Will Google Win The Mobile Computing War?

Reggie Middleton's picture

BoomBustBlog is just about the
only financially orientated publication that declared for nearly a year
now, the inevitable conquest of Google’s Android OS and ecosystem. I
feel our highly contrarian research and analysis has been proven correct
beyond a shadow of a doubt. Fresh off the heels of
“If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…” and Sony’s widescale adoption of the Android platform, we have Nokia’s apparent capitulation and what could be the (inevitable) assimilation into the “Borg”. After
all, they are just the largest manufacturer of phones (both feature
phones and smartphones) in the world – that is, at least they are for
now.

Google topples Symbian from smartphones top spot:

(Reuters) – Google’s Android dethroned Nokia’s Symbian as the most popular smartphone platform in the last quarter of 2010, ending a reign that began with the birth of the industry 10 years ago.
Research firm Canalys said on Monday phonemakers sold 32.9
million Android-equipped phones in the last quarter, roughly seven times
more than a year ago, compared with Symbian’s sales of 31 million.
The landmark piles pressure on Nokia as it struggles to reassert
itself at the top end of the mobile handsets market. The success
of the open-source Android operating system, which has become the
standard for most phone makers, leaves Google well placed as cellphones
are due to surpass computers for accessing the web. Among key players in
the industry so far only Nokia, Apple and RIM have not resisted using
it. … Canalys said the overall smartphone market grew 89 percent from a
year ago in the fourth quarter, with all vendors in total selling 101.2
million smartphones.

Stephen Elop, the Nokia CEO, is quoted as saying during the firm’s latest conference call (via endgadget):

“In Q4 we delivered solid performance across all three of our
businesses, and generated outstanding cash flow. Additionally, growth
trends in the mobile devices market continue to be encouraging. Yet,
Nokia faces some significant challenges in our competitiveness and our
execution. In short, the industry changed, and now it’s time for
Nokia to change faster.”

And from All Things Digital, he is quoted:

“The game has changed from battle of devices to war of ecosystems,” Elop said, adding later that “Our industry has changed and we have to change faster.”

Although Elop didn’t name any names, he did talk about the need for the company to “build or join a competitive ecosystem,”
suggesting that it might be open to shifting to a competing platform.
And while he wouldn’t confirm such a move, he said that the company
could pull off such a switch because of its strong brand and
relationship with operators.

Nokia’s operating profit dropped from €1.47b (€950m net) a year ago
to €1.09b (€745m net), suffering from the margin compression that I
warned would also befall the other two companies that have not embraced
Android as an OS, having decided to build their own – Apple (Apple on the Margin) and Research in Motion (Blackberries
Lost More Market Share Than We Bearishly Anticipated While RIMM’s
Share Price Spikes: Is It Time To Revisit the Bear Thesis?
).

Straight from the source, Canalys press release:

Canalys today published its final Q4 2010 global country-level smart phone market data, which revealed that Google’s Android has become the leading platform.
Shipments of Android-based smart phones reached 32.9 million, while
devices running Nokia’s Symbian platform trailed slightly at 31.0
million worldwide. But Nokia did retain its position as the leading
global smart phone vendor, with a share of 28%. The fourth quarter also
saw the worldwide smart phone market continue to soar, with shipments
of 101.2 million units representing year-on-year growth of 89%. The
final quarter took shipments for the year to fractionally below 300
million units, with an annual growth rate of 80% over 2009 (see table
below).

In Q4 2010, volumes of Google OS-based
smart phones (Android, OMS and Tapas) were again boosted by strong
performances from a number of vendors, notably LG, Samsung,
Acer and HTC, whose volumes across these platforms grew 4,127%, 1,474%,
709% and 371% respectively year-on-year. HTC and Samsung together
accounted for nearly 45% of Google OS-based handset shipments.

… The United States continued its reign
as the largest country market in terms of shipments, at more than
double the size of the Chinese smart phone market. RIM recaptured first
place from Apple, as the latter experienced its usual US seasonal dip,
and RIM benefited from the first full quarter of shipments for the
BlackBerry Torch. HTC successfully maintained its third-place ranking
in the US for the third consecutive quarter, driven by its speed to
market with the latest Android updates and new Windows Phone 7 devices.

