Why 2014 Will Not Be Like 1984

Nov 21, 2010
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Or: Will Google's Open Model Overcome Apple's Closed Model?

There is an argument I’m hearing a lot lately that Apple is repeating the mistakes it made in the PC era again today with the iPhone. The argument – which I’ve heard from financial analysts, journalists, and my friend Marc on our walk home from synagogue – goes something like this:

In 1984 Apple ran an ad during the Super Bowl promising that 1984 would not be like [the totalitarian world of George Orwell’s novel] “1984.” Apple then launched the Macintosh, which had an enormous lead over the rest of the PC industry thanks to its graphical user interface. But Steve Jobs decided to keep the Mac a completely closed system while Bill Gates over at Microsoft invited all comers to build apps for MS-DOS. Thanks to the open nature of the PC platform, clone makers from Compaq to Gateway to Dell built more powerful hardware than Apple, Microsoft eventually built its own graphical user interface, and the Mac was relegated to 2% market share.

In 2007, Apple launched the iPhone, which had an enormous lead over the rest of the mobile phone industry thanks to its graphical user interface. But then Steve Jobs decided to keep the iPhone a completely closed system while Andy Rubin over at Google invited all comers to build apps for Android. Thanks to the open nature of the Android platform, vendors from HTC to Motorola to Samsung are building more powerful hardware than Apple, and soon the iPhone will be relegated to a small percentage of the market, and Apple will be in trouble once again.

That’s the argument. It’s wrong on a bunch of levels. Oh, there are parallels, but it’s still wrong.

First, let’s tackle the revisionist history: back in 1984 Apple didn’t have as big a lead as it looked. The Mac was beautiful, but there wasn’t much you could do with it (the advent of desktop publishing single handedly rescued the platform from oblivion). In contrast, the iPhone is a market leader in large part because it is the most versatile platform – there are more, and higher quality apps for iOS than all other platforms combined. App developers nearly always target Apple first because that’s where the money is.

Some argue that this app advantage will be short lived, and app developers will switch allegiance as Android shipments exceed iPhones, which is already happening according to most market sizing numbers. Jobs argues that will not happen because fragmentation within the Android camp makes iOS app development more appealing, but I expect Google to minimize the version fragmentation going forward by slowing down the pace of software releases now that Android is maturing, leaving mainly screen resolution fragmentation as an issue for developers to deal with.

However, while I don’t expect fragmentation to slow Android’s rise, I don’t think Apple has anything to worry about here: it already has the most apps, the best apps, and the deepest selection of good niche apps. It is a leader in mobile gaming. As long as Apple maintains a meaningful share of the market overall, it will remain a premier mobile platform for developers. Apple is also benefiting from the reach iOS has in media devices (the iPod touch) and tablets (with the iPad), not to mention the leading digital media store, iTunes. Android is beginning to compete with Apple in tablets, but the iPad has a significant lead – Google has not even built a tablet-specific version of Android yet, and the iPad enjoys a massive lead in tablet-specific apps.

But doesn’t open always beat closed?

Not necessarily. Google argues that consumers want an open OS. Why? The benefits to consumers for Apple’s controlled environment are clear (the iPhone delivers a consistently good user experience), while Android’s openness has been a mixed bag: there is diverse hardware available, but fragmentation has left some phones unable to run the latest apps, and even as that situation improves, carriers have imposed their own restrictions on core elements of the platform. Cellphones are the most personal of personal technology, and there is no reason to think that we will end up with a single platform. Our present state of seven major platforms (iOS, Android, WP7, webOS, Symbian, MeeGo, BlackBerry) is not sustainable, either, but it is definitely not a zero sum game where if Android succeeds, the iPhone fails.

Apple is dominant in a critical industry metric: profitability – Apple makes more money than anyone else in the industry. It sells high margin devices (the average selling price paid by carriers for the iPhone last quarter was $610) and sells tens of millions of them per quarter (14.1 million of them last quarter). Apple doesn’t break out profitability by business unit, but iPhone revenues were $8.6 billion last quarter and corporate gross margin was over 36%, so iPhone profits are extremely robust no matter how the numbers actually break down. When Google sells an Android phone, it makes nothing, because Google doesn’t sell Android phones; Google licenses the OS for free.

Google claims that Android is profitable thanks to advertising revenues Google accrues down the line, but from that perspective, Google actually gets a fair amount of mobile advertising revenue from the iPhone as well. Google’s business model is different from Apple, allowing both Android and iOS to be successful at the same time. Right now, Apple outsells any individual Android licensee and outearns all of them combined. Even if Android takes an even larger share of the market overall, as long as Apple remains one of the top three or four smartphone vendors and continues selling high margin devices, Apple wins the real game among handset vendors, which is making money.

How likely is Apple to remain one of the top smartphone vendors over the next few years (i.e., large enough to continue to present a healthy target for app developers)? Bet on it. Apple has the lead in apps, consistently refreshes its hardware thanks to strong profits, leads in digital media sales, and owns an incredibly strong brand. Given its position and assets, there are only two things that could realistically knock Apple out: if Apple completely misses an inflection point in how smartphones are used, or if Google chose to use mobile advertising revenue to subsidize hardware (not just the OS), penalizing companies that charge for premium hardware. Either scenario is certainly possible, but rather unlikely, in the near term.

The pace of innovation at Google is astonishing, and Android has easier access to market segments Apple has chosen to avoid – entry level smartphones, QWERTY businessphones, orange square-shaped swivel phones aimed at tweens. However, Apple chose to avoid those segments for a reason: it can make more money by offering a consistent experience on a limited number of hardware variants. Apple is just fine with Google “beating” it in marketshare as long as it can corral the lion’s share of industry profits.


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