Change for Change’s Sake

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iPhone OS was, but for copy-and-paste, a perfect OS (bear with me here – assume this is true).

It handled every function the iPhone was expected to do in an incredibly elegant and polished way, and it’s not an accident that much of the core functionality has gone unchanged for six years. The tech press and gadget junkies are demanding something new, but then again, they demand feeds and speeds as well, and we know how Apple feels about that.

Apple will not change anything about iOS simply for change’s sake.

Yet, on Monday, I suggested that change was indeed afoot.

Today, as the premium smartphone market moves towards saturation, an increasing portion of iPhone users are buying their second device. The context is changing. And, likely, so is iOS.

It’s all about the context: I don’t have any insight into iOS 7, and I’m not arrogant enough to tell Apple what they should do. But I can see three significant contextual differences between 2013 and 2007, and I think it’s those differences that likely provide the best hint as to what to expect in upcoming versions of iOS.

So what has changed since 2007?

1. The App Store Launched

iPhone OS did not support 3rd-party apps, and I am in the camp that believes Jobs in particular had no desire to do so. The best evidence is the haphazard way that so much app functionality feels tacked on: Springboard very much feels like it was designed as a single screen view, double-tap for multi-tasking is an elegant hack, but a hack nonetheless, and the only types of inter-app communication that work are photos and music, both of which rest on functionality that has been in iOS since day one.

On balance, with the exception of Springboard, I don’t think the situation is nearly as dire on the iPhone as most critics paint it to be. But there’s clearly room to rethink some aspects of app launching and management.

As for the iPad…

2. The iPad Was Invented

It’s no accident iOS was originally called iPhone OS. It was clearly designed for a phone form factor, and while the “iPad is a big iPod Touch” trope has been justifiably trashed, it is fair to say the iOS for iPad feels like a big iPhone OS.1

What might iOS look and feel like if it were designed for the iPad from the start? It’s something to think about and is certainly an opportunity for improvement. Moreover, it’s on the iPad that many of the aforementioned app frustrations come to bear, particularly inter-app communication.

3. Communications Channels Have Proliferated

The original iPhone included three communications channels: Phone, SMS, and Mail.

The Original iPhone
The Original iPhone

My homescreen has 10: Facebook, Twitter, Phone, Skype, Google Voice, WhatsApp, Messages, LINE, Lync, and Mail (and I have other, lesser-used channels on other screens). The vast majority of these channels didn’t exist in 2007, or weren’t widely used. Since then, social interaction has both exploded in use and fragmented in type, but iOS simply wasn’t designed to support multiple channels intelligently.2

I didn’t really mean the first sentence as a thought experiment: iPhone OS was one of the most astounding v1’s in the history of computing. It really was largely “finished”, and Apple has rightly resisted changing too much. And, to be fair, there certainly isn’t time to change all of this this year.

But context is everything, and thinking about what has changed around iOS gives clues as to what might change in iOS.

  1. Yes, I know the iPad idea came first. Shipped and finished matters here, especially when it comes to the UI ↩

  2. Other OS’s, particularly Windows Phone and Blackberry, are seeking to unify all these channels, but I’m not sure that’s what users want. They seem to rather like the proliferation ↩

Adobe’s Subscription Model & Why Platform Owners Should Care

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It’s difficult to overstate the significance of Adobe’s announcement that all of their products will be solely available through Creative Cloud. No longer can you buy packaged version of Photoshop, for example, that are yours forever. Instead you can subscribe to different individual apps or suites. What makes this so interesting is that while companies come out with new products all of the time – this is the 20th version of Photoshop! – very rarely do they come out with new business models.

There are several obvious reasons for this move:

  • Smoother revenue streams are much more preferable than launch-driven spikes (just ask Apple!)
  • This will significantly reduce piracy (although that may have unintended consequences)
  • Just as it’s easier to sell to your existing customers, rather than get new ones, it’s easier still to ensure existing subscribers don’t unsubscribe

However, there are a couple of bigger picture factors at play as well.