‘The US landscape will shift dramatically
this coming year, as a result of the Verizon-Apple agreement,’ said
Canalys Analyst Tim Shepherd. ‘Verizon will move its focus away from
the Droid range, but the overall market impact will mean less
carrier-exclusive deals, while increasing the AT&T opportunity for
Android vendors, such as HTC, Motorola and Samsung.’ Android was by far
the largest smart phone platform in the US market in Q4 2010, with
shipments of 12.1 million units – nearly three times those of RIM’s
BlackBerry devices [the 2nd largerst platfrom]. Windows Phone 7 devices
appeared too late in the quarter to take full advantage of holiday
season purchasing. As a result, Microsoft lost share in the United
States, from 8% in Q4 2009 to 5% in Q4 2010.

Analysis of the published country-level
data shows that, around the world, the strength of smart phone
performances remained diverse. In South Korea, for example, shipments grew from under 700,000 units in Q4 2009 to just under 3.4 million units in Q4 2010, making the country a top 10 market. In Japan, Android
shipments have taken off over the past year, with nearly 1.4 million
units shipping from local as well as international vendors, such as HTC
. More Japanese vendors have also announced plans to launch Android devices in 2011, such as NEC Casio and Panasonic. Under pressure from Huawei and Samsung in particular, Nokia’s
share in China slipped to 56%, down from 76% a year ago, despite
growing its volume in the country by over 70% in the same period
. Albeit
from a smaller base, the Chinese market grew 134% year-on-year,
notably faster than the US market, which grew at 64% in the quarter
.

Canalys Smart Phone Analysis, Quarterly Shipment Data

Worldwide smart phone market

If there is any doubt to the Android onslaught, NPD has similar findings to that of Canalys, in that Android is outselling everything in sight.

… the Android smartphone operating
system (OS) significantly increased its market-share lead by 9
percentage points, since the prior quarter, to reach 53 percent of the
U.S. consumer smartphone market. According to The NPD Group, a leading market research company,
Apple iOS share declined 4 percentage points to comprise 19 percent of
unit sales in Q4; RIM OS fell 2 points to tie Apple’s 19 percent;
Windows Mobile, Microsoft’s legacy OS, fell 3 points to 4 percent, as
the new Windows Phone 7 OS debuted at 2 percent; and Palm’s WebOS held
at 2 percent.

… Despite buy-one-get-one promotions
at both AT&T and T-Mobile, the Windows Phone 7 OS claimed less
market share than its predecessor, Windows Mobile, for which handsets
are still available at all four major U.S. carriers. Windows Phone 7
also entered the market with lower share than either Android or webOS
at their debuts, according to NPD’s Mobile Phone Track.

“At CES there were announcements from
several handset providers of the intent to use the Android OS to bring
new capabilities to market, including dual-core processors, 4G network
speeds, and larger displays that seek to expand on the success of
handsets like the Motorola Droid X and HTC EVO 4G,” Rubin said.
“Android will encounter greater competition this year, however, as
Apple’s iPhone 4 — the best-selling handset in the U.S. — debuts on
Verizon Wireless.”

Top Five Handset Models Were All Smartphones in Q4 2010

Based on U.S. consumer purchases of
mobile phones in Q4 2010, for the first time there were no
feature-phone handsets in NPD’s top-five ranking. All top-selling
mobile phone models were smartphones, as follows:

1.    Apple iPhone 4
2.    Motorola Droid X
3.    HTC EVO 4G
4.    Apple iPhone 3GS
5.    Motorola Droid 2

Hat tip to BoomBustBlogger  H.Kwint for the following articles: Android gains 22 pct tablet market share -analyst

Bloomberg – Google Inc.’s Android software boosted its share of tablet computers almost 10-fold in the fourth quarter, narrowing the lead of Apple Inc.’s iPad, market researcher Strategy Analytics
said. Android devices captured 22 percent of global tablet shipments in
the three months to Dec. 31, up from 2.3 percent in the preceding
quarter, the Boston-based researcher said in a statement today. The iPad
accounted for 75 percent of shipments in the period, down from about 95
percent, it said.

This is absolutely amazing performance on behalf of Android.
Amazingly enough, none of these media outlets have commented on just how
amazing said performance actually was. You see, Android has not even
released a tablet OS yet. What Samsung, et. al. have been selling has
been hacked up versions of the Android smartphone OS, complete with
weaknesses and inconsistencies that come with forcing a small screen OS
onto a big screen. If you think Android has taken significant market
share from Apple thus far, wait until there are actually Android tablets
for sale!!!!

