The smartphone market is maturing as its rapid growth slows. This maturation has led to big disruptions among manufacturers and massive shifts in their market share. Palm is dead. Nokia is dead. Blackberry is dying. Samsung’s star rose and is falling fast. Microsoft has lost billions chasing single-digit market share. Google’s Android runs on 80% of smartphones in use while Apple became the world's most valuable company. All of this happened in less than eight years. I see this as the first wave of the mobile revolution. Now, there's a second wave coming and it's breaking in China.
The second wave of the mobile revolution will be just as disruptive and we are starting to see how. Take what is happening to Samsung for example: In less than two years, they have gone from record sales to having Apple gobble up the premium smartphone market while Xiaomi gobbles up the mid-tier. Despite the breakneck speed at which Samsung's star rose, it has been snuffed out even faster: Samsung's mobile division is now a money-losing operation.
Meanwhile, iPhones are selling like hotcakes in China as the middle class snaps up Apple’s premium devices. iPhone sales in China are driving record breaking financial results in what should be Apple's slowest quarters. It isn't difficult to see why. There are more subscribers on China Mobile (China's largest mobile telco) than the entire population of the United States. But it's not just the affluent who are buying. Growing numbers of Chinese households making between $500 and $800 USD per month are choosing iPhones often as their primary computing device. Apple products have become inter-class status symbols in China where discerning customers flock to the added value Apple’s ecosystem of integrated devices, software, and bricks and mortar stores affords.
Apple has positioned itself to generate hundreds of billions in sales from China in the coming years while Google remains completely shut out of the world’s largest consumer market. Google services are blocked by the Great Firewall and that is not likely to change any time soon. This is a serious problem because Google's business model depends on gathering data about and from its users. Even if Google starts operating in China again, it won't be able to count on existing Android devices as a launch pad. Google’s largest hardware partner, Samsung, finds itself under crushing pressure from white-label OEMs, Xiaomi, and Apple. In China, both white-label and Xiaomi’s Android smartphones are stripped of Google services in favour of regional alternatives. iPhones run iOS which seem to have more Google services stripped out with every new version. This means that, in China, hundreds of millions of smartphones have little to no interaction with Google at all.
Android might currently have 80% market share, but Google is failing to capitalize on it. Despite a billion Android activations last year, the ecosystem is badly fragmented. There’s simply not enough of any one device, or version of the operating system, to offer any standardization. Fragmentation has become a daunting barrier to entry for software developers wanting to bring their apps to Android. It has eroded Google's app economy to the point where Apple App Store customers spend 4x more on apps than Google Play users. And that translates to iOS developers making 4x - 5x as much revenue as Google Play developers. The vicious cycle of Android fragmentation has led to iOS having the best apps, having them first, or Android not having them at all. It's a serious and growing disincentive to buy an Android device.
Android’s fragmentation problem is also why Apple Pay will continue to dwarf Google’s digital payment efforts. It is why HomeKit will dominate the market for the "Internet of Things" in your home. Android might have far more market share but, for software and hardware makers, iOS is a much larger addressable market. Apple's ecosystem is conferring more and more value upon its devices which, in turn, drives sales. Within Apple’s closed ecosystem, a rising tide only raises Cupertino’s boats. It is why Apple's market share continues to grow, contrary to the laws of market disruption and commoditization.
The consequences Google faces for Android’s fragmentation are becoming dire. While more than 80% of iOS users are on the latest version, less than 10% of Android users are up to date. In fact, the majority of Android users run an operating system more than two years old. Because of the critical mass of iPhone 5, 5S, and 6 owners running iOS 8, Apple was able to put a state of the art biometric sensor on a few million wrists. Building atop this new ecosystem, it rolled out ResearchKit for the secure collection, transmission, organization, and sharing of personal medical data. Apple has been busy while Google’s hands have been tied.
While Google's engineering capabilities are not question, it can not meaningfully implement a ResearchKit-like framework for dealing with big data in science, medicine, and health care. Android fragmentation denies Google both a large enough addressable market and enough early hardware adopters to take an initiative like ResearchKit to critical mass. Already, it appears Android Wear is DOA as Apple sold more watches on launch day than all Android watches sold ever. The ecosystem Google created seems unable to support Google's vision of big data analysis and machine learning. Isn't it rather odd that the company seeking to organize [read: monetize] the world’s data, has created an ecosystem that is incapable of collecting it?
Beyond issues with leveraging an ecosystem, there are big questions about privacy when it comes to your medical information and vital statistics. Are you going to trust an advertising company with the most private and personal data you have? By virtue of Apple's business model, it doesn’t monetize your data like Google has to. That means Apple is trusted in ways Google is not. All this to say Apple will soon become the largest provider of big data to medical research and health care. It is a role many would expect Google to be filling. That it is Apple instead speaks volumes on the state of Android in 2015.
As Android fails to keep pace with innovations in iOS, manufacturers are left fighting over the 7% of the industry’s profit that did not go to Apple. You read that correctly; Apple rakes in 93% of the global smartphone industry’s profits. As Apple’s market share continues to expand, Android manufacturers will find it even harder to turn a profit. Apple may not have waged thermonuclear war on Android like Steve Jobs vowed, but it has hurt Google where it counts by denying it access to the most valuable user data. Google collects no data from Apple Maps, iCloud, the iTunes Store, and Siri - each one a treasure trove to mine in its own right. But the news gets worse for Google's model. Despite Apple attacking its arch rival’s dependency on user data, 75% of Google’s mobile ad revenue comes from iOS. Google’s entire mobile advertising division would be losing money if it were not for iOS - an operating system Android was designed to undermine and undercut. If Apple decides to change its default search engine from Google to Bing or Yahoo, it will cost Google billions in revenue and leave a gaping hole in Google’s data footprint. I would not be surprised if Apple makes this move as soon as the June 8 WWDC keynote.
In order to exploit the world’s data, Google needs access to all of it. If it’s missing iOS users and it's missing China, Google’s business model faces and existential threat. It simply will not be able to monetize the habits and preferences of the most affluent 25% of the world, nor will it know anything about the needs and wants of what will become the world’s most valuable consumer market (China). Google's business model as it applies to mobile is breaking down. The market share Android ceded to iOS is not coming back. Wiith it went Google's opportunity to monetize that user data.
Android has run its course. It no longer provides hope to Google for monetizing mobile. It is a money-losing venture that failed to achieve its objectives. It is not something Google is going to keep doubling down on. No tech company in history has created and cancelled as many products as Google. It is wishful thinking to expect them to keep around something that is failing to meet its goals.
The writing is on the wall as Google adds features to Android that Apple's iOS has had for years. Google has already signalled that Android is no longer a priority. I predict that within two years, Google will divest itself of Android and leave it to the open-source community in order to focus on apps, services, and Chrome OS. Despite running on more than a billion devices, it is only a matter of time before Google decides to cut a boat anchor that is stuck on the bottom.