The PC as Humpty Dumpty

As I noted yesterday, the jobs we hire a PC to do are being increasingly done by dedicated devices. If Adobe wants to be relevant in a world where users interact with as many as five different devices in a day, then a per-device licensing model is clearly unsustainable.

Enter the SaaS model. Users can use Adobe products on as many devices as they wish. It is, ultimately, an obvious and necessary shift, and kudos to Adobe for doing it. (Update: You can only use the apps on two PCs, and you still have to pay for the tablet apps. Still better than now, but “kudos” should probably be singular – kudo?)

Even so, their aggressiveness – there will be no more packaged software, period – seems surprising, but the truth is Adobe is probably thrilled with their new model.

The Problem With Monetizing Productivity

Productivity apps have never been a good fit for the packaged software model.

The reason has to do with what is called Economic Surplus. From Wikipedia:

Economic surplus refers to two related quantities. Consumer surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. Producer surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for.

I’ve illustrated what this looks like for packaged software:

Productivity apps sold as packaged software have a lot of surplus
Productivity apps sold as packaged software have a lot of surplus

Imagine how this plays out for Photoshop:

  • Consumer A rarely edits photos, which means a photo-editing app is worth maybe $20 to him. Yet, he buys Photoshop anyways for $499. In this case, Adobe is, in effect, charging $479 too much.1 The consumer is getting a bad deal.
  • Consumer B is a graphic designer. She uses Photoshop every day, for hours a day. Without Photoshop, she couldn’t do her job, for which she is paid $60,000 a year. In this case, there is a consumer surplus of $59,501. Adobe is getting a bad deal.
  • Consumer C is a student. He has aspirations for being a photographer, but is just getting started. He buys Photoshop, but finds it very hard to use; in fact, he is losing time trying to figure it out. Yet, over time, he becomes proficient, and eventually an expert. The economic surplus shifted from producer to consumer, even though there was no transaction.

How do you price a product to best monetize these three very different consumers? If you price too high, you may never acquire Consumer A or C (And Consumer C is a big loss). If you price too low, you are effectively subsidizing your consumers, which may make them feel warm and fuzzy, but not your shareholders.

Why Subscriptions Are Better

Moving to a subscription vastly improves this model, for both users and Adobe.

The subscription model more closely matches revenue with value, meaning less surplus.
The subscription model more closely matches revenue with value, meaning less surplus.

Consider again the three types of consumers I listed above:

  • The price is much more approachable for Consumer A.2 He can “try out” Photoshop, and if he ends up not using it, he can simply end his subscription. More importantly, there will be a lot more Consumer As, and some of them will stay subscribed.3
  • Consumer B will get a great deal right off the bat, but as she uses Photoshop throughout her career, Adobe will be along for the ride, making revenue every month as opposed to every few years.
  • Consumer C is similar to A: Photoshop will be much more approachable, and there will be a lot more Customer Cs. As they become real users, Adobe moves with them.

Moreover, Adobe is well-incentivised to maintain the app to reduce churn, and users always have the most recent version. It really is a win-win.4

Thinking About Apps

The challenges facing Adobe are shared by almost all productivity apps.

  • Productivity apps are indispensable (and thus priceless) to some users
  • Productivity apps usually have high learning curves
  • Well-done productivity apps require significant investment up-front
  • Productivity apps require regular maintenance and upgrades

Unfortunately, app store economics don’t really work here.

  • If you have a low price, you need massive volume to make up for the upfront costs
  • If you have a high price, users are much less likely to buy your app, especially since there is likely a learning curve
  • If you can’t monetize over time, your users are extracting MUCH more value than you are receiving in revenue. That’s great if you’re a user, up until the company you love sells out because they can’t make money. Sparrow is the canonical example here. How many Sparrow devotees would gladly pay $5 a month to have the app available and continually updated?

Trials do ameliorate the pain a little, particularly if you pursue the high price option, but they don’t address the time mismatch: as a productivity app becomes more valuable, the developer doesn’t get a dime of more revenue.

