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).

Hence: 

  • 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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Apple cyclicality

Apple's results yesterday were actually pretty boring. But one of the more interesting things is the way that the iPad is now starting to become just as cyclical as the iPhone.  

You can see this at a high level in this chart, which shows unit sales for Apple products since the iPhone launched back in 2007.  

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There are a bunch of dynamics here.

  • The iPod, obviously, spikes each Christmas as a gift, though that is declining as a percentage of sales as the overall business declines. 
  • The iPhone has spiked, to an increasing extent, with new product launches
  • The iPad has been driven both by new product launches and by buying seasons
  • Apple changed the iPad product cycle in 2012, from launching in the Spring to launching in the December quarter
  • And, just to complicate things, Apple has shifted from launching new products in China in the March quarter (i.e. after the USA and in the New Year season) to launching them in the December quarter with everything else.

This product cycle impact is clear in the two charts below, which break out iPhone and iPad sales by the primary product that was on sale (older models continue on sale but we don't have a breakdown). 

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The iPhone dynamic is pretty obvious, but the iPad cycle is more complex, because sales are being driven by both the calendar season and the age of the product.

For the first two cycles Apple launched the new iPad in the June quarter and sales then rose in the September quarter (back to school?) and again in the Christmas quarter (presents) before falling in March (old product, new one coming). But then in 2012, iPad Mini rumours led to sales falling in September and then Apple launched the Mini and a 4th gen model in the December quarter. So sales shot up in the December quarter, held up well in March (newer product plus Chinese new year) and then slipped this quarter as it's now a nine month old product.

I should point out, incidentally, that competition is a relevant but not sufficient factor to explain these swings. Certainly, Android tablets are having a minimal impact in the West. The iPhone picture is more complex, but the chart below makes it pretty clear that substitution from iPhone to Android cannot be the main factor. 

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All of this is a long-winded way of saying that sales patterns for the iPad have yet to settle down. It looks like September quarter iPad sales will be down again, but really, who knows? The one thing that's certain is that there'll be another big spike in December. And that historic comparisons just don't work. 

The broader issue for investors is that the annual cycle means you can't really tell how Apple is doing from the mid-cycle sales numbers. So much of the revenue and the momentum is determined by the December quarter that you really have to wait. 

There is, of course, a significant set of financial implications for Apple from such volatility in production and sales, but that's another topic. 

UPDATE Google released tablet numbers for the first time yesterday: see a discussion here.  

Twitter as a window into smartphone distribution

This is fascinating. Mashing twitter metadata against maps. Produced by Mapbox. Blackberry is purple, iPhone is red, Android is green. (Click to zoom)

First, Africa. Mostly Blackberry, mostly South Africa, Nigeria and a little Kenya. 

Next, a look at South Korea. Android everywhere, but a cluster of iPhone in the centre of big cities.  

Bombay: mostly Android, but iPhone and Blackberry in the richest areas?

Central London: Blackberry on the roads, iPhone in the richest areas

New York area - a cluster of Blackberry in the Midtown business district, iPhone in the richer areas (and JFK), Android further out. 

And western Europe: iPhone and some Blackberry in the UK, Android and some Blackberry in Spain, and Germany and France (as usual) late adopters. 

Finally, northern and Central Italy.Lots of iPhone, despite the lack of subsidy. 

Lots more to explore looking at this, but one point stands out. I sometimes feel like Cato saying this over and over, but the iPhone is more expensive than most of the phones on the market, and this shapes the kind of people who buy it. 

Also, it's worth pointing out that the site that made these is laying iPhone on top of Android rather than blending them. There's Android in the central/rich areas too - though often less. But iPhone is concentrated in those areas. 

 

iOS

So, Jonny Ive certainly changed things in iOS, just 7 months after taking over. The new version will be out in the autumn with a whole new look and a systematic rethinking of how things work together, though not any fundamental change in how your mother uses it. 

He didn't make things 'flat' - in fact the new UX model is based on depth and layers. There's a shock of the new (analogous to the shock of the original Mac OSX, which was also radically different), and plenty of graphic designers are complaining about the colour palette and the typography (forgetting that this is a beta, and that they're mainly only seeing static screenshots). A lot of apps will have to be rethought if they're not to look painfully out of place, just a year after the switch to the larger screen prompted another redesign, illustrating the ways apps are an ongoing commitment if you don't want to damage your brand. 

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From personal experience, the new look is startling in screenshots but makes a lot of sense when you use it. And actually, most things are roughly the same, just clearer and simpler. But beyond the 'chrome', it seems to me that there are three important things to note. 

First, how it works is what matters, and Apple has made a lot of things work better. Most of the UX inconsistencies and confusions (accreted over the past 6 years) have been fixed and, as in every new version of an OS, there are lots of nice little improvements and cool new things. 'Airdrop' peer-to-peer local file sharing (pass this photo/address/video to your friends in the same room, with no set-up at all) solves a real user problem in a way that NFC has tried and fail to address for years, for example. 

