- Mar 24, 2011
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Summary: Google is seeing some 1.5 million new Android devices being activated daily, but is the Android ecosystem too focused on market share rather than profits?
By Adrian Kingsley-Hughes for Hardware 2.0 | May 30, 2013 -- 08:51 GMT (01:51 PDT)
There's little doubt that when it comes to the battle of the mobile operating systems, Android commands a massive lead over the other players. But is market share all that matters?
On the face of it, having a strong market share might seem good. After all, increased market share means more people using the product, which in turn means more buzz and a healthier ecosystem. After all, seeing 1.5 million new Android devices being activated daily can't be a bad thing, right?
Problem is, market share numbers ignore one vital factor: profit margins. And, as investor John Kirk reminds us in a piece over on Techpinions, there's no point losing money on every sale and then trying to make it up in volume. All you're doing is digging a deeper hole.
He reminds us of the old joke where two farmers buy a truckload of watermelons for five dollars a piece which they later sell for four dollars each. Counting their money at the end of the day, they realize that they've ended up with less money than theyd started with.
"See!" said one farmer to the other. "I told you we should have got a bigger truck."
According to Kirk, there are a number of better ways to work out who's winning and who's losing in a particular market, and market share isn't a factor in any of them. The only factor that counts in his eyes is profit.
And, as Kirk quite rightly points out in another piece over on VentureBeat, many of the big names in the Android ecosystem are losing money or, at best, barely breaking even.
Apple, on the other hand, is doing very well indeed from iOS.
So, while Android might be crushing iOS and the competition in terms of market share, Kirk believes it is doing so by sacrificing the lifeblood of all businesses: money.
"But," Kirk points out, "market share isnt necessarily a leading indicator. Profit comes from a combination of market share times margins, and people are completely ignoring margins."
Parallels are also drawn between the Android/iOS war and another similar war that has been raging for years, which is the war between the PC and the Mac. PC OEMs increasingly cut margins in order to capture market share from one another, until prices were driven to the point where it became hard for anyone to make a profit from PCs. Compare this to Apple, which kept prices at a healthy level, and worked on its margins rather than obsessing over market share.
"Market share is like advertising," says Kirk. "A huge audience is fine, but its much better to have a very focused, targeted audience."
While what Kirk says makes a lot of sense, there are some points which I think he ignores.
Does Kirk expect the Android players to simply pack up shop and walk away from the smartphone and tablet markets in the face of Apple's might? Competition is what makes the economy work, and there are always winners and losers. Kirk seems to be advocating that we jump straight into calling Android a loser and move on.
Some players, specifically Samsung, are making money from Android. Here, playing the market share game seems to have paid off.
Then there's the whole issue of the smartphone market being oddly skewed because of subsidies. As analyst Sameer Singh points out, this could lead to a "profit trap" for the dominant players.
"Profit share in the smartphone industry is currently skewed, because of the economics involved," Singh writes. "Smartphones sold in markets with higher purchasing power are mostly subsidized, which ensures that today's major brands dominate. Smartphones sold in markets with lower purchasing power are mostly unsubsidized, which ensures the dominance of low-end phones, and a number of low-end vendors (with far lower profits)."
The problem comes when the lead that the big players have is eroded as the competitors' products become "good enough."
"However, as products become good enough, pricing pressure and supplier bargaining power limits profits. This 'profit share trap' becomes more problematic as investors & analysts continue to expect the same, unsustainable level of growth and profitability. The only way to escape this trap is by diversifying (IBM is an example), becoming a services/software/component supplier to the increasingly competitive OEM space (Samsung has the advantage here) or by the riskiest approach: attempting another disruption (Apple's rumored iWatch seems to be such an attempt)."
It's far too soon to write off Android.
By Adrian Kingsley-Hughes for Hardware 2.0 | May 30, 2013 -- 08:51 GMT (01:51 PDT)
There's little doubt that when it comes to the battle of the mobile operating systems, Android commands a massive lead over the other players. But is market share all that matters?
On the face of it, having a strong market share might seem good. After all, increased market share means more people using the product, which in turn means more buzz and a healthier ecosystem. After all, seeing 1.5 million new Android devices being activated daily can't be a bad thing, right?
Problem is, market share numbers ignore one vital factor: profit margins. And, as investor John Kirk reminds us in a piece over on Techpinions, there's no point losing money on every sale and then trying to make it up in volume. All you're doing is digging a deeper hole.
He reminds us of the old joke where two farmers buy a truckload of watermelons for five dollars a piece which they later sell for four dollars each. Counting their money at the end of the day, they realize that they've ended up with less money than theyd started with.
"See!" said one farmer to the other. "I told you we should have got a bigger truck."
According to Kirk, there are a number of better ways to work out who's winning and who's losing in a particular market, and market share isn't a factor in any of them. The only factor that counts in his eyes is profit.
And, as Kirk quite rightly points out in another piece over on VentureBeat, many of the big names in the Android ecosystem are losing money or, at best, barely breaking even.
Apple, on the other hand, is doing very well indeed from iOS.
So, while Android might be crushing iOS and the competition in terms of market share, Kirk believes it is doing so by sacrificing the lifeblood of all businesses: money.
"But," Kirk points out, "market share isnt necessarily a leading indicator. Profit comes from a combination of market share times margins, and people are completely ignoring margins."
Parallels are also drawn between the Android/iOS war and another similar war that has been raging for years, which is the war between the PC and the Mac. PC OEMs increasingly cut margins in order to capture market share from one another, until prices were driven to the point where it became hard for anyone to make a profit from PCs. Compare this to Apple, which kept prices at a healthy level, and worked on its margins rather than obsessing over market share.
"Market share is like advertising," says Kirk. "A huge audience is fine, but its much better to have a very focused, targeted audience."
While what Kirk says makes a lot of sense, there are some points which I think he ignores.
Does Kirk expect the Android players to simply pack up shop and walk away from the smartphone and tablet markets in the face of Apple's might? Competition is what makes the economy work, and there are always winners and losers. Kirk seems to be advocating that we jump straight into calling Android a loser and move on.
Some players, specifically Samsung, are making money from Android. Here, playing the market share game seems to have paid off.
Then there's the whole issue of the smartphone market being oddly skewed because of subsidies. As analyst Sameer Singh points out, this could lead to a "profit trap" for the dominant players.
"Profit share in the smartphone industry is currently skewed, because of the economics involved," Singh writes. "Smartphones sold in markets with higher purchasing power are mostly subsidized, which ensures that today's major brands dominate. Smartphones sold in markets with lower purchasing power are mostly unsubsidized, which ensures the dominance of low-end phones, and a number of low-end vendors (with far lower profits)."
The problem comes when the lead that the big players have is eroded as the competitors' products become "good enough."
"However, as products become good enough, pricing pressure and supplier bargaining power limits profits. This 'profit share trap' becomes more problematic as investors & analysts continue to expect the same, unsustainable level of growth and profitability. The only way to escape this trap is by diversifying (IBM is an example), becoming a services/software/component supplier to the increasingly competitive OEM space (Samsung has the advantage here) or by the riskiest approach: attempting another disruption (Apple's rumored iWatch seems to be such an attempt)."
It's far too soon to write off Android.