Why Platform Owners Should Care

For the most part, I tend to turn a deaf ear to developer griping about App Store policies. The purpose of iOS, Android, Windows Phone, etc. is not to make developers’ lives easy; it’s to attract users for the purpose of making money for Apple, Google,5 and Microsoft, respectively. Adopting developer-friendly policies only makes sense to the extent it will attract more users, and most of what developers want doesn’t qualify.

This is an exception. Platform owners should add subscription support for productivity apps.6

What makes monetizing productivity apps so tricky is that they are indispensable to some consumers, yet overwhelming to others. It’s that indispensable part, though, that should matter to platform owners. If a user comes to depend on certain productivity apps that are only available on one platform – and, in general, mobile productivity apps are much more likely to be monogamous – then that user is effectively bound to the platform, and won’t even consider another platform when it comes time to upgrade.

The opportunity for growth in smartphones is increasingly previous-smartphone owners (as opposed to new smartphone owners). Keeping those owners around should be a top priority for every platform, and one of the best ways to do so is fully supporting a subscription model for productivity apps. It will make them more successful and thus stickier, ultimately to the platform’s long-term benefit.

  1. Were Adobe willing to sell at their marginal cost (which for software is effectively $0) + consumer value, the producer surplus would be $479 ↩

  2. To be fair, it’s significantly cheaper to pay annually, which defeats some of the advantages ↩

  3. A lot of Consumer As buy a version of Photoshop and hold onto it for years. They are understandably upset by this change, but the truth is Adobe probably doesn’t mind losing them, given the other benefits of subscriptions ↩

  4. So why did Adobe wait so long? Truthfully, the technology just wasn’t there until the past few years ↩

  5. Well, Android is more ambiguous ↩

  6. Apps can obviously implement this on their own on the server, but that’s impractical for many small shops that specialize in these types of apps. I’m talking about full-blown app store support. ↩

The Humpty Dumpty PC

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This has been making the rounds on Twitter (the picture was first posted on the Facebook page of W&CIE):

The iPhone is everything you need in a highly mobile package
The iPhone is everything you need in a highly mobile package

It’s a powerful image, and accurate.

Interestingly, though, the iPad and other appliance-like devices have actually had the opposite effect on non-mobile-phone computing. Many of the activities one used to do on a general-purpose personal computer are now done on machines better suited to the task at hand.

Being mobile doesn't matter; a superior experience does
Being mobile doesn’t matter; a superior experience does

This is my personal setup. I still have a laptop, but the only thing I use it for is photo editing. I read long-form on a Kindle; use Twitter, play games, and draw on the iPad;1 write on a Pixel (I’m a believer); and watch movies from iTunes and Netflix on an AppleTV. Each of these products has competitors (Nook, Android, Xbox), but all are simple, always up-to-date, and maintenance-free.

As I wrote in The iPad and the Disaggregation of Computing,

The divergent effects of the iPhone and iPad make total sense when looked at from a human-centered perspective. The phone is often the only device you have when out-and-about, so the more capable the better; the iPad is usually used when stationary, when it’s more conceivable to have multiple devices at hand. In fact, while my Mini is perfect for reading, a larger iPad would be nice for the graphics I make for this blog. And, if one has a choice, why wouldn’t one want to use the best possible tool for the job?

This has massive strategic implications. More on Adobe tomorrow.

  1. Ironically enough, today’s is the first drawing that I didn’t do electronically ↩

The Week in Review – April 28-May 4, 2013

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The Week In Review is a weekly digest of what I found interesting in tech over the last week. It consists of the story of the week, a summary of stratechery articles and links, a huge collection of links that I found noteworthy (plus commentary), and my favorite tweets of the week. I post this weekly at stratechery and email it to the stratechery mailing list (sign up here).

This week was earnings week for Facebook and LinkedIn. On the surface, Facebook did fine, and investors appreciated their successful shift to mobile advertising. The stock is up. LinkedIn had a rougher time; although they beat expectations, their forecast suggested that growth is slowing.

