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Looking at the Results of Google’s “Negative Cost” Business Model Employed Through Android
The mobile computing field is growing by leaps while potential
casualties are already limping across the battle field before the second
round of ammunition has been fired – see Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!
We all know of Apple’s spectacular performance, but the media still
seems to allow such to overshadow the amazing progress of Android and
those entities that have embraced it over the last year or two. Let’s
take a look…
Google employs the “negative cost” business model through Android
where manufacturers and carriers are actually paid to use and sell it
after getting it for free (before any customization or special app
licensing). The result of such is a very compelling business
proposition, a business proposition that (shockingly) many people who
would be expected to know better believe does not make anyone money.
Well, the carriers seem to make better money on Android than they do on
Apple products – reference AT&T’s
Q1 Record Results Show That There Is More Money In Android Than
There Ever Was In Apple: How Do You Compete With Less Than Free? and Verizon’s Earnings Confirm The Economic Impact of Android vs iPhone In Regards To Carrier Profitability. If one were to review My Thoughts on Roger McNamee’s View of Google and Mobile Computing, you can see where I am coming from. I answered his comments in detail in the following posts:
- Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google
- A Realistic Look At The Success Of Google’s Investment History
Part of the answer is simply tracking the success of the companies
that have went nearly full Android, such as HTC. Take a look at the
historical picture, pre and post- Android…
Android through nearly all price
points, geographic markets and carrier platforms – therefore Apple has
no choice. Apple has always thrived as a niche company, and entering a
space that is being rapidly commoditized by Android is dangerous and at
the very least guarantees margin compression. It is not as if money
can’t be made in the space, but it is much easier to make money in the
commoditized space when you don’t have to pay for the OS development,
you know like the Android adopters. Witness the success of my
historically favorite (at least for now) handset maker, HTC after they
invested full on into Android and benefited from the commoditization of
the high end smartphone…
The Android drives revenue/profit scenario
is not endemic to just HTC. Notice Samsung, LG, Motorola, etc. – all
have made a bundle on Android. Reference the carriers who sell more
Android devices than anything else, and get kickbacks from revenue
shares. I simply disagree with Mr. McNamara’s observations, as do these
charts above.
The HTC story actually gets better, much better. Taking a look at how
they performed in the most recent quarter, they actually make Apple’s
results look tame. HTC ships 9.7M units in Q1, revenue up 174% year-over-year, reporting Q1 earnings that sported outrageous growth in practically every metric that mattered:
- 9.7 million units shipped, a 192% increase from the same quarter
last year and a 6% increase from the previous holiday quarter, - Revenues of NT$104.16 billion, up 174% year-over-year and 0.1% quarter-over-quarter,
- Gross profits and total assets also blew up by 162.2% and 75.1% respectively year-over-year.
- The company expects shipments to be between 11 million and 11.5
million units in Q2, which would represent a 100+% increase
year-over-year.
HTC actually makes the smartphone that I personally use for business,
the HTC EVO, and I have been using HTC phones for about 8 years or so.
The Evo was the first phone that was widely accepted as being a better
product than Apple’s iPhone. Of course, widely accepted doesn’t mean
universally accepted. A technology refresh is due next month with a
fresh dose of Android which includes processors faster than desktop
processors from just a few years ago as well as 720P HD, glasses-free 3D
video (and still pics) record and playback, as well as 1080p 2D record
and playback. We’re talking some heaving doses of tech and functionality
here. Apple’s biggest suppliers (the most important parts vendors for
the products that contributes about 75% of Apple’s profits) and the
companies that Apples is currently embroiled in global litigation with
(no wonder why) also produce similar products, ex. the LG Optimus 3D and
the Samsung Galaxy S II.
