Android

Android taxonomies

For reference, and, perhaps, discussion: 'Android' means lots of different things, and there's a lot of confusion about forks, Xiaomi, China and AOSP, as well as 'the next billion'. So this is how I try to think about this. First, there are actually (at least) six types of 'Android' in the market today:

  1. 'Stock' Android, as seen on Google's Nexus devices, complete with Google services (but with tiny unit sales)
  2. 'Modified' Android, as seen on phones from Samsung, Sony, LG etc, complete with Google services - generally, these are modifications that no-one especially likes, but which Google explicitly allows 
  3. 'AOSP' or open Android, as seen in China - essentially these phones are the same as number 2, but with no Google services and apps from the Chinese portals embedded instead. Hence Samsung, Sony etc sell their phones in China without Google services, but few other changes
  4.  (or perhaps 3.1) 'Modified' Android as seen on Xiaomi phones and those of its followers, which people actually seek out, and which comes without Google services in China and with them elsewhere
  5. ROMs and third-party implementations of Android that are available for any handset, such as both Xiaomi's MIUI and Cyanogen (an a16z portfolio company), which may or may not have Google services included or accessible. Again, these contain optimisations and improvements that make people seek them out
  6. Forked Android, such as the Kindle Fire phone: Android heavily modified to produce a different experience, and Google refuses to allow Google services to run on them (other than plain old web search, AKA POWS). Note that Xiaomi and Cyanogen are not forks. 

Th first two or perhaps three I would describe as 'closed' Android and the second three are 'open' Android, certainly from the perspective of device manufacturers. The first two (actually just number 2) have over a billion users outside China (as of the numbers given at IO last summer). Versions 3 and 4 have a further 400-500m users, almost all in China, and there are perhaps 50m users of 5 ( a very rough estimate) both inside and outside China, partly overlapping with the others. Six - well, ask Amazon. 

In parallel, it's worth breaking down Android users in a similar way:

  1. ROM users (very roughly, perhaps 50m people)
  2. People who like to install the kinds of apps that do things Apple doesn't allow on iOS and Google does allow on Android (note that Apple now allows rather more things and Google does not, oddly, allow gambling apps). I had a go at quantifying this here
  3. People with a personal preference for Android, who none-the-less do not actually install ROMs or do many things that are blocked on iOS (the difference between this and 2 is a grey area, obviously)
  4. People who don't actually care very much one way or the other between Android and iOS, and (for example) got a good deal, preferred the handset design or (especially) the larger screen size that used only to be available on Android, and indeed might switch back and forth between iOS and Android 
  5. People who can't afford iPhones or other high-end phones and so got Android as the cheaper option. 
  6. People who actually don't care about smartphones at all, and so just bought a 'cheap phone' (or just a  phone with a good camera, say), and happened to get an Android since it's taken over most of the mid range and low-end, and who don't do much with the ecosystem
  7. People in emerging markets who really can't afford anything other than a $50 or $100 Android phone but are enthusiastically taking advantage of everything it can do.  
  8. As above, but have a relatively expensive data plan, limited 3G coverage and, often, limited access to power to charge their phone (this one is is where the 'next billion' will sit) 

 Some of these categories (but obviously not all) also apply to iOS, of course, but selling phones only at $600 for the latest model creates a more uniform customer base. 

Layered across both of these is huge geographic variation. The must-have phone for teenagers in San Francisco and Jakarta is very different. But the underlying point about both lists is that tech and mobile have grown far past the point that there is really a single market for anything. When you connect everybody you get, well, everybody, and they're not all like you. 

Why do we care about Xiaomi?

'If you have nothing to tell us, but that on the banks of the Oxus and the Jaxartes, one barbarian has been succeeded by another barbarian, in what respect do you benefit the public?' - Voltaire

The Android smartphone business can feel like it's a rerun of the PC business, but compressed into 5 years instead of 20 or 30. The component layer is mostly a commodity, especially below the high end, and so is the operating system layer, and manufacturers are stuck in the middle, all of them using the same basic components and the same software (Windows for PCs, Android for phones), and so unable to differentiate on much beyond than price. The result is a race to the bottom with distribution, marketing and manufacturing scale the bases of competition. 

