Last week – what most predicted – has finally happened: Android passed Apple iPhone in global units sold. This was no surprise. Google’s Android has a much more effective distribution mechanism than Apple’s iPhone. Apple’s iPhone is made by one manufacturer, Apple, and in the US, is only distributed by one service provider – AT&T. On the other hand, Google’s mobile operating system, Android, runs on many hardware manufacturers’ devices (HTC, Motorola, Samsung and others) and is distributed by many service providers in almost every region. It was just a matter of time until this strategy paid off for Google.
This raises the question: Will Android do to the iPhone what Windows has done to the Macintosh? More specifically, will Android make iPhone a niche solution? Even though the Mac was the first successful computer to have a graphical user interface and a mouse, Microsoft came from behind with Windows and reduced the Apple Macintosh computer to about 4% market share. It did so by making Windows practically ubiquitous – distributed by practically all other PC manufacturers.
Is Google Android going to do the same to the iPhone? All early indications are that it will.
So what might Apple do in order to prevent history from repeating itself?
I have a somewhat radical idea that Apple might explore to beat Android. Here are the two clues leading up to it:
Clue #1: The iPod
In the iPod days, Apple effectively maintained close to 70% market share, which appeared to many as a miracle. Especially given that most would agree that the iPod was often not the best portable music player – from a feature/function perspective. When other portable music players were smaller, lighter, had recording capabilities, more memory, more interfaces, and were cheaper, iPod still remained the leader in this sector. How did Apple accomplish this? Apple focused on the experience, innovated rapidly, consistently reduced the price of the product, and went down-market. I’ll relate to each factor in brief:
- Focused on the experience: The iPod was more of an experience innovation than anything else. Everything from the white earphones to the navigation wheel, the seamless integration with the iTunes software and iTunes online store – were geared to providing the user with a consistent experience which delighted the user. Most competing devices had only part of the solution and did not focus on the entire experience.
- Innovated rapidly: Every 6-12 months, Apple added capabilities that were often introduced by their competitors, in addition, to something unique and appealing from Apple. In this way, Apple neutralized most competitive advantages brought in by their competitors and added more differentiators. This made it good enough for most of the skeptics and great for anybody that was after this new differentiator. Obviously, the whole iTunes store concept was a huge business model innovation that structurally changed the recorded music industry.
- Consistently reduced price: With every new product introduction, at least once a year, the price went down by either $50 or $100 per unit. This brought significant pressure for all other competitors who were also forced to drop their prices – even for competitors that had just released their “new product”. This made it unprofitable for these competitors to continue to play the game, and many of these players had to fold their cards and leave the game, each time Apple came out with a new version.
- Going down market: The iPod classic was too big and expensive for many users. Apple introduced a cheaper music player called the iPod Shuffle to compete with low-end portable music players. It was diminutive and had very few capabilities. No display, for one. But it competed with all the music players in that price range. Then Apple introduced the iPod Nano, a music player which competes with the mid-market music players. So Apple, effectively, has released products which cover the entire music player market, except for the very low-end and niche solutions. Today, only the market for portable music players below $50 is not covered by Apple. But at that price range, the profit margin is so small that any competitor would need to sell great numbers of devices in order to be profitable. Apple is still exposed there – and if someone manages to create a brand which will drive volumes and will be able to make a profit at say $20 retail price per unit, they might come out on top. But that’s not easy.
All in all, Apple continuously cannibalized its own products and made it harder and harder for others to “sneak up on it”.
Clue #2: A key quote
Not long ago, a good friend of mine was in a meeting with the CEO of a Tier-1 global service provider. This was one of the top 5 multi-national carriers in the world. Thoughtfully, the CEO said this in that meeting: “If the iPhone will have an “operator cost” of $200 or less, we will sell nothing but iPhones”. The “operator cost” is the unsubsidized wholesale cost of the phone to the operator. The operator then often marks up the phone to create additional margins, subsidizes it with a long term commitment and a usage plan. Indeed, the bill-of-materials (BOM) of an iPhone 3GS today is below $200. So we’ve reached that point in which such a price could be possible. The concept behind this is that the iPhone offers a better overall value for the overwhelming majority of consumers than any other phone while also being cheaper than most of its closest competitors which have a much higher “operator cost”.
