Chinese app platforms

Looking at the Chinese mobile market today reminds me a lot of looking at the Japanese model in 2000 or 2001 - lots of very interesting stuff is going on, but getting reliable data is very tough.  

One triangulation point comes from app analytics platforms. You need to have some caution as to how representative they are, but the big ones give a good directional steer. Umeng (think Flurry for China) is one of the biggest. It puts out statistical reports every quarter or so - these are some of the key charts in the latest. 

First, platform size - this is their estimate of active devices that are using apps (not total devices), including tablets.  

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Both iOS and Android are growing fast, and Android faster, as one would expect given the range of prices that Android devices are offered at. However, on this data there are probably more iOS devices in China than smartphones in the USA. 

Second, handset brands. Apple is the largest single brand in this data set, but shrinking. This of course is users, not ongoing sales, so some recent suggestions that (for example) Xiaomi outsold iPhone in the run-up to the iPhone launch may be compatible with this. 

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Finally, and perhaps most interestingly, a window into the state of Android in China. As most people know, the great majority of Android devices sold in China are built on AOSP and have no Android services pre-installed (indeed, I've used a Motorola phone with no Google services present) - instead they have a range of apps from the local internet giants. 

This means that most Android phones have no Gmail, Google Now, Google Maps or, of course, Google Play, and most apps are installed form third party app stores or side loaded, either pirated or downloaded directly from publishers' sites. Some handsets do have these, either because people added them afterwards (which is not easy) or because they're using grey market imports. Estimates of the total with Google apps on them are mostly in the 20-30% range. However, on Umeng's data, Google Play amounts to just 5.6% of Android app installs in China. OEM app stores are 8.5%. This, for example, is why Baidu paid $1.8bn to buy a couple of app stores earlier this year. 

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Platform updates and the rate of innovation

Apple, obviously, blew the doors off with opening weekend iPhone sales - 9m units in 3 days, up from 5m last year. Having day one launch in China and adding DoCoMo to distribution obviously helped, but there's clearly still strong underlying organic growth. And it appears that this is without substantial demand for the 5C (which is not an early-adopter/queue overnight sort of product). 

However, the really interesting thing is that there are now 200m people using iOS7, where last year 'only' 100m people upgraded to iOS6 in the opening weekend. The chart below shows what this means, as compared to Android, the other platform. 

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Google, of course, is trying to address the fragmentation embodied in these charts with a shift to Google Play services, as neatly explained by Ars Technica here.  But though this means Google itself is less subject to fragmentation, it isn't much help to a developer wondering whether to use APIs that are only in Android 4.2 or later - let alone one wondering why their app crashes on one Android 4.2 phone but not another. 

This issue makes it hard for Google to drive the agenda for new mobile technologies within Android: it will take at least a year after announcement before a meaningful part of the base has access to anything new. Hence the focus on Google Play services and on the cloud with things like Google Now - moving everything several layers up the stack from the intractable fragmentation problem, and making the hardware OS less relevant. But of course, this reduces further the reasons to upgrade your OS, and makes it much less likely that third party apps will do anything on Android that they don't do on iOS (system utilities and other minority interests aside).  

Conversely, a developer can use anything that Apple announced in iOS7 and be confident it will work on all their users' devices. So anything innovative Apple does takes effect right now. Apple does have some fragmentation issues - some of the coolest features in iOS, such as Airdrop or iBeacon, have chipset dependencies that rule out older hardware. But Apple's integration means that it can drive innovation on the device much faster than Google. It can do Airdrop - putting that in the next version of Android and expecting it to work predictable for a meaningful proportion of the base any time soon would be much harder. 

Hence the paradox: the open platform is actually slower-moving in some ways than the closed one.  

Incidentally, the fact that Google seems to be moving more and more innovation away from the OS poses interesting questions about future roadmaps. Will 'Android' still be the main platform in the future, or will it be Chrome, or something else, with Android buried underneath?

iPhone price and positioning

Someone once pointed out that Apple's obsessive secrecy was wasted on the iPad, since even a year after it launched most of the competition had no idea what the iPad was or why anyone would buy it.  

I was reminded of this while puzzling over Apple's new iPhone launch, because much the same issue applies. What, exactly, has Apple just done? 

We know perfectly well what it has not done: it has not released a dramatically cheaper phone that could sell to the prepay market or even to mass-market contract customers outside the USA. This was widely rumoured and I myself thought Apple would go significantly cheaper, but it didn't. 

