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Gartner Predicts Mobile OS Market Share

Lots of people apparently think it’s a big deal that Gartner is predicting Android will surpass iOS for second place. But why is that necessarily a good thing, given that they’re predicting Symbian will remain in first place? Who thinks Symbian is actually doing well? Nokia’s board sure doesn’t.

via Daring Fireball Linked List: Gartner Predicts Mobile OS Market Share.

I also noted with amusement that by 2014 “other” is slated to sell 85 million units or nearly 10% share, up from 6.1% in 2009. These “others” will be selling more than twice what Apple is expected to sell this year. Is “other” WebOS, Bada, MeeGo, LiMO? If so they’re in for a healthy future.

But dwelling on details like these is missing the point. To see how improbable this prediction is, let’s go back to 2006 and ask what Gartner was forecasting would happen now.

First thing to note is that in 2006 Gartner was busy tracking PDA sales. You might wonder why this is relevant. The reason is because a significant proportion of RIM’s Blackberries counted as wireless PDAs and were therefore considered to compete with Palm’s Treos, HP’s iPaq and Dell’s famous Axim. Nokia was in the running with its Communicators. Here is how Gartner characterized the equivalent market in early 2006:

So I’ll just come out and say it: In 2006 Gartner did not have a clue what a smartphone was. By their admission:

Gartner defines a PDA as a data-centric handheld computer weighing less than one pound that is primarily designed for use with both hands. These devices use an open market operating system supported by third-party applications that can be added into the device by end users. They offer instant on/off capability and synchronization of files with a PC. A PDA may offer WAN support for voice, but these are data-first, voice-second devices.

In other words, in 2006 Gartner was splitting phones with operating systems into two separate markets: data-oriented wireless PDAs and voice-oriented smartphones. The split was mostly based on the judgement of the analyst on whether a device was “voice” or “data” oriented. I suppose they used the primary input method as a proxy: numeric keypads meant the device was one-handed and therefore voice-oriented. If the device had a full keyboard and/or a stylus-actuated touch screen then it was a two-handed data-oriented device. But even this proxy was not quite enough, sometimes devices were classified whimsically.

To make it more complicated, they bundled non-cellular but Wi-Fi enabled PDAs with wireless PDAs. This made some sense from a corporate IT point of view (their primary customer base) as these data-oriented devices would be used either on a LAN or a WAN (Wide Area Networks: what Gartner anachronistically called cellular networks.)

The presence or absence of a cellular radio did not enter into their view of these devices. So if you asked Gartner in 2006 to forecast smartphones (as we know them now) in 2010, I suppose you’d get what they forecast for “data-centric” devices.

So assuming that today’s smartphones are mostly “data-centric” we would have to look back on their view of that market and not the voice market which was seen as an entirely different thing. Their answer should have had something to do with the market leaders and participants in 2006. As the table above shows Gartner showed that RIM, Palm and HP led in 2005 with Nokia and T-Mobile[1] pulling up the rear.

However, from a platform point of view, at the beginning of 2006

Microsoft Windows CE was the No. 1 PDA operating system (OS) in 2005 as 7.05 million PDAs were loaded with the OS, up 33 percent from 2004 shipments of 5.28 million units. Palm OS PDA shipments declined 34 percent to 2.96 million units in 2005.

In late 2006, Gartner made further predictions for the year:

In 2006, Gartner expects the PDA market to increase by 6.3 percent to 16 million units. The market will continue to be driven by broader availability of cellular-enabled PDAs from wireless carriers. Gartner estimates that 53 percent of all PDAs shipped in the first half of 2006 featured integrated cellular capability, up from 46 percent during the same period in 2005. “The share of PDAs purchased by enterprises will continue to increase; it accounted for 49 percent of all PDA shipments in the second quarter of 2006 and Gartner expects that the enterprise market will account for 52 percent of all PDA shipments in 2006,” said Todd Kort.

At this time I have not yet dug up a Gartner “Wireless PDA OS” four year forecast from the year 2006 but I suspect it would not show devices running Google’s Android operating system or any running something called iOS.

