Views from Phanfare CEO and Co-founder Andrew Erlichson

Link Day 3 with Android: Understanding Apple

In the United States, high-end Android phones and iPhones are essentially the same price. The Droid X was $199 after rebate, and the iPhone 4 is $199.

Apple made a very deliberate decision in the US to achieve that price parity. They gave an exclusive to ATT, a weaker carrier, in exchange for a whopping subsidy by ATT. The result is that Apple is able to hit the price point that they believed was a necessity to achieve mass market adoption of smart phones. But, they limited themselves to those people willing to use ATT, which is a clear #2 to Verizon in the US.

ATT traded a lot of their profitability to Apple to get the exclusive on the iPhone, a bet that has clearly paid off. Without the iPhone, ATT would almost certainly have shed subscribers to Verizon in the last few years.

But if you look at International markets that enforce transparency, we are able to see the pricing disparity of the iPhone versus Android. In Denmark, the six month cost to own an iPhone 4 is $885, versus $460 to own the LG GT 460 (android) or HTC Wildfire (android). The iPhone 4 cost of ownership is 2x.

And while it’s easy to guess that if Verizon had the iPhone 4, it would outsell Moto Android phones at the same price, the pricing probably would not be the same on Verizon. If Verizon offered the same subsidy to Moto and Apple, Droids would be cheaper.

Android is well positioned to be cheaper. Multiple handset manufactures (Moto, HTC, Samsung) are fiercely competing for consumers but those competitors are unable to differentiate themselves because they all run the same OS. The result is that consumers do shop based on price and the handset makers earn significantly less than Apple does.

Another factor that leads to Android being cheaper for consumers is that the carriers like Verizon junk up the handset with branding and offers. Like a PC with crapware pre-installed, the cost of the hardware to consumers is subsidized by the companies that pay to put their offers on the device. You can be sure that Blockbuster paid to have their app pre-installed on the Droid X I just bought. If Verizon had the iPhone, they would not get to offset the price off the handset by selling space to marketing partners. Apple would certainly not allow it.

Meanwhile, Google develops the Android OS and charges nothing for its use, content to play the long game and own the software platform so that it is receptive to Google advertising. All this has the effect of lowering the cost of the device to consumers.

The final factor that props up Android in the US is that Verizon, in a brilliant marketing play, owns the Droid brand, backs it with $100MM of advertising per year and doles out the Droid monicker to particular handsets if and only if the handset manufacturers is willing to accept tight subsidies and Verizon co-branding of the experience and crapware.

It really is Mac vs PC all over again. The Android OS is positioned as a multi-vendor, good-enough, cheaper alternative to Apple’s finely crafted but tightly controlled solution. But unlike MS that wanted to be paid to install their OS, Google is giving it away (for now).

Apple has enormous manufacturing scale now. Nobody can build an iPhone for less than Apple. And Apple is the early leader with more applications. Apple is the innovator. But ultimately, Apple will probably be a minority player in smart phones over the long haul, content to accept 20% of the market and 80% of the profits. Why?

The reason I believe is that Apple is driven by different goals than Google. Apple is driven by a desire to see their vision of the world realized. Their goal is self-actualization. In their vision of the world, smartphones are elegant, uncluttered and tasteful. They don’t have porn. They are not tainted by low-brow marketing tactics of the carriers. Apple allowed ATT to sell its holy iPhone only if they would sell it exactly as the artist, Apple, intended it. They could not brand it, put anything on it or control how its used. Is Apple controlling? You bet. And you can see Apple’s orientation in the spoof video they showed at the front of the Antennagate conference? You don’t like the iPhone 4? Don’t buy it.

Google on the other hand is driven by a desire to see open and free access to information. They see mobile as a growing and important way that consumers access information and they want to make sure they can continue to be influential there. In short, Google is hell bent to organize the world’s information (for free) and Apple is hell bent to bring elegance, grace and art to our lives, but only to those who appreciate it.

