Bloomberg News recently conducted a wide-ranging interview with Google Chairman Eric Schmidt and the headline comments that are lighting up the technology world point to Schmidt’s belief that Google is “winning” the mobile platform “war” against Apple. If Schmidt defines winning by market share, he is correct. But if one defines it according to profits and market capitalization, Apple is clearly winning that war.
Here’s my own view. Let’s start with how the Bloomberg article leads into Schmidt’s statements:
Google Inc. (GOOG)’s Android is extending its lead over Apple Inc. (AAPL) in the mobile-software market at a rate that compares with Microsoft Corp. (MSFT)’s expansion in desktop software in the 1990s, Google Chairman Eric Schmidt said.
“This is a huge platform change; this is of the scale of 20 years ago — Microsoft versus Apple,” he said. “We’re winning that war pretty clearly now.”
My own view here is that Google is indeed “winning” the long-run race to move from the PC to mobile platform. And further, this is indeed a platform move from PC to mobile. As I stressed last month “the paradigm shift to cloud computing is in full swing. The most important facet of cloud computing in terms of business model disruption is its effects on platform stickiness and network effects. Basically, the cloud reduces them and means many incumbent businesses with barriers to entry in their existing model will find themselves disintermediated.
“Here’s the 30,000 foot view. In technology, the phase transitions in computing have taken place predominantly because of advances in four areas: processing speed, network bandwidth, storage costs and form factor mobility. As computers have become faster and more mobile and as storage space and bandwidth have become cheaper and more plentiful, a whole new world has opened up. That world is one of “Streaming Content to Any Device, Anywhere and at Any Time“. And increasingly this is the world of today as opposed to the world of tomorrow.”
So that’s where we are – in the midst of a monumental platform shift from PC to mobile device. See this post for the full report. But there is also a clear shift within the mobile market – just as Schmidt is saying. Just last month I wrote that the latest trends in the mobile market favour Android commenting specifically that “[e]arlier in the month I wrote about the last IDC report on the mobile market as a watershed event. The leap in Android market share is alarming for Apple because it is starting to approach Windows-level dominance of the smartphone market. Android had a 68.2% market share in 2012 through Q3, with that number surging to 75.% in Q3 on the back of the Samsung Galaxy S3. Gartner has confirmed the IDC numbers, putting Android’s Q3 2012 market share at 72%. Meanwhile overall sales of mobile handsets declined 3% from the same quarter in 2011 to 428 million units.”
What this means is what I wrote yesterday, that the market for premium-priced handsets is saturated and largely driven by the upgrade cycle just as PC volume is now driven by this dynamic. But what is key to note here is that, just like the PC market before it, the mobile handset market sales volume is now declining. That tells you we have reached a relative degree of maturity in this market where price becomes the defining element, just as it did in the PC market beforehand. And Android will win any battle based on price. So, longer-term, Android will win. That is something I firmly believe we are already seeing. Over the short-to-medium-term, however, Apple is going to still reap the lion’s share of profits.
From an investing perspective, here is the crucial comment to focus on:
“The core strategy is to make a bigger pie,” he said. “We will end up with a not perfectly controlled and not perfectly managed bigger pie by virtue of open systems.”
What Schmidt is saying is that “open beats closed”. I know this is a hackneyed and tired debate in the technology world but it is the crux of the argument that Google has made and I believe it has merit from a platform-standards perspective more than a profitability perspective. What Google believes is that the technology world evolves too quickly for companies who build their business based on controlling their ecosystem to survive and be profitable over the long-term. Google therefore tries to compete as much as possible using open standards that they simply exploit better than others. The open-source Android operating system is a perfect example of this philosophy. And it stands in sharp contrast to Apple’s preferred approach of controlling its ecosystem. Hence, the comment.
But, while open usually does beat closed in terms of building platform standards, it is’t true that open always wins or that more profits are to be garnered from an open platform. For example, Microsoft developed its impregnable position through a “closed” software operating system standard. Their office suite was also “closed” and came to dominate the marketplace both in word processing and spreadsheets even though there were incumbents with big market share, Word Perfect and Lotus 123. Moreover, the word processing and spreadsheet software standard that became .doc and .xls files was closed. Clearly, that Microsoft tied its software suite to its operating system made a big difference. But the fact remains that these were closed standards. And we know that Apple employed similar tactics in tying iTunes to the iPod and then to the iPhone. I believe this tie was crucial in allowing Apple to redefine those markets.
By contrast look at the so-called “open” PC platform that IBM created in competition with Apple. IBM allowed third-party distribution and this was crucial in cementing the PC as the industry standard, just as Android will become the mobile market standard for the same reasons in my view. But IBM was not able to profit from this and went through a horrific period of writedowns, losses, and downsizing afterwards.
So, it does not hold that open is more profitable than closed in the short- or long-term. Open does, however, create a more compelling ecosystem with many different competitors that stands a much better chance of developing industry standards. But it is exactly because of that thriving competition that profits generated by open platforms will be lower than those generated by successful closed platforms.
If I were to compare the mobile market to the PC market, I would probably put Google in the IBM position and Apple in the Apple position. Samsung is like Compaq, the first successful major PC hardware seller, who was then supplanted by Dell as margins began to erode and manufacturers began to compete on price. It’s not clear to me that Google, Apple or Samsung have sustainably profitable business models then. I would rather be Apple at this point, given the profits they are making now. Valuation is another question.