Discovery kills distribution: why the web needs a new leader

[Apple and Google have locked app discovery and distribution within their app stores. VisionMobile’s Andreas Constantinou explains how Facebook is using the web to disintermediate Apple/Google and why the web needs a new leader].

Discovery kills distribution: The real impact of the web highway

The platform duopoly.

In just the space of 3 years, the mobile platforms landscape has changed from an election race to an oligarchy. The network effects at the heart of the Apple and Google business models have created formidable barriers to entry. The growth in device shipments and apps created seems to continue a relentless climb, showing no signs of developer fatigue or consumer segment saturation as we discussed in our earlier analysis. Beyond the duopolists, competitors have been forced to jump from their burning platform into a chasm of uncertainty or to give up altogether.

The Apple/Google duopolists are now behaving like proper autocrats. Apple is imposing a 30% revenue share on all in-app payments. Google is keeping Android Market and Motorola patents for the exclusive use of its protégées.

The duopolists have been able to run such a tight game by locking together four elements: development, discovery, distribution and monetisation. That is, you can only discover, download and pay for Apple apps through the App Store. Plus development happens through Apple tools only. Google is equally fanatic in controlling development, discovery, distribution and monetization, but is more open to affiliates – for example it allows Sony Ercisson and Vodafone to run their own branded shop within Android Market.

The results are measurable: Over 65% of Apple and Android users discover games via the native app stores, according to Nielsen.

Web discovery kills distribution

With the duopolists amassing so much control, other industry players are getting uneasy. Amazon is creating its own Android tablets and own app store to circumvent Google’s control points. Facebook has shed its Flash dependency and is working on project Spartan – believed to be an app store for HTML-based mobile web apps – that will circumvent Apple/Google app stores.

In the mobile world app distribution is locked to the platform, discovery is still a bottleneck due to the abundance of 100,000s of apps. Developers and media brands alike will pay dearly whoever can put their app in front of the right consumers and help that app get “discovered”. This is similar to the desktop web where distribution is commodity, but discovery is still king due to information abundance, which is what makes search such a lucrative business.

This is where HTML and the web come in.

HTML implies browser-based access and browsers are the only de-facto installed runtime on all handsets that is not bound to any proprietary ecosystem.

HTML and browsers are being used to bypass distribution silos. As such, HTML is being promoted not as a platform (i.e. apps), and neither as a technology (i.e. APIs), as we argued in our recent report. HTML is being promoted as a business model.

Facebook is using the web (in effect browsers) to help users discover Facebook apps and bypass proprietary Apple/Google distribution silos. Facebook is using discovery to kill distribution.

Web purists will argue that the mobile web will always stay open. But we know this is not the case on the web where social networks (Facebook, Twitter) have built silo’d mega-portals which you can only access through carefully crafted, ajar APIs.

Similarly, you can expect Facebook to restrict access to mobile Facebook apps to its own mobile web store, much like how Google can eventually restrict Chrome apps to be only discoverable through the Chrome web store.

And here you have it: web will be the new closed. Back to square one.

Mobile Web as the 4th horse

There are many benefactors or sponsors of the mobile web evolution and they are all in to help drive their core business. Facebook is expected to use the mobile web as a development, discovery and distribution platform. Qualcomm is pushing the web to drive browser sophistication and help sell more smartphone chipsets with web-acceleration smarts. Apple is pushing the web because it wants to have the most “street-compliant” web browser. Google is pushing the boundaries of browser sophistication so that it can auction smarter, more lucrative ad formats across more eyeballs. Facebook and Google are leading web discovery through social discovery and mobile search. Telcos are hoping their own web-based app stores will compel users to switch away from Apple/Google lock-in to a buy-once-use-everywhere app concept.

But there’s a paradox here: the mobile web platform has many benefactors but no leader. Everyone is promoting the mobile web as a business model, i.e. to indirectly drive their core business or benefit from free PR and implicit goodwill. But no one is promoting the web as a platform. The mobile web as a platform has no leader, no general to command the troops, no governor to set the rules. It’s a headless platform.

This presents an unprecedented opportunity for the next challenger to the Apple/Google duopoly. We believe that the next player with complete metal-to-cloud consumer ambitions will use the mobile web as a platform.

