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. 

Market shares and ecosystem value

Screen Shot 2014-06-25 at 2.37.00 PM.png

There's lots that was interesting in this year's Google IO, and indeed some of the absences were also interesting (no mention at all of Glass or Plus, for example). 

But we also, for the first time, got some decent numbers. Google Android has 1bn MAUs (not including China or Kindle), and Google paid developers $5bn in the last 12 months, and $2bn in the previous 12 months. 

Apple told us that it paid out $7bn in calendar year 2013 - given the growth trend, it probably paid $10bn in the last 12m. On a trailing 24m basis, there were 470m iOS users in March 2014.

 So, Google Android users in total are spending around half as much on apps on more than twice the user base, and hence app ARPU on Android is roughly a quarter of iOS. 

This is not surprising - it is entirely in line with innumerable reports from developers and publishers. It reflects a mix of several factors: 

  1. Android's market share is strongest in relatively lower income countries
  2. Many people in those countries lack credit cards and Google has been very slow to offer carrier billing
  3. Android phones average $250-$300 where iPhone average $600 - people who choose to spend the extra money are sending a signal about their intents. That is, we don't know what the ARPU for a Galaxy S5 user is, but it's probably very similar to an iPhone user - but Galaxy S5 users are a small minority of Android users
  4. Apple offers a distinctly different proposition to Android: perhaps the people who are attracted to that proposition are just more likely to spend money - that is, maybe iPhone users do spend more than GS5 users.
  5. Finally, this can become circular: if developers believe that Android users do not pay, then their behavior will be affected - they may offer a free ad-supported app instead of a paid app, or have a lower price. And if they decide not to support Android or support it second, then their users will gravitate to iPhone first, which becomes self-fulfilling. You can see this clearly on Android tablets - magazine apps have low use on Android so are slow to support Android, so users who want magazine apps don't buy Android tablets. 

Whatever your view on the relative importance of those factors (and I'm open to suggestions for more), it makes any discussion of market share complex. That is, there are lots of market shares, depending on what you're doing and where you're doing it.  

Notes

There is no way to dedupe tablet and phone devices from users who own both, so I have used phones as a consistent value in the chart above, except that of course there is no way to split this out for ecosystem revenue. I'd prefer it otherwise, but this doesn't affect the validity of the comparison. 

Amazon and Android forks

The general reaction to Amazon's Fire Phone has been a puzzled shrug. It's a good but unexceptional device with entirely conventional high-end and high-margin pricing - a move as out of character for Amazon as the purchase of Beats was for Apple (and probably driven in part by the way the US pricing structure makes even $400 phones ’free’). There's an interesting quasi-3D UI feature and a big flashing BUY button, in line with Amazon's role as the Sears Roebuck of the 21st century, but little that really changes anything or couldn’t be done on any other smartphone anyway. And that leaves people wondering why Amazon bothered. The most productive line of thought, I think, is to look at Prime, Amazon's whale service, and the role that the Fire Phone plays in securing that relationship. 

To me, though, the interesting thing is less the phone than the platform and what it it represents - that is to say, the first real attempt to sell phone that forks Android outside China*.  

Android itself is open source, and anyone is free to take the code (AOSP) and build whatever they want. Android is the new Linux, in this sense. But AOSP doesn't give you Google's own smartphone apps and it doesn’t give you all the system services Google has built. So if you make an Android device without reference to Google, and change a bunch of things ('fork Android') your device won’t have the app store and the maps, and it won’t have the Google services APIs that lots of third-party apps need, most obviously push notifications, in-app payments, location and embedded maps. There are lots of other things Google makes as well, but those are both the important and the hard parts. 

Without this Google layer you really only have a featurephone, and to get Google's layer you need to submit to Google's control over what you make, which amongst other things means that you have to use Google's interface and you have to take the whole package - whatever Google wants on the phone goes on the phone. (The core mechanic here is that you have to pass the compatibility test). Hence, Google uses access to its apps and services as a lever to control Android. This is pretty similar to the way that Microsoft used Office and Windows: selling an Android phone without Google's services is like selling a Windows PC that doesn't have Office and can't run it. 

In China all of this works differently. Google services are either blocked or weak or both (the Chinese unaccountably didn't let Google send its mapping cars down every road in the country), while the Chinese internet giants Baidu, Alibaba and Tencent ('BAT') and scores of others have built lots of great Android services of their own. So the vast majority of Android phones sold in China (even from Samsung or Motorola) come with no Google apps and integrate these instead. 