Speaking of the Samsung Galaxy, this newest refresh is nearly
universally thought of to be the best smartphone available, including
the Apple iPhone. I haven’t found a single review yet that has said
otherwise. This is an impressive feat considering how “Apple-centric”
the media currently is. Reference this snippet from Endgadget:
For a handset with such a broad
range of standout features and specs, the Galaxy S II is remarkably
easy to summarize. It’s the best Android smartphone yet, but more
importantly, it might well be the best smartphone, period. Of
course, a 4.3-inch screen size won’t suit everyone, no matter how
stupendously thin the device that carries it may be, and we
also can’t say for sure that the Galaxy S II would justify a long-term
iOS user foresaking his investment into one ecosystem and making the
leap to another. Nonetheless, if you’re asking us what smartphone to
buy today, unconstrained by such externalities, the Galaxy S II would
be the clear choice. Sometimes it’s just as simple as that.
Endgadget is not the only reviewer to go head over heals over Android super-powered phones. Check it out, courtesy of onlinesocialmedia.net:
- Dan Sung of Pocket-Lint
rates the phone with 4.5 out of 5 stars and calls it a “cracking
experience” and like Engadget, “better than any other Android
smartphone.” Very minor complaints included the 1080p DLNA streaming,
which was noted could be better, plus minor quibbles with the camera
lens but overall the conclusion is that “no one buying this superphone
will have anything to complain about.” - Chris Davies over on Slash Gear. Guess what, Davies also says, “this could well be the best Android smartphone on the market today” and noted that iPhone users that were shown the Galaxy S II said they could have their heads turned by it. There were minor criticisms, such as the <>keyboard,
but these were said to “pale in comparison to the Samsung’s strengths.”
In conclusion Davies says “we’re running out of reasons not to buy the
Galaxy S II.” - Electric Pig by Ben Sillis, who gave the phone a staggering 5 out of 5 star rating and says “Samsung has triumphed again with theSamsung
Galaxy S 2.” There are some quibbles about software in this review but
not enough to get in the way of it being a “surefire contender for phone
of the year,” and again the superb display gets a special mention.
Be aware that Samsung builds the chips for Apple’s iPad and iPhones,
is embroiled in a 4 or 5 country IP lawsuit with Apple, and also happens
to build their own proprietary chip for the phone above and most likely
the chips for their new (thinner, faster, lighter and possibly less
expensive) tablets as well. It appears as if the stuff they build for
their own Apple-competing products are cheaper and faster than what they
produce for Apple. This puts Apple in a bind as they not only compete
directly and sue Samsung, but will have a problem as they cannot quickly
jump to another vendor that can produce the volume and tech that
Samsung does. What happens when your biggest and most valuable vendor
becomes your biggest biggest competitor and you start suing them? What
happens when they produce superior tech for their own competing
products? Well, we’re about to find out. We may also find out what
happens when your second largest and most valuable supplier does the
same, for LG is going full steam ahead with high end Android tablets and
phones as well, supplying equal or superior screens for their devices
as well.
This also begs the question, “What happens when the market tightens
up on either the supply or the demand side?” I anticipated this several
months ago when I penned, “Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!“. Well, in the news (due largely to the issues that Japan has faced), “Component shortage to hit tablet makers“.
When things get scarce, whose products and enduser customers do you
think LG and Samsung will cater to first? Their own or Apples?
- advertisements -
how come apple never entered the game console market.... its everything they dream of closed systems, billions of cross licenses, consumers hooked on 4 button pretty pieces of plastic
.
iphone 5 lol.... its like... macintosh 5... and thats really how they roll wear out a good idea until people who never got it dominate the market place...
.
anyone can make an app that puts a bullet hole in Osamas head, its the 21st century
HTC down 7% today. TV sales also down. Has strapped consumer lost his zest for expensive gadgets with little or innane content ?
"We all know of Apple’s spectacular performance,"
I suppose this is the most we are going to get out of you ;-)
Actually, I have spent the last couple of weeks picking Apple apart, forensically. I am very, very impressed by their cost management, foresight, and the ability to innovate (product and business model-wise) around considerably slower yet better established competition. Kudos definitely goes out to management. The point of disagreement is that I see Apple as a company while others see it as a religion and the CEO as a deity :-)
My (and my analysts) thorough peaks into Apple have all but corroborated my earlier perceptions. For instance, it appears as if Apple has turned its aggression against Samsung because Samsung has effectively locked Apple out of volume access to the next (as in the end of the month) generation of the highest performance chip operating on the thinnest fab. Samsung will use it and Apple cannot since they relied on Samsung for fabrication at the same time that Samsung is Apple's largest Android competitor, hence is Apple's largest competitor outside of Google itself. There are not a lot of places for someone with the high volume needs of Apple to go, which is one of the many reasons why you don't have an iPhone 4g or 4gs and why the iPhone 5 release has been pushed back towards the end of the year in lieu of the historical july-ish release date.
