For years, people have been warning Apple that the iPhone is about to be smoked in smartphones by Android just like the Mac got smoked in the PC market by Windows.
According to these people, technology platforms are winner-take-all. Once Android takes the vast majority of smartphone market share, then developers will choose Android as their platform for applications. Apple will lose out on applications. Then it will lose out on customers. Then it will die.
It sounds outlandish, but remember it already happened once to Apple. It released the category-defining Macintosh, but Microsoft’s Windows ran away with the market on the back of low-cost, widely distributed personal computers. Developers put all their resources into applications for Windows-based PCs. Apple had no apps, and as a result, few customers. It was on death’s door when Steve Jobs returned.
Well, Android has 78.1% of the smartphone market, and Apple has 17.6% of the smartphone market. If Apple were destined to crumble, it would either have happened already, or it’s going to start happening shortly. But, if you talk to developers, they’re still focused on the iPhone’s software platform, iOS. It doesn’t seem like they’re going to suddenly rush to Android. Last quarter, Apple generated a very healthy $US22.7 billion in cash from its operations.
Why is Apple still thriving despite a tiny sliver of market share? Why isn’t Apple doomed to fail this time just like when Microsoft won the PC wars?
Benedict Evans, an analyst for Andreessen Horowitz, gave the clearest explanation we’ve heard yet about why this time is different on his new podcast. We’ve transcribed his explanation below.
In short, Evans says the PC industry is completely different than the mobile industry. In the PC industry, corporate buyers picked out PCs for employees. In the mobile industry, consumers are picking the device. As long as Apple continues to make high quality products that consumers love, it will be ok.
Apple will end up with 700-900 million iOS devices in the world, says Evans. Android will end up with 2-3 billion devices in the world.
Yet, user numbers alone aren’t enough to attract developers. Apple’s users are all wealthy, and engaged users. They’re paying $US600-$1,000 for an iPhone. As a result, no major company is going to abandon development of its iPhone applications.
Could Apple end up dying anyway? Certainly! But if it happens, it won’t be just like the PC versus Mac war, it will be for different reasons altogether.
My Cambridge professor said, “The only thing that history teaches you is that something will happen.”
…The dynamics of the PC industry were so different that it’s quite unhelpful to draw a comparison.
For example, during a critical part of the PC industry most of the sales were corporate and corporate buyers wanted 1,500 generic boxes that they would put onto people’s desks. They didn’t care what they looked like, they didn’t care how easy the user interface was because they were never going to be reconfigured. They were going to run one app. And they wanted a quote from 5 vendors and they picked the lowest quote. And so, Apple didn’t have product market fit. And Wintel did. That’s clearly not how phones get bought. Phones get bought by individuals on fit and feel and the user experience and design. And they’re not by and large bought on specs. At least they’re not sold, they’re sold on some of the experiences the specs can provide but they’re not sold on RAM. So, now Apple now does have product-market fit. It’s selling exactly into the kind of buying environment that suits what they have been doing for 30 years.
I think there’s a broader point, the specific ecosystem point, as I said, presume that were were winner take all dynamics around the smartphone operating system as there were with PCs, well, Apple is going to have 800 million users before there’s time for those effects to kick in. Imagine you are Marks And Spencer’s or Target, or Bank of America, or Carrefour, or Aldi, or … any retailer. If you are Carrefour in France, right now you have an Android app and an iOS app. Do you have a Windows Phone app? Probably not because there’s no Windows Phone users in you country, and the people that do have Windows Phone, it’s too small to be worth it. But you’re not going to pull the iOS app, the iPhone app, because that’s only a third of the subscriber base. You’re not even going to pull it if it were to drop a quarter or even 10% of your subscriber base. And actually, if you were to look at share of value right now, you’re probably looking at three-quarters of your basket size.
The market share number doesn’t work in quite the same way. If you were a software developer 30 years ago and you said, I’m going to invest $US10 million making a Windows app, do we invest another 5 making it for Mac? And there’s no offices, none of our target market has bought a Mac, the answer was “no,” it was self fulfilling.
But if you are a super market, or a bank , or a movie chain, or any of the modern services that feels like it needs to be engaged with its users online, you don’t do that kind of calculation. You think where are our customers? What are the touch points? Where do we need to be? Windows Phone and Blackberry are lopped off the bottom end of that. But there’s a vicious circle here and also a virtuous circle. It’s extremely hard to kill an ecosystem as long as the product’s good and customers keep buying it.
The way Blackberry killed its ecosystem in effect was by having a product that was no longer competitive. I don’t think anyone would look at an iPhone and say it’s not a competitive product. It would cease to be a competitive product if there were not apps for it, but how do you get there?
If you look at the market share for high end phones, it’s two-thirds, three quarters iPhone, and the rest goes to high end Android phones. The problem with looking at the value sizes is that if Apple is only got the good customers. Android has all the customers. So it’s got some good customers, it’s also got some moderately good customers, it’s got grandma who went to the store and said I need a new phone and they gave her a $US100 Android phone. You’ve got a much lower average for Android concealed within that, you got a big chunk of people worth having but then when you add that up, you still get to a basket size, or an ecommerce transaction size, or payment rate that’s half what you see from iOS. That’s really just a function of price.
The corollary of that of course is that if Apple were to make a $US150 phone, there average would collapse, because they’d be getting loads of people that wouldn’t care.
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