Outside China, though, if you want to use Android as a platform but do something different, you need to build or buy those core functions yourself, and that’s what Amazon has tried to do. It has licensed Nokia’s HERE mapping platform, it has built an app store for Android, and it has built its own versions of the key enabling APIS - location, push notifications etc. 

The problem is that the maps and the app store are not commodities. Adding them is not just a matter of spending the money. Google's Maps platform is very good and HERE, at least in western markets, is not as good. As with Apple Maps, it works, mostly, but the gap is clear and there is no roadmap that points to that gap closing. For apps, though an app store itself is perhaps a commodity, Amazon has only persuaded a minority of Android developers to load their apps into its store, partly since this means they have to swap out Google’s APIs (for maps etc) for Amazon’s, and that is not necessarily trivial. Amazon has done just about as good a job as one could expect anyone to do at this stage, and there are very few other companies that could get this far - perhaps only Microsoft. But it hasn’t, remotely, reached parity with Google. 

And so Amazon is testing the proposition that you have to have Play (or iTunes) and Google Maps to sell a smartphone outside China - or, rather, it is testing just how good the app store and maps have to be. How many of the latest cutting-edge apps do you have to have, if you cover the basics? How close do you have to get to Google Maps’ coverage? We know Windows Phone does not have enough apps, but can the Amazon store get there?

These same questions apply to any Android OEM that might be thinking of asserting greater independence from Google (such as Samsung), with a further complication. Google’s agreements with OEMs have been leaked several times, and they include clauses that prevent you from having a foot in both camps: you cannot sell a forked device and carry on selling official Google Android devices. So you can’t experiment on the margins (Samsung can't sell a phone running Amazon's Fire software) - you have to walk away from Google entirely, or not at all. That's really no choice at all at the moment. 

All of this takes us to the elemental question - why, exactly, are you forking Android? What important problem do you solve that’s worth reinventing the wheel, while taking on the risk of building on someone else’s platform, open-source or not? Why are you asking people to buy a phone with second-rate maps and a second-rate app store? Are you offering them something you couldn’t otherwise do in return, or just addressing your own strategic concerns? Are you solving a user problem or your own problem?

Both Xiaomi and Cyanogenmod (an a16z portfolio company) have built their own very custom versions of Android that do none the less pass the compatibility test. And though Xiaomi differentiates on software, Xiaomi phones outside of China ship with Google Apps. Hugo Barra called it 'a compatible fork'. After all, it’s not as though you’re not allowed to change Android at all. Google describes the compatibility test as follows: 

"Enable device manufacturers to differentiate while being compatible. The Android compatibility program focuses on the aspects of Android relevant to running third-party applications, which allows device manufacturers the flexibility to create unique devices that are nonetheless compatible."

Generally, Android OEMs have been no better at differentiating on software than were PC OEMs, even though Google allows you to change more than Microsoft did. But it doesn’t follow that you can’t make Android visibly better without forking it if you bring the right skills and culture - Xiaomi and Cyanogenmod (and a number of other Chinese companies) show that. 

Hence, it seems to me that the forking question really flows not from a specific feature that you want to implement but the fundamental principle of controlling your destiny - you want a platform that’s 'yours'. 

That is, a central strategic problem for both Amazon and Facebook, amongst others, is that their businesses have moved from the essentially neutral platform of the web browser, where there has been no real change in the user interaction model in 20 years, to the much messier, mediated and fast-changing platform of smartphones, where the web is just one icon and platform owners are continually adding new ways for users to discover and engage with content, such as iBeacon or Google Now. They didn’t need to make browsers because browsers had become transparent commodities, but smartphones aren’t. This of course is why Google itself made (or rather bought) Android - to make sure that it would not be shut out in this new environment. Making an entire new OS is not an sensible option for Amazon or Facebook at this stage, but building on top of a free, open-source one is worth at least thinking about. But, again, in doing that you need to solve the users' problems, not just your own. 

Facebook is also poking away at this issue (such as with the abortive Home), but as Mark Zuckerberg pointed out, even a really successful Facebook Phone would only be used by 5% or 10% of Facebook’s users, so would really just be a distraction. Instead, faced with a very different set of competitive dynamics on mobile, Facebook is exploring the unbundling of its product with a 'constellation' of different apps. That is, Facebook is embracing this new and more complex environment. With the Fire Phone Amazon is going the other way - greater bundling rather than less.