Today, Samsung's dominance of Android (with close to half of unit sales) appears to have peaked and a wave of companies appear to be able to use the entire Shenzhen manufacturing cluster or ecosystem to achieve many of the benefits of scale without having vast factories themselves. We see this in Chinese companies such as Xiaomi, OnePlus or Gionee, and also in local companies around the world that are having their phones made in China and basing their business on branding and distribution - some examples are Micromax in India, Cherry in the Philippines, Blu in Latin America or Wiko in France, which claims over 10% market share. Many of these are simply picking standard models from the big contractors in China and adding a brand - hence one big OEM told me 'when those guys say they designed it, they mean they went to Foxconn and asked for models 4, 23 and 39'. It's not clear quite how big you can get on this model, nor how like the PC clone business (i.e. eventually consolidated) it will end up. Equally importantly, it's far from clear how global these companies will be, but that may not matter. 

In this environment, just as in the PC business, some companies and some business models do better than others, but that doesn't necessarily matter to anyone else further up the stack. Gateway 2000 disappeared and Dell prospered, but that didn't much matter to PC buyers, let alone software developers or anyone on the web. Equally, Samsung rose to dominance and now slips, Lenovo buys Motorola and invests in mobile, HTC faltered and Sony goes sideways and Chinese OEMs are rising, but the phones keep coming.

(This issue is also one of the problems with Mobile World Congress in Barcelona, from which I've just returned. When I started going to this conference, in 2000, operators and handset makers drove the agenda for the whole consumer experience and the show was the place to see that, but today that agenda is driven at Google IO, Apple's WWDC and, perhaps, Facebook's F8.) 

So these companies, XIaomi included, are interesting to people who are interested in the handset business, then, but why do they matter to anyone else? Xiaomi sold 75m phones last year, yes, but isn't it just another OEM with a new branding and distribution model, and its rise relative to Samsung, say, no more interesting to anyone not in the handset business than the rise of Dell relative to IBM's PC division was? And it's mostly in China, for now  - isn't it just one 'barbarian' defeating another in a far away place

Well, up to a point. Though it's certainly possible to get over-excited about Xiaomi, this sort of dismissal misses several important threads worth pulling on. 

First, PC OEMs mostly failed to differentiate in design, and this has also been true of the Android market (and especially of the biggest OEMs), but the Chinese appear to be learning design, and quickly. Xiaomi, Gionee and several other companies are making phones that are visually appealing, using materials and finishes to differentiate from the run of black plastic rectangles that predominate in Android below the high-end (there are several consultancies composed of former Nokia people serving this market). A couple of these phones look superficially similar to Apple products - most do not. They're nice-looking, interesting, and half the price. (Interestingly, the way this has played out in China so far is that Samsung's share has fallen fast but Apple's has grown: they're selling to different customers.) 

Second, PC OEMs never managed to create any meaningful differentiation in software, and neither again did the Android OEMs, but Xiaomi has, and so have some of its imitators. The difference is that unlike most previous OEM attempts at software, they are not trying to compete with the whole internet. Instead of relying on vertical point solutions (photo editing and music services etc, though it does have some of these too), Xiaomi builds a thin horizontal layer between the commodity AOSP OS and third party applications. It has rebuilt the Android front-end - the whole UI from the launcher and notification panel down to the preference panels - to make it simpler and cleaner, changing the experience of using Android. This sometimes looks superficially rather similar to iOS 7, but this is a little misleading, which is hard to get from screenshots: a big part of the uniqueness is the animation. A Xiaomi phone feels very different from an iPhone or 'stock' Android phone, across the whole experience.

In addition, Xiaomi has packaged together a suite of integrated OS-level services that remix what Google and Apple provide in a similarly integrated way. In this it is of course helped by the fact that those Google services are mostly unavailable inside China and Apple's require you to spend 2-3x more on a phone. People tend to talk a lot about Xiaomi's services as a way to sell the phones at lower prices, but we know from various leaks that the revenue from these is actually immaterial, at  least for now - the point again is the experience that they give. 

It's a common reflex in the USA to call Xiaomi and similar companies copycats, on both a hardware and software level, and there's certainly a lot of design inspiration going on, but dismissing these phones as rip-offs is rather lazy. When you actually hold them and use them you would never mistake them for iPhones, any more than you'd mistake a $500 coat or bag for the $2,000 example that sometimes inspires the colour or trim. You can sometimes see where it came from, but it's not the same, nor is it trying to be. Rather, they deliver a similar approach to the user experience at a lower price in a way that's often been absent from Android so far (it's hard not to look at some of Nokia's beautiful Lumia devices and wonder what impact they might have had on Apple if they'd run Android).   

The result of this is that we now appear to have at least a couple of Chinese companies doing what was supposed not to be possible - low-margin companies using commodity components and a commodity OS, yet achieving differentiation in design, software and services. Looking at China always challenges your assumptions about what's inevitable in technology. Hardware companies doing good software and UI? Commodity box-shifters learning design? How far might that spread? 

