The smartphone OS wars are not about functionality or design, they are about the business model. Consumers or tech blog reviewers don’t get to chose which smartphone OS wins and looses.
Today, the carriers decide
The main reason Android dominates today is that carriers pay about $200 less per customer on an Android phone compared to an iPhone (about $400 vs $600). The other aspect of Android that carriers like is the customization of it to make more money on extra services. For example, Google provides the carrier with a share from app sales in the Google Marketplace. Carriers can pre-load the devices with apps for on-demand music and videos and other services. Apple does not give carriers any share of revenues from the App Store or iTunes.
The actual bill of materials and manufacturing cost of today’s high end Android smartphone or iPhone is less than $150. Amazingly, the average US smartphone consumer pays above $2400 for his smartphone on contracts, for example, Verizon’s Average Revenue Per User is $105/month. ARPU is lower in Europe, and much lower in developing countries. The carrier economic aspect of Android winning is only how things are today. Even as there is competition with very good high end Android smart phones provided to the market by Samsung, Motorola and HTC, consumers still pay about the same for these phones as they would with an iPhone.
When the carriers loose control
Things are going to change fast. Soon, the carriers will loose control of the smartphone market, and Android will dominate even more.
As 20 Android smart phone makers compete, there are to be $99 Android phones sold unlocked directly to consumers, such as the Chinese Huawei or ZTE Android phones, there will be alternatives to carriers voice services such as the new VOIP centric version of Google Voice which has become an integral part of Android in Gingerbread.
The next phase of Android means consumers will have choices such as the Archos 28 Internet Tablet at $99, no contracts needed, to do SIP/VOIP/Skype calls on WiFi-only, and depending on the region of the world, there are sub-$20/month even sub-$10/month data SIM cards that will be used to get Data-only experiences of Android. White Spaces could also provide for worldwide free wireless broadband for these devices if setup using the http://fon.com model.
While bloggers analyze smartphone differentiation, fueling a feature war on blogs among constantly improving Android super phone specs, in which new models are represented as destroyers of the ones released the previous week, the fact is brands that sell most don’t do it on features, they do it by negotiating the strongest deals with the carriers. If you look at the US smartphone market, it really doesn’t matter which high end Android phone consumers buy, they all cost basically the same $2400+ after those compulsory 2-years in contracts. The consumer only really gets a choice once devices are sold unlocked through all retailers. Then, prices for these devices will have a meaning and the best value for feature will clearly win. So if you thought it was fun with all these Android phones coming out through carriers this past year, you haven’t seen nothing yet compared to what will happen once phones are sold unlocked directly to consumers.
The next billion sub-$100 Android smartphones
Android smartphones can thus soon be $100 unlocked instead of $2400+ on contract. We are talking about a 24x cheaper Android experiences for the consumer. At that point, the consumer gets to choose who wins the smartphone war. This is happenning. It doesn’t matter what Apple, Microsoft, RIM, Nokia and others do. When there are $100 Android phones in every super market, competitors don’t get to keep a market share if they don’t also provide the devices unlocked for $100 with no contracts needed. You think Apple is looking forward to loosing their 300% profit margins on the iPhone?
What carriers will do to try to keep control
The only ways carriers will try to retain control on their trillion dollar industry will be to block VOIP on cheap wireless data plans, buy out and close down any pre-paid carrier competitors that are offering services that are too cheap on any given market, campaign against unlicensed use of the 700Mhz spectrum for White Spaces, block the licensing of 3G/4G modem technologies in cheap unlocked devices, do anything they can to limit competition in the wireless carrier business. Hopefully all these attempts at keeping control will be defeated by strict regulation and government policies.
The smartphone industry is moving too fast for any Government to regulate it, much too fast even for carriers to adjust and protect themselves against the auto-disruption that is inevitable. Everyone is racing and trying to keep the flow of money going their way for as long as possible.
[I originally wrote this on 16th December 2010 to be published on another blog, but since it wouldn’t get published there as is, I decided to post it here, your turn to say what you think in the comments.]
