Mobile OS Wars – the new rules of the mobile ecology

I wrote a piece for India’s Business & Economy on the mobile OS war. Draft text below… (online version article available here)

The eco system is key. The mobile OS giants have one guiding principle: the OS with the best selection of software applications available for its users will be most attractive to consumers, and will therefore attract yet more developers to create further software applications for them. The more devices that are sold, the more widely purchased and used apps are likely to be, which attracts more developers to write apps for the device, which makes the device more useful, which finally results in more devices being sold. The platform functions like an ecology in which the platform owner, software developer, and user all play a part. Except, the rules seem to have changed – the old rules may not be true any more.

In early April HTC, a manufacturer of smart phones, surpassed both Nokia and RIM, the maker of Blackberry phones, in market capitalisation value. HTC’s dramatic rise is a sign of the popularity of Google’s Android operating system. Android’s market share rose from 3.5% in late 2009 to over 25% in a single year. HTC was an early supporter of Android, and worked with Google on the first Android phone years in advance of its release in October 2008.

However, though sales of Android devices surpassed Apple in mid 2010, Apple remains the revenue leader. Google does not see significant revenues from its version of the App Store. This may in part because the very characteristics that make Android so popular: its openness and flexibility, and its ability to present network operators with a cheap iPhone alternative.

The majority of the Android OS is opensource (under the Apache 2 license). Manufacturers have the latitude to customise the device, though Google exercises a degree of control by, among other things, imposing a minimum standard of compatibility imposed by Google before they are slowed to use the Android Market, or other popular Google apps such as Gmail and Maps. The manufacturer’s ability to customise means that Android phones range from cheap and slow to high-end, sophisticated devices. The user base of the Android OS, though bigger than the iPhone, is therefore not necessarily as lucrative.

As an example, consider 3D gaming on mobile devices. Games are the best selling apps on the App Store, and the hardware required to run sophisticated games on a mobile handset is expensive. The latest installment of the iPhone, the iPhone 4, comes equipped with 3D graphics acceleration hardware, which effectively places it in the bracket of a gaming device. Even high-end Android phones, on the other hand, have not yet defined themselves properly as game devices.

Nokia’s latest smart phone also has built in graphics acceleration. In February Nokia and Microsoft announced a strategic partnership to create a new ecosystem for Windows Mobile Nokia phones. Since Nokia shipped 450 million handsets in 2010, the scale of its supplier network will reduce the costs of Windows phones, giving developers and mobile networks a third option for a touch screen smart phone. Though Microsoft has produced a mobile OS for more than 10 years, Windows Mobile 7 is by far its best effort. Now, with Nokia as strategic partner, it may gain market share. This puts further pressure on the Android ecosystem.

Thus, while Google dominates the mobile OS market, its revenues from mobile app sales are insignificant. Both Google and Apple take a cut of 30% on all apps, but Google’s cut is a fraction of Apple’s. While sales through Apple’s App Store reached $1.78 billion in 2010 according to HIS research, the Android alternative reached only $102 million.

Thus, Apple, with a smaller percentage of the market is actually making more money on sales of software made through its device. Moreover, Apple announced a books and subscription service in February through which users could subscribe to news papers and magazines – and it will take 30% of revenue here too, adding to app sales and music sales through iTunes. Google’s revenues from the Android phone, for the meantime, are focused on its core business of search advertising and its growing payments business. The implications for the ecological battle may be significant.

The lesson is, the strength of a mobile OS ecology is not just about the number of users, its about the number of paying users. Apple’s corporate history makes it acutely aware of the importance of its devices not just as products in themselves but as platforms for software. In the dark days of the mid to late 1990s Apple sales fell from 4.5 million in 1995 to 2.7 million in 1998. Even though Apple could avail of economies of scale to produce high quality machines, the number of Apple users dwindled to the point where it became more economic for software developers to migrate to the more popular Windows platform.

Google seems better at keeping its developers happy. For example, it has a far more permissive publication policy for its Android apps market, whereas the Apple app store has alienated many developers by rejecting their apps simply because they compete with Apple’s own offerings.  Even so, it may be possible for Apple to win the app store war while Google wins the device war.

Google may, however, be changing tack. A recent controversy emerged when the Android team at Google decided to delay the release of the source code of the latest version of the Android OS, ‘Honeycomb’, which is intended to compete with Apple’s OS in the tablet market. One possible reason is that while Google works closely with some preferred device manufacturers, such as HTC, to ensure that their devices are worthy of the Android badge, the release of the new Android OS now could have allows other manufactures to rush sub-standard honeycomb tablets to the market. Maintaining a minimum quality, even in so diverse an ecosystem as Android, may be the way to make the Android app market viable. Google may be learning that strong mobile OS ecologies are not just about numbers of users, but numbers of paying users.

See PDF of the full feature in 1 April 2011 Business & Economy here

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