COLUMN :THE NEW RULES OF THE MOBILE ECOLOGY
Johnny Ryan

Senior Researcher, International Institute of European Affairs (IIEA), Author of A History of the Internet and the Digital Future and a Columnist with Businessweek

Ecosystem is key. The mobile OS giants have one guiding principle: the OS with the best selection of software applications available for its users will be most attractive to consumers, and will therefore attract yet more developers to create further software applications for them. The more devices that are sold, the more widely purchased and used apps are likely to be, which attracts more developers to write apps for the device, which makes the device more useful. This finally results in more devices being sold. The platform functions like an ecology in which the platform owner, software developer, and users – all play a part. Except, the rules seem to have changed, and that may not be true any more.

In early April 2011, HTC surpassed both Nokia and RIM in m-cap. HTC’s dramatic rise is a sign of the popularity of Google’s Android OS. Android’s market share has risen from 3.5% in late 2009 to over 25% in a single year. HTC was an early supporter of Android, and worked with Google on the first Android phone, years in advance of its release in October 2008.

However, though sales of Android devices surpassed Apple's in mid-2010, Apple remains the revenue leader. Google does not see significant revenues from its version of the App Store. This may in part be because of the very characteristics that make Android so popular: its openness and flexibility, and its ability to present network operators with a cheap iPhone alternative. The Android OS is open source (under the Apache 2 license). Manufacturers have the latitude to customise the device, though Google exercises a degree of control by – among other things – imposing a minimum standard of compatibility imposed by Google before they are allowed to use the Android Market app, or other popular Google apps such as Gmail and Maps. The manufacturer’s ability to customise means that Android phones range from cheap and slow to high-end, sophisticated devices. The user base of the Android OS, though bigger than the iPhone's, is therefore not necessarily as lucrative. As an example, consider 3D gaming on mobile devices. Games are the best-selling apps on the App Store, and the hardware required to run sophisticated games on a mobile handset is expensive. The latest instalment of the iPhone, the iPhone 4, comes equipped with 3D graphics acceleration hardware, which effectively places it in the bracket of a gaming device. Even high-end Android phones, have not yet defined themselves properly as game devices.

Nokia’s latest smartphone also has built in graphics acceleration. In February 2011, Nokia and Microsoft announced a strategic partnership to create a new ecosystem for Windows Mobile Nokia phones. Since Nokia shipped 450 million handsets in 2010, the scale of its supplier network will reduce the costs of Windows phones, giving developers and mobile networks a third option for a touch screen smart phone. Though Microsoft has produced a mobile OS for more than 10 years, Windows Mobile 7 is by far its best effort. Now, with Nokia as strategic partner, it may gain market share. This puts further pressure on the Android ecosystem.

Thus, while Google dominates the mobile OS market, its revenues from mobile app sales are insignificant. Both Google and Apple take a cut of 30% on all apps, but Google’s cut is a fraction of Apple’s. While sales through Apple’s App Store reached $1.78 billion in 2010, according to HIS research, the Android alternative reached only $102 million.

Thus, Apple, with a smaller percentage of the market is actually making more money on sales of software made through its device. Moreover, Apple announced a books and subscription service in February through which users could subscribe to news papers and magazines – and it will take 30% of revenue here too, adding to app sales and music sales through iTunes. Google’s revenues from the Android phone, for the meantime, are focussed on its core business of search advertising and its growing payments business. The implications for the ecological battle may be very significant.

The lesson here is – the strength of a mobile OS ecology is not just about the number of total users. It is all about the number of paying users!