Emotional Rescue

Monday, 27 December 2010

There was an interesting thread of iOS-vs.-Android news and punditry over the weekend, starting with this report by Seth Weintraub for Fortune:

I had a chance to speak with Jim Tran, VP/GM Handset Line of Business for Broadcom, who was able to elaborate on the details of the new processor and what it meant for the industry. […]

But the kicker is the price. Tran says that phones made from the BCM2157 chipset will retail for under $100 and may dip as low as $75. Those devices should debut in just 3-6 months (and we might hear about them next month at CES). […] To be clear, That sub $100 price is not the cost of materials, it is the suggested retail price after the manufacturers (and carriers) have taken their profits.

In other words, $100 Android phones within the next year.

I’m not sure how this qualifies as news, though. US discount carrier Cricket already sells a Huawei Android phone with reasonable specs for $130. I’m not aware of anyone paying attention to this industry who hasn’t anticipated a race to the bottom from discount Android handset makers.

Here’s how Weintraub concludes his report:

What’s most interesting is that unless Apple has a plan to keep up, their iPhone, once one of the only usable smartphone games in town, may wind up back where most Apple products are slotted — at the top of the market, affordable only to those willing and able to pay a premium for Steve Jobs’ aesthetic sensibilities.

In other words, ever-cheaper Android phones spell trouble for Apple.

I expect better from Weintraub. He says the iPhone “may wind up” relegated to the top of the market. But isn’t that exactly where the iPhone started, and has remained, from 2007 through today? The key is how much of the “top”. There’s a big difference between, say, dominating the top 5 percent of a market and the top 30 percent of the same market.

In July 2007, by some measure of the word “usable”, Apple had 100 percent of the market for, to use Weintraub’s term, “usable smartphones”. Things only look disastrous for Apple if you count their ever-declining share of “usable smartphones”, rather than the company’s share of phones, or even just smartphones.

The real story, if Weintraub’s report of $100 Android phones in 2011 pans out, is the elimination of the distinction between “phones” and “smartphones”. Horace Dediu gets it:

What strikes me about the claim from Broadcom is that a $100 retail price for a smartphone implies an ASP of about $85 or so (assuming $15 or a very modest 18% channel mark-up).

That means that a smartphone could be built using this chip which would have nearly half the average price of all branded phones sold last quarter.

It would also be priced cheaper than the average price Nokia charged for all its phones (75% of which were non-smart phones.) […]

Note that I’m not suggesting that the market for high-end smartphones is threatened yet–there is still a lot of innovation that still needs to happen to shape that market into one of mobile computing (vs. mobile phoning).

Instead, what I am suggesting is that the bottom of the phone market is very vulnerable to becoming smart.

In other words: $100 Android smartphones in 2011 would be cheaper than the typical non-smartphone that was sold in 2010. Such phones will be a much bigger threat to traditional handset makers — Nokia, perhaps, particularly — than Apple.

Think of it this way: Apple has been competing against $100-150 cell phones ever since the iPhone was announced. Most of these phones are given to customers “free” when they sign or extend a two-year contract. The difference going forward is that even low-end phones are going to be what we today call “smartphones”, by any reasonable definition of the term.

Will this affect Apple? Sure. The iPhone in summer 2007 was utterly unlike anything else on the market. The iPhone in summer 2011 will share the same basic form factor and basic touchscreen UI premise as a “typical” phone. Surely Apple anticipated this. Apple’s executives weren’t merely convinced that the iPhone’s basic design was the right idea for an Apple phone. They were certain that it was the right fundamental design for all phones.

Here’s Steve Jobs, regarding his 1979 visit to Xerox Parc:

And they showed me really three things. But I was so blinded by the first one I didn’t even really see the other two. One of the things they showed me was object orienting programming they showed me that but I didn’t even see that. The other one they showed me was a networked computer system… they had over a hundred Alto computers all networked using email etc., etc., I didn’t even see that. I was so blinded by the first thing they showed me which was the graphical user interface. I thought it was the best thing I’d ever seen in my life. Now remember it was very flawed, what we saw was incomplete, they’d done a bunch of things wrong. But we didn’t know that at the time but still though they had the germ of the idea was there and they’d done it very well and within you know ten minutes it was obvious to me that all computers would work like this some day.