I do wonder what might appear if Facebook's strategy was applied to Amazon's product - if there were half-a-dozen different interesting and useful Amazon apps for finding and buying products. But Amazon has never been a user experience company in that sense - it thinks about user experience the way Fedex does, as something to focus on ruthlessly, but not as a playground for new experiences. That means it's going to be very interesting to see how it can enchant and delight people who buy its phone. 

 

*Note: when I wrote this on a Sunday evening the fact that Nokia (and hence now Microsoft) has been selling a forked Android phone for the last 6 months passed completely out of my mind, even though I played with one at MWC and rather liked it. It's done rather well in emerging markets, apparently, and is on sale in parts of  Europe) but isn't even for sale in the USA. The main driver is that Windows Phone doesn't fit well into the hardware required of that price. The points in the blog post all remain, though. 

Android fragmentation and the cloud

Game Oven's post on Android gyroscope support is a nice illustration of a general issue (another good illustration here): Android fragmentation is both massively overstated and massively understated, depending on what you want to do. 

On one hand, Google has been quite successful in reducing the impact of Android version fragmentation. Around three quarters of the Android devices that hit Google Play are running 4.X, but more importantly, Google has moved its own key services (maps, payment, notifications etc) out of the OS itself and into a software layer, 'Google Play Services'. By putting key platform APIs into a software layer that can be updated in that background over the air, Google has reduced its dependance on OEMs to produce firmware updates - it can update its own tools any time it wants, across the great majority of phones. When Google announces new APIs for Maps or notifications at this year's IO, they'll be available on devices running year-old and two-year-old versions of Android. There is no more fragmentation if you're using Google's cloud.

On the other hand, hardware fragmentation is if anything accelerating. This chart from OpenSignal, from last summer, is a nice visualization of the market dynamic. 

Android fragmentation isn't of itself a bad thing - it's inherent in the choices that Google made. This is what 'open' and 'choice' look like. And I doubt if it's possible to have an 'un-fragmented' device landscape that includes both $600 devices and $50 devices: some scattering in capability is part of the deal. If you want to have thousands (literally) of OEMs, and a huge range of choice and price points, well, you're going to have different devices with different capabilities. 

This is only interesting, then, to the degree that it has broader consequences. The consequence of Apple's approach is that pretty much everything behaves in predictable ways, but you have a very narrow range of devices at a narrow range of prices (and screen sizes), and that severely restricts the addressable market. More people can afford $50 phones than can afford $600 phones. The consequence of the Android approach is that you have a much wide range of devices and prices, and a much larger market, but anything on the bleeding edge doesn't work predictably at all. This doesn't just apply to the gyroscope - it also applies to varying degrees to almost anything trying to do clever things with the hardware. This is also true even if the API does actually work as advertised - there's not much point trying to do a mass-market Android NFC deployment when you have no idea how many of your users even have NFC Androids (and the users themselves don't know).

One result of this, as I've said before, is that Apple and Google are focusing their innovation in different areas. Apple is moving down the stack with integrated hardware/software experiences (iBeacon, fingerprints, M7 etc) that are hard for Android to match, and Google is moving Android up the stack with Google Play Services, the cloud and machine learning, which is hard for Apple to match. 

The paradox for developers, meanwhile is that the more open and extensible platform can actually be harder to hack on. When you buy two Samsung phones of the same model and brand in two different countries and find they have different camera drivers and your app will crash on one or the other (or both), where do you focus your seed funding? You have limited resources and limited time and you need to hit milestones to get your next round, after all. Plus, the users who want to install your cool new apps are still concentrated on the iPhone. Again, this is a paradox: Android is the platform best for early adopters and iOS the one best for late adopters who just want something that works, but the market adoption is the other way around. That's one of the reasons this chart is both unfair but relevant.

Which type of innovation is crucial to a platform? With the current dynamics, people like Game Oven are going to keep doing iOS first and Android second (if at all), and that keeps the majority of the best users on iOS and Apple's machine turning over - the classic ecosystem virtuous cycle. But if, as many people suggest (Fred Wilson most recently) the most interesting and important innovation will happen in the cloud, then Google's tradeoff might win over Apple's trade-off - Google's comfort zone beats Apple's.

