The Four Myths of Android's Ascendancy
Myth 1: Market share is the most important metric possible
As my colleague Erica Sadun points out, market share doesn't matter. But don't try telling that to the analysts, because they keep hammering away at market share like it's the only thing that matters. Android's market share numbers keep climbing more than Apple's, which obviously means that Android is going to beat Apple black and blue and steal its lunch money.
With all due respect, I don't think Erica's gone far enough in her counterargument. She's acknowledged that market share doesn't matter as much as the pundits claim it does, but I'll go a step farther: market share doesn't matter at all. It is the least important metric possible when analyzing Apple's future success or failure in the smartphone market.
Let's look at some numbers that actually matter in terms of a corporation's bottom line. The original iPhone was released on June 29, 2007. On that day, Apple's stock was worth US$122.04 per share, and its market cap at the beginning of the month was about $105.56 billion. Today, Apple's stock is worth $353.01 per share (289 percent more), and the company's market cap has risen to $324.05 billion; Exxon-Mobil is now the only US company whose market cap exceeds Apple's.
What effect has Android's "ascendancy" had on Google so far? The first mass-market Android phone, the HTC Dream, was released on October 22, 2008. On that day, Google's stock was $355.67 per share, and its market cap at the beginning of September 2008 was $125.94 billion. Today, Google's stock is $525.10 per share, 148 percent more than before the first Android handset hit the market. That's a respectable increase, but nowhere near the massive rise in Apple's stock. Google's market cap now stands at $171.31 billion; Apple's market cap has grown by over $200 billion since it introduced the iPhone, but Google's has only grown by $45 billion since the first Android phone hit the market. Again, $45 billion is nothing to sneeze at, but it's sure not $200 billion... and since Google's only pulling in $1 billion in revenue per year from Android, it doesn't look like it's had much positive impact on Google's stock at all.
"Now, hold on," you might be thinking. "If there are more Android phones sold than iPhones, that obviously means that Android's making more money than Apple, right?" Not necessarily, and the stock performances of Apple and Google certainly don't reflect that line of thinking. But since the analysts are so fond of comparing the smartphone market to the global PC market (more on that dross later), let's go ahead and look at it from that angle. Apple's market share in the PC market has held pretty steady over the past decade. Depending on which fiscal quarter we're talking about, Apple's either gained or lost a percentage point here or there, but overall Mac OS X has hovered at about 10 percent of the US market and approximately 5 percent of the world market. That leaves the rest to Microsoft Windows, which still holds an overwhelming lead in worldwide OS market share. [That's leaving out the rounding error that is Linux on the desktop, and not including the infrastructure/server market where Linux does indeed challenge the Microsoft hegemony. –Ed.]
Since market share is supposedly all that matters, that should mean Apple is at best carving out a niche amount of the available profits in the PC market, right? Sure, except that's not what's happened at all. Not even close. For 20 or more fiscal quarters in a row, Apple has been the only PC maker to show consistent growth; everyone else is either stagnating or losing market share. As for Microsoft itself, despite shipping a remarkable 350 million licenses of Windows 7, the company frankly isn't the "too big to fail" monolith that it was in the 90s. In fact, going by the market cap, Apple is now worth more money than Microsoft, and Apple passed Google's market cap almost three years ago.
"It's not a fair comparison," you may now be thinking. "Apple's a hardware company, and Microsoft's a software company. It's apples to oranges." You're right -- although of course Apple makes both hardware and software, the only hardware products with a Microsoft brand are the Xbox 360 and some admittedly nice mice and keyboards. Thanks for pointing that out, though, because it leads me directly into the second of the Android analysts' myths.
Myth 2: Android is a company, not a platform
Every single analyst who's jumped on the "Android rules, Apple drools" bandwagon seems to be treating Android like it's a standalone company instead of a software platform (a combination of open-source and proprietary chunks, along with a brand and a licensing scheme tying it together) that runs on a plurality of handset manufacturers' hardware. Since these analysts all have market share tunnel vision, it's easy to see why they're making this basic and obvious mistake, and they have Microsoft to fall back upon as an example; there's currently no such thing as a Microsoft-branded PC [there was for a while -- looked a bit like a table-sized iPad, actually -- but now the Surface platform is being built by Samsung instead –Ed.], but Windows is the default OS on almost every PC maker's hardware except Apple.
Here's a couple of forehead-slapping "duh" points these guys are overlooking. First, "Android" isn't a company the way Google is a company. Android is a software platform, like Windows is a software platform. That leads into the second point: Google doesn't charge for Android like Microsoft charges for Windows. Google's profits from Android come from ad revenue, carrier licensing for Google-branded proprietary apps (Maps, Gmail, Market, etc.), Android Market fees and other sources -- but not sales of its smartphone OS. The people who really stand to make money off of Android are the smartphone vendors, and they're all competing not just with Apple, but with one another. Not to mention non-Android and non-iOS players like RIM and Windows Phone makers. And all the unsmart phones out there.
Analysts like to treat Android like it's a single entity so that they can make impressive pie charts where Android looks like Pac-Man gobbling up iOS, but once you split that up by manufacturer, the story looks a lot different. It's virtually the same story as the PC market; Apple's share of the PC market looks trifling indeed when you compare it against Windows-running PCs as a whole, but when you break it down by each PC manufacturer, Apple definitely more than holds its own. When you break it down by profitability, the contest isn't even close; Apple owns 90 percent of the "high-end" PC market.