Android will win this war if your definition of success is handsets sold. When the iPhone eventually does come to Verizon, people will prefer it but only if its the same price and it probably won’t be. But the good news is that this time, unlike in the Mac vc PC battle, Apple will have an installed base of one billion devices at some point and there will always be great support from ISVs for the platform.

So who’s right, Apple or Google? Well, that’s hard to say. There are people starving in the world and yet we still have art museums. Is it more useful to dedicate yourself to art or to feeding the world? Both increase human happiness. It seems that we need a balance and with Apple and Google, we have it.

  • Andro

    Quite an interesting post, in fact a valiant effort to justify the hint of smugness associated with I-phone users. You defend the iPhone as better, something that only the true connoisseurs can recognize and afford. You state that if the rest of the population (80% ?) doesn't buy it, that's because they supposedly either doesn't get it or can't get it because of its premium price.

    I gotta give credit to Steve Jobs for his amazing talent. He made the Mac special, and again cast his spell on the Iphone. His message as the leader of the iPeople seem to be: “We are the few chosen ones, the true believers, plucked from the masses for a higher purpose”, before leaning forward to whisper: “We are special!” What a great marketing guru (or cult leader) he is. So much so that it's hard to imagine Apple without him. Just think of Sculley's Newton PDA for a glimpse of the future.

    The truth is somewhat less subjective. The hardware cost for the Iphone is only $187.50, and adding a little for assembly labor its total cost hovers around the $199 price you paid for it.

    Any amount above that goes to pay Apple overhead and profits. That goes a long way in explaining how incredibly profitable Apple has been for the last few years. And I would charge thru the nose too, if I had a unique and appealing product.

    But even with Apple's obscene profit, the Iphone is NOT an expensive phone (the European market is not a good proxy for actual costs, for a number of political and strategic decisions made by both the governments and phone manufacturers).

    Instead, and keeping it within our borders, let's compare the actual TCO of your two phones, the Iphone and the Droid. To avoid boring you with details I will just compile the conclusion:
    For two years, contract included,

    AT&T iPhone 4: $2,718
    Verizon HTC Droid Incredible: $2,838

    LOOK AT THAT! the iPhone is actually the lower-cost solution, trying to compete on price against a more desirable option (vox populi, because as you stated 80% of people prefer the Android – and even pay more for it).

    So we agree that the Android wins, hands down. The question then becomes the fate of iPhone. You hope it won't have the same end as the iMac, because this time Apple will reach critical mass to keep the iPhone alive:

    “Apple will have an installed base of one billion devices at some point and there will always be great support from ISVs for the platform.”

    Sorry to disappoint you again, but sales of the iPhone aren't growing fast anymore, and so far Apple has sold no more than 60-80 millions iPhones + iPads. And many were cannibalized sales, where iPhone fans simply upgraded their software. Moreover, many iPhone owners (like you) also own iPads. So the actual user base is likely smaller than 40 millions, and won't ever reach 1 billion with the increasing competition of the Android.

    Here's where this is leading:

    Steve Job retires in a couple of years as one of the richest man on Earth, and Apple and its products will go the way of the Palm: extinct.

    And that artistic concept called the iPhone, Jobs masterpiece, will keep on increasing human happiness, as a nice display piece in a museum of art.

    We'll be talking about that in our Android devices.

    The end.

    ______________
    TCO source: http://www.anandtech.com/show/3791/the-sprint-h…

  • http://blog.phanfare.com erlichson

    I noticed you did not register with a real email address for this blog. Are you in any way affiliated with anyone involved in the Android effort? If not, disclose your name, affiliation and background.

    If TCO is slightly higher today on the Verizon phone, it is because ATT is paying Apple a whopping subsidy. That subsidy is paid by ATT in exchange for the exclusive.

    I have now used both devices extensively and it is my opinion that if you offered a Verizon customer an iPhone and the currently shipping Android phones that most (not all) would choose the iPhone. It's the better executed product for most people who don't want to root their phones and install different ROMs.

    Also, there is absolutely no doubt that Apple has been the innovator here and Google the imitator. But what Google did innovate is the business model.

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