There's another paradox here, though: if all the best stuff is happening in the cloud, then you'll buy the device based not on apps and developer support but on design, quality, fit and finish... that is, all the things Apple always leads on. The web saved Apple 20 years ago, because with the web you could choose the best hardware and UX regardless of the ecosystem - you could buy an iMac and not worry about the software. So if everything goes to the cloud again, is that really an existential problem for Apple?

(As an aside, note this post I wrote a year ago about the different issues facing iPhone and Android.)

Unfair but relevant

A while ago I wrote a post talking about how sometimes, the best and most important comparisons are those that are unfair, but relevant. 

This is a pretty good example of an unfair but relevant comparison: Facebook's active users of Android and IOS by region. 

People who buy $600 phones (Apple's ASP) and people who buy phones for $250 (Android's ASP)  or less tend to be different types of people. 

Of course, whether everyone in Greenwich who will ever get one already has an iPhone, and hence whether there's any more growth to be had, is another equally relevant question. 

Cards, code and wearables

Google has announced 'Android Wear', a new extension of Android to power smart watches (it also realised some teaser renders of Motorola smart watches that are due for this summer). The Wear concept is that smart watches are remote touch displays for an Android smartphone. They will show the time, accept touch and voice input, display the Google Now feed and they will display all the notifications that apps on your phone produce. Developers have options (which will be enhanced in future) to customise how the notifications their phone apps produce behave on the watch. But they don't get native code at all - the developer isn't running code on the watch, really. The device is really an extension of the phone's Android OS itself, not an extension of your app. 

In effect, the watch is a device for using Google Now and cards that apps on the phone send to it. 

Now contrast this with the rumours of a new Apple 'Healthbook' app. I hate speculating upon Apple rumours, because they could come true next week, next year or never, but they provoke an interesting idea. 

Suppose, for the sake of argument, that Apple does indeed plan a health app that's card-based, somewhat like Passbook. What would happen when you buy and turn on a blood pressure monitor that is certified for 'Healthbook'? Well, one would expect that Apple would use the Bluetooth LE auto discovery that's already in iOS7 to detect it automatically and tell you. And then, suppose it offers to install the Healthbook card to manage it (either from iTunes or from the device itself) - an HTML/Javascript package that runs in the Healthbook sandbox in some way. Suppose it does the same for any sensor you might buy? Then Apple has created a zero-setup platform for personal health devices. No apps, no native code, no app store, no configuration at all.  

This would be one answer to why Apple's recent hires of 'wearables experts' sound a bit like a team for a hospital device rather than a watch, measuring various quite technical things - because Apple plans to enable such devices, not try to pack every single one into its own device. That is, the straightforward sensors should live in the phone (like the pedometer that's already in the iPhone 5S) and the complex and demanding ones should be enabled by an Apple platform, not become part of an Apple device.

Today you can manage a bunch of heath sensors with a bunch of apps, but that seems less... obvious, to use an 'Ivism'. If I have a wearable sleep sensor, a pedometer in my phone and a wifi scale (without even getting into glucose metres and more specialised things) should that be three apps that I install separately and open separately? If I buy a small computer I wear on my wrist, should it run apps (especially given that with the current state of technology it'll need to use your phone to go online anyway)?  If you have multiple devices, where should the code live, and how do you shape the user flow based on what makes sense rather than on where you put the code? Does a sensor need a screen? Does a screen or a sensor need to be smart? Is the right UI something totally custom that's installed from a store, or something more standardised?

This question of where the code lives also of course applies to TVs and to cars as much as to wearables. With AppleTV and Chromecast and Carplay, Apple and Google are saying that though everything is becoming a computer, actually the 'smart' part should be concentrated in the smartphone or tablet - something that's easy to update, that's replaced every couple of years, and that has a rich touch interface, and everything else should be a dumb sensor or dumb glass or both. And so the apps should only be in one place, and whether it should be an 'app' in a strictly technical sense is also up for debate. 

During the 'apps versus HTML' argument of a year to two ago, someone said that the issue is not what coding language you use but how you get an icon onto the user's home screen and whether indeed they want  your icon on their home screen. The conversation more or less crystallised around the position that apps are for the head of the tail and the web is for the rest. But Android Wear is not the web or an app. Neither is Google Now, and neither is the Healthbook I just described. 

Now, suppose you hesitate outside a restaurant and look at your phone, and iBeacon has already activated a Yelp review card on your phone or watch, or Google Now has put a scraped review up, or Facebook tells you 10 of your friends liked it? Is that the web? Or apps? How do you do SEO for that? What's the acquisition channel? Some of that might be HTML, but you'll never see a URL. 