Let's talk briefly about Samsung and Google.
Samsung obviously know how to manufacture. But they suffer the same ailment all the other phone manufacturers suffer. They have no idea how to deal with user friendly software and support. When the iPhone first came out I had mine and I sat next to s senior Samsung person on a flight. He was not a Korean. I remember getting off the plane thinking these people have no clue.
In comes Google. They obviously know what software is. But they are literally androids. They think the world can run without human interaction. They certainly dint know anything about music software or other creative applications. Those, in addition to productive applications, are driving the APPL ecosystem. The games are a throw in that generates huge income.
My simple conclusion is, all other things being equal those two companies are not very high touch in terms of the creative/human side of the universe. Someone has yet to come up with a content platform that rivals the functionability of iTunes.
If they don't solve this problem, which is a cultural problem, APPL will continue in the drivers seat....IMHO
iTunes is Apples biggest weakness. It's interesting that you think it is a strength. It is big, slow and bloated and most importantly it ties all mobile users to the desktop. I can get every single thing on my Evo that an iPhone user can get from iTunes without going near a desktop computer (or notebook), putting up with bloat, or syncing through USB.
I can easily manage my entire library from the cloud or the phone. I strongly suggest you check out the competition.
+1
iTunes ends up being a ball chained to your iSomething.
i'm not sure where Reggie gets the idea iTunes is "slow and bloated" as i've had no speed problems... but i agree the model (selling music) is in diseased Dino stage of its life cycle with death knocking on the door.
In fact it's the music industry model dying, time for the free music model ...the Rolling Stones 20 years ago made more touring and from merchandise than they did from album sales... it's remarkable the industry hasn't shifted to this nstead of flog a dead horse clinging ever more desperately onto the past!
When things get scarce... who do you think LG and Samsung will cater to first? Their own or Apples?
So what Reggie?
So there's a wait list at Apple. Do you think Apple customers are going to jump ship to Android? You can whistle Dixie while you wait coz it won't happen. It might mean a quarter missed targets but exceeded the next quarter. Big Fajita!
People could have seen the coming domination of Samsung way back in June of 2007:
http://www.youtube.com/watch?v=I3071WuqgTs
Seriously though, Reggie has been stating the obvious for some time now, specifically, this will all end for Apple the same way the PC wars ended for Apple, because ultimately it's ALL ABOUT SOFTWARE and being an arrogant, greedy blowhard towards software devs is dooming his products. Not that hard to figure out, but Reggie has never claimed unquestioned brilliance, only an unquestioned commitment to reality.
I think the best indicator was the release of XOOM's sales for the quarter: 150,000 total. Of course it didn't ship until 2 Months in but even at 450,000 , it's a little short of the supply constrained 4.7 Million iPads sold.
Apple just used it's balance sheet to the tune of 11 Billion to secure parts. No one could possibly match that. The parts shortage will soon end at least for Apple. Lets not forget they also know how to manufacture, source and cost. They have the institutional knowledge to either open a factory overseas or here. They have the cash to pay for it without taking on debt of any kind.
I've followed Apple since 1980 and the only time they got in trouble was when Steve Jobs got ousted. It crested in 1997 when he came back. Then it turned around within 2 years.
First the new iMacs: "They'll never sell , they don't look like PCs, they are hard to add on upgrades to yadda yadda yadda as people went nuts over the new design.