But what did it do?

The obvious answer is that Apple continued the existing strategy. A new high-end iPhone, with new cool tech (camera, 64 bit, fingerprint) that makes it the phone to beat for the next 6-9 months until Android catches up and overtakes it in the annual game of leapfrog (though matching 64 bit might be rather more difficult). Plus, last year's phone sold at a discount. This time, last year's phone is in a different case (and gets more LTE bands and a bigger battery), but the price is the same, so it's clearly not a step change. The 5C is really just last year's phone. And historically the old models have sold well in the USA (non-LTE iPhones were half of Verizon Wireless iPhone sales in Q4 and Q1), due to the unique US pricing structure that makes them look cheap, but don't appear to have sold well anywhere else. 

For investors, the fundamental question is whether Apple is still a growth stock. This doesn't look like a growth move, and the lack of a China Mobile announcement (so far) doesn't help, so the stock went down. 

But I'm cautious of applying the word 'just' to anything Apple does. The iPad, after all, was 'just' a big iPod Touch. 'Just' works well when you're looking at a company that launches dozens of products (Samsung now, Nokia in the past) - many of them are experiments, not all are expected to be hits, some are niche.  But when you only make a handful of products, all of your moves are carefully considered. All of them have an agenda, and all of them are intended to achieve something. Hence, I'm cautious of applying the word 'just' to anything Apple does. There's generally a plan. 

And then we have this.  

Apple did not spend the last 12 months running advertising for the iPhone 4S. That was an 'old phone', and it was a phone you bought if you wanted an iPhone 5 but couldn't afford it. The 5C is different. It's a new iPhone, and indeed I think it's the main iPhone. The iPhone 5S is the high-end one for people who want the latest tech - the 5C is the one for normal people. The same money now buys you a cool new phone, not a discounted old one. 

If you spend all of your time looking at this space you can miss this point. You know that the iPhone 5c is mostly the same as the 5 - 'just' the 5 in a new case, more or less. But consumers neither know nor care. They don't go into the shop and ask how new the chipset is - they look at the phone itself as a buying proposition.   

The fundamental characteristic of the mobile and tablet business is that consumers do not buy 'feeds and speeds' - they buy experiences, and they buy in person, in the shop, holding the thing in their hand. Feeds and speeds matter, behind the scenes - because they change what experiences are possible, but they're not the deciding factor at purchase in the way that they often were in the PC market. 

Hence, if you look at Apple's Youtube channel, there are videos talking about the 5S fingerprint scanner and the 5S camera, but not the new 64 bit chip (though this enables both). The same applies to Apple's (relentlessly hammered in) talking points: 

  • "iPhone 5C - an advancement of iPhone 5 with an entirely new design that feels great in your hand, and colour that only Apple could do
  • iPhone 5S, the most advanced iPhone ever, with our most forward-thinking technologies. "

So the 5C is the new iPhone, and it's  $100 cheaper, while if you want the supercool new tech you pay more for the 5S.

What does this mean for sales? In the USA, Apple has effectively halved the price of a new iPhone, from $200 to $100. It already has 40-45% of contract smartphone sales - this move will take another big bite out of US Android sales.

It's worth thinking about what that would do to the Android ecosystem. Apple already has a systemically disproportionate share of the kinds of users who download apps. If, in the USA, where so many developers are concentrated, it went to well over 50% share, that could have a big impact, not so much in support from large companies but from all the cool new startups that do much to drive a platform forward. 

Elsewhere, $550 for the 5C is still expensive, especially for the 50% of Europe and 90% of China that's on prepay. Android averages $250 to $300, in contrast, and Xiaomi's new flagship phone is $330. But that doesn't mean it's out of reach for the other 50% of Europe, or for the 2-300m people in China who buy expensive consumer goods.

This is where the real question arises. How much price flexibility will we see? How many more people will pay an extra €5 or €10 a month for the 5C over a cheaper Android? What will happen to sales of the Galaxy S4, which is notionally a higher-end phone at a similar price? How much will the 5C take from sales, not just of $550 Android, but of $400 Android? That answer could make a big difference to Apple's market share. And it's worth noting that even with the previous pricing strategy, Apple's market share was growing steadily. 


