg prices in smartphone. This changes when an OEM decides to go for market share like RIM has done, in situations like this it is the OEM that lowers the price and/or introduces a low priced device that might change mix resulting in a lower average price.

    Google’s interest though is to see smartphone commoditized ASAP. I think Nexus S is a push in that direction. I think Google is saying – the Nexus S is a good enough configuration and they would like their OEMs to use it as a guide. I suspect that we will see some Android providers gunning for better market share, thus lower prices or/and entry level dives in the mold of Nexus S and some might opt for the high end resulting in dual core processors and such.

    It will be interesting to see what Apple does. I think the consensus is a 90% growth for calendar year 2011 for the iPhone. The US is assured to hit that due to Verizon. Ironing out their supply issues might give them another 10 million; I am however not sure what else they can pull to hit the balance of 20 million to do the projected 80 million. The only lever they haven’t pulled so far is a wider range addressing lower priced devices, I suspect that we will see low, mid and high range iPhones like they have with the Mac and the iPod. This will result in lower average prices because of changes in mix (not necessarily changes in price for the same/equivalent product). This I do not think with confirm commoditization of smartphones, I think we are still far away from that.

  • Priit

    Have you noticed that race to technical superiority is over. Android manufactures all but stopped moneyburning activities, they were actively angaging a year ago. Take Nexus. One had better cpu, better resolution, better cameras, better everything. S has same cpu, same old resolution screen, same cameras, less and fixed memory. S has worse tech specs than iPhone4, 6 months later…

  • MattF

    I think the smartphone market is a long way from commoditization. It didn't happen in the PC market until -after- 1) technical specs leveled off and 2) more than one full replacement cycle. After 1) and 2), at the -next- replacement cycle, the PC purchaser, (both individual and institutional) would wonder 'why, exactly, do I need a new computer?', and -then-, here comes commoditization. So, making a wild-assed guess, I think it will be around three years before commoditization becomes a real issue in the phone market.

  • C Knight

    "you look at the third chart above you can see how attractive it must be for the diversified vendors to abandon the non-smart market to ZTE, Huawei et. al."

    But this is why you are ultimately wrong, ZTE et al. don't want to be stuck with the non-smart market and are already making low-price android devices undercutting their rivals. ZTE have captured 8% of the UK smart-phone marketplace with handsets like the ZTE Blade which can be purchased for less than £75. The downward pressure on prices is just getting started.

    • asymco

      Perhaps you did not read further down where I wrote: "What’s even more provocative is that I believe the “others” will follow and abandon voice-oriented phones for smartphones almost immediately after the larger group"

  • m4rkus

    Horace, your 2012 estimate is pretty aggressive ("My bet is that by the end of 2012, it will be hard to find any branded phones which won’t run a smartphone OS.").

    Calculating from vendor ASPs and total cellular market size it's obvious that more than way more than half of the cellular market is sub 100USD (maybe 700M to 1B units annually). Reaching these price points will be really hard with something that is truly smart. Even a basic 3.2'' display costs 35USD (http://www.electronicsadvocate.com/2010/08/17/isuppli-teardown-reveals-17105-bom-for-blackberry-torch/). And then when you add a processor, memories and stuff you're suddenly at 75USD in materials alone. And you would still need to cover your R&D, marketing and other expenses. The compromised experience low cost smartphone might be below 100USD, but just barely. I think the market might be better served by a feature phone that actually works (as compared to a smartphone that doesn't).

    For now, or next year, I find it hard to believe that you could run a truly smart OS on a hw platform that costs less than a 3.2'' LCD today. And on the other hand, it's hard to believe that there would not be demand for branded devices in lower income brackets. I think there will be a big market for branded cost optimized devices going forward, and it will take years and years until those devices will be powerful enough to be smart.

    • asymco

      Well, my call is for the end of 2012 (so basically for 2013). How many top eight vendors will remain committed to the voice-only market? Effectively I count three now.

      • m4rkus

        Your effectively three is fair. Maybe you could include Moto as the fourth one if you wanted to. Still, I wonder if the opportunity cost of the feature phone business is so high for the three that they would give up the 50BUSD business?

      • asymco

        Moto is only there now out of momentum. I don't think post-split there will be resources allocated to keep that going. The next victim might be LG. Enduring losses does seem to focus the mind on escape from low-BOM/low-margin land.

        The other wild-card is how aggressive the "others" will be to take over that sector. It would not surprise me if they actually went more aggressively toward Android than toward the low end, but it could go either way.

  • Nalini Kumar Muppala

    "Why do vendors bother making any dumb phones at all?"
    – to keep customers loyal to their brand while the market evolves to produce smartphones with unsubsidized prices within the reach of current dumb phone users.

    If most phones will become smartphones, current feature phone users either upgrade to a smartphone from the same brand or switch brands. Major brands thus have their task cut out – moving feature phone users to smartphones and try to keep them with their brand.

    It is a tough task given the ease of switching brands and OS for smartphones – most of the data has short life and data with longer life is in the cloud, native apps or webapps on a different brand phone running same/different OS will easily carry on from a previous device.