Such a choice has many benefits; firstly a mobile web platform offers access to “virgin” segments of web developers who are new to mobile; secondly it comes will many billions of dollars of free developer marketing – already in our measurements of developer mindshare (see our Developer Economics 2011 report), the mobile web comes 3rd after Android, iOS platforms; thirdly, it is a kind of patent haven since web technologies are in the public domain and not behind corporate legal walls; and finally because it allows content providers and brands to get on board from day one with their legacy web content.

The mobile web is waiting for a new leader.

– Andreas
You should follow me on Twitter

The flywheel effect of Android and iOS (and why their rivals are grinding to a halt)

[Many analysts have speculated on the strength of mobile ecosystems based on the size and download traffic of app stores. But is this economically sound? Business Analyst Stijn Schuermans quantifies the network effects behind the Apple and Google ecosystems and the market barriers they have built.]

The flywheel effect of Android and iOS (and why their rivals are grinding to a halt)

The holy grail in business is to create a product that sells itself, a momentum that automatically drives the business forward and that at the same time raises high barriers for competition. In the mobile domain, Google’s Android and Apple’s iOS are seen as such holy grails. Much has been written about the power of ecosystems. The race for large app stores with hundreds of thousands of apps has caused a lot of speculation about who the winners will be. But how powerful are those app store assets in reality?

Our analysis shows that Apple and Google have indeed managed to create an ecosystem that shows significant network effects. Developers and mobile phone users move in lock-step to create more and more value for each other. Windows Phone, Blackberry and Symbian on the other hand have not succeeded in starting up such network effects. Their sales remains dominated by other events.

The following two graphs show the relationship between the number of apps available on particular platforms at a particular point in time, and the number of devices shipped for that platform in the quarter just preceding it. The number of apps available can be considered a metric for how attractive a platform is for developers. Device shipments  is likewise a measure of the attractiveness of a platform for its users. As time progresses, we move along each line towards the right.

Android,iOS - devices sold vs. apps available

For Android and Apple iOS, there is a surprisingly strong correlation between device shipments and amount of apps available. On a scale of 0 to 1, with 1 being a perfect straight line, correlation coefficients of 0,96 and 0,97 respectively indicate a very tight match. The two measures move so well together that there is no doubt that they are interdependent.

This is a clear and unambiguous illustration of the strong network effects that are in play in these platforms. As more devices are sold, the platform becomes more attractive to developers, who subsequently write more applications, hoping to reach a large user base. Likewise, as more applications become available, the platform gains more functionality for users, who will then be more inclined to buy a mobile phone that supports these apps. This becomes a virtuous cycle, a positive feedback loop which is so strong that it dominates all other aspects that might affect sales or app development, like promotions and advertisements, or the coolness of a particular technology for developers.

So far, there doesn’t seem to be an effect of diminishing returns. That is, an increase in the number of apps will drive an increase in the number of devices shipped, and vice versa, at a constant rate. You might expect that at a certain point, once for example half a million apps become available, the needs of most users would be covered. How many more QuadroPop of Hold ’em poker clones will people need? However, this point apparently is not yet reached. We will leave the speculations about what that implies about the saturation of the targeted user segments to the reader.

Another interesting observation is that the relative rate of app versus devices growth is different for iOS and for Android. The data indicates that to persuade developers to write a thousand extra apps, 220.000 Android devices have to be additionally shipped each quarter versus only 45.000 Apple devices. This implies that users and developers (apps) assign a different level of value to each other depending on the platform they use.

Several tidbits of information support this last hypothesis. The Android market store has much more free applications available relative to Apple’s App Store. The difference is even larger in download behavior. Android users seem to spend less money on apps as well as other services like data plans. Two thirds of the mobile add revenue for Google actually comes from Apple devices, which again suggests that Apple users are more likely to use internet on their phones (and pay for the data plan).

The fact that Android users spend less money would, in a very direct way, make Android users less attractive to app developers. Hence, reading the graph ‘in reverse’ (with axes switched), the amount of extra users needed to entice an Android developer to write an extra app – the “marginal users per developer” – is higher (compensating for their lower spending), explaining the difference in slope.

So what about the other smartphone platforms out there, like Blackberry, Windows Phone or Nokia’s Symbian?