The iPods and iTunes: "That will last a few months. That's so easy to copy". Yeah look at only the year over year sales and the cumulative sales since the prescient statement was made by millions of doubters.
iPhone: Same thing "Everyone will copy it, Apple will never make a dent in the highly competitive world of Cell phones". Now of course we have new phones that after 4 years may make an Apple user think twice according to reviews. Gee after defining the category with over a 100 million sold world-wide while developing a hard to penetrate eco-system around each product, you would think the Apple Haters would turn to another company.
iPad: "This will be Apple's undoing. No one has ever been successful selling tablet PCs." "Ok so they are selling a lot of them but it doesn't have near the features" of the soon to be released competitors models on a operating system that's still in hard beta frustrating users to no end.
Oh yeah , They still sell computers.
Find me one 31 year old company in the Fortune 500 growing at 100% each year as well as growing profits and cash flow through flawless execution where annual profits are on a run rate of 25 Billion net. Sales? 100 Billion +. Cash on hand 66 Billion dollars. Products in the pipeline, a rock solid O/S for computers and their smart product line, plus they happen to sell content too.
Me, I kind of like a company that has captured virtually all the profit from the device to the content. Eventually Google will have to charge for that O/S as it pours more resources into it to compete with Apple as it's core search product and ad programs that support the free O/S are now being challenged by some erstwhile competitors.
Carriers will have most of the say over who makes it and who doesn't. I would hate to have a product out that is dependent on a free O/S given out by a Public Company, dependent on kickbacks from Carriers who seem to be consolidating enough that manufacturers vying for their attention will have to make better offers to get their phones in the line -up while Apple piles up the cash to buy out or take control of a myriad of carriers. I wouldn't want that staring me in the back.
Features? Geek shit. Total Geek shit. There are still people running their companies on MS-DOS computers. 99% of users don't care about features, especially if the involve any learning curve at all. The only care about them when the "features" crash the product they bought.
The reason Dell's market cap is now 10% of Apple's when it was once 20x greater which gave M Dell confidence enough to slam Apple by saying they should return the cash to the shareholders and liquidate in 1997, as he proudly showed off the business model that everyone thought Apple should have. Dell would be lucky to be in business if they had kept at it.
Ever Since Jobs came back, his detractors willfully blinded themselves to the fundamentals of investing. They look for pepper in fly shit to proclaim the next calamity that will drive the company into the ground. No company lasts for ever. Hell 2008 showed us that. But consider where we would be without Apple. Think Microsoft would have been under any pressure to develop a version of Windows that works..?.. which is still somewhat debatable mainly because of the business model?
Apple doesn't really come up with new ideas, they take existing ones, add on and execute flawlessly in commercializing them. In other words they just make shit work for people who don't care about processors, memory, capacity and other features. They market and sell better than anyone. They have brand equity that allows them to charge a smaller but still good premium over competitors products that are jammed packed with features that 1% of it's users will make use of and the rest wouldn't understand them.
To try to predict that this product or that product will turn 100s of millions of users world wide always has been a exercise in futility, because it discounts to zero the Brand, the user base, and the weaponized balance sheet along with ongoing R&D. It's much easier to build on a O/S where all the hardware features are under ones control.
At least Microsoft Charged for their versions which allowed them the cash to make improvements from "great for geeks" to use in Modern day homes and offices. I don't see where the primary driver of Apples many wannabes, Google , is going with a free O/S that's becoming increasing complex to match to Apple's without charging for it. Once they do, and they will, it then starts to look more and more like the business model that drove hundreds of PC clone makers and their shareholders broke.
Being in the business of copying success seems to work for generic drug makers but wouldn't if big Pharma didn't have the blockbuster mentality that drives them to overpay for new companies and products that could give them a multi-billion dollar blockbuster if they could just get the Govt to give it patent protection for 10-12 solid years and they could find enough people to pay up to xxxxx% over cost.
The difference between Apple now and the Apple of the 1980s is they understand they have to set the standards and be the dominate player in the market. They are doing a damn fine job at it too.
they have had a great run, they could do nothing forward and continue profit handsomely just from their app market and their ecosystem...that does not mean they can do it forever....maybe they will do it for another 25 years...and no their faltering was not solely to Jobs being around, it was largely due to same issues that will be surfacing in the next year....they extracted great profit and high margins from a closed elegant system but along came cheaper options that were good enough, so they were left with a small market share that still provided high margins.