Same with the original iPhone. Surely Jobs, and the rest of Apple, knew that all handheld computing devices would work like the iPhone some day. If you don’t think Apple has been prepared for this, all along, then you’re not paying attention to how Apple operates.

The iPod debuted at $399 with 5 GB of storage and a tiny black-and-white display. It didn’t stay there. They added new models at lower prices, and steadily added major new features at the high end.

Apple has been selling $199 iPod Touches for three years. This low price point — compared to $500 and $600 unsubsidized iPhones, or subsidized iPhones with $2,000 two-year service contracts — is a huge factor in the growth of the iOS platform. The battle isn’t merely for “phones”. It’s about software platforms. Any discussion that focuses solely on “phones” is ignoring the iPod Touch and iPad. Apple won’t join a race to have the very lowest prices in the industry, but surely they’ll release iOS devices with prices lower enough (than today’s) to continue growing the platform.

Something else missing from this discussion of $100 Android phones: the cost of service contracts. The iPhone 4, along with all competing top-of-the-line smartphones, are, when sold without carrier subsidies, relatively expensive: $400-600. But in the U.S. almost all of these phones are sold at subsidized prices, with expensive monthly service contracts. $75 a month for 24 months is $1,800 — and many people spend more than $75/month for their smartphone service. How different, cost-wise, is a free Android handset from a $99 iPhone, if both come with two-year contracts for the same monthly rate? Or, from a $100 unsubsidized Android phone sold without a contract, if the minimum monthly rate plan is $70 or $80? The real race to expand smartphone sales is to reduce the cost of the monthly plans.

You’re Just a Poor Girl in a Rich Man’s House

Here’s a bit from Louis Gray’s take on the state of the market:

The truth is that Android can go feature by feature against iPhone now. iPhone is not yards ahead of the competition, and while there may be some clear places where Apple is ahead, it comes down to an individual’s preference now, including their choice to have a keyboard (which Apple seems not interested in doing), their choice of carriers (still limited here, even if Verizon comes to the party), or many other factors. This is not like the Microsoft of the 1990s, where Apple’s lead was obvious and Windows 95 was arguably the first usable OS on that platform to be considered Mac-like.

The way you can tell when tech connoisseurs have crossed the line from data to emotion is when they use blanket phrases like “In my usage of the Android-based Samsung Nexus S, I’ve found it’s still behind Apple’s iPhone in almost every way,” which Scoble drops in his post. If you strongly believe a high pixel density Retina Display is demanded, great. If you think FaceTime is something you use all the time and it trumps Qik, great. But blanket statements don’t work for the true nature of the mobile landscape today. Android really is that good.

(This is the Robert Scoble post Gray referenced.)

Ignore for the moment whether it’s true that “Android can go feature by feature against iPhone now”. I’d dispute it, but just concede it for now. Ignore also that the best Android phones, like the Nexus S, cost over $500 unsubsidized. What Gray is missing is that emotion counts. Mobile computing is not an entirely rational market. Emotion is a huge factor when people choose what to buy — I’d say maybe even the biggest one. Apple understands this. All iOS devices — all Apple devices, for that matter — are designed with the emotional experience in mind. Why does almost everything in iOS animate? Why did Apple create CoreAnimation, and base UIKit app development so heavily upon it? Because animation, even in small unobtrusive doses, has an emotional affect. It results in a feeling.

To discount the emotional appeal of Apple’s products is to ignore the entire point of Apple’s products.

Think about how cars are marketed and sold for an apt comparison. Or the way Nike markets and designs footwear. Or the market for jewelry and women’s handbags. Emotion matters, and Scoble is exactly right: the iPhone 4 soundly beats the Nexus S in terms of emotional appeal.

Emotion works for other companies, too. Tens of millions of BlackBerry users have an emotional connection to their handsets. There are some people with an emotional aversion to anything and everything from Apple.

