Mobile Competition Part 2: Great Artists Steal

Mobile Competition Part 2: The circle of competition
In all likelihood, this piece of the Mobile Competition series won't be the same kind of opus as Part 1, because this time around we don't need to explain the pros and cons of each system. In part one, we laid out and organized the pieces of the puzzle, this time around we're putting the puzzle together and seeing how it all fits. We've explained the first point we wanted to make, which was that there is no "best" mobile OS, there is just what's best for you. This time around, we're going to expand on that, because in the fervor to crown a king of the hill, we tend to forget that all of the players are pushing each other up that hill. As we said in Part 1: quality becomes ubiquitous by the nature of competition.

The name of the game

To start this off, we need to reiterate something that we've tried to explain in the past: while the mobile space is a competition, not everyone is playing the same game. This is a very important distinction to make, because often we like to point to numbers as the ultimate indicator of performance, and therefore the ultimate indicator of who "wins." Unfortunately, it's hard to name a winner when companies aren't playing for the same numbers. So, who is playing for what?

Apple is playing for revenue, not market share. Apple is a unique hardware company in that it keeps tight control over its hardware along with a closed software platform. Because of this, Apple's best way to make money is on the sales margins, because it's a much safer long-term strategy than aiming for market share, which can be very fickle (just ask RIM about that.) Apple's path to success is built on its exceptional marketing/media buzz, its exceptional design, and its exceptional content stores. Apple was happy to tout its market share as a sign of dominance when it suited the marketing campaign, but market share was never the game for Apple, and so when market share fell, the advertising shifted focus to its content stores. Right from the first release of the iPhone, it was clear that Apple was pushing for revenue over market share. If Apple wanted market share, it would have released the iPhone on every carrier a long time ago. Instead, Apple created false scarcity through its exclusivity deals with various carriers. This false scarcity drove demand with the help of the marketing and media frenzy around the device, which helped Apple to get unprecedented subsidy margins on iPhone hardware from carriers. And, of course, those margins lead to huge revenues and profits. As of Q2 2011, Apple's iPhone made up just 5.6% of the global mobile phone market (not just smartphones, but all phones,) yet accounted for 66% of the profit of the top 8 mobile manufacturers, where the next closest was Samsung at just 15%. That is the power of Apple's margins, and that is the game that Apple is playing, not market share. That has always been Apple's game, and likely always will be. 

On the other hand, Google and Microsoft are both software companies; and, the path to profits as a software company is through market share. Of course, even though both are playing for market share, they still aren't playing the same game, because Google had a 3 year head start in the modern smartphone race (for which Windows Mobile was a non-entity), and Microsoft is still playing catch up, both in OS features and market visibility. Beyond that, Google doesn't charge any licensing fees for the use of Android. Google only makes money through the Android Market (which devices aren't required to use), and ads, both in-app and through the browser. Google wants Android on every device because the vast majority of those devices will keep Google search as the default, which means all searches will lead to Google ads. The trouble that Google is running into, as we've explained, is that more and more a content library is a necessity in pushing a mobile platform, especially when expanding into the tablet side of things. This is why we've seen Google pushing to get into the TV space through Google TV deals with content providers, as well a continuing to bid for Hulu and its video library. Although Android is expanding its lead in market share right now, Google understands how fickle market share can be, and needs to keep evolving its product.

Microsoft does charge a license fee, and while it may be relatively low (somewhere around $8-15 per phone,) it amounts to some income. For instance, in Q1 of 2011 HTC sold about 800,000 WP7 devices, which means it had to manufacture at bare minimum 1 million handsets. That manufacturing alone represents $8 to $15 million in license fees for Microsoft, regardless of if HTC's sales figures. It's not a huge sum for a company like Microsoft, but it's some income as Microsoft slowly builds up the WP7 base in order to compete more aggressively for market share. The real push from Microsoft is likely to come with Windows 8, which is rumored to run the same kernel on both mobile and traditional PCs, allowing for cross platform apps and better integration. Windows 8 is also rumored to have new technology allowing it to scale to any number of cores in the processors, which should allow the hardware to start iterating much faster.

To round out the competition space, we have the various manufacturers, which choose the best platforms to serve their needs and occasionally create in house platforms in an attempt to replicate the models of Apple or Microsoft. But, try as they might, right now the mobile OS space is a two-horse race between Apple and Google. That can certainly change and likely will, but it will be a relatively gradual change. However, the mobile space is not just the software, but the hardware as well, and in that regard every company contributes to the circle of competition.

The article continues on Page 2.
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