My take is actually the opposite; the trouble with Facebook is that their revenue is completely dependent on advertising. This demands they monopolize user attention and time. But I’m not sure social works that way. The proliferation of messaging apps, photo-sharing apps, Twitter, etc. suggest that social is inherently fragmented.

LinkedIn, on the hand, is driving revenue growth through its recruiter offerings. To my mind that is a far more sustainable growth vector, in addition to its own ads and premium offerings.

It was a great week on stratechery. As always, I greatly appreciate your spreading the word about stratechery and following @stratechery.

Articles | Linked List Items | Other Links Worth Reading | Tweets of the Week

Continue reading “The Week in Review – April 28-May 4, 2013” →

HTC Stalls

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HTC’s 1Q earnings were, as expected, terrible. From The Next Web:

The Taiwanese company reported net income after tax of $2.88 million (NT$85 million) on $1.45 billion (NT$42.8 billion) in total sales for the first quarter of 2013. That’s in line with the unaudited results for 1Q 2013 HTC announced in April.

HTC’s gross margin was 20.3% and the operating margin came in at 0.1 percent. Earnings per share were $0.003 (NT$0.1) for the quarter.

I’ve written a couple of times about HTC’s death spiral (first here, and a follow-up here). To quickly recap:

This is what a death spiral looks like:

  • HTC is a smartphone-only vendor with limited capital reserves
  • HTC foolishly wastes cash on acquisitions, including VIA and Beats, and pisses off the carriers to boot by allowing their phones to be unlocked
  • HTC underinvests in marketing, including above-the-line (advertising), commissions, etc.
  • Samsung does the opposite, plus a whole lot of other interesting stuff (lots more about this soon)
  • HTC sells relatively few phones compared to Apple and Samsung, resulting in less cash for marketing
  • Less cash for marketing means fewer phones sold; fewer phones sold means less buying power in the component markets
  • Less buying power for components means their “Savior” phone is late, which means they get less cash

The best analogy for this spiral is a stalled airplane, losing altitude fast. Wikipedia has an overview here (emphasis mine):

In most light aircraft, as the stall is reached, the aircraft will start to descend (because the wing is no longer producing enough lift to support the aircraft’s weight) and the nose will pitch down. Recovery from this stalled state involves the pilot’s decreasing the angle of attack and increasing the air speed, until smooth air-flow over the wing is restored. Normal flight can be resumed once recovery from the stall is complete. The maneuver is normally quite safe and if correctly handled leads to only a small loss in altitude…The only dangerous aspect of a stall is a lack of altitude for recovery.

In this analogy, putting the aircraft into a dive – the way to recover from a stall – is the equivalent of spending money on marketing. To handle a stall incorrectly is to pull on the stick, increasing the angle of attack. Unfortunately, that’s exactly what HTC’s former CFO and CMO did; according to folks I’ve talked with, they cut ALL discretionary marketing spend after the One X got off to a slow start last year. Unsurprisingly, both were fired.

There is evidence in this week’s earnings report, though, that their new leadership team at least understands the cure – more spending, not less. From Bloomberg:

HTC Corp. forecast weaker-than- expected profit margins as it boosts spending to reverse shrinking sales and contracting market share.

Second-quarter gross margin will be 22 percent to 24 percent, lagging the 24.6 percent average of 19 analyst estimates compiled by Bloomberg. Operating profit will be about half the average of estimates, while sales outlook was in line.

Given HTC’s predicament, more spending is a good thing. Sadly, it probably won’t succeed; they simply fly too close to the ground relative to Samsung in particular:

Benedict Evans - Click Image to Read Article
Benedict Evans – Click Image to Read Article

As Benedict Evans, who made this chart notes:

In the handset market today, having a lovely product is necessary but insufficient. This chart ought to show why.