Finally, this shift in what handsets might look like also has a broader implication: the spread of new types of Android OEM might change Google's control of Android. 

Historically, Google's lock on Android outside China has therefore been based on three things: 

  • You can't experiment outside very tight constraints: making even one forked device means Google won't allow you to sell a single phone running Google services. And all the OEMs have too much to lose to risk experimenting
  • There's a widespread belief that an Android device without Google services (really, this means Maps and the app store) is unsaleable outside China (I'm not entirely sure about this, as I wrote here)
  • No OEM managed to build a compelling set of services or tools of its own that might offer alternatives to Google, because, well, that was impossible (see above)

These new trends place all of those in question. The growth of smaller operators pursuing different models, with no existing base of sales and hence nothing to fear from  Google ban, may mean more experiments with forks. Xiaomi and its imitators point to a new potential model to differentiate (and note that Xiaomi is not a fork), and Cyanogen (an a16z portfolio company) offers the tools to do it. Smaller OEMs are less powerful than Samsung as a counterpart to Google, but also harder collectively to impose upon - Google can't shout at them all. This isn't to say that I necessarily expect to there to be lots of local attempts at the Kindle Fire, but we may start seeing a lot less uniformity in how Android comes to market, and what it looks like. 

 

How many ecosystems?

There are now close to 2bn smartphones on earth. How to ecosystem dynamics work at this scale? What kind of market share matters? It looks like the winner-takes-all dynamics are different, and seems clear that both Apple and Google have sustainable positions. 

Read More

iPhone 6 and Android value

The new iPhones were much the most predictable part of Apple's event - widely leaked and impelled by an irresistible logic - the customer is always right. For all that Apple thought and argued that you should optimize for the thumb size, it turns out optimizing for the pocket size is a better metric. *

(Of course, this isn't the first time - Steve Jobs famously said that no-one would watch video on an iPod, and that small tablets should come with sandpaper for your fingers).

Meanwhile, Apple did not, as I and others have argued it now could, make any real change to its pricing strategy. We still have a new model at $600 or so (plus another that's even more expensive) and older models at $100 and $200 cheaper, together with a (very) large secondary market act to address some of the top of the mid-range, but no more. 

Instead, these phones are a direct move against premium Android. 

Apple currently has about 10% of global handset unit sales, at an ASP of $550-600, and Android has another 50% at an ASP of $250-300 (almost all the rest are feature phones, now also converting fast to Android at well under $100). But within that Android there is a lucrative segment of high-end phones that sells at roughly the same price and in roughly the same numbers as the iPhone. To put this another way, Apple has 10% of the handset market but half of the high-end, and Android has the other half of the high end. 

That Android high-end is dominated by Samsung, and by screens with larger screens than previous iPhones. Until now.

How much of an impact will these new iPhones have on that segment? There are a bunch of reasons why someone would buy a high-end Android rather than an iPhone:

  1. Their operator subsidies an Android but not an iPhone - this has now ended, with Apple adding distribution with all the last significant hold-outs (Sprint, DoCoMo, China Mobile)
  2. They don't particularly care what phone they get and the salesman was on more commission to sell Androids or, more probably, Samsungs that day (and iPhones the next, of course)
  3. They have a dislike of Apple per se - this is hard to quantify but probably pretty small, and balanced by people with a dislike of Google
  4. They are heavily bought into the Google ecosystem
  5. They like the customizations that are possible with Android and that have not been possible with iOS until (to a much increased extent) iOS8 (more broadly, once could characterize this as 'personal taste')
  6. They want a larger screen. 

Splitting these out, the first has largely gone, the second is of little value to an ecosystem player and nets out at zero (i.e. Apple gains as many indifferent users as it loses) and the third is small. Apple has now addressed the fifth and sixth, and the massive increase in third-party attach points means that Google's ecosystem (and Facebook's incidentally) can now push deep into iOS - if Google chooses to do so. 

That is, with the iPhone 6 and iOS8, Apple has done its best to close off all the reasons to buy high-end Android beyond simple personal preference. You can get a bigger screen, you can change the keyboard, you can put widgets on the notification panel (if you insist) and so on. Pretty much all the external reasons to choose Android are addressed - what remains is personal taste.

Amongst other things, this is a major cull of Steve Jobs' sacred cows - lots of these are decisions he was deeply involved in. No-one was quicker than Steve Jobs himself to change his mind, but it's refreshing to see so many outdated assumptions being thrown out. 

