Competing in a Heated Android Market

As an analyst, I'm frequently asked for advice on buying different phones. I'm happy to give it, but when I "review" phones I am typically looking at it from more of a strategic angle. In other words, I'm trying to determine "how does this help/hurt the vendor/carrier," not "is this a good phone, per se." You'd be surprised at how many terrible phones sell well, and how many fine phones falter. It's my job to help vendors and carriers navigate these dynamics. With that in mind, here's my mid-year update on Android and the challenges vendors face when licensing it.

Handset vendors choosing an operating system have the same choice as you do when you're deciding whether to cook dinner or order take-out: build vs. buy. Building an OS from scratch not only requires technical expertise to compete with the best offerings on the market, but also the ability to galvanize developers to support the platform. Understandably, most manufacturers choose to source their OS from someone else. Android is the licensed OS of the moment, largely because the other options didn't innovate fast enough – Microsoft had to abandon Windows Mobile and start fresh with Windows Phone 7 and Symbian ought to be doing the same thing.

Android has a lot to recommend it in any case. It's backed by Google, which has a strong consumer brand. Android still provides the best integration with Google's services and its non-obtrusive notification system is the envy of annoyed iOS users everywhere. Google has also done a terrific job of creating an easy to use and widely adopted development environment. Android Market is growing quickly along with the installed base as there are now Android devices in a variety of form factors from many vendors at multiple carriers. It's free, sort of (vendors typically still need to pay for ancillary IP before they can ship a phone), and it's open source, sort of (Google tightly manages changes to the OS and only releases the source code at intervals it chooses).

There are plenty of weaknesses, too. The user interface is relatively complicated and appeals to those with a higher technical comfort level than iOS; the iPhone's deliberately simple operation still has the broadest appeal, ranging from simplicity-seekers to power users. Android offers limited social network integration out of the box, lacks any sort of PC client for storage and synchronization, and Google provides no consumer-friendly options for getting movies or TV shows onto the device.

The downside to choosing to "buy" Android rather than "building" your own OS is that you must then compete with all the other Android phones on the market. The question then becomes how to differentiate your Android phone from everyone else's. I have identified six different factors that vendors are using: price, hardware specifications, software customization, industrial design, availability, and carrier backing. I have a lot of analysis on each of these points, but here's a SlashGear summary:

Price – It is an axiom of business school textbooks that while you cannot always compete on price profitably, you can nearly always try. That is not necessarily the case for smartphones in heavily subsidized postpaid markets like the U.S. and the UK. Carrier subsidies and standard pricing levels (such as $99 and $199) obscure the actual price of the device, taking it out of the end consumer's buying decision.Hardware specifications – Differentiating based on unique hardware specifications can certainly be done, but the windows of time when a product is truly unique is shrinking because vendors generally all have access to the same components. That should not detract from the obvious: Android is much more competitive when using high-end hardware, and with the improved specs, Android has closed the hardware gap with Apple. Apple upped the screen resolution on the iPhone 4 to an incredible 640 x 960, but its screen size is stuck at 3.5". In practice, the iPhone 4 is better for reading text, and the larger Android phones are better for watching movies – assuming you can figure out how to get a movie on there in the first place.Software customization – Early on, it was fairly easy to create a uniquely compelling software layer on top of Android because the stock interface was rather rudimentary. The most recent editions finally feel like a complete OS without requiring vendor embellishments; 2.2 fixes a key usability issue by placing the phone call icon on the static ribbon bar, enabling users to quickly dial the phone without first having to search for it. However, there are still some areas where Android needs help: social network integration, media, and gaming.Industrial design – Most touchscreen phones today all share the same basic look (a thin slab dominated by a huge screen); the details differ, but all are reasonably attractive. As such, good industrial design is a requirement, but not enough to drive purchase decisions on its own. As the smartphone category matures there is room to segment the market with non-standard form factors, but these are not likely to be the volume sellers.Availability – Lately, it seems that any phone you want to buy is already sold out. The reasons for the inventory problems differ by product, but vendors who can control their supply chain have a decided competitive advantage.Carrier backing – In the US, carriers rule, and getting a piece of carrier shelf space is a prerequisite for volume sales. Every attempt to circumvent or break carrier control over handset distribution has failed, including efforts by Nokia, Sony Ericsson, and Google. Even Apple, which may be the only vendor with the brand and physical retail store network to actually pull it off, chose to work with carriers from the outset, and capitulated to the dominant subsidy model after just a single year. US carriers are also among the largest advertisers in the world – up there with beer brands and Coke. As such, carrier lineups and priorities matter as much as all the other factors combined. That does not mean carriers are monolithic. Some carriers need Android more than others, some are creating their own sub-brands, and each carrier wants to customize or lock down Android to various degrees.