The Intel Opportunity

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A new CEO has taken over Intel. Their core business, upon which the company has been built, is floundering. Does the new CEO, who is not really new at all (he’s the current COO), have the vision to ensure Intel’s continued success?

I’m not talking about Brian Krzanich, who today was promoted from COO to CEO at Intel. Rather, I’m talking about Andy Grove, who took over Intel in 1987.

Intel’s Identity Crisis, v1

Intel originally found success as a memory manufacturer. It’s 1103 chip was the first commercially available DRAM memory, and the DRAM business led massive growth throughout the 1970s.

By the 1980s, though, it was the microprocessor business, fueled by the IBM PC, that was driving growth, while the DRAM business was fully commoditized and dominated by Japanese manufacturers. Yet Intel still fashioned itself a memory company. That was their identity, come hell or high water.

By 1986, said high water was rapidly threatening to drag Intel under. In fact, 1986 remains the only year in Intel’s history that they made a loss. Global overcapacity had caused DRAM prices to plummet, and Intel, rapidly becoming one of the smallest players in DRAM, felt the pain severely. It was in this climate of doom and gloom that Grove took over as CEO. And, in a highly emotional yet patently obvious decision, he once and for all got Intel out of the memory manufacturing business.

Intel was already the best microprocessor design company in the world. They just needed to accept and embrace their destiny.

Intel’s Identity Crisis, v2

Intel reaped the benefit of Grove’s repositioning for 25 years. Their chip designs were the foundation of the PC era, and while they faced nominal competition from AMD, they gained many of the economic benefits of a monopolist. But for a brief spell around the turn of the century, a “good” computer required an Intel chip, and they charged prices befitting their place in the PC value chain.

Throughout the PC period, Intel invested heavily in their chip design. They learned the lesson of DRAM, and were determined to never be commoditized; their microprocessors would always be superior performers.

The problem with setting such ambitious goals, of course, is that you are usually successful. Intel chips have no rival when it comes to PC performance; unfortunately for Intel, PCs are in decline. Mobile devices, such as phones and tablets, are in ascendance, and there Intel’s core strength in all-out performance is a 2nd-order consideration. Power consumption is critical, as well as custom logic for specific functions such as graphics and media decoding. General purpose performance is nice-to-have.

Intel’s identity as a chip designer is increasingly irrelevant.

The Commodification of Chip Design

Most chip designers are fabless; they create the design, then hand it off to a foundry. AMD, Nvidia, Qualcomm, MediaTek, Apple – none of them own their own factories. This certainly makes sense: manufacturing semiconductors is perhaps the most capital-intensive industry in the world, and AMD, Qualcomm, et al have been happy to focus on higher margin design work.

Much of that design work, however, has an increasingly commoditized feel to it. After all, nearly all mobile chips are centered on the ARM architecture. For the cost of a license fee, companies, such as Apple, can create their own modifications, and hire a foundry to manufacture the resultant chip. The designs are unique in small ways, but design in mobile will never be dominated by one player the way Intel dominated PCs.

The Rise of Manufacturing

It is manufacturing capability, on the other hand, that is increasingly rare, and thus, increasingly valuable. In fact, today there are only four major foundries: Samsung, GlobalFoundries, Taiwan Semiconductor Manufacturing Company, and Intel. Only four companies have the capacity to build the chips that are in every mobile device today, and in everything tomorrow.

Massive demand, limited suppliers, huge barriers to entry. It’s a good time to be a manufacturing company. It is, potentially, a good time to be Intel. After all, of those four companies, the most advanced, by a significant margin, is Intel. The only problem is that Intel sees themselves as a design company, come hell or high water.

Back to the Future

Today Intel has once again promoted a COO to CEO. And today, once again, Intel is increasingly under duress. And, once again, the only way out may require a remaking of their identity.