BB, WP, Symbian - devices sold vs. apps available

Here we see another story unfolding altogether. These platforms have not succeeded in kick-starting or sustaining significant network effects. While some traction in app development has been achieved, this has not had the same overwhelming influence on shipments or vice versa. Since network effects don’t dominate as in the case of Android and iOS, other factors come to the foreground.

For Nokia, this is the deal with Microsoft, where Symbian became a victim of Microsoft’s ambition to become Nokia’s exclusive smartphone OS provider, leading to its accelerated demise. BlackBerry’s lack of innovation in an environment where messaging (its key selling point) has become a commodity is causing it to steadily lose ground. While both of them might have benefited from network effects earlier in their history, they are now failing to sustain there ecosystems and losing the race for customers as a result.

Windows Phone is the most recent challenger. Microsoft has managed to convince developers to start writing software for the Windows phone platform, obviously trying to kick-start the network effect process, but device sales have not (yet) followed.

Network effects are a formidable barrier to entry. Once an ecosystem is well established, it is extremely difficult to lure participants away from it to competing platforms (breaking its back), or to stop its momentum. So far, despite similar efforts from its competitors, only Apple with iOS and Google with Android have been able to get the flywheel going. For these two platforms, the momentum will drive both consumer sales and developer enthusiasm with little extra investment needed. We might see diminishing returns effects in the future, but for now the feedback loop is going as strong as ever. Their rivals seem condemned to a futile catch-up race.

– Stijn

follow us on twitter: @visionmobile
[Want something more than a glimpse into the complex world of apps and platforms? Check out our Software Economics seminar]

A game of ecosystems: Crashing the Android party

[In a game of ecosystems, it it possible to bend the rules? Research Director Andreas Constantinou examines the few technologies that can bring the Android ecosystem on non-Android devices – compatibility layers, virtualisation or emulators – and their impact in a post-‘Googlerola’ world]

A game of ecosystems: Crashing the Android party

A game of ecosystems

The mobile industry in 2011 is an industry ruled by ecosystems. The Android and iOS platforms are jostling for the top spot in terms of number of applications and developer mindshare. Earlier this year, Nokia had to jump from a burning platform (its in-house Symbian OS) into an ocean of uncertainty (Microsoft’s Windows Phone).  MeeGo has to find foster parents, as both Nokia and Intel (its founders) seemed unable to gather enough momentum. Nokia is re-launching its effort at building the Qt ecosystem through a more ‘open’ platform governance model. Qualcomm is trying to rebuild loyalty in BREW MP by investing in online marketing. The platforms today are fighting for who can build the biggest, most active and most sustainable developer ecosystem.

VisionMobile - App Store figures 2Q11

What determines the success of a platform? We know it’s the wealth of its ecosystem (lets call it developer ‘mindshare‘) as well as its consumer reach (the ‘market share’). It’s also patents, as these legal instruments can create not just barriers to entry (see how Apple barred Samsung tablet), but also market costs (see how HTC, Acer and Viewsonic are paying patent royalties to Microsoft).

Therefore, ecosystem wars are fought on three fronts: mindshare, market share and patents.

Let’s focus on developer mindshare. Developers are extremely critical as ‘platform consumers’. Anyone who has tried to recruit developers through traditional outbound marketing has failed. Developer marketing is about evangelising developers to a higher cause, more like crafting a software-centric religion – what can be called “religion engineering” (see evidence here on Apple as a religion). More importantly, building developer mindshare is extremely costly and tricky – you need software marketing know-how to execute successfully. Which is why many ecosystem-building efforts, including Java ME, Symbian, MeeGo and Palm OS 5, have failed.

Crashing the party 

Developer marketing needs a very different toolbox and billions of investment; unless you can crash the party.

Two types of solutions exist that allow OEMs to piggy-back the Android ecosystem on non-Android devices: compatibility layers from Myriad, OpenMobile and virtualisation technologies from OK Labs, Red Bend, and VMWare. RIM has also been using an emulator approach to bring Android apps on QNX.