I also seem to remember that they were suggesting that Windows would be the leading mobile platform. Although it was trailing in 2006, Gartner was quite bullish on the disruptive challenger from Redmond.

[1] T-mobile is in the list because it was common practice in 2006 for operators to market Pocket PC Phone Edition devices made by HTC under their own name. Orange, Vodafone and Verizon also had own-brand HTC Windows touch-based devices. Now what does that strategy remind me of?

Elop utters the D word

He said that the technology world was facing a “moment of fundamental disruption” thanks to the advent of the smartphone, social media such as Facebook, and “cloud computing” which uses the internet to increase the capabilities of home computers.

Via: BBC

It’s encouraging when an incumbent realizes when they are being disrupted. The textbook says however that it usually happens too late to reverse the damage done.

With a new CEO, Nokia may cut one year off from their response cycle but it’s not a certainty that it will happen.

Asymco assessing Nokia’s response cycle

Android tablets without apps

Android is an open platform. We saw at IFA 2010 all sorts of devices running Android, so it already running on tablets. But the way Android Market works is it’s not going to be available on devices that don’t allow applications to run correctly. Which devices do, and which don’t will be unit specific, but Froyo is not optimised for use on tablets. If you want Android market on that platform, the apps just wouldn’t run, [Froyo] is just not designed for that form factor.

via Google’s Hugo Barra: Android 2.2 ‘not optimized for tablets’ – Google 24/7 – Fortune Tech.

How appealing are tablets that don’t run any apps? Or content?

It still amazes me that a Google exec would say that it’s acceptable that consumers are led to make purchasing mistakes with his product.  Apparently any malfeasance is excusable in the name of openness.

Tight supply of iPhone 3GS?

Just noticed that the Apple online store now says it takes 1-2 weeks to ship an iPhone 3GS. I think this just changed from 5-7 days shipping.

Is Apple having supply problems again with the 3GS model?  Or perhaps Apple is saving supply for a China launch? Or using production capacity to make iPod touches?

via tight supply of iPhone 3GS? | The Mac Observer Forums.

The news today that Foxconn can only produce iPhones at the rate of about 4 million per month shows how constrained Apple’s production is. Demand is far, far higher.

The discussion about iPhone vs. Android share is usually framed around questions of demand or distribution, but may really be a question of production capacity right now.

Why OPK was fired

Under Kallasvuo Nokia embarked on the most dramatic shift in its business since entering the mobile phone business in the early 90s.

The shift was not into mobile software which began in 2001 under his predecessor. It was not into enterprise solutions which also preceded his tenure. OPK’s main contribution was the move into mobile services.

The concept of mobile services may be an unfamiliar one for casual observers because it has not become a visible business for operators and certainly not for handset vendors. It’s also a complicated business model that requires some deeper understanding of the way the telecom industry is structured.

What Nokia had in mind was to offer various value-added, billable services to operators which would be enabled by Nokia handsets. The types of services included music subscriptions (Comes With Music), email (several acquisitions), photo sharing, and navigation.

The idea was that since many operators would not be capable of rolling out own brand services and could not do the heavy back-end lifting or the integration with handsets, someone could step in and roll out white labeled solutions world-wide. Third parties would also find it impossible to integrate and would lack the relationships Nokia had with operators world-wide.

For example, Nokia could enable a South American operator to offer email services to all their customers (with or without smartphones) and that service could be offered at a certain incremental price over the basic voice plan. The client implementation could be device independent but Nokia devices would probably work better. This would lead to higher ARPU which could be shared with Nokia.

Anyone can see that this is a complicated business plan and is therefore unlikely to be successful. But what makes it a complete failure is the realization that most buyers will resist the idea of paying for individual services separately. $1/mo for email, $2/mo for music, $3/mo for maps, etc. is repulsive. Users stampeded instead to unlimited data plans and smartphones which offered all these services and hundreds more for free or at prices negotiated with third party providers, rather than the untrusted network operators.

And therein lies the entire cause of Nokia’s strategic failure: an operator centric point of view. It led to poisoned devices and irrational business plans.

Which leads to the question in the headline. Is this mistake recognized and is it big enough to cause such a disruptive CEO dismissal?