It is into a climate of doom and gloom that Krzanich is taking over as CEO. And, in what will be a highly emotional yet increasingly obvious decision, he ought to commit Intel to the chip manufacturing business, i.e. manufacturing chips according to other companies’ designs.1

Intel is already the best microprocessor manufacturing company in the world. They need to accept and embrace their destiny. 2

  1. Of course they keep the x86 design business, but it’s not their only business, and over time not even their primary business ↩

  2. Hopefully Krzanich is as inspired a choice as Grove was; in fact, he may have to be even better. The transition I’m calling for will be harder than 1987. That transformation was from a low margin volume business to a high margin one; Wall Street loves that. To go in the opposite direction will take incredible intestinal fortitude ↩

The Truth About Windows Versus the Mac

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Ben Evans wrote the article I’ve been wanting to write about why the phone market is fundamentally different than the PC market. I’m glad he did; his version is even better that what I had outlined. A quick taste:

In the 1990s, the PC market was mostly a corporate market (roughly 75% of volume). Corporate buyers wanted a commodity…Meanwhile with no internet, home buyers were mainly interested in a PC that ran the same software they used at work (and all of the games were for PC).

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

It’s a must-read; I agree with every word.

There is one more point worth adding, in the interest of putting this myth that phones = PC’s fully to bed. Specifically:

Apple didn’t lose the PC market to Microsoft; they never owned it in the first place.

You’ve heard the phrase, “No one ever got fired for buying IBM.” That axiom in fact predates Microsoft or Apple, having originated during IBM’s System/360 heyday. But it had a powerful effect on the PC market.

In the late 1970s and very early 1980s, a new breed of personal computers were appearing on the scene, including the Commodore, MITS Altair, Apple II, and more. Some employees were bringing them into the workplace, which major corporations found unacceptable1, so IT departments asked IBM for something similar. After all, “No one ever got fired…”

IBM spun up a separate team in Florida to put together something they could sell IT departments. Pressed for time, the Florida team put together a minicomputer using mostly off-the shelf components; IBM’s RISC processors and the OS they had under development were technically superior, but Intel had a CISC processor for sale immediately, and a new company called Microsoft said their OS – DOS – could be ready in six months.2 For the sake of expediency, IBM decided to go with Intel and Microsoft.

The rest, as they say, is history. The demand from corporations for IBM PCs was overwhelming, and DOS – and applications written for it – became entrenched. By the time the Mac appeared in 1984, the die had long since been cast. Ultimately, it would take Microsoft a decade to approach the Mac’s ease-of-use, but Windows’ DOS underpinnings and associated application library meant the Microsoft position was secure regardless.

Evans is correct: the market today for mobile phones is completely different than the old market for PCs. And, so is Apple’s starting position; iOS was the first modern smartphone platform, and has always had the app advantage. Neither was the case in PCs.

The Mac didn’t lose to Windows; it failed to challenge an already-entrenched DOS. The lessons that can be drawn are minimal.

  1. Sounds familiar! ↩

  2. In fact, they didn’t even have an OS. They acquired the foundation and built it to order ↩

Thorsten Heins Is Not an Idiot, But He May Be a Fool

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Thorsten Heins, in an interview with Bloomberg:

“In five years I don’t think there’ll be a reason to have a tablet anymore,” Heins said in an interview yesterday at the Milken Institute conference in Los Angeles. “Maybe a big screen in your workspace, but not a tablet as such. Tablets themselves are not a good business model.”

Most of the Internet reacted with derision, including myself, but Matt Rosoff took the time to dig a little deeper:

The more interesting part is the company’s vision of the future. Heins is saying that the BlackBerry phone will be your one and only device — it will contain your method of authentication, your apps, and your data (or links to your data in the cloud).

So imagine this: In the morning you arrive at work. Your phone wirelessly connects to a monitor on your desk, and all your apps and data appear as if by magic. You work at that desk with a keyboard and mouse, occasionally touching the screen to open apps or zoom into data. When you need to go to a meeting, you transfer the display to a portable flat panel with minimal local storage — a “dumb” tablet if you will — and the same experience, with the same data, is downscaled for the small screen. Your work is not interrupted simply because you have to switch devices.

