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I read news regarding partnership between Apple and IBM. If these legends of technologies comes together then who gonna get hurts most. But here’s something you can hang your hat on: if the partnership between Apple and IBM—two huge companies with diametrically opposed cultures—succeeds in any material way, it will be disastrous for Google and most of the GMS (Google Mobile Services) OEMs who brand their phones as Android.
Let me tell you why.
Android Is Already as Profitable as It Will Ever Be, and That’s Not Saying Much
At Google I/O last month, Android & Chrome head, Sundar Pichai, triumphantly announced Android passed the 1 billion active user mark…and that doesn’t even include most of Chinese AOSP (Android Open Source Project) Android. Truly a remarkable feat of scale driven by logarithmic growth. The Android team should be proud.
But while all that is true, those numbers have not delivered as bountiful a return as Google, the Android OEM ecosystem, and developers would have hoped. Lets recap what many of you may already know:
- App usage outstrips mobile web browsing by more than 4:1, reducing the search ad monetization potential for Google.
- Though Apple devices trail significantly in market share, they still dominate mobile web browsing by a factor of 2:1. Luckily for Google, most of that ad revenue accrues to them anyway, but it is an indicator of how active the two user-bases are.
- In addition to having more engaged users, iOS owners are also more lucrative. Despite the install-base advantage and a greater raw number of app downloads, iOS generates 85% more revenues for developers than Android. Many of those developers who took Fred Wilson’s advice to build Android first are still waiting for the payoff.
- While Android leads in worldwide smartphone market share, Apple owns profit share. And it’s not even close. As the following chart from Asymco’s Horace Dediu shows, Apple has historically owned two-thirds of the smartphone market’s profit share. Samsung has generally owned the other third while all other Android OEMs were accumulating losses. Recently, LG eeked into profitability, but Samsung, the lone bastion of Android success, just had a horrific quarter.
But don’t worry, Android backers, good news is on the way. As Pichai stated at I/O, “…our goal is to reach the next 5 billion people in the world.”
But hold on a minute. Let’s look at that picture.
The blue dots represent the 5 billion people Google wants to sell Android phones to. By the process of deduction, the map’s gray areas represent the locations of the first 1-2 billion who have already bought smartphones. While those blue dots represent a lot of people, they’re almost all in developing countries. I’ll hazard to guess they represent markedly less buying power than the first couple of billion people have.
So if the first billion Android customers haven’t been that profitable for OEMs and developers, this next set of customers is going to be significantly less so. We’ve all heard the phrase “make it up in volume,” but sometimes you gotta get real.
It’s not likely the profit outlook will get better for Samsung and Android OEMs, either. To date Samsung has done a masterful job of both product copying development and distribution to become the largest smartphone manufacturer — pioneering the phablet category and utilizing Android’s customization advantages.
But many of those benefits are likely to evaporate on September 9, when Apple launches its new iPhone line — expected to have at least 1 SKU with a larger screen. Apple already owns two-thirds of the most profitable smartphone customers. With a larger screen and iOS 8 eliminating feature gaps such as widgets and custom keyboards (frequently cited as the reason people switch to Android), it’s quite possible many of Android’s most lucrative smartphone customers will return to Apple. Which would only put more margin pressure on Android OEMs.
And just one more thing…
(Sorry, I couldn’t resist quoting Xiaomi’s CEO, Lei Jun. That cat can really turn a phrase.)
Speaking of Xiaomi, they (along with the other Chinese handset makers) represent a significant threat to Pichai’s plans.
See, most of those blue dots represent people living in Asia, with a combined population of 4.3 billion people (a third of which are in China). Companies like Xiaomi are gunning for all of those blue dots. And they’re beating companies like Samsung at their own game…competing on price by closely copying Apple hardware and interface designs while using a heavily modified fork Android AOSP and replacing many of Google’s GMS services with their own.
Overall, Xiaomi, Lenovo and others are putting pricing pressure on Samsung, Motorola, and LG from below while Apple attacks from above. Furthermore, the Chinese forking of Android blunts Google’s revenue and the loss of data eliminates any machine-learning opportunities.
The Enterprise Is the Last Hope for Profitable Android Customers
If your most profitable consumers are already spoken for, where do you find high volumes of profitable business? The Enterprise.
When it comes to mobile, Enterprises are only beginning to scratch the surface. Of those that have taken the first steps, only 34% have moved beyond mobile strategies that address email, contacts, and calendar, according to Maribel Lopez at Lopez Research. Even fewer have built a portfolio of apps to empower their workforce and reinvent business processes, though Lopez’ research shows that 75% intend to build 10+ apps over the next 12 months.
A recent IDC survey underscores the lack of mobile maturity in the enterprise:
- Only 16% of companies take a clear, enterprise-led approach to mobility
- 41% of companies have an ongoing, enterprise-wide mobile budget
- 31% of companies have a comprehensive mobile technical staff
At Propelics, we see this time and again.
OK, back to IBM and Apple. This deal represents the first and only time Apple is looking to drive for market share. But they’re not doing it by selling cheap phones, as many analysts have implored. They’re going to do it for the same reason Bonnie and Clyde robbed banks — because that’s where the money is.
During Apple’s Q3 2014 earnings call, Tim Cook stated:
“We also are in the—virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500…[but] the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week. We think that the core thing that unleashes this is a better go to market, which IBM clearly brings to the table.”
The deal with IBM, then, is a step-on-your-throat, run-up-the-score kind of move.
Apple’s Enterprise Sales team pales in comparison to IBM’s reach and presence in the Enterprise. IBM has a point of view on key verticals where Apple has none, while vertical customers are crying out for business process re-engineering and productivity enhancements. Mobile then becomes part of the equation for which IBM crafts the end-to-end solution.
And while this is a lot about tablets (and likely iPhones), it’s probably also about Macs (guess who hasn’t made ThinkPads for years?). Google and Samsung know this. Apple has sucked the air out of the high-end consumer segment. If Android similarly loses out the only other profitable segment — big business — they’ll be pretty screwed.
This explains why Google has been diligently closing their platform’s security holes over the past few years, along with explaining why they bought mobile device management start-up, Divide — to burnish its security credentials and make Android friendlier to the Enterprise with its containerization-based solution.
This also explains why Samsung invested so heavily over the past several years into their Knox security platform — to enable it to pass muster with large corporations and governmental agencies. Despite achieving government approval, unfortunately none of Samsung’s efforts bore fruit. According to a recent Forbes report, only 2% of their installed base adopted the security platform.
Just before Google I/O, Samsung announced they were donating the Knox code to the Android community. Was this because they were frustrated at the lack of progress after all they invested? Or maybe it was because they didn’t want to compete against Google in the Android security space after the Divide buy. Or was Google’s growing control over the Android experience limiting Samsung’s ability to differentiate against other Android OEMs? Or perhaps Samsung is shifting focus on its emerging Tizen operating system, which ships on its Galaxy Gear smartwatch.
How Can Google and Samsung Circle the Wagons if They’re Too Busy Shooting Each Other?
It’s as much intrigue as you’d expect in a teen drama. And if it continues it’s going to be hard on the ecosystem — at both the operating system and device level — to penetrate the Enterprise space in the face of an Apple-IBM alliance.
And if Android doesn’t succeed in the enterprise, if its OEMs lose the only remaining lucrative market, it may well serve the next 5 billion consumers. We may well see the Android One future Pichai put forward. But it will be an AOSP-forked Android future — one that won’t be particularly profitable for OEMs and developers.
We shall see what we shall see. Perhaps now I’ve allowed you to see the Apple-IBM alliance in a different light.
Your Right MANISH...
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