    • dchu220

      When people don't know what to do next, they tend to stick to what they've been doing.

      In fairness, most of these dumb phone vendors don't have the abilities to create a viable

    • asymco

      "to keep customers loyal to their brand "

      That's the theory. In practice users jump brand and platform unhindered. In fact, I can guarantee that every iPhone, Blackberry and nearly all Android users jumped from some other branded non-smartphone device. Nokia may hold some users from S40 to S60, but the platforms are not as sticky as one might assume.

      • Nalini Kumar Muppala

        Horace,

        I agree that the OS and platforms are not very sticky –but it is non-zero. The alternative for diversified brands would be to abandon non-smartphones altogether, and in effect not cash-in on whatever stickiness is still present. The question then becomes "do the costs of running a diversified product line justify the returns from diminishing stickiness and brand loyalty"

        While customer migration to Blackberry is complex logic, given that Andriod phones and iPhones have been around only a few years, their customers definitely come from other brands — most users of iPhones and Andriod phones have been using a mobile phone for much longer. Diversified brands still have a huge market at the bottom-of-the -pyramid (BoP). BoP might not be as attractive in ASP terms, however, there is still a significant section of the population in lower income countries that is embracing a mobile phone for the first time. Current offerings from Blackberry, Android vendors, Apple are beyond the reach of BoP customers.

        Regards,
        Nalini

      • asymco

        Good points, "guaranteeing" was a poor word choice. I'm arguing that since the smartphone market is growing so rapidly, it's dominated by new customers (not replacement units). Those new customers are typically upgrading from non-smartphones. When RIM was gaining users they were most certainly coming from non-smart devices. In the US at least, iPhone uses typically also came from either plain or feature phones or from Palm or RIM or Windows Mobile–but those platforms were tiny in comparison to what iOS is today. This suggests to me that people who used RAZRs did not wait for Motorola's smartphones to upgrade. Similarly for whoever was providing Windows Mobile. Palm users have some loyalty but it's mostly evaporated already.

  • James

    Even though no one wants a Windows phone, we are et one anyway and it's called Android. Unlike the high price hooker of OS (Microsoft), Google will be the cheap two-bit whore that drives prices down. Is this good, probably, but in the end we get another computer with a task manager instead of the Star Trek appliance consumers crave.

    It will be interesting to see how this works out. I'm will to bet there will be many platforms in the end. Win or lose they will all be a copy of Apple's ecosystem, minus Steve Jobs. Just look at Windows 7, it's a Mac without an Apple logo. Apple has the vision while everyone else runs to get more toner for there photocopiers.

  • Bob Shaw

    Typically technologies tend to advance at a much faster pace than the need or ability of most customers to use. There is always going to be a market for inexpensive and simple to use dumb phones that perform minimal number of tasks like voice communication etc. A good brand provides an assurance of quality and thus customers understandably pay a little premium for its product. A company with a good brand and appropriate business model can still make good amount of profits serving customers at the lower end of the market segment.

    • asymco

      The advance of technology beyond the needs of the market is completely true. That's exactly what I'm suggesting. There may be a market for typewriters but how many are really sold? Most people will still buy a PC and a printer to type a paper. The 'feature set' of PC market has been driven by supply rather than demand for decades. In other words, vendors, one and all, put more features in the product than is needed by most users. I think the driver for that phenomenon in PCs (platforms) will be the same driver for the device market.

  • ChriS

    Good interpretation, good points.

    Some reasons to keep producing Feature phones:
    – Despite the popularity of Smart phones, Feature phones are still a mass-market
    – Development costs are lower (closed operating systems are easier to control)
    – Component costs are much lower (you can reach a smartphone-like experience with a fraction of CPU-power and memory) –>
    – USP is much better (product is harder to compare with others, full control over platform allows controlled evolution)

    But as you pointed out, people will move to Smart phones.
    The challenging task is, how to get your customers from Feature to Smart while keeping them with your brand….?

  • JP Chicago

    The gold rush for higher ASP would lead vendors to mainly sell smartphones and data plans from here on out. You showed us earlier how featurephone unit sales still eclipse smartphones because the market is new. I suspect that a mass migration to computer-phones will have some potentially new effects, which I am curious about.

    A defining element of the new wave is more complex physical concerns: solid state memory, batteries, weight. The supply of a key component may be constrained, leaving competitors to pay higher component prices.

    The stage is set for worldwide smartphone adoption in the next two years. Is there enough supply to go around to support 50M+ touchscreen computers a quarter, in the next year?

    iOS as a whole may have a significant impact on smartphone sales. iPad brings to mind a new consideration for the typical consumer: how does this phone work together with other computers I have or ones I plan to purchase?

  • Pingback: What do the Windows Phone 7 sales numbers mean? | NotifySync in Canada

  • dangermouse

    Quote “Android is almost viral in the way it spreads. With no constraints on intellectual property”… Love the brash generalisation.

    It’s impossible to develop any technology product without infringing on some broad swiping patent these days. Apple makes just as many if not more infringements on IP. It’s the same for everyone MS, Oracle etc.. The key issue here is a massive need to overhaul the patent system.