It seems to me that the key question this year is that now that the platform war is over, and Apple and Google won, what happens on top of those platforms? How do Apple and Google but also a bunch of other companies drive interaction models forward? I've said quite often that on mobile the internet is in a pre-Pagerank phase, lacking the 'one good' discovery mechanism that the desktop web had, but it's also in a pre-Netscape phase, lacking one interaction model in the way that the web dominated the desktop internet for the last 20 years. Of course that doesn't mean there'll be one, but right now everything is wide open. 

This thought, incidentally, is one of the things that prompted this tweet. 

Android instability

If you were a PC OEM from, say, 1990 to 2010, you operated in a very clear ecosystem. You outsourced much of the innovation to Microsoft and Intel. You knew exactly what WinTel were doing, both because their roadmaps for the next few years were actually public and because Microsoft and Intel had very clear and widely understood strategies. Moreover, the core, fundamental strategies of OEMs, Intel and Microsoft were pretty much aligned. Everyone wanted more PCs to be bought, and preferably a good number that were high-end and high-margin. Intel, Microsoft and CloneCo all lived for the same things. CloneCo didn't necessarily make great margins (and eventually got killed by Dell, perhaps), but it knew what the game was. 

The Android ecosystem today is superficially similar to the PC ecosystem, but I'd suggest that the clarity and alignment of interests of the PC ecosystem isn't present in anything like the same way. As an Android OEM you have very little idea what Android will be in 3 years - partly because Google itself may not have a fully-formed idea. There certainly aren't public roadmaps stretching out years in advance. 

It's also questionable how much alignment of interest there is. Google certainly wants Webkit everywhere, and arguable Android everywhere (or, more precisely, Google Plus everywhere). But that doesn't translate to a burning hunger for an aggressive phone replacement rate at high prices. Indeed, Google Play Services reduces Google's interest in device replacement as a way to drive service penetration. As an Android OEM, your ecosystem creator doesn't benefit directly from the health of your industry. A healthy PC market was Microsoft's driving objective - 'A computer on every desk and in every home'. That's not quite the case for Google and the sales of Android smartphones - they're reach, and a means to an end, but not the reason why Google exists. 

Next, it's not clear what a sustainable position for an Android OEM looks like. All the brands except Samsung are sub-scale and failing, and while Samsung looks dominant it is clearly feeling paranoid: the growth of the Chinese Android OEMs outside China is a huge question. Lenovo has made its first move by buying Motorola but the real story is whether 2, 10 or 100 others follow it, and if so how. 

Finally, Google's control of Android itself is a question. Amazon forked it, but with limited broader effects. Almost all Android in China lacks Google services but then Google is largely absent from China anyway. The ways that forks of Android might become relevant outside China (and Google's tools for preventing this) are complex and a topic for another post, but we can't rule this out. Indeed, a lot of the most interesting ecosystem innovation is being done on top of Android rather than as a would-be competitor to it. 

On one level, then, the smartphone platforms wars are over - iOS and Android both won. But actually, nothing is finished - we just move onto new questions. 

Ecosystem maths

I'm pondering Apple's results, sitting in a cafe in-between meetings. It's been apparent for years that Apple was camped out at the high end of both tablets and phones, and that Android would take almost all of the rest. But it's worth working out on the back of a (rather large) envelope exactly how that would play out, assuming that Apple's pricing strategy doesn't change and of course that nothing else changes (which of course are rather unsafe assumptions). Hence: 

  • Right now, on the basis of a 24m replacement cycle, there are perhaps 290m iPhones in use on earth. Depending on the second hand market, this might be larger. 
  • Apple has sold 195m iPads - perhaps 180m are still in use. 
  • There are also a fairly small number of iPod Touches in use - perhaps 20m

That adds up to a rough estimate of 490m live devices. For comparison, around 900m Google Android phones were sold in the last 24m, and probably another 110-120m Google Android tablets ('Google Android' = 'not China'). 

Where might this go? Apple now has about 10% of global mobile phone sales, rising steadily. It's important to note that Apple is not losing share of phone sales to Android - it's just not taking as much share as Android. There are between 3.5bn and 4bn people with mobile phones on earth (there are far more connections but many people with multiple connections). This number is also rising slowly, but all the growth is from the very low end. 

So. 