Meanwhile, with the iPhone 6 Plus (a very Microsofty name, it must be said) Apple is also tackling the phablet market head on. The available data suggests this is mostly important in East Asia but not actually dominant even there - perhaps 10-20% of units except in South Korea, where it is much larger.  Samsung has tried hard to make the pen (or rather stylus) a key selling point for these devices, but without widespread developer support (there is nothing as magical as Paper for the Note) it is not clear that these devices have actually sold on anything beyond screen size and inverse price sensitivity (that is, people buy it because it's the 'best' and most expensive one). That in turn means the 6 Plus could be a straight substitute. 

Finally, not unlike Nokia for much of its history, Apple remains the only handset maker of scale making phones with a premium hardware design. Both Nokia and HTC also made equally desirable hardware but for different reasons have faded from the scene, while Samsung appears unable to make the shift in approach that this would necessitate. Several Chinese OEMs are making significant progress here (most obviously Xiaomi), but are not yet in a position to challenge Apple directly, and indeed are much more of a problem for Samsung, which finds itself squeezed in the middle. 

Setting aside the OEM horse-race commentary, the important thing about this move is how much it tends to reinforce the dominant dynamic of the two ecosystems - that Apple has a quarter of the users but three quarters of the value.  

We know from data given at WWDC and Google IO that Apple paid out ~$10bn to iOS developers in the previous 12 months and Google paid out ~$5bn. Yet, Google reported "1bn" Android users (outside China). Apple, depending on your assumptions about replacement rates, has between 550m and 650m active devices (though fewer total human users). That is, Apple brought in twice the app revenue on a little over half the users. (I wrote a detailed analysis of this here.)

We used to say that of course the average spend for Android users was lower, because the devices were available at any price for $80 to $800 where iPhones average $600, and sold well in poorer countries, but the premium Android users were bound to be worth much the same as iPhone users. This new data showed that this was not true. 

If premium Android users were worth the same as iPhone users, but the mid-range and low-end Android users were (naturally) worth less, then the Android number should have been (say) $11bn versus Apple's $10bn. But it's $5bn. So, even the premium Android users, the very best ones - even the people buying phablets - are worth much less to the ecosystem than an iPhone user. And now Apple is now going after them too. 

This takes us to a final question - is it the users or is it the ecosystem? If Apple converts a big chunk of premium Android users to the iPhone 6 when they come to refresh their phones (and note that since they won't all have bought their phones in September 2012, they won't all be up for upgrade as soon as the new iPhones come out), will their behavior change? Are we seeing less ecosystem value for these users because of differences in the platform they're on, or is there something different about those users' attitudes?

And, of course, if those users do leave, what will the Android metrics look like then?

* Just as for multitasking, and the new extensions in iOS8, Apple had to work hard to make this possible - in this case it had to move away from pixel-perfect layouts to something more responsive. This of course is where Android started - since it was predicated on a wide range of devices it had to allow for different layouts, where Apple started from one screen size. This, I think, reflects a broader trend - that Android and iPhone started in quite different places and have converged over the past 5 years.

How many Android tablets?

More extrapolation from Google IO numbers, this time looking at tablets. Google gave two 'charts' on this topic, shown below. 

Screen Shot 2014-07-31 at 11.57.58 AM.png

In addition, Google's developer dashboard gives a breakdown of active Android devices by screen size: in the first week of July they accounted for 12.6%, not including phablets. And since Google also, for the first time, told us the active base, 'over 1bn', we can calculate an active tablet base of at least 126m devices, rising to 138m if we take 'over 1bn' as 1.1bn. 

So. 

Apple, almost uniquely in the market, reports tablet sales and shipments. In the last 12m (which I presume that "62% in 2014" bubble refers to) iPad shipment were 69.7m and sales were 73m. If Android tablets indeed had 62% of sales (the chart isn't clear if it refer to sales or shipments) then that would equate to a market of 192m units and 119m Android tablets sold in the last 12 months. 

This would imply that Android tablets have an average active life of a little under a year. Or, that they have a life of more like two years (say) but half of them are inactive.

Conversely, it's pretty clear that the active life of an iPad is if anything too long, from Apple's point of view - at least two years and probably longer. Apple has sold 143m iPads in the last two years and 196m in the last three. 

That, in turn, implies that each iPad unit sale is worth 2x more active devices over time than an Android tablet sale - before looking at actual usage. 

There are, though, two problems with this data. The first is that it's not clear if that 'Android tablets market share' includes AOSP tablets in China, where the vast majority Android devices  have no Google services and hence do not show up in Google's active user figure or the developer dashboard screen size breakdown. Sundar did say that this doesn't include Kindle and other Android variants, which would add 'a few percentage points'. So it probably doesn't attempt to include China.