Apple’s iPad, which has sold more
than 14.8 million units worldwide since its introduction in April, faces
intensifying competition from Android tablets made by Samsung
Electronics Co., Motorola Mobility Holdings Inc. and Acer Inc.
Google gives away Android for free to boost revenue from services such
as mobile advertising and expand the market for its search engine. A
wider range of cheaper devices with Google features like YouTube and Google Maps will probably erode the iPad’s market dominance, said Neil Mawston,
director at Strategy Analytics. Its share of the global tablet market
will probably drop to 67 percent this quarter, he said. The cheapest
version of the iPad, which only has Wi-Fi connectivity and 16 gigabytes
of memory, costs $499 in the U.S. Acer plans to introduce an Android
powered tablet in April that will likely sell for as little as $299, Jim Wong, Acer’s head of information-technology products, said in November.

Expect to see Google shoot to the number one spot in the tablet
market just as rapidly (or not more) than they did in the smartphone
market. For those who have not recognized the difference between a
smartphone and a tablet OS interface, this video may help.

Larry Dignan, over at ZDnet,
feels that Android’s growth will be harder to replicate  for 2011. I
seriously disagree and (respectfully) don’t believe he could be any
more incorrect. He is referencing Verizon’s sale of iPhones as the main
reason. Let’s run down both some observations and facts to the
contrary.  To begin, let’s recap what appears to be the source of
Larry’s claim:

‘The US landscape will shift
dramatically this coming year, as a result of the Verizon-Apple
agreement,’ said Canalys Analyst Tim Shepherd. ‘Verizon will move its
focus away from the Droid range, but the overall market impact will
mean less carrier-exclusive deals, while increasing the AT&T
opportunity for Android vendors, such as HTC, Motorola and Samsung.’
Android was by far the largest smart phone platform in the US market
in Q4 2010, with shipments of 12.1 million units – nearly three times
those of RIM’s BlackBerry devices [the 2nd largerst platfrom]. Windows
Phone 7 devices appeared too late in the quarter to take full
advantage of holiday season purchasing. As a result, Microsoft lost
share in the United States, from 8% in Q4 2009 to 5% in Q4 2010.

To begin with, I think the Canalys analyst characterization is innacurate.
The iPhone/iPad will most likely divert Verizon’s focus from that of
mainly Android, but the Android has proven to be a true money maker and
has driven profits for all of the major carriers already and all but
three of the major handset vendors. Those three handouts failed to
triple or better revenues because they didn’t adopt Android (Nokia,
Apple and Research in Motion). Since Verizon really doesn’t have a dog
in this fight, it would be very unwise for them to pick sides,
particularly prematurely – that is unless they have signed some sort of
exclusivity agreement with Apple.

The iPhone is really just shifting distributors, while Android will be NET ADDING vendors.
As iPhone gains on Verizon, it loses on AT&T. Those who feel that
Verizon will offer better service should realize that they are just a
carrier and they can and probably will get bogged down by the extra
bandwidth use just as AT&T did. After all, they all basically lease
the spectrum from Sprint/Clearwire anyway. The only way Verizon can
prevent this network degradation is to implement caps and surcharges
which I can tell you as an ex-Verizon customer they are very prone to
do. Verizon is putting some marketing muscle behind Android, offering
deals to adopt new iPnones, but this aimed primarily at pulling existing
iPhone business from AT&T, not netting new iPhone subscribers. In
the meantime, AT&T is offering a trade in your old [iPhone] promotions, touting its newer, higher-powered Android offerings as an enticement. From BGR.com:

If you have not witnessed the AT&T dual core Motorola Atrix  in
action, you may be missing a new paradigm in form factors and usage. See
If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors
Though Verizon is probably slated to sell a lot of new iPhones, many of
those new phones will most likely be to existing iPhone users. AT&T
on the other hand, will most likely join the extreme revenue that every
other carrier enjoyed (but them due to being wedded primarily to the
iPhone) and sell (net, net) more new Androids than Verizon will sell
iPhones.

Then we have the margin issue with Apple again. I have been clamoring
that Apple’s margins will get chopped by Android’s commoditizng the
smartphone space – both on the lower and and the higher end. See Apple on the Margin
and my on air proclamation just hours before Apple released earnings
and declared – surprise, surprise – a drop in margins. Go to 3:40 in the
video…

Apple needed the Verizon distribution deal much more than Verizon
needed it. Android has already surpassed Apple by a significant margin,
and the iPhone hasn’t started selling from its new home yet. Thus when
it came to negotiating terms, it is essentially guaranteed that Apple
got nowhere near the sweetheart deal that it originally negotiated with
AT&T at $600 per phone plus a cut of the servicing fees. Although
AT&T consequently negotiated that outrageously Apple-centric deal
towards a more neutral perspective, it was still quite rich. Expect the
Verizon deal to come in at a fraction of that struck with AT&T,
which means that Apple will have to push more phones through Verizon
than it did/does through AT&T just to break even on previous
numbers.