But this time, the competition is Android and Android phone makers....HTC and Samsumg are IBM, no Compaq and Android is no Windows....they are better in many ways for the average consumer than Iphone, iOS...that was not the case with Windows, not the case with the initial Wintel hardware.
I'm not saying the harware makers will get rich, but Apple will fall in a way eerily similar to their PC fall...
And for all you Xoom haters, consider the tablets coming onto the market, including Amazons...it will take a while for public to catch on how good some of these tablets will be and it will take a while for the Android tablet market to compete with Apple's...but the first Android phones weren't huge sellers either...
Read the comment sections of the product review links that I put in this article and then answer your own question. How do you think Apple gained the momentum that it has? Answer: By outmanuevering the competition. Do you really believe that the abiity to outmaneuver vanished once Apple grabbed the baton? I have an iPad and I'm dumping Apple and I'm not by myself.
i'm sure Apple won't rest on its laurels Reg... their only problem on the iPad tablet is they can't ship enough
You write, "Apple has always thrived as a niche company.. entering a space that is being rapidly commoditized by Android is dangerous and at the very least guarantees margin compression."
Yes Porsche and BMW have suffered this exact same problem since Hyundai began selling nicely designed cars at low prices. Their prices and margins have gone..... nowhere!
And I'm sure the Germans quaked in their boots when Tata brought out the Nano for $1,250. Did you see the margin compression in their $70,000 saloon cars. Yep they were $69,999 next day!!
Apple have a niche (private) customer base who won't move to lessor commodity (cheap as chips) copy-cat competitors. The other brands are catching up but like BMW they look like they can manage a lead having trounched a whole host of the biggest giants on the planet (Microshite, Google, Nokia etc)
Look carefully and you will see that is not true.
Nice try, but Toyota made a dent with the Lexus brand in the high end luxury market, didn't it? You appear to be playing favoristism versus looking at the facts for what they are?
And herein lies the problem. What would make you believe the competition is a lessor commodity (the are all commodities made from the same components) when 5 reveiws above uninamously state that the new Android is the best phone available, bar none and last year many said the same of the Evo - and in that time span Android has taken the pole position in both national and global market share, as well as market share growth rate? Apple saw a bump from Verizon, but they can't launch on Verizon every month.
"Toyota made a dent with the Lexus brand"
Yes in America where the consumers of luxury cars are uneducated Yanks (bunch of tarts) who can be swayed with some bling-bling in the cockpit and a Supersize-Me Big Mac cupholder. Apple consumers are alot more knowledgeable and discerning, more like European luxury car consumers, and know their jumbo burgers from fillet steaks
"What would make you believe the competition is a lessor commodity.."
because all without exception have copied Apple to hell
"..they are all commodities made from the same components.."
Yes so go buy a Tata Nano, it's the exact same components as a BMW! ..let's dumb-down all consumers to un-discerning Droids to fit your Google 'we all want cheap' Android storyline shall we?
"..5 reveiws above uninamously state that the new Android is the best phone available.."
Have you seen the state of journalism Reggie? Is there any magazine that can't be bought on the planet?? Answers on a Postcard to: Born Yesterday, Crones for Rent, c/o CNBC
"Android has taken the pole position in both national and global market share.."
Yes yes fine. Google has the biggest dick. But Apple isn't after market share, they're after special share. Apples niche is the premium future shaping technology leading smoothy. The day Porsche dumps its high engineering ideals to produces a commoditised hatchback for $5,000 and goes for market share is the day Porsche isn't Porsche but a doormat (like Google)
Googles spread and pricing structure scares the crap out of me. It looks like a pyramid of junk that could implode like sub-prime mortgages. Ok it might be the next genius like Ryanair in mobile phones but that doesn't threaten Apple who are in a niche of their own. Google can give their droids away (they are aren't they?) and Apple will just come up with iDroid 3 times smarter and smoother
Unfortunately your argumentation blows up in your face: the West-European consumers bought only 2.6% of their new cars from Hyundai in 2010.
I'm planning to dump Apple for Android platform when I renew my phone contract later this fall.
Reggie, you've got one defector, get your trumpets out it's probably your last!!