Myriad ( (SIX Symbol: MYRN). is a mobile technology company that offers browsers through to messaging infrastructure, with mobile software deployed in more than 2.2 billion mobile handsets. Based on the earlier acquisition of Esmertec (the early Google partner on the Java virtual machine) Myriad offers an Android emulator it calls Alien Dalvik. Launched in February 2011, the emulator allows “thousands of Android apps” to run on non-Android platforms like MeeGo. Myriad claims that once the APK files are repackaged for Alien Dalvik, applications can run unmodified and with no loss of performance. The company is focused on making its emulator compatible with popular apps like Dropbox, IMDB and Evernote, presumably focused at OEMs that want to bring the out of box apps experience on proprietary platforms.

OpenMobile ( is a Massachusets-based company founded in 2010. The company is privately funded and led by Nachi Junankar, a serial entrepreneur, and Bob Angelo, a software veteran who, as COO of Phoenix Technologies, led the team that opened up the clone business and later created the PC BIOS. OpenMobile has developed an Application Compatibility Layer (ACL) that claims to bring all 250,000 Android apps to non-Android device. The ACL is available for MeeGo (webOS and Windows support are in the pipeline), and claims 100% compatibility as “all Android Apps run exactly as they do on an Android device”. Moreover, OpenMobile says that app developers don’t have to modify, recompile or repackage their Android apps to run under ACL.  OpenMobile doesn’t use virtualisation or emulation, but integrates the Android application runtime into the native OS and supports Android API Level 4 or higher, as well as NDK 6 or higher.

The alternative approach to bringing Android apps on non-Android devices is to use a virtualisation technology from Red Bend, OK Labs or VMWare (see our earlier analysis of virtualisation technologies). Virtualisation allows the Android OS (including the apps ecosystem) to run in sandbox, completely isolated and independent of any other platform (including OEM proprietary OS). Like on desktop virtualisation, the apps from both platforms can surface on the same menu, so that virtualisation remains transparent to the user.

Challenges and the new shape of Googlerola

Can an OEM crash the Android party? Yes, but only with a bodyguard. We suspect that the above vendors will be facing two primary challenges that they‘ll need to muscle their way through.

Firstly, keeping in sync with the Android upstream changes is no small task, as new Android (including NDK) APIs have to be integrated into the target platforms and Google introduces API changes every two months on average.

Secondly, OEMs who use an Android compatibility layer will also be exposed to potential patent lawsuits. Now getting access to an Android Insurance Policy (see our Googlerola article) from Google will also mean complying with Google’s tight software/hardware specs. The one region which seems opportune for Android-compatible technologies is China, where telcos and OEMs have long been trying to develop their own OS flavour, but have been stuck with antiquated OS versions as they haven’t been able to keep up with Android upstream.

So can an OEM crash the Android party? Yes, but you‘ll need some pretty good bodyguards to escort you in.

– Andreas
you should follow me on Twitter

The post-Motorola dilemma: Same old-Google or the new Apple?

[Google’s pending acquisition of Motorola creates a dilemma: Google must choose between staying true to its core business or reshaping into the new vertical giant that will challenge Apple at its own game. Research Director Andreas Constantinou discusses Google’s dilemma and why both outcomes stand to radically change the rules of the Android Empire]

The post-Motorola dilemma: Same old-Google or the new Apple?

Google’s forthcoming acquisition of Motorola for $12.5B has been largely dubbed a patent deal. And it is. But beyond the patents, Google faces a fundamental dilemma for its core business, and one that will determine the future of the Android Empire.

In mid-August Google announced it intends to buy Motorola Mobility Holdings (MMI), which includes the mobile phone, set top box and DVR businesses, for $12.5B. The true cost to Google is much less though, given that MMI has cash and accrued tax benefits. The move has seen an unprecedented amount of analysis in the blogosphere, with a fair amount of guesswork as to what Google’s motivations were in buying a hardware company.

We believe that Motorola’s acquisition is not just about patents. The move marks a major turning point in how Google runs the Android Empire. Let’s see why.


The post-Motorola dilemma

We believe that the Motorola acquisition was sold to the Google board as a patent deal, with the hardware business being an unwanted but inseparable part of the package.

Now Google faces a fundamental dilemma. The combination of Google and Motorola is like building a skyscraper in the middle of the ocean; the two companies are built on very different business models.

Google is a profitable, 28,000-strong direct marketing company. Google uses Android as a platform with which to commoditise mobile handsets, flatten network access and reach billions more consumer eyeballs.