The second is that it appears that a very large number of cheap Android tablets are used mostly or entirely offline, consuming video via SD card and playing games. So those might not be in Google's MAU data either. 

A year ago, Google gave a more explicit set of numbers for Android tablet sales, in the chart below. If you eyeball the numbers, that equates to 50m tablet activations (i.e. not AOSP) in the 12m to July 2013. 

(I'm not sure, incidentally, why this sources Gartner and IDC as well as 'Google internal data' - shouldn't Google know activations?)

50m tablet activations in that 12m period compares to 70m iPad sales in the same period (more or less), giving a total market (excluding AOSP) of 120m units and  Android a market share of 41%, which is probably close enough to the cited 46%. Activations in the previous 12m look like about 15m: Apple did 53m, giving Google Android a market share of 22%, though, not 39%. Something has got lost in those numbers somewhere along the way. 

One more thing. Google's internal data on tablets activations and device screen sizes is self-reported by the devices when they access play, using the Android screen profiles described here. But devices that are on the margin between two buckets can and do change what category they report from region to region and from one software update to another. This is a particular issue for phablets, where it's really a matter of opinion whether you should tell an app this is a normal or large screen, and whether it's xhdpi or xxhdpi. 

This, incidentally, is one reason why I sometimes mark shares of tablet sales with terms like 'approximate'. 

Finally, of course, all the available usage data of tablets shows iPads with around three quarters of total use, even in China. 

How long do Android phones last?

For the first few years of its life, Google gave two types of number for Android: cumulative activations and daily activation rates. They tended to give them at scheduled events and they tended to give round numbers, so the precision was always pretty unclear, and sometimes the daily rate was not reconcilable with the increase in activations, but you had a pretty good sense of the rate of sales, as charted below (note the wonkiness of the data points). 

The last time a daily rate was given was in May 2013 (1.5m a day), and the last number for cumulative activations was in September 2013 (1bn). After that, dead silence until Google IO, when we got this chart, with a completely different set of metrics. 

Screen Shot 2014-06-25 at 2.26.49 PM.png

The last bar represents 1bn monthly active Android users. This of course excludes China, where Android devices do not use Google services. 

We've all rather focussed on the growth rate and the 1bn MAU number, but it's very interesting also to go back and compare the two data sets. The dates don't always match exactly, and the numbers are rounded, but you can still get a good sense of how things line up. 

In June 2011 there were 77m MAUs. In May Google reported 100m cumulative activations and 160m in August. So maybe 130m is the comparable activation number. The first Android phone, the HTC G1, went on sale at the end of 2008, two and a half years earlier, but sales didn't really pick up until 2010: in February Google announced a 60k daily activation rate, which equates to 22m a year, and if you model it out it's very clear almost all the sales were after that.   

Hence, half of the Android phones activated in the 2.5 years or so after Android went on sale remained active at the end of that period, but arguably, half of those sold in the last 18 months (i.e. from the beginning of 2010).  

Now, let's look at the next year. In June 2012 there were 223m MAUs (+146m) and at roughly the same time, cumulative activations were 400m: 270m activations in the year it we take that 130m number from mid-2011. So, it looks like the average life of an Android phone at that point was less than one year (i.e. more phones were sold in the year than were in use at the end of it), compared to a two year average in the phone industry. 

Next, in June 2013 there were 538m MAUs (+315m), and 900m cumulative activations by May. So, a bit over 500m activations in the year, and roughly a 1 year life span. 

Finally, in June 2014 there were 1bn MAUs (+460m). Google has not given an activation number: most estimates of sales in the previous 12 months group around 750m. So it's opening up, a little. By this point tablets have become a material part of the Activations, which they were not in previous years, further opening up the cycle, though we have not had solid numbers from Google here in a long time. 

What should we make of this? These are (to repeat) approximate numbers, but it seems clear that Android phones remain in use for well below the 24m average for the market, and during the peak growth period the replacement rate was closer to one year. The chart below compares what a 24m replacement cycle would have looked like compared to Google's own numbers.

The cycle clearly seems to be lengthening, but it's not clear yet how much.

Meanwhile, we don't have comparable data for iPhones, but the fact that around a third of the active base is on the iPhone 4 or 4S does rather speak for itself: if anything the iPhone is on longer than 24 months, especially if you take 2nd hand into account (though quite a lot of that second-hand seems to be exported to emerging markets, complicating the picture). 