I argue yes. Strategic errors are forgivable, but the they become a capital offense when they turn into a derailment of the core business. Instead of being enhanced with value-added services, the core business collapsed under the disruptive attack of unlimited data.

But it gets worse. Like the capital offense that Robbie Bach was guilty of at Microsoft, there has to be some direct accountability. To add insult to injury, OPK single-handedly pushed through the biggest and stupidest acquisition in Nokia’s history. To support this flawed vision of mobile services OPK bought Navteq for $8.1 billion in October 2007.

Intended as a service that could be rolled out on all phones and monetized through operator billing, Nokia maps is a free service that will never return anything to shareholders.

Missing where the puck was going is one thing but burning precious capital is another. This, in my humble opinion, is why OPK was fired.

Speaking of pucks, here’s hoping fresh Canadian eyes will see where it’s going.

Android is in 60 devices, in 49 countries, 59 operators and 21 OEMs

@tim Google often finds out about new Android phones the same day the rest of the world does. The joys of an open platform!

via (1) Twitter / Home.

Clears up why they rely on “activations” to find out what’s going on in the market.

Android is open unless you want to change your search engine to Google, or use tethering or Google maps or non-market apps

That means no seamless integration with Gmail. No Google Latitude. No multitouch in the map app, either. And in place of the free and fantastic turn-by-turn Google Navigator app, Verizon installed its VZ Navigator service — a feature which costs $10 a month to use.

It would be one thing for Verizon to set the default search and map app to Bing with the option to switch back to Google. But it’s utterly inexcusable for Verizon to destroy the possibility of a switch without the user having to root the device and, under Verizon’s company policies, void their warranty. And on top of that, repeatedly charge you for a sub-par service instead of keeping the gold standard of navigation apps for free.

And as bad as that is, there’s now a rumor that Verizon will be doing this again. On every single one of its Android devices.

After speaking with a Verizon representative about the Bing debacle on the Fascinate — who also lied about the existence of a search alternative — The Droid Guy contacted two Verizon tipsters who told him that the carrier “is dropping the Google Search from all future Android Devices and offering Bing in it’s [sic] place.”

via Verizon Rumored To Replace Google With Bing On All Android Devices | Markets | Minyanville.com.

Lots more in the linked article.

This story just keeps getting better and better.

Regardless of motivations, the restriction if broadly applied would have Verizon reneging on its pledge to support the openness of Android and reflects a wider trend of the OS being artificially restricted by carriers. Most US providers are disabling Android 2.2’s tethering support in favor of their own, and AT&T has banned non-Market Android apps under the pretext of security. The moves paradoxically leave Apple’s iPhone more open in some areas, as its users can choose Google, Bing or Yahoo for search and don’t have first-party apps deliberately hidden or broken.

Read more: Electronista

It takes nearly $1 billion/yr to run iTunes

In recent articles I highlighted the acceleration in iTunes App downloads where the rate is approaching 18 million apps per day and the cumulative total apps which is about to overtake the cumulative songs downloaded.

We now turn our attention now to constructing the iTunes income statement: namely total sales, gross margins and deduce its operating budget.

Gross Sales

To obtain the top line (income) for iTunes we need to know the average selling price (ASP) for songs and for apps. Apps are easy, we received that info in June: $0.29 per app. For songs, it was easy before early last year: $0.99/song. After the selective price increase, the blended price needs to be estimated. I chose $1.10 for 2009 and $1.2 for 2010. These are just assumptions and can be adjusted but should give us a rough estimate:

I followed the convention of using income rate or $/month to show the history of sales. It shows that even with a price less than a third of the music product, apps are generating over half of the sales of music. In other words, apps are adding 50% to iTunes sales today. If the decline in music units continues and the app sales increase with the current trajectory then app sales value will overtake music sales next year, consistent with the cross-over of cumulative units sold.

Gross Margin

If we know how much Apple pays music licensors and developers (i.e. cost of goods sold) we can calculate how much it keeps for operations (gross margin). Apple’s app margin is 30 percent. The music margin was never official but the consensus has been 10 percent for a while.