Does everyone shop for phones with emotion in mind? No, of course not. And the same is true for cars, jewelry, footwear, clothing, whatever. Some people buy based on nothing other than price and specs.

People keep bringing up 1995, vis-à-vis Windows 95 and Apple’s pre-Jobs decline. MG Siegler writes:

What does concern me about Android’s success is if it does to Apple what Windows did to them in the 1990s. That is, drives them into near extinction. There are plenty of reasons to believe why this won’t be the case — but history does have a tendency to repeat itself. What if everyone does decide that they want a free smartphone subsidized by search? How does the iPhone survive in that environment?

I don’t think that will happen, I think Apple has enough ecosystem leverage with things like the iPad, iTunes, and their apps, that it would be very hard for a full collapse to occur. But it is something that has to be thought about.

No, it doesn’t. Why not ask what happens to Honda if everyone decides to buy $8000 Chinese automobiles? Or what happens to Nike if everyone decides to buy $30 discount running shoes? Or if everyone buys $15 wristwatches? There’s no question that Apple would be in a better position in some alternative universe where Android doesn’t exist. If not for Android, what would be iOS’s chief rival? Windows Phone 7, which only shipped a few weeks ago? But no one at Apple, either in public or private, seems to be in denial about Android. There’s an implied assumption in some of this handwringing that the iPhone (and iOS as a whole) only have a chance so long as they don’t have any competition — that Apple is a delicate corporate flower that stands still and can’t compete on price.

If Android handset makers can make a good phone for $100, couldn’t Apple make a better one for the same price? And if these $100 Android phones aren’t all that good, how is it a concern to Apple? The iPhone 4 hardware is decidedly superior to the Nexus S — better camera, better display, better build quality — and only slightly more expensive.

Scoble, in a follow-up to the aforelinked piece, gets it right. The entire PC market in the ’80s and ’90s was entirely different than the mobile market today:

In 1995 Microsoft had a HUGE marketshare lead with DOS. That meant it had a huge army of developers who didn’t want to switch over to Apple’s system, which they saw as very closed and inflexible. […]

But I look at who is making money. Back in 1995 developers were mostly making money from DOS. Remember, this caused WordPerfect and Borland to make bad bets. They bet on DOS for too long, while Bill Gates went and built some of the first and best Macintosh apps. The lesson, though, doesn’t pass from 1995 to 2011. Today where are most of the developers making their money? iOS (according to Sephora, Starbucks, OpenTable, eBay, and many other developers). So, Android has to convince developers to switch, or do both platforms at same time. That’s quite different.

Microsoft had the biggest software platform even before Windows 95 shipped. Back then, people lined up at midnight to buy Windows 95 the day it was released. Here’s the line from earlier this month for the Nexus S. There will never be an Android phone that people line up for like they did for Windows 95 — or like they do today, once or twice a year, for major new products from Apple.

Apple today has the biggest mobile software platform, by far. That was never true for the Mac. But the biggest difference is that Apple, today, has an emotional trust with the mainstream mass market.

Imagine this. It’s June 2011. Steve Jobs comes to the end of his WWDC keynote address, and announces the iPhone 5. Except he doesn’t even show it, or say what’s new. He just says that it’s great, the best iPhone yet by far, and that it’s going on sale in two weeks for $199 with a two-year contract.

How big would the lines be to buy it? Sight unseen, based solely on Jobs’s word that it was “great”?

I say just as big, if not bigger, than the lines to buy the iPhone 4 last year.

Android isn’t like Windows. Windows was created to make massive licensing revenue for Microsoft, and to serve as a platform for additional sold-for-profit software like Office and Exchange. Google gives Android away free of charge, profiting only indirectly (but, perhaps, handsomely nonetheless) by delivering mobile ads. There’s never been anything like Android before. But there’s never been anything like iOS before either.

Here’s the question: Can iOS remain the leading mobile platform without being the leading platform measured by device unit sales? Put another way: can iOS and Android both thrive in 2011, because they are, by design, playing very different games?