Apple Should Be Paranoid About Android

JANUARY 18, 2011   wall street journal

By MARTIN PEERS

Apple investors' biggest concern right now is whether Steve Jobs will remain deeply involved with the company. Whatever happens, though, Apple still faces a long-term strategic question: Will it be content to be a high-end niche player in smartphones?

Having Verizon selling the iPhone means phones running the Android software are in for a tougher time in the next year or two. Helped by the fact it only faced competition from the iPhone on the AT&T network, Android accounted for 34% of North American smartphone sales last year, compared with Apple's 23%, Strategy Analytics estimates.

In the rest of the world, where Nokia is dominant and Apple is available more widely, Android's 16% market share was only slightly bigger than Apple's 14%.

Longer term, though, Android has one clear advantage over Apple, which can only become more important: price. While it isn't apparent to consumers because of carrier subsidies, the wholesale price of an iPhone, at about $600, is $100-$150 more than the typical high-end Android device, estimates Sanford C. Bernstein analyst Pierre Ferragu. That makes it less crippling for carriers to offer low-priced deals on Android phones, such as "buy one, get one free."

And there are plenty of mid and low-end Android phones available with even lower wholesale prices. That is allowing carriers to offer the devices even to the lower end of the market. T-Mobile, which introduced a $10-a-month limited data plan last year, gives away a Huawei-made Android phone to customers signing up for contracts. After subsidies, the latest iPhone model costs at least $200.

This means the smartphone market, and Android's share, will continue to expand. Indeed, Canalys projected Wednesday that Android would expand at "more than twice the rate of its major" rivals this year. Of course, the allure of the iPhone brand will ensure it remains a vital part of carriers' array of phones. That is arguably truer in Apple's home territory of the U.S. than Europe. But there is reason to think Apple's edge over other brands has narrowed somewhat.

A consumer survey last November found that 71% of Motorola smartphone customers were very satisfied, only six percentage points fewer than the 77% of iPhone customers, according to ChangeWave Research. HTC, an Android pioneer, had 63% satisfaction.

For carriers, meanwhile, the revenue benefit of Android phones is just as good as the iPhone, at least based on European experience. Bernstein estimated recently that the lift in average revenue per user signing up for a smartphone there is now about the same for the iPhone as for various Android devices, about 25%-26%.Bernstein also noted that about half of iPhone sales in Europe today were replacements, which means the phone isn't bringing in as many new customers as it once did.

With both Nokia and BlackBerry maker Research In Motion struggling, Android is poised to become the world's biggest smartphone platform. While Apple's software also is on the iPad and iPod Touches, broadening its market share, falling far behind Android could undercut Apple's edge with developers of mobile applications. It has been Apple's lead with apps—its App Store has more than 300,000 versus 100,000 for Android—that has fueled the iPhone's popularity. If Android takes the lead in apps, its market-share advantage would only increase.

The question, then, is whether Apple will be willing to do what it hasn't done in personal computers, which is to go a little down market with its pricing. That would likely dilute Apple's famously high margins on the iPhone. But failure to do so might end up doing even more damage.

—Martin Peers

Write to Martin Peers at martin.peers@wsj.com