This has some interesting ecosystem implications. It looks like the Android ecosystem has to sell significantly more phones than Apple to get the same number of active users. This is probably good for the OEMs (presuming the replacements are not people switching away from Android to iPhone), but less good for Google. Ironically, Apple might prefer it to be the other way around as well - it would probably prefer you buy a new phone every year. But this makes comparing market share problematic - it looks like a given number of iPhone unit sales might mean more customers than the same number of Android unit sales. 

There's a multiplier effect here, too: the other data set we gained from Google IO was revenue paid to developers. We now know that in the last 12 months Google paid out roughly half as much as Apple (link). These ecosystems are just not the same. If this seems confusing and opaque, you're catching on. 

App store revenue

App store revenue is not an ideal way to scope the value of an ecosystem to developers. The majority of the revenue comes from games, mostly freemium using IAP, while a large proportion of the most valuable apps are offered for free and generate revenue through other means (Facebook or Amazon, for example).

However, it does give a pretty good proxy for the broader behavior of the users, and it also of course is very relevant for developers who do want to to charge. 

For the first time, Google gave numbers for app store developer revenue at IO this year, and in the latest quarterly results Apple gave (almost) like-for-like numbers: 

  • Google said it paid out $5bn to developers from Google IO in 2013 to Google IO in 2014 (a little over 13 months)
  • Apple said it has paid out $20bn to developers in total by the end of the June 2014 quarter, and at WWDC June 2013 it gave a figure of $10bn paid to developers (at the June 2013 earnings call a month later it then said it had paid out $11bn). So in the last 12 months, it paid out roughly $10bn. 
  • Google also said at IO that it has 1bn 30-day active Android users - the degree of precision is not clear. The iOS number is fuzzier: trailing 24 months' sales would be a little under 500m, but extending that to a three year lifespan would take it to over 600m. 

Obviously all of these numbers are rounded and were given at scheduled events, so need to be taken as imprecise. The fact that four different growth rates are involved also makes calculating ARPUs a little tricky.

That said:

  • In the last 12 months, on public numbers, Google has paid out roughly half of Apple - $5bn versus $10bn, on roughly double the number of devices. 
  • On a run-rate basis, annual gross app store revenue across iOS and Android is now $21bn. 

The chart below shows the public data points. 

The problem with this, of course, is that with only two data points from Google, we don't know the trajectory - if this is a steep curve the recent period might be pointing more sharply upwards. 

A further observation: if the current market dynamics remain, Google Android's user base will at least double in the next few years - the iPhone base is still growing, but it will probably not double. However, those users will be gained at progressively lower (much lower) device price points, and with significantly lower spending profiles. 

For more discussion of why the two platforms look different, see this post. 

Finally, just to make life easier, Play is not the only payment system you can use on Android, even Google Android. A material number of apps, mainly games and mainly in emerging markets, use other payment methods. So that number might really be somewhat higher. 

Unbundling innovation: Samsung, PCs and China

It seems pretty clear now that the Android OEM world is starting to play out pretty much like the PC world. The industry has become unbundled vertically between components, devices, operating system and application software & services. The components are commoditised and OEMs cannot differentiate on software, so they are entering a race to the bottom of cheaper and cheaper and more and more commoditised products, much like the PC industry. 

The funny thing about this is that part of the original promise of Android was that it would allow OEMs to avoid this. Part of the promise was that because Android was open, OEMs would be free to customise it to differentiate their products on top of a common platform. But of course, it hasn't really worked out like that. I think there are a couple of reasons why. 

The first is that 'a common platform that OEMs can differentiate on' is very close to a contradiction in terms. Microsoft never pretended to allow OEMs to change Windows in that sense, and it quickly emerged that if you did change Android in any really important way it was no longer part of the common platform, but a fork. This is what Amazon has done with the Kindle Fire, and Google's reaction (as the sole arbiter of what is nor is not a fork) is that if you do that, you lose access to all Google's own apps, tools and APIs for Android. It wasn't entirely clear 4 and 5 years ago how big a deal that would be - how much of the value of a smartphone operating system would be in those embedded meta-services and cloud services from the platform provider. But now it's apparent that if you don't have those then you're really only selling a featurephone, at least as far as a normal consumer is concerned, and the only companies that have the assets and resources to build those things themselves (outside China, which is another world for Android) are Amazon (perhaps) and Microsoft. 