Motorola, on the other hand, is an unprofitable, 19,000-strong hardware company, one that uses Android as a ticket to sell more hardware to more consumers and more carriers in the form of smartphones.

We have no doubt that Google will divest a large part of the Motorola business. A hardware business would not help Google sell more ads, i.e. drive its core business.

Motorola accounts for less than 10% of Android devices sold in Q2 2011 – third after Samsung and HTC who shipped 18 million and 11 million Android devices, respectively, according to data from Gartner and Arete. By fully incorporating Motorola, Google would be just nudging forward Android device sales, while at the same time upsetting all of its major OEM partners. In other words, incorporating Motorola would have the same market impact as buying a local network carrier.

The question then is which parts of Motorola Google plans to keep, besides the patents. This presents a major strategy dilemma for Google – and one whose outcome will have fundamental impact on how Google runs the Android Empire.


Android as a software autocracy

Motorola’s IPR portfolio is substantial: 15,000 wireless patents, another 6,200 pending, and 3,000 granted or pending patents in the Home division, according to Arete research. More importantly, Motorola has a host of essential (blocking) patents around GSM.

These patents buy an Android Insurance Policy that Google can issue to “compliant” OEMs that are intended to protect these OEMs from “patent taxes” levied by Microsoft, Nokia and others. This Insurance Policy is essential to protect the vast Android handset population from stalling its so-far phenomenal growth. At the same time, this insurance policy is not sufficient if Apple does attack the mid-priced smartphone segment, as it is rumoured to do.

Android has been built on very shaky legal grounds, heavily “borrowing” from the Java language, the Java SE APIs and integrating with copious amounts of GPL-licensed code. Contrast that with how iOS, Symbian and Windows Phone platforms were built from scratch with very little inbound software licensing above the kernel. In other words, Google is buying Motorola to remedy the lack of IP strategy that threatens to undo 5 years of software craftsmanship. Google is paying for its past sins.

Moreover, the Motorola patent portfolio is comparable to Nokia’s, which not only buys Google insurance but puts Apple and Microsoft on the defensive – see the outcome of the Apple-Nokia patent dispute in which Apple has to pay Nokia 8 EUR per iPhone sold in the future, in addition to a substantial one-off payment.

But beyond the Android Insurance Policy, Google is getting something much more important: it strengthens the Android software dictatorship.

As we discussed here and here Google licenses the Android platform under an open source license but uses several control points to incentivise OEMs to stick to a tight software implementation (and one that goes way beyond APIs). Google’s Schmidt explains eloquently how “OEMs feel like they have a choice” with how they implement Android  [see video segment starting at 28m 50s] but in fact, they have to comply with Google’s requirements as they need G’s permission to add Android market and use the relevant trademarks on their handsets.

What patents buy by extension is practically a software autocracy; Google is now going to extend its Android Insurance Policy only to compliant OEMs. This means that if an OEM doesn’t follow Google’s precise software requirements, they will be prey to patent taxes by Google competitors. This now makes it untenable for an OEM to not pass Google’s Android certification.


Android as an Experience Licensing business

Besides software, there is a great deal of value that Google can leverage from Motorola. But that means a substantial change to Google’s business model.

Google’s business strategy is based on the economics of complements – that is, if you want to sell more cars, you need to lower the price of gas.

In Google’s case, if you want to sell more ads, you need to lower the prices of smartphones (Android), commoditise the networks (GTalk, Google Voice) and advance the state of web browsers (Chrome). Notice how everything complementary to Google’s business is “open”, while everything core to Google’s business is closed (Adwords, Android Market, Google Maps)

The Google strategy is to make Android smartphones as ubiquitous and as cheap as possible, with the lowest possible barriers to entry for OEMs and ODMs, so that the last citizen on Earth can be exposed to Google inventory.

However, the trouble with Android is that it has turned into a price-driven battlefield. The vast majority of devices compromise on the industry design and experience with cheap me-too plastics and poorly tested OEM apps and UI overlay. So far Android has managed to grow impressively fast as most devices are well below the iPhone and iPad price points. But with Apple rumoured to be releasing a lower-priced phone design, we expect Google’s empire of Android me-too clones to be challenged by the integrated, consistent and entwined experience that Apple offers.