Over the next few years the great majority of that 3.5-4bn will convert to smart (and indeed the more important variable is affordable data plan penetration rather than smart penetration). If Apple continues the current strategy and share growth, it will end up with (say) 15% unit share. 15% of 3.5bn is 525m. (I told you this was a BOTE calculation.)

The great majority of the rest will go to Android (though quite what 'Android' will mean is an open question). That means perhaps 2.5-3bn Android phones in use. There might be some Windows Phone as well (assuming it doesn't become an Android fork) but we can ignore it for these purposes.

No-one has much idea what the total addressable market for tablets really is, let alone premium ones such as the iPad, and the recent sales trajectory is somewhat lumpy. If we assume a four year lifespan for iPads as the tech stabilises and look at the recent run-rate, that suggests a stable base of, say, 300-350m. This gives us a base of perhaps 850m iOS devices, with a lot of ownership overlap.

There will also be an ungodly number of Android tablets, of course, but we know neither quite how many nor what they'll be being used for (right now, mostly TV, it seems). 

What does this mean? What does it mean for Apple to have a platform with a minority of users, indefinitely, in mobile? An minority ecosystem with only 850m devices? Or even 490m?

Certainly, this isn't 'Windows versus Mac all over again'. There are now 490m iOS devices in use, but PCs only hit that number in around 2000, long after Apple lost the last ecosystem battle. Apple sold 51m iPhones last quarter - total PC sales in 1995 were 59.5m. That is, the iOS ecosystem now is much bigger than the winning ecosystem back then.

Even beyond that, all the other dynamics are different - the smartphone market is not driven by corporate buyers who demand commodity product based on bullet points and don't care about design or user interfaces, for example. The relative market share of an ecosystem is relevant, but it's not the only thing that's relevant. We need also to think about value share, engagement share, and all the other dynamics that drive the viability of an ecosystem. The assertion that an ecosystem with close to 500m users now and over 800m in a few years will not be viable because there's another that's bigger seems pretty simplistic. It can't be taken for granted that any 'winner takes all' dynamics will work like that. 

More importantly, though, these questions will probably have become irrelevant by the time we find out the answer. That happens quite often in tech. To me, the platform wars are now much less interesting than what happens on top of the platform. On the desktop internet, we had close to 15 years of stability with almost all online activity going through the web browser, but on mobile it is far more complex already and also far less stable. Nothing is settled on mobile. I have no idea what it will mean in 5 years time to say that I 'installed' an 'app' on an 'Android' 'smartphone'. All of those terms could change completely, and with it what it means to say 'ecosystem' or 'market share'. 

Note: for supporting charts, see this post

The meaning of really cheap Android

One of the big puzzles in trying to understand the tablet market is data. Apple is pretty much the only large manufacturer giving unit sales, and not only are Samsung and Amazon saying nothing, but there are hundred of Chinese companies making Android tablets, and few if any say anything publicly. In the phone business the story is rather easier, since Google says roughly how many Android devices are being activated outside China, and give a screen size breakdown, and the Chinese mobile operators have a good sense of smartphone sales inside China. But in tablets there is no-one with an overall view of sales. 

This means that analysts have to fall back on component makers. Though there are hundreds of companies making tablets, they almost all use more or less off-the-shelf chipsets from a handful of companies. These companies have a good sense of the overall number of tablet chips that are being sold into the manufacturers. So too do the screen markers - they have a good sense how many 7” panels are being sold. So you take an estimate of tablet chip sales and an estimate of tablet screen sales (and take into account people using ‘phone’ chips in tablets) and you estimate tablet sales, both inside and outside China.

The obvious problem with this is that these devices are being used in very different ways. It seems clear that most of the huge numbers of sub-$150 Android tablets now being sold do not have anything like the web or app usage that is seen on an iPad, Nexus or Galaxy Tab, and that many are mainly used as substitutes for TV sets, with maybe some gaming on the side. 

The deeper issue, though, is that estimating tablet sales in this way is a little like trying to estimate global car sales by working out how many internal combustion engines are being made, and how many tyres, but not adjusting for motorbikes, cranes, outdoor generators or 18 wheelers. Lots of ‘tablet' chips and ‘tablet' screens do not actually end up in tablets.

Consider this device, one of thousands of similar products on offer on Alibaba - an in-car video player running Android, complete (if the screenshot is to be believed) with the phone app. This probably doesn’t activate with Google, but it certainly looks like a ‘tablet’ to LG or Rockchip.