So, as an Android OEM, you can't practically make fundamental changes to Android anymore than a Windows OEM can make them to Windows. What you can do is to try to add value on top. That hasn't worked either, for several reasons:

  • Most of these companies are simply not good at software and services: the operating structures and skills required are totally different and hard to build
  • Anything that they add, even if it's actually really good, is competing with everything on the app store and everything on the internet. So even if they're good at software and do make (or buy or partner with) something good, it's just another app amongst many. The whole point of open platforms and indeed the internet is permissionless innovation - you don't need the OEM's permission to innovate. Again, how can an OEM differentiate by adding things when a user can add anything they want themselves? 
  • If they do anything cool that requires any sort of third party support they probably won't get it, because the ecosystem effects are at the platform level, not the OEM level. Hardly anyone will support something cool that only works on Samsung Android phones (or only some Samsung phones). 

The general point here is that the differentiation moved from one part of the stack to another (or, perhaps, to a new layer). The OEMs' own software used to be a core part of the purchase decision - that was Nokia's advantage with Series 40. But now that way to differentiate has moved up the stack to a new layer that the OEMs struggle to access - it's controlled by Google.  

There's another parallel here, I think, with what happened to the mobile operators. If you go back to 2000, they were all intensely aware of all the cool stuff that was going to happen with mobile and the internet.  They predicted a great deal of it very accurately, but they thought that they would be doing all of it. And of course what happened was that again, that innovation and differentiation layer got unbundled - it moved up to a new layer at the top of the stack, and the handset OEMs and MNOs were equally unable to access those services. Just like the OEMs:

  • The MNOs were structurally bad at making services
  • Even if they were good those services were just one amongst many
  • The network effects for these services ran across the whole internet, not just their customers. 

That is, MNOs tend to be bad at innovation in internet services, but even if they aren't, it isn't their place to provide it. It isn't their place in the stack to make a great video sharing site or a cool photo messaging app, even if they could. The analogy I often use in this case is that for an MNO to get into apps and content is like a municipal water company deciding to get into the soda business - because it knows water, and has trucks, and customers trust its brand. Even if it managed to come up with a great soda, it would still be just another can of soda amongst many. (Continuing the analogy, of course, it also makes little sense for soda companies to think they can get into the municipal water business - nor for tech companies to think they're going to disrupt mobile operators). 

When you unbundle an industry, you get new and different types of innovation in different layers of the stack. The skills you had in the bundled world may well still apply in the layer you find yourself in. Hence Samsung carries on doing interesting and impressive things in components, and can innovate up to a point in handsets, with things like phablets, so long as they do not depend on concessions from other parts of the stack. Equally, for example, Dell created an entirely new type of PC company - the PC company as a highly specialised logistics business - without differentiating at the operating system layer at all. 

But what's happened for PCs and smartphones and, to a large extent, mobile networks is that it's that top layer of the stack, that the PC and Android OEMs  and operators struggle to play in, that's where most of the differentiation happens. That's the stuff that makes the difference between a commodity and something unique. This is obviously something of a wrench. After all, especially for the phone companies and mobile operators, this is what they always felt they should be doing, and now other people are doing it instead, free-riding on top of their work and their investment. 

Samsung, Apple and Microsoft are all strong in two layers: Samsung in components and devices, Apple in devices and operating systems and Microsoft in operating systems and application software. Each of these companies has cross-leveraged these adjacent strengths to create better products and a stronger market position. Samsung has used the scale of the component business and access to those components to drive the devices business and vice versa, despite failing, mostly, to create compelling software differentiation. This leveraging of scale, combined with some great execution, has taken it to at least half of the total Android market. 

The problem is that Samsung is increasingly competing with another sort of scale effect - it is competing with the entire Shenzhen ecosystem. Before, it was competing with individual companies (many of which happened to use that ecosystem), and like Nokia before it was fortunate in the relative weakness of most of its competitors. As for Nokia, that luck was bound to run out. Now Samsung is starting to face competition with new companies who are finding ways to build new types of handset businesses on top of that ecosystem - taking that ecosystem and using it to unbundle Samsung.

The company that everyone talks about here is Xiaomi, which has created the skills to build both good services and software and good handsets. Xiaomi has faced the fork problem by working out how to dance right up to the edge without going over - Hugo Barra described it as a 'compatible fork'. Rather than turning Android into a fork, it has, so to speak, polished it, adding features and services without breaking anything. And so it has created real differentiation at the operating system layer without losing access to Google services, which its devices outside China all use. 

But there are lots and lots of other interesting Android companies unbundling, both within the price range, with some attacking the mid range and there the low end at under $100, and geographically, with companies like Micromax, Karbonn or Blu or Wiko peeling off particular geographies. In effect, this is the Dell innovation - not trying to get into the other parts of the stack (though Dell has moved into other businesses), but at being really really good at your own part. 