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The price of the 5C

 At this stage it looks as though everything about Apple's 'cheaper phone' has been leaked - plastic casing, choice of colours, '5C' name, same screen as the current iPhone 5, and a transparent box to help retail sales. Everything, of course, except the price - which is all that really matters.

What price would Apple choose for a genuinely cheaper phone? There are four brackets worth looking at:

  1. $100-$150 – this is where budget Chinese manufacturers are starting to deliver  usable dual-core 3G Android phones
  2. $150-$200 – the upper end of what is possible to sell to the unsubsidised prepay market - which is half the planet
  3. $200-$400 – almost certainly out of reach without subsidies but a solid mid-range smartphone price range
  4. Over $400 – similar price to the existing discounted two-year-old model, but with more up-to-date technology, possibly higher margins and probably an easier marketing sell than the ‘old’ phone 

The first of these price points requires too many product experience compromises from Apple, while the leaks we've seen so far seem to show a device that would not be priced $200 or under, ruling out most prepay.

So, the decision is where to sit in the mid-range. The interesting dynamic in this is the tension between the USA and China.  

The US contract phone pricing structure today effectively puts a lower limit on the viable price for a contract smartphone. The ($450) iPhone 4 and similar high-mid range Android phones are sold as 'free' on contract'; phones whose list price is actually much lower are sold at the same price. A $200 phone is sold to consumers at the same price as a $400 phone - and hence is very uncompetitive. 

One effect of this is that the iPhone 4 and 4S made up a quarter of Verizon Wireless contract smartphone sales in Q4 2012 and Q1 2013, a much higher share than they appear to have elsewhere. In the USA they're as cheap as any contract phone on the market - everywhere else they're cheaper than the iPhone 5 but still relatively expensive. The Android ASP, after all, is $250-300. Everywhere else $200 and $300 Android massively outsells $400-$600 iPhone: in the USA much of that price advantage is removed. 

So, a $300 or $250 iPhone is a tough sell in the USA. But a $450 iPhone is a tough sell in China. Xiaomi, after all, just announced a very compelling new phone, the M3, at $330, and that may not be staying in China

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Hence the tension: which is more important to Apple? It already has 40-45% share of smart sales in the USA, which was just 12% of the global smartphone market in Q2. But it can't launch a phone that doesn't work at all in the USA (nor is it likely to persuade the US operators to drop their pricing to remove this distortion) - which points to a higher price, higher spec model. The further you go below $400 the more you get a phone that's tough to sell in the USA. 

But too high, and the current dynamic may not change - Apple remains camped out in the top 10% of the global handset market while all the rest converts to Android - and this is a problem

The true unknown in this, of course, is that while we know that any $300 iPhone would sell very well, we don't know how much better a new $400 or $450 iPhone would sell than the current "two year old" $450 iPhone. How much difference would the screen, coloured plastic casing and 'newness' make? 


Defending iOS with cheap iPhones

Over the last 12 months, Google Android devices have outsold iOS by about 3 to 1. There are now perhaps 775m-800m 'official' Android devices in use, versus perhaps 415m iOS devices. This is without counting sales of the Amazon Kindle Fire or the (very) many Android devices sold in China that are not connected to Google services - these may be a further 150-200m active devices now (or more). So, the Android install base is more than double the size of iOS. If you look just at phones, there are maybe 250m iPhones in use and perhaps 700m 'official' Android phones alone.  

Of course, Android has had a larger installed base than iOS since mid 2011, but engagement remained far behind. Until well into 2012 publishers and developers tended to see app download rates on Android of a half to a quarter of what they experienced on iOS, in absolute terms, while payment and purchase rates were a quarter or lower of iOS rates. This was due partly to weak execution by Google and partly to a vicious circle of self-selection: Android phones were cheaper (averaging $250-300 globally versus $600 for the iPhone) and had a poorer choice of apps, so they attracted people with less money and less interest in apps. The small and very vocal number of people who really want an Android are far outnumbered by people who don't particularly care. 

This engagement gap is now starting to close:

  • Google has significantly improved the execution of the ‘Google Play’ app store, and has made a strong effort to extend operator billing
  • The sheer size of the Android base, at close to 800m active devices (outside China), versus around 400m for iOS (and around 250m iPhones), means that even with lower proportionate engagement rates the absolute numbers are starting to catch up

Hence, by the first half of 2013 Android cumulative downloads caught up with iOS (both at around 50bn), and both now see a run-rate of something around five apps downloaded per active device per month. 