Using these figures, we get the following chart:

This shows that what is left after paying the content license, Apple “keeps” about $50 million every month to run the App store (iTAS) and another $30 million to run the Music store (iTMS).

The Operating Budget

Apple has made a point of saying that both iTAS and iTMS are run at “break even” implying that the gross margin is used up in operating costs (CAPEX, R&D, SG&A). To be sure, the cost of bandwidth and the data center(s) needed must be considerable.

But the operating budget for the store is beginning to reach a level that may be beyond what can be spent reasonably. The amount left over for operations has increased from ~$30 million a month in 2009 to $75 million/month today.

In fact, if this burn rate is maintained (even though it’s increasing) the operating budget for iTunes is nearing $1 billion/yr.

I’m not an expert on the cost of operating data centers but $ 1billion a year seems like a lot. I would love to see an analysis of how this could be allocated.

Implications

I would also add that because of the increasing mix of apps, the overall gross margin percent is increasing. I estimate that to be a blended 17%–a healthy margin for a content store–and an increase from 10% before the app store came online.

Finally, one implication of the economics involved is that a budget like this may provide a significant barrier to entry for any competitors looking to take on the iTunes juggernaut. iTunes has reached content critical mass (12 million songs), user base (160 million users) and wide distribution (23 countries for songs and 80+ countries for apps).

These are non-trivial operational issues that even the best in the “cloud” business models will find challenging.

Footnote:

This discussion excludes video sales, rentals, book sales as we don’t have solid histories for these product lines. However, we can do a spot check on the cumulative totals:

  • 450 million TV episodes downloaded implies $1 billion in sales.
  • 100 million movies downloaded probably adds at least another $1 billion
  • 35 million books adds another 500 million.
  • Compare with 11.7 billion songs at ASP of $1 for about $12 billion in song sales and 6.5 billion apps at ASP of $0.29 or about $1.9 billion.

iTMS content downloads have generated $16.4 billion in sales to date.

iTunes app total downloads to overtake songs this year

Last week I posted the iTunes download rate graph that showed how Apps are being downloaded much more rapidly than songs and revealed an inflection point in the song rate.

Based on the recent updates to iTMS and iTAS on Sept. 1, the following graph shows the cumulative units of songs and apps downloaded indexed to the same starting date.

As can be seen, the App store has reached the same total downloads in 2.2 years as the iTMS reached after five years. The two curves are likely to be the same height (around 13 billion each) before the year is over.

Google vs. Android Part IV

Verizon, unfortunately, is also what ruins the phone. Or, rather, what it’s forced Samsung to do to the phone, which you could sum up in a word: Bing. Bing is the default—and only—search engine on the Fascinate. A Google Android phone. In the search widget, in the browser, when you press the search button. Bing. No, you can’t change it. There’s no setting for it, and the Google Search widget that you can snag from the Market is blocked (or at least very carefully hidden). Being unwittingly forced into Verizon and Bing’s conjugal relationship is infuriating on its own, but the implementation also feels like the sloppy hack that it is.

via Daring Fireball Linked List: Matt Buchanan on Verizon’s Samsung Fascinate Lightning.

John Gruber astutely adds:

Android is “open”, but who it’s open for, primarily, are the carriers. (Somehow I doubt we’ll see any Windows Phone 7 devices where Google is the one and only search option.)

The primary defense of Google’s Android strategy is that it’s beneficial in driving traffic to Google’s services/properties. This is by no means a certainty. To the contrary, it seems likely that the Android experience will be defined by operator back-room deals.

See also: asymco | Android vs. Google Part II

Coupling a lack of control over the platform, the revenue streams, the user experience, the potential banishment of AdMob from iOS and an attack on Google’s brand, Android is currently winning the war with Google.

However, my money long term remains with Google. They can and will eventually beat Android. Perhaps with Chrome.

[Footnote: if anyone wonders why Verizon, Google’s best friend in mobile, is gutting Android, you need to remember an exclusive five-year deal Microsoft struck with the carrier to provide search and advertising services on the phone. Microsoft was rumored to pay $500 million for the opportunity.]

Asymco

Asymmetric Competition

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