The idea: A $200 unsubsidized and unlocked iPhone
So, what if Apple “suddenly” decides to sell the iPhone for $200 (or less) unsubsidized and unlocked (to a specific service provider)? Perhaps the current iPhone 3GS. Recall, they’ve done similar things before in the iPod era (brought down the price considerably every year, and surprised the market players). This would also meet the criteria in the second clue, above. This would make the iPhone considerably cheaper than its Android competitors.
Can Apple do it?
I think they can. The only question is whether they wish to do so and will they do so. Apple might be pushing off this sort of decision until they see it is required or the time is right. Doing this reduces their margins considerably – right now Apple makes more money on these devices. Also, it is somewhat cannibalistic to their higher-end device sales of the iPhone 4 (and its successors). An unlocked version also is undesired by the channels in many countries – service providers want to be able to retain the customers and phone locking is one mechanism they employ despite the consumer benefit in having an unlocked phone. Service providers might try to put hurdles to unlocking – but I believe Apple would be able to push it through. Whatever is good for the consumer is actually good for Apple in this case – making the iPhone even more attractive to consumers.
What would happen?
For one, this would immediately put considerable pressure on all Android handset manufacturers. Some might be squeezed out of the market entirely. Others will frantically lose margins and profitability – since many may not have the volume of units to make this a good business to be in. Many more consumers will join the “Apple party”. Many folks who are not considering the iPhone because it is either more expensive, or comparable in price, to other handsets, may opt to get one – should consumers become convinced it offers them better value. Apple could, quite easily, return to being the dominant player in smart phones. And with this position secured, continue to earn the most in this enormous and rapidly growing market. The gorilla position it enjoyed in the iPod days could last much longer and could affect a much bigger market.
Why we might not see this happen so soon
- Apple might think that it’s not too late for the market to change: Even though Android adoption curve is very steep, it still has a lot of challenges ahead. It is very fragmented with many versions and form factors. Android’s marketplace for applications is still not as effective as Apple’s App Store and it is still dealing with many quality and security issues. Applications are more likely to be affected by malware due to the relaxed management of the application landscape. The new users are no longer the tech-savvy early adopters, and the jury is out as to whether these users will grow as passionate about their device as the iPhone users have. So far, iPhone users are much more loyal than Android users. So Apple might think that the time is not yet right to reduce the margins.
- Apple might wish to remain only in the higher tier: Until now, Apple has never made low-end PCs (I’m not considering the iPad a PC). They chose to remain at the high end. They might choose to do the same in this case.
- It might still cost too much: While the BOM of an iPhone might be less than $200, it might still cost much more over its entire life-cycle, including the support and maintenance costs, to sell an iPhone at this price.
- Perceived act of desperation: Apple has never been more successful and has recently become the #1 valued technology company, replacing Microsoft in this enviable position. This move might appear an act of desperation and shareholder reaction might negatively affect its stock, hence shareholder value.
- An unlocked iPhone might suffer in some geographies: In many geographies, locking the iPhone by Apple was a business decision to get service providers on board – the service providers wanted exclusivity first, and if not exclusivity, at least the ability to lock the customers in through technical and business constraints. Some service providers might discontinue selling or promoting the iPhone to pressure Apple again. Apple might consider this a significant risk and therefore avoid doing it.
- Apple might lose in a price war: Price wars are dangerous. Apple might start it, but a leading manufacturer might match their price reduction, and an all-on price war might begin where everybody loses as value declines. Consumers pay less, but the margins continuously shrink. Apple too, could ultimately lose in this war.
- There might be better ways to beat Android: Some think that a Verizon iPhone would be a killer. I’m not sure Apple will produce a CDMA flavor of an iPhone, but they just may.
Will it work?
It just might! Android is open, sold by dozens of equipment manufactures and has several very successful phone models, such as HTC EVO 4G, Samsung Galaxy S, and Motorola Droid. It’s sold and promoted by practically all service providers. It will soon appear on other devices besides phones ranging from TV set top boxes to tablets to healthcare products. Yet, if Apple closes the “low-end” and undercuts most of Android phones, the ripple effect described above, could pay off. Consumers and businesses will chose their phone, and at this price, it would be extremely compelling for most potential buyers, hence arresting the ascent of Android – and any other competitive threat from RIM, Nokia, or Microsoft’s mobile operating systems.
So, I’ve made a case that Apple has at least one trick up its sleeve against Android. I think it has a few more.
Do you think Apple would do this? If so, when and why?