This is a plausible vision for the future1– and five years in tech is a long time indeed. Something will be at the center of our digital existence. While most believe it will be the cloud, it’s not hard to construct a scenario where it’s our phone surrounded by “dumb” screens, of which the “tablet” is one.

Two visions for the future. The first has the phone as the center, the second has the cloud.
Two visions for the future. The first has the phone as the center, the second has the cloud.

So, in the end, one can make the case that Thorsten Heins is not an idiot.

But even with this generosity, the only possible conclusion is that Heins is a fool. For, in the device-centric world he envisions, Blackberry is most assuredly dead.

The device-centric world is only possible under two scenarios: widespread standards adoption by nearly all device makers, or widespread dominance by one platform. The first is completely unrealistic, and I feel rather safe in guaranteeing that if there is a dominant platform in five years, it won’t be Blackberry. They simply don’t have the wherewithal.

The only world in which Blackberry can exist is the cloud-centric world. The cloud-centric world is, despite the best efforts of nearly all the major players, wonderfully fragmented. I personally have my mail with one provider, my documents with another, and my photos with a third. Each supports all major device types as a matter of course and economic necessity, even Blackberry.

Blackberry’s future – if it has one – is that of a niche device, able to fully participate in a cloud-connected world that can never be dominated by any one platform. The fact their CEO envisions the opposite is foolish.

  1. Albeit one I don’t agree with; this article, particularly the last paragraph, gets at why ↩

If Not for Android, Where Would Google Be?

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John Gruber responded to yesterday’s piece about an alternate reality where Android didn’t exist and Apple gained 70% market share with piece called If Not for Android, Where Would the iPhone Be?:

But with today’s piece, we have a first: one where I disagree with Thompson’s conclusions.

I don’t think the iPhone’s market share or sales numbers would be all that different in a world without Android; other mobile OSes simply would have picked up the slack. Windows Phone, for one. WebOS/Palm for another. The key is that the carriers have never liked the iPhone because of the control Apple has over every aspect of it…

Second, even in the scenario Thompson outlines, in which the iPhone wields a majority market share in smartphones in a no-Android world, I would be quite surprised if Apple abused that position to do something like reject Google Now from the App Store.

Both points are valid, particularly the first one: I’ve written previously about the extreme discomfort the iPhone causes carriers in subsidized countries, as well as the fact the iPhone is simply too expensive for most non-susbsidized ones. Something, anything, would have filled the 70% of the market that Android now holds.1

But it’s Gruber’s second point that is, to my mind, besides the point. The reason Android exists, and the basis upon which we should judge it a success or failure, has nothing to do with what Apple would do in an alternate reality; it has everything to do with what Google thought was best for their business.

Remember, Google bought Android in 2005 before Eric Schmidt joined Apple’s board.2 Google had designs on the phone market long before they knew what, if anything, Apple was up to. They were primarily concerned with Microsoft, which most analysts presumed would come to dominate the phone market, just as they had PCs. And for Google, that was unacceptable. Apple may have been happy to have Google power Siri; would Microsoft let Google power TellMe?

And so Google – who at that time was not yet the industry titan we think of today – launched a plan to ensure no one dominated mobile the way Microsoft dominated PCs. And, if billions of people gained the ability to go online from anywhere, well, that was money in Google’s pocket.

I’d say Google succeeded. And that’s why Android is a success.

One final note: At the very real risk of veering off into pop psychology, if Schmidt was willing to abuse his position on Apple’s board for Google’s benefit3, do you think he would have been likely to believe that Apple would happily partner with Google forever and ever? Seems doubtful, no?

I agree with Gruber: Apple would love if Google powered Siri, and iCloud for that matter. We both understand that Apple prizes focus and would have had little desire to extend themselves to an area they didn’t understand. But did Eric Schmidt understand this concept? More importantly, would it have been rational for him to in effect place the future of Google in Apple’s hands, a company legendary for its secrecy and need for control?

I think not.