It bears repeating at this point that Google doesn't charge for Android per se, and the bulk of its profitability from the platform comes from ad revenue. Android pulls in about $1 billion in revenue per year for Google. Meanwhile, Apple is the sole manufacturer and seller of devices that run iOS, and the company made $11.9 billion in revenue off the iPhone in one quarter. That doesn't include the $1.4 billion in quarterly profits from the iTunes business, selling music, movies and apps to run on all those phones (and iPod touches, and iPads). "Android's" hardware profits are scattered amongst HTC, Samsung, Motorola and a host of other manufacturers, but Apple is making all the money -- and lots of it -- from iPhone sales. Apple's carrier partners are also making quite a bit of money from iPhone users' service plans.
Myth 3: The smartphone market will be a repeat of the PC market, where Apple "failed"
This one's been repeated often enough to qualify as a meme: "Apple's locking down of iOS will be its downfall. Android's openness and support from multiple handset vendors means the smartphone market will play out exactly the same way the PC market did in the 90s, and the iPhone will be left with only a tiny slice of the overall market."
I wish I was making that up, but that is in fact what outlets like Business Insider are shouting from the mountaintops, almost word-for-word: "As we've said before, Apple is fighting a very similar war to the one it fought -- and lost -- in the 1990s. It is trying to build the best integrated products, hardware and software, and maintain complete control over the ecosystem around them. This end-to-end control makes it easier for Apple to build products that are 'better,' but it makes it much harder for the company to compete against a software platform that is standard across many hardware manufacturers (Windows in the 1990s, Android now)."
Yeah, boy, Apple's paltry $11.9 billion in iPhone revenue per quarter sure pales against Google's $1 billion in Android revenue per year. Stick a fork in Apple, it's done. And hey, remember how the Mac "failed" in the 90s and was never heard from again? You know, except for the roughly 3,760,000 Macs Apple sold last quarter, almost all of them models with hefty profit margins. That's the kind of failure that most companies can only dream of. [Granted, the company did go through a near-death experience in the depths of the Mac 'bad years,' but it made it through. –Ed.]
While we're at it, let's not forget nearly a decade of frothy prognostications of the iPod's imminent demise, when in fact the only products that have managed to put a dent in the 'classic' iPod's sales are Apple's own iPhone and iOS-based iPod touch. And remember how in 2010 virtually every Apple-loathing tech pundit on Earth was utterly convinced the iPad would be a miserable failure? Does anyone remember how that one worked out?
Let's assume for a minute that guys like Business Insider's Henry Blodget are right (even though they're oh so obviously wrong), and Android vs. iOS in this decade (when Apple is on top of its game in every way that counts) will play out the same way Windows vs. Mac OS did in the 1990s (when Apple started out as a niche player, went downhill from there, and was a hair's breadth from dying out completely). Let's assume further that Apple's share of the smartphone market dips down to the same level as its share of the PC market, in the neighborhood of 10 percent of the US and 5 percent of worldwide share. Does such a dip in overall market share mean Apple suddenly starts making less money per iPhone? Nope; Apple's device margins aren't dependent on sales volume in the slightest. Does it mean Apple is "dead in the water" if the coalition of Android handset manufacturers gains a wide majority in the market? Nope; according to recent Asymco analysis of Apple's cash reserves, Apple can afford to make no money whatsoever starting today and still sustain its operations until 2018.
At this point, the only way Apple can fail as hard as it did in the 90s is if someone deliberately mismanages the company into the ground. That leads into the final busted myth...
Myth 4: For Android to succeed, Apple must fail
Why do so many of these pundits have this Old West, "This town ain't big enough for the both of us" mentality when it comes to the smartphone market? Almost since the first Android phone hit the market, it's been all gloom and doom from these guys when it comes to the iPhone. It's the same story with Android users, at least the ones motivated enough to post about their preferences online. One of the Android users I know in real life has gone so far overboard with his anti-Apple rants that I can't even hang around him anymore, because I got tired of the rolled eyes, raspberries and fanatic lectures any time I started using something with an Apple logo in his presence.
There are plenty of examples of markets where multiple vendors succeed simultaneously without the category being dominated by any one player. The one that most closely fits the likely outcome of the smartphone market, at least as far as that "all-important" market share is concerned, isn't the PC industry, but the games console business.
There are three major players in video game hardware right now: Nintendo, Sony and Microsoft. They're all competing for the same space and the same mind share, yet all three companies thrive despite wildly different approaches to the market. None of the three companies holds a lead over the other two that's large enough to call the others a "failure" by comparison. People still get into online shouting matches over which platform is "better," but none of these three companies are in danger of being "dead in the water" because of the efforts of the other two -- although Sony's certainly gone out of its way to shoot itself in the foot as often as possible, most recently with the PSN outage/intrusion debacle.
That's not what pundits want you to hear, though, because "Can't we all just get along" doesn't drive eyes to their sites. "Android number one in US/Earth/Universe, Steve Jobs living in cardboard box by 2013" is the story these guys want you to believe, even if market share is the only metric that even slightly lends credence to that claim. Yet during the same time that Android has gained that precious market share so vital to hysterical analysts, Apple's profits have continued to rise, relentlessly. It really makes it hard to take these guys seriously when Apple keeps turning in record numbers every quarter despite Android's market share (as a platform) outperforming iOS.
What can we take away from all this? Basically, anyone who pounds away at market share while ignoring every other metric is an "analyst" in name only. There's way more to building a successful product and business than number of units sold. If I sell 1000 lambs at $10 profit each, am I really doing better than the guy down the road who sells 500 lambs and makes $40 on each one? Obviously not, and I'd be doing even worse if I were really only selling the feed that goes into those lambs, at a profit of $1 per lamb. But according to these analysts, if those lambs down the road have an Apple logo on their wool, suddenly the fact that 1000 lambs are eating my feed means those other 500 lambs are destined to drive that farmer out of business... somehow. Look at the monkey! Look at the silly monkey!