Second, there are no fundamental structural changes. There is no new model to let apps talk to each other, no API for Siri, no synthesis of the app store and web apps, no (increased) social integration. This may or may not be a good thing. Apple is effectively doubling down on third party developers rather than trying to do more and more itself (Android and Google Now) or integrate everything social into the OS (Windows Phone). Maybe this is philosophical but maybe there just wasn't time, given how much other new stuff there is.

But on the other hand, Airdrop points to some intriguing new opportunities. Things you could 'Airdrop' to your friend's phone as you sit in a bar with them: a video, a Spotify track, a game level, a game, a Yelp review, access to a Dropbox folder...

Third, lots of interesting new APIs for developers. For example:

  • Multitasking has been enhanced, allowing more apps to do background downloads without (hopefully) sacrificing battery life.
  • Apple is pushing to maintain its lead in games with a new 'Sprite kit' API to make it much easier to make some of the most popular types of games, and adding support for external controllers (which may also point to the future of the Apple TV)
  • Built-in barcode recognition
  • Bluetooth Beacons APIs, so that a retailer can make an app that will know exactly where it is in a store
  • Many improvements to help corporate and educational deployment
  • And judging by the applause in the developer session for iCloud, a lot of pain points there have been addressed. But no mention of a step change in the quality of data in Apple Maps. 
Overall, I think this maintains Apple's position at the premium end of the market and as the first choice for most developers, but it probably doesn't change anything in the direction of the market, and most developers now have to address Android too (which may limit how many of these APIs they can really take advantage of if they need a cross-platform product).

It (obviously) does not broaden the market for iPhones as long as the phones themselves are priced at the premium end of the market - hence the ongoing speculation about a cheaper phone. My bet is $200, to hit the top end of prepay. We'll see in the autumn when the new hardware is unveiled. 

A final note - Google didn't actually announce a new version of Android at Google IO - though it did create a lot of features in Play that will be available to most Android devices. So there's another big unveil coming. 

Apple, open and learning from history

"History teaches us nothing except that something will happen' - Hugh Trevor-Roper

In the 1990s, the PC market was mostly a corporate market (roughly 75% of volume). Corporate buyers wanted a commodity. They were buying 500 or 5000 boxes, they wanted them all the same and they wanted to be able to order 500 or 5000 more roughly the same next year. They wanted to compare 4 vendors on price with the same  spec sheet. They didn't care what they looked like (and they were going under a desk anyway) and they didn't care how easy it was for non-technical people to set them up because the users would never touch the configuration. Nor did they care much about the user interface, because most of the users were only going to be running 1 or 2 apps anyway. 

Meanwhile with no internet, home buyers were mainly interested in a PC that ran the same software they used at work (and all of the games were for PC). They may have known Macs were supposed to be easier, but Apple had no shops of its own and what TV advertising it could afford didn't show off the user interface (it's hard to demo an desktop computer's user interface on TV). And, of course, Apple's computers were ultimately beige boxes and not really that much prettier than PCs anyway. And they were significantly more expensive. 

Hence, in this market all of Microsoft's advantages were in play, and none of Apple's. Apple, in Steve Blank's phrase, did not have product/market fit. The Open model deployed by Microsoft and Intel produced a generic commodity product that was exactly what the market wanted: Apple's model did not. Fundamentally, Apple's selling points were irrelevant, invisible or both. 

Today, of course, Android, combined with chip makers such as Qualcomm and MediaTek, is producing a quite similar flood of generic commodity smartphones. Hence, there's a pretty common narrative that 'we've seen this before' - that the same open approach, producing the same flood of generic commodity product, will crush Apple in the same way.

It would also, necessarily, crush anyone trying to make a living selling high-end Android phones, which are ipso facto much less differentiated from a $200 Android phone than is an iPhone. This is one reason why BIll Gurley suggested Android may be 'the greatest legal destruction of wealth in history' (link), at least for the tech industry. 

However, I'm not sure that's true. If one looks again at all of those 1990s PC market dynamics, almost none of them apply to the smartphone market. Phones are NOT generic, fungible commodities:

  • Phones are bought by individuals on design and user interface
  • Phone are also bought on price, and the iPhone is expensive, but the subsidy system weakens the effect (to a varying degree depending on the market and on the proportion of contract versus prepay). Moreover, the price gap between an iPhone and a cheap Android is much smaller in absolute terms than the gap between a Mac and the cheapest PC. 
  • Apple has a massive retail presence and has premium placement in every mobile operator shop
  • It is in the nature of a phone UI that you CAN show it off in a TV spot - which Apple can now afford (originally, thanks to the cash from the iPod)
  • Apple is stronger in apps than the competition, and that shows no signs of changing

In other words, Apple has product/market fit in the phone market in a way that it never had in the personal computer market. ALL of the key dynamics that doomed it in the computer market are fundamentally different in the phone market - this time, they all work in Apple's favour, and in favour of the high-end market in general. 