  1. Two quick asides:

    • I doubt Windows Phone would have taken up much slack, particularly in subsidized countries; Microsoft has insisted on Apple-like control of the user experience without an Apple-like user base willing to switch carriers for Windows Phone devices. The result is zero leverage in the face of carrier hostility.
    • The uncomfortable truth, as I actually alluded to in a footnote yesterday, is that Android’s success has almost nothing to do with the quality, or lack thereof, of its user experience. So what matters?
      1. It offers carriers control.
      2. It’s free for OEM’s.
      3. It’s good enough.

    Today, the fact it has an app ecosystem is high up the list as well, but only as a necessity to compete; five years ago it didn’t figure in the calculations.
     ↩

  2. The Schmidt-on-the-board fiasco is entirely on Jobs. It’s hard to fault Schmidt for doing right by Google. One of Jobs’ most significant mistakes ↩

  3. There’s little question in my mind that Google benefited greatly from Schmidt’s presence on the board. The pre and post iPhone Android devices speak for themselves. As I noted above, the mess is Jobs’ responsibility, but Schmidt should never have accepted the position ↩

Apple Rejects Google Now; EU to Investigate

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Google today announced via their blog that they are filing a complaint with the Justice Department and EU regarding Apple’s recent rejection of Google Now for iOS.

“It’s clear that Apple is leveraging its OS monopoly to ensure Siri is the leading personal assistant software,” said Kent Walker, Senior Vice President and General Counsel at Google. “We applaud innovation and recognize that Apple has earned its dominance in smartphones, but that does not give them the right to abuse that dominance to eliminate competition in services.”

The iPhone, which was launched in 2007, is on 70% of the world’s smartphones, and 35% of all phones worldwide. Microsoft is in a distant second place, with less than 10% of the smartphone market. Much of the iPhone’s dominance can be traced to its app store, with over 800,000 apps; Microsoft’s equivalent store has less than 100,000, and most industry observers say its apps are of much lower quality.

“Had there been a competitive OS before 2011 (when Windows Phone 7 became widely available), there may have been room for a duopoly,” said analyst Bob Beginerle. “But iOS simply had too much momentum.”

Apple has received criticism that its services, such as mail, maps, calendaring, and messaging are inferior to those of Google, Facebook, and even Microsoft, but most experts think it’s only a matter of time until iCloud, the name for their collection of services, has more market share than any of its competitors.

“Because Apple has the final say on what runs on their operating system, most customers simply default to iCloud services, including Siri,” said blogger Ben Thompson. “What has to really worry Google is if Apple bans alternative ad networks as well.”

In 2011, Bill Gurley wrote The Freight Train That is Android:

AdWords is an highly respectable castle, and Google would clearly want to put a “unbreachable moat” around it. Warren himself is on record suggesting that Google’s moat is pretty good already. But where could you extend the moat? What are the potential threats to Google’s castle? Basically, any product that stands between the user and Google…

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

The alternate reality depicted above is the reality of a world without Android. Given enough time without viable competition, it is very reasonable to believe that iOS would have gained a natural monopoly in smart phones,1 just as Microsoft once did in PCs. And in a monopoly, one serves at the pleasure of the king.

The fact Google is able to compete on iOS is evidence enough that Android is a wild success. Apple needs to allow Google’s services; if they didn’t, they would risk competition on the services layer vis a vis Android, and offer customers a valid reason for leaving iOS. Or, to put it another way, if Android didn’t exist, it wouldn’t matter how much iCloud sucked.

Google wins, whether or not Android wins.2 Winning is in the eye of the beholder.3

UPDATE: See the follow-up article, If Not for Android, Where Would Google Be?.

  1. Although every player in mobile, including the carriers, would have fought this result tooth-and-nail. I leave it as a thought experiment to the reader to consider what this says about the reasons Android has been successful ↩

  2. And to be fair to Tom, we actually mostly agree on this count ↩

  3. Android serves other purposes as well: it gets more people online, which flows directly to Google’s bottom line, and it gives valuable signaling data to Google’s data engine. ↩