This also reminds me a little of Facebook. Facebook's integrated social platform model has been unbundled by mobile, with the social graph that it owns on the desktop being replaced by the smartphone itself as a social platform that all social apps can plug into. Hence, there have been dozens of new and interesting services peeling off parts of the use case or creating new ones. Making good services in this space does not require a totally different type of company, in the way that making good services and running a mobile network require different types of companies, and Facebook's 'constellation' approach to unbundling its apps has resulted in some perfectly good products, but so far none of them has risen above the status of 'just another social app' - they're all just another can of soda. 

The next phase of smartphones

It’s now 7 years since the iPhone reset the phone business, and indeed the entire computing and internet businesses. But it was pretty clear at the time that the first iPhone was an MVP, and Google’s first Android… homage, the HTC G1, was even more so. It feels rather like the last 7 years have been spent adding all the things that really needed to be there to start with, both in hardware and software. For iOS and Android these have come in different orders, since their opening assumptions were very different, but they’ve ended up at much the same place in terms of the user experience and interaction model. There are small differences in how you interact, and there are always things that are on one platform before the other, but the basic user flows are very similar, and almost all the obvious gaps have been filled. 

Along these lines, my colleague Steven Sinofsky makes the point that for any new ‘thing' in computing, at the beginning everyone is doing roughly the same stuff because the stuff you need to add is pretty obvious and undifferentiated - you might deliver different things in different orders but you’ve got basically the same wish list. It’s once you’ve finished building out that stuff that things start to diverge. 

This, I think, is what we started to see at this year’s WWDC and Google IO - the end of the first 7 years and the start of a new phase, with the fundamental characters of Apple and Google asserting themselves. As Jean-Louis Gassée put it, iOS 8 is really iOS 2.0

Hence, WWDC was all about cloud as an enabler of rich native apps, while the most interesting parts of IO were about eroding the difference between apps and websites. In future versions of Android, Chrome tabs and apps appear together in the task list, search results can link directly to content within apps and Chromebooks can run Android apps - it seems that Google is trying to make ‘app versus web’ an irrelevant discussion - all content will act like part of the web, searchable and linkable by Google. Conversely for Apple, a lot of iOS 8 is about removing reasons to use the web at all, pulling more and more of the cloud into apps, while extensions create a bigger rather than smaller gap between what ‘apps’ and ‘web sites’ are, allowing apps to talk to each other and access each others’ cloud services without ever touching the web. 

Unlike the previous differences in philosophy between the platforms, which were mostly (to generalise massively) about method rather than outcome, these, especially as they evolve further over time, point to basic differences in how you do things on the two platforms, and in what it would even mean to do specific tasks on each.The user flows become different. The interaction models become different. I’ve said before that Apple’s approach is about a dumb cloud enabling rich apps while Google’s is about devices as dumb glass that are endpoints of cloud services. That’s going to lead to rather different experiences, and to ever more complex discussions within companies as to what sort of features they create across the two platforms and where they place their priorities. It also changes somewhat the character of the narrative that the generic shift of computing from local devices to the cloud is a structural problem for Apple, since what we mean, exactly, when we say ‘cloud’ on smartphones needs to be unpicked rather more. That's a subject for my next post. 

Meanwhile, this sort of divergence is why I’m a little skeptical about the other two big reveals in the last couple of months: the Fire Phone and Facebook’s mobile announcements at F8. Facebook is trying to build essential plumbing to connect the web and apps together, in particular with its deep linking project. But this is like building the plumbing for a building that’s still going up, and where you don’t know what it's going to look like. Making tools to connect apps and the web together when Apple and Google are shifting the definitions of those terms is going to be challenging. 

Amazon has a bigger problem. Most obviously, more and more of what it means to be ‘Android’ will come from the closed Google services that aren't part of AOSP and that it doesn’t have access to. If Amazon wants to free-ride on the Android app ecosystem, it will need to spend more and more time replicating the Google Android APIs that the apps it wants are using, or the apps just won’t work - presuming that Amazon even has the sorts of search-led assets to do that. But more fundamentally, AOSP is being pulled along by Google’s aims, and will change in radical and unexpected ways. This isn’t like building on Linux - it could be more like taking a fork of DOS just before Windows 3.1 came out. Are we quite sure (to speculate wildly for rhetorical effect) that we won’t be running Android apps in a sandbox on our ChromeOS phones in 5 years? Where would that leave Amazon’s fork? AOSP is not necessarily a neutral, transparent platform for Amazon to build on.