Then there’s this TV dongle - no screen, but does it have a ‘tablet’ chip? A ‘phone’ chip? If you used it to watch Youtube, what would Google think it was? (Note also the memory card slot, used for side-loading pirate movies.)

Now what about this, from Steelcase? An meeting room door with a 7” capacitive touch screen. To a component maker, this is also a tablet. I have no idea if it runs Android today, but if it doesn’t, it probably should. And if Nest doesn’t, the copies of it will. 

The important dynamic here is that a combination of very cheap off-the-shelf chips and free off-the-shelf software means that Android/ARM has become a new de facto platform for any piece of smart connected electronics. It might have a screen and it might connect to the internet, but it’s really a little computer doing something useful and specialised, and it probably has nothing to do with Google.

As should be obvious, this makes counting total ‘Android' devices as though they tell you something about Google or Apple’s competitive position increasingly problematic. But to me, pointing out that ‘Android’ doesn’t necessarily competed with iPad is rather boring - what’s really interesting are the possibilities that these new economics might unlock. 

A good example is this - a 2G Android phone wholesaling for $35 (just one of hundreds). 

Now, stop thinking about it as a phone. How do the economics of product design and consumer electronics change when you can deliver a real computer running a real Unix operating system with an internet connection and a colour touch screen for $35? How about when that price falls further? Today, anyone who can make a pocket calculator can make something like this, and for not far off the same cost. The cost of putting a real computer with an internet connection into a product is collapsing. What does that set of economics enable? 

There are other interesting hardware trends that overlap with this as well. Bluetooth LE is the obvious one - you can make a widget that broadcasts a location ID for $50 or less, stick it on a wall, and the battery will last for years. EInk is also interesting here: it needs no power to show something, only to change, and you can pass enough power over an induction touch point to cycle the screen. The problem here is cost, but why doesn’t my Oyster card show the remaining balance? Why wouldn't Coin (a product I'm rather skeptical of, mind) show the cards loaded onto it on one side with an eink display? How do these trends interact with cheap Android computing?

Marc Andreessen famously coined the phrase 'software is eating the world’ to describe the way that functions that used to be served by dedicated hardware are now being subsumed by general purpose devices - mostly smartphones. But there’s also the beginnings of a trend in the other direction - devices that weren’t smart and didn’t get merged into the phone gaining a digital presence of their own, and creating a new set of opportunities. 

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.  

Screen Shot 2013-10-08 at 15.33.55.png

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. 

Screen Shot 2013-10-08 at 15.33.43.png

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. 

Screen Shot 2013-10-08 at 15.33.36.png

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. 

Screen Shot 2013-09-23 at 15.11.30.png

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?

Android's route to 1bn

This week Google announced that it has now passed 1bn cumulative activations. This is what that trend looks like. 

Screen Shot 2013-09-08 at 7.12.16 pm.png

Google generally releases these numbers at scheduled events, and they're pretty round, so we can't take them as exact. My model makes some allowances for the overall trend rather than trying to hit the exact number on the exact day of the announcement (since the figure might actually have been passed a week earlier anyway). 

If we aggregate this by quarter and split out tablets (also provided by Google recently), we get this chart, showing rapid but slowing growth and tablets as a pretty small share of the total. 

Screen Shot 2013-09-08 at 7.17.53 pm.png

This base, as everyone knows, is somewhat fragmented, with a wide mix of versions in use. 

Screen Shot 2013-09-08 at 7.33.49 pm.png

The interesting thing is that if you apply these percentages to the active base (on the assumption that trailing 24m activations are active), it appears that there is very little upgrading of existing devices: the growth of new versions of the OS seems to come solely from new devices.  

Screen Shot 2013-09-08 at 7.25.02 pm.png

Of course, what's missing from this data are the devices that are used in China and do not have any Google services on them, and hence do not activate with Google. There is, obviously, no good data on this, but most people in the Chinese market think that only, say, 20% of Chinese Android devices have Google on them. That means the overall Android market is rather bigger than 1bn, with well over 200m extra devices in China, and run-rate 'unactivated' Android making up perhaps a quarter of total Android sales. 

Meanwhile, as Ars Technica points out, Google is starting to get around fragmentation by putting all its services into a software layer on top of Android that it can update remotely. This solves the fragmentation problem for Google (their services are on every Android device outside Amazon and China), but doesn't help Android developers trying to work out why their app crashes on one Samsung model but not another.