The Canalys report is quoted: “More Japanese vendors have also announced plans to launch Android devices in 2011, such as NEC Casio and Panasonic.” Add to this the fact that Sony Bites The Bullet & Joins The Android Camp, Adding Its Entire Suite of PSOne Games To The Android Platform and even Nokia, currently the world’s largest smartphone vendor by installed base, may join the Android camp.

Then there is the most obvious. Larry Dignan is quoting a Canalys report which literally starts as follows:

Canalys today announced its
projection that Android will continue to grow at more than twice the
rate of its major smart phone competitors in 2011, despite market
concerns over platform fragmentation and the arrival of the iPhone 4 on
Verizon in the US. According to Canalys Q3 2010 estimates, the
Google-backed platform already claims a 25% share of the worldwide
smart phone market, with over 20 million shipments of Android-based
worldwide.*

‘The growth of Android has been
phenomenal, but so too has the number of related devices launched with
different hardware and software specifications,’ said Canalys Principal
Analyst Chris Jones. ‘This has led to the market perception of it as a
fragmented platform, though we believe that growth will continue as
the pace of Android OS upgrades slows.’

The analysts actually agree with the BoomBustBlog in full, save for
the fact that I don’t believe the rapid growth of Android innovation
will slow anytime time soon. This rapid innovation is how Google keeps
copycats at bay who wish to fork Android. Anybody, ex. Chinese companies
who attempt to fork will have an outdated OS in a matter of months,
about the minimum amount of time it would take to get a differentiated
product to market if you were one of the fastest vendors on earth.
Basically, Google is arranging it in such a fashion in that the only way
to benefit from the latest and greatest Android is to have Google’s
Android.

The momentum behind Android is indisputable now that it is the number
one selling OS in all markets. There have been several pundits stating
that this is not a zero sum game and that their is room for more than
one OS vendor to co-exist. While I agree that this is not a zero sum
game, it is far from a linear one, and the net effect may be similar to
zero sum. I have explained the logic behind this several times in the
past, from different perspectives:

  1. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  2. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  3. Apple on the Margin
  4. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  5. More of the Android Onslaught: Increasing Handset Revenues and Growth

Long story short, the more handsets carrying a specific OS sold, the
more advertisers and developers will be drawn to that platform. Google
can afford to compress margins to ZERO because it is not in the
hardware business and its OS is open source. Apple, Nokia and RIM have
no such luxury. Thus as the space is inevitably commoditized, margins are
compresses yet volume of units sold actually increase – Google
benefits at all other manufacturer’s loss… That is unless they are able
to do what Google has accomplished, and that is change the actual
business model of the industry versus combating the industry leader on
their terms.

Illustrative valuation model examples and complete interactive market share models embedded into the web page can be viewed in the original version of this post on BoomBustBlog.

More Reggie Middleton on Google:

  1. The Complete, 63 pg Google Forensic Valuation is Available for Download

  2. Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown

  3. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours

  4. Google 4th Quarter Performance: Strong Performance, & Better Yet Healthy Investment Into The Business

  5. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All

  6. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift

  1. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  2. This article should drive the point home: 
  3. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  4. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  5. RIM Smart Phone Market Share, RIP?
  6. Android is gaining preference as the long-term choice of application developers
  7. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  8. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  9. Apple on the Margin
  10. RIM Smart Phone Market Share, RIP?
  11. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  12. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  13. More of the Android Onslaught: Increasing Handset Revenues and Growth
  14. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  15. The Complete, 63 pg Google Forensic Valuation is Available for Download
  16. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  17. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  18. As
    I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing
    War! Their Marketing Campaign is PURE GENIUS! and it Appears as if
    the Phone Ain’t Bad Either
  19. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?

More Reggie Middleton on the Future of Mobile Computing

  1. The Future of the Mobile Computing Wars: Contiguous Rich Client Computing!
  2. Blackberries
    Lost More Market Share Than We Bearishly Anticipated While RIMM’s
    Share Price Spikes: Is It Time To Revisit the Bear Thesis?
  3. Will
    The Meritocratic, Playing Field Leveling Nature Of The Web Fall Victim
    To The Net Neutrality Scheme? If So, Many High Traffic Low Margin
    Sites (Read The Little Guys) May Go Bye-Bye