This is where Motorola comes in. To counter Apple mid-priced phones, Google needs to tightly define and control the experience delivered on OEM licensee phones.

In this scenario, Google would use Motorola’s design teams to develop a complete “reference experience” that encompasses industrial design, hardware specs, complete software specs, marketing specs, pricing norms and of course the Google app suite. The Android open source “take it and fork it” mantra becomes much closer to a contractually enforced “experience licensing” business, in which OEMs that choose Android can compete with Apple on the same level, and get guaranteed margins through Google’s contractually-specified boundaries for Android handsets. How are OEMs going to differentiate you ask? Through regional marketing deals, retailer agreements and pre-loads with local service providers that deliver an additional rev share.

We envisage Android’s Experience Licensing scenario as borrowing heavily from the franchise business model widely practiced in the retail industry.  In franchise stores, the experience is as tightly controlled as the products, the marketing strategy and the pricing policy.

In other words, Experience Licensing is about running the Android Empire with Apple’s grip.

To accomplish this strategy, Google needs to seed the market with “Hero” devices that epitomize the Android experience. Here is where Google can leverage on Motorola’s device production assets.

A quick backgrounder: so far, Google has designed Android to offer three types of handset projects: Experience handsets (based on Google specs and branding), Partner handsets (compliant with Google’s Android specs, but with no Google involvement or branding) and DIY handsets (take the source code and fork it, but you ‘re on your own, e.g. China Mobile’s oPhone). The purpose of Experience handsets is to advance the state of the platform, by working closely with 2 pre-selected OEMs 6-9 months prior to the public release of the codebase under an open source license. Experience handsets (see full list here) are run under tight Google control and co-marketed by both Google and the OEM.

Google would be adding “Hero” handsets to the existing three tiers, which delivers two benefits.

Firstly, it allows Google to divide and conquer among OEMs without giving anyone “special privileges” or know how – it is rumoured for example that Google has been unhappy with the know-how HTC developed as a result of their long-standing relationship in the early Android days which has given HTC the fastest time-to-market for handsets based on the public codebase (note how HTC is no longer involved in Experience handsets for some time).

Secondly, it allows Google to better compete for carrier deals with Apple, by offering carriers exclusive access to the latest and best Android features on Motorola hardware. As we know, carriers die for exclusives, so rather than run Motorola device business at cost, Google can just keep the crown jewel features for carrier-exclusives from Motorola.


Redefining how Google runs the Android Empire

The purchase of Motorola makes Google the emperor of the Android Empire. Whichever parts of Motorola Google decides to keep, the laws of the Empire would be irreversibly changed. The how depends on which scenario Google opts for.

1. In the software dictatorship scenario (which we take as the default option), Google would make it untenable for OEMs not to follow its software specifications to the letter or to fork Android. Google stays true to its core ad business and divests everything apart from patents to a Taiwanese OEM wanting to break into the North America market.

2. In the Experience Licensing scenario, Google keeps the hardware design and device production capabilities to allow Android to compete head-to-head on every Apple price points, both the current high-end iPhone/iPad pricing and the rumoured mid-tier pricing. Here Google would have to take a hit on its cash flows and profitability by putting its hand deep in its pocket (both in terms of CAPEX and OPEX) to more favourably compete with Apple.

Irrespective of Google’s mobile plans, the Motorola acquisition offers the search giant a means to control the hardware and software make up of set-top boxes and offer a similar licensing program to Android TV licensees. We know that the first attempt at Android TV failed because there was very little premium content as content producers were concerned with DRM and content security. By controlling the hardware and software specs for Android TV, Google could bring the content producers back on board.

Historically, Apple has been fundamental to the success of Android. As it turns out, it is going to fundamentally challenge the Android business.

Stephen Elop noted in June 2011 that “Apple created the conditions necessary for Android”, by incentivizing carriers and OEMs to offer iPhone-killers at less than profit-killing prices.

Now Apple is creating the conditions necessary to challenge Android’s growth, by milking Android OEMs for patent taxes and challenging the Android clone empire with unique product experiences at more price points.

Whatever route Google chooses to take, it will fundamentally change the rules of the Android Empire.

– Andreas
you should follow me on Twitter: @andreascon

[Mystified by the intricacies of Google’s  Android strategy? Check out our Android Game Plan workshop!]