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Google does not give any data on payment trends, but Apple gives enough to estimate  that iOS users spend about a dollar a month on apps and in-app purchases. Android payment levels (both on Google play and with other methods) are significantly lower (perhaps half the value of iOS in total, despite having double the users, but there's very little data to go on), but again are rising (this Distimo report is one illustration).


  • There are 2-3x more Android users than iOS users
  • The average Android user, for a range of reasons, downloads fewer apps and spends less on the app store than does an iOS user
  • However, there are so many more Android users that the total rate of app downloads has caught up with iOS and the total value of payments rate may also be starting to catch up

In other words, the average Android smartphone user is worth much less than the average iPhone user, but there are lots more of them.  

Does install base matter? It may start to. 

It is possible to argue that this does not matter much: if Apple’s ecosystem of 400m active devices is big enough to sustain developers already, does it matter that the Android opportunity may become even bigger?

When Apple launched the app store, a year after launching the original iPhone, it had sold just 6.1m iPhones (as well as a significant number of iPod Touches), yet this was enough to attract a flood of developers – even a year later it had only sold 26.1m, which is roughly the same as the 27m Windows Phone Lumias that Nokia has sold to date. Yet Windows Phone is an afterthought at best for developers. Though some independent developers may see an opportunity in an empty Windows Phone app store, for most the question is where best to allocate limited resources. Where is the opportunity cost, and where is the best return? The size of an ecosystem per se is not important – what matters is which should be the first priority.

Hence, developers are starting to move from creating new products on the basis ‘iPhone, then maybe Android’ to ‘iPhone and then Android’ or even ‘iPhone and Android at the same time’. Cool little apps from seed-funded companies are still iPhone-only, but most big well-funded businesses are doing both. Android is no longer optional for any publisher seeking real reach. This applies even more if your app is free, since Android download rates are much closer to iOS than are Android payment rates (and of course 'free' doesn't mean no revenue). 

Of course, this comes with problems. It's pretty clear that for many developers supporting Android costs 2-3x what iOS costs (the BBC made this explicit, for example), which pushes it further down as a priority. In addition, lower individual engagement means lower CLV, and so the dynamics look different on (for example) customer acquisition. But the greater absolute numbers all act to push the other way.  

If total Android engagement moves decisively above iOS, the fact that iOS will remain big will be beside the point – it will move from first to first-equal and then perhaps second place on the roadmap. And given the sales trajectories, that could start to happen in 2014. If you have 5-6x the users and a quarter of the engagement, you're still a more attractive market. 

This is a major strategic threat for Apple. A key selling point for the iPhone (though not the only one) is that the best apps are on iPhone and are on iPhone first. If that does change then the virtuous circle of ‘best apps therefore best users therefore best apps’ will start to unwind and the wide array of Android devices at every price point will be much more likely to erode the iPhone base. Part of the reason for spending $600 on an iPhone instead of $300 on an Android is the apps – that cannot be allowed to change.

A new, cheaper, high-volume iPhone would have the potential to mitigate or even reverse this trend. Clearly, like current low-end Android, it would sell to a demographic with a lower average engagement and purchase rate and so the average iOS rates would drop. However, it would mean that iOS’s reach would expand significantly at the expense of Android. How would a $200 or $300 iPhone sell? Easily double digit millions, possible up to 50m units a quarter. 

This means that the financial value of a cheaper iPhone cannot be considered in isolation. A large part of its purpose is to defend sales of the high-end model.

This is an excerpt from a longer report on the outlook for a cheap iPhone that I published for Enders Analysis. 

US iPhone share

No sign of weakness in US iPhone sales, with T-Mobile appearing to be purely additive. There's an obvious diminishing return at work - each new operator sells a lower share of iPhone. This is most probably due to self-selection - the people who really want an iPhone move operator to get it. 

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Annoyingly, AT&T has stopped disclosing iPhone sales, though it gave some hints. Applying those, it looks like the iPhone was a little over 50% of smartphone activations at the big 4 operators, and 40% of their contract phone activations, which is actually the more relevant metric.

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Meanwhile, contract smartphones sales are getting close to topping out. You can't sell more than 100% and the overall contract phone volume is growing very slowly. (Note that this is not adjusted for the Metro PCS acquisition.)

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