Now, it is unclear just how many more people can afford to pay the price Apple charges for the iPhone (link), and it is unclear how or whether Apple would offer a cheaper product (link). But the underlying structure of the market is vastly more favourable to Apple than the PC market ever was. Simply chanting 'open wins!', as though you suffer a form of tech Tourette's (a phrase coined by Fraser Speirs), isn't necessarily relevant.  

Q1 2013 US smartphone share

Numbers for the three big US operators that carry the iPhone (T-Mobile, which didn't in Q1, hasn't released the Q1 numbers yet). iPhone was 57% of smartphone activations and 49% of ALL contract phone sales. Smartphones are 86% of contract sales. 

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To be strictly precise, these numbers are a mix of 'activations' and 'sales', which are not always consistently reported. The main delta is in second-hand sales. However, these do not (yet) appear to be big enough to change these numbers much. 

US smart sales

Lots of interesting things in this chart. 

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First, Android isn't really growing at all in the USA, at least at the big two operators. ('Other smart' is almost all Android now). All the growth is coming from iPhone. 

Second, there's near-zero seasonality in Android phone sales. People decide they want a phone and go out and buy whatever's in the shop at the time that looks good. Launches of 'hero' Android phones appear to have no impact at all - they may take share from other Androids, but not from iPhone and they don't increase overall sales. 

Third, there seems to be a complete disconnect between Android and iPhone purchasing. One can understand iPhone sales per se going up in a launch quarter, but why don't Android sales go down in those quarters? It looks like a new iPhone launch doesn't tempt in Android buyers at all. 

The implication is that there is an ongoing base of sales that goes to Android, and to some extent iPhone as well, that totally ignores product launches, and just buys a phone. Then, there's a base of people who wait to buy the new iPhone (and of course come off their 24m contact in another launch quarter, eager to buy). And this latter base is getting bigger every year, and indeed driving all of the growth. 

What isn't shown in this chart, of course, is churn within the Android base: Android users moving to iPhone while new non-smart buyers shift to Android, keeping the sales steady. That's a bit more work. 

Notes:

AT&T and Verizon WIreless had about 65% of US smartphone sales in Q4 2012. They're the only operators (anywhere) that reported this data. Sprint only began reporting smartphone sales in Q4, and T-Mobile USA hadn't started selling the iPhone: it had had about 9% of smartphone sales, almost all Android and growing slowly

This particular split is very US-specific: the US market's pricing structure tends to conceal the price premium of the iPhone. A chart for China, assuming one could get the data, would show very strong Android growth (though also strong iPhone growth)

A note on install bases

On average, mobile phones are replaced every 24 months. So trailing 24m sales are a pretty good proxy for the install base. On that basis, at the end of 2012 the Android install base was about 675m, and the iPhone base was about 230m. (Apple discloses these numbers so you can just work them out: Google gives Android activations numbers with sufficient frequency to work out a run rate, to which you have to add an estimate of Chinese sales, since they're not included in the activation numbers.)

The interesting thing is to think abut how those bases have grown. At the end of 2010 (24 months earlier), Android had sold 55-60m units since launch about a year earlier, and the iPhone had sold 72.7m units in the previous 24 months.

Applying a little arithmetic, we see that a little over 90% of the current Android base got its first Android in the last 2 years, and 68% of the iPhone base its first iPhone.

Of course, this ignores switching between the platforms, for which there is no good data, but a lot of it will net out. It also ignores people buying a new phone every year - but also people who are still on 3 or 4 year old phones - but these are buried in the average. The number of people selling their iPhone to buy a new one every year is the big variable here. 

To put that another way, about 90% of current Android users are on their first Android, as are 70% of iPhone users. It'll be interesting to see what their second purchase is. 

US smartphones at 90% of contract sales

With Sprint, VZW and AT&T Q4 results now out, we can see that US smartphone sales were at or near 90% of contract phone sales. 

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Within that:

  • The iPhone, with 17m sold, was 65% of reported Q4 smart sales and 57% of contract sales at the big 3 US MNOs carrying it. It was about 48% of total US contract sales
  • Maybe 13m non-iPhone smartphones were sold on contract in the USA in Q4.

As an aside, this means that the US was well under 10% of global Q4 Android unit sales, versus 36% of iPhone sales. 

iPhone market share in the USA: 50% of Q1 sales

An experiment of sorts: today I published a very detailed report for Enders Analysis on the iPhone’s market share in the USA. Enders is a subscription business, so I can’t post it all here, but I’ll be sharing some of the more compelling charts over the next few days. Today: smartphone market share. 

Since the US operators disclose their iPhone unit sales and their smartphone bases, and AT&T, Verizon Wireless and T-Mobile disclose total smartphone sales as well, you can make some pretty good estimates as to where the market is going - far better than relying on panel data, as some of the more widely-quoted stats do. 

So, this is my starting point: 

Roughly 50% of all the smartphones sold in the USA in Q1 2012 were iPhones. This is very different to the global picture: 

Android is outselling iPhone by more than 2:1 on a global basis. But in the USA, Apple is massively outselling Android. That has obvious implications for where (mainly US-based) developers should be placing their efforts. 

Tomorrow, the install base, and what effect expanded distribution has had.