Shane BarnhillSunday,15 September 2013

The Snap:

A few days ago, Apple formally announced the two latest iterations to the iPhone. The higher-end iPhone 5S has a new fingerprint scanner for unlocking the phone and making purchases through iTunes; it also offers a 64-bit mobile processor for gaming, an improved camera, and it comes in three colors: gold, silver and black (no, I’m not going to call it “Space Gray” — that’s ridiculous). The iPhone 5C, meanwhile, comes in five bright colors and has a lighter, plastic body. It also costs less, and thus, doesn’t have the camera and processor upgrades that Apple implemented in the 5S.

The Download:

Like a lot of Apple enthusiasts, I quickly decided that I would place my order for a new iPhone — a silver 5S — as soon as I could. But as I did, I was overcome with an odd sense of nostalgia. Whenever Apple announces new products, I have always canceled meetings, blocked out distractions, and tuned into the live streams or live blogs of the events, just to get a peek at the new iDevices that I would inevitably order. The new product announcements never let me down, and I now have an assortment of iPhones, iPads, MacBooks and iPods to show for it.

But this time around, I felt nostalgic because I realized that my next iPhone might end up being the last one that I purchase. While Apple will continue to produce finely-crafted devices for years to come, it’s clear that the company’s advantages are waning and/or gone altogether. Samsung and others have (arguably) caught up in terms of hardware design, and Google has (arguably) caught up to iOS in terms of the performance of its Android operating system.

However, Apple still clearly has a superior ecosystem of apps and related products. Nearly all innovative new apps continue to release on iOS first before coming to Android months (or even years) later, because despite Android’s 79.3% global smartphone market share, the iOS App Store still generates 2.3 times more revenue for app developers than the Google Play market. It makes sense, then, that developers are prioritizing the platform that makes them the most money, and for now, iOS (and thus the iPhone and iPad) get preferential treatment.

For an early adopter like me, this makes all the difference in the world. My first two smartphones were Android-based models from HTC, but I switched over to an iPhone because I became frustrated each time that I’d read a glowing review of a new app that I couldn’t download. Apps still drive the purchasing decisions of many early adopters, and I’m no different in this regard.

But three trends lead me to believe that Apple’s last inarguable advantage in the smartphone market will have dissipated between now and the time my new two-year phone contract expires.

First, there’s the question of whether iOS can continue to monetize more effectively than Android for app developers. As I noted above, the iOS App Store still generated 2.3x the revenue of Google Play as of Q2 2013. However, that advantage was 4x in Q1 of 2012, which means Apple’s app monetization advantage decreased by 42.5% in just three quarters. If that rate of change continues, then Google Play apps will pull roughly even with the iOS Apple Store from the standpoint of revenue generation in late 2015. This development would certainly cause app creators to re-think where to prioritize new app releases.

However, there is every reason to believe that the rate of change at which the iOS App Store is losing ground to Google Play may actually accelerate, and this brings me to the second factor: Android’s ever-increasing smartphone market share. According to IDC, Android’s share of the smartphone market climbed from 69.1% to 79.3% worldwide between Q2 2012 and Q2 2013 — a 15% year-over-year rise. If that rate holds (granted, a big assumption), Android’s share would surpass 90% globally by midyear 2014. As Android’s market share grows, so too will the ability of the Google Play app market to generate revenue. Even if iPhone users continue to spend more money on average than owners of Android-based devices, overall volume will help close (and flip) the monetization gap fast.

The third factor is that the “walled garden” that app ecosystems are intended to produce is now largely a myth. Put simply, third party developers are producing apps that handily outclass Apple’s own apps (which I rarely use anymore), and this degrades Apple’s lock-in effect. I stopped using iTunes for music acquisition long ago; I subscribe to music via Spotify instead. In place of Apple’s Notes app, I use Evernote. My primary calendar app is Donna — not the iPhone Calendar — and the Weather app that shipped with my iPhone gathers digital dust while I spend time in Yahoo’s gorgeous competitor. Furthermore, Google’s apps — such as Google Drive, YouTube, Google Maps, Gmail, Google Voice and Google Search — have claimed prime real estate on my iPhone. In effect, any walled garden that Apple sought to create with its own apps was destroyed long ago. My switching costs are almost zero, and they will be largely non-existent as well for many other smartphone users, as apps like the ones that I have listed above grow in popularity.

In summary, it’s easy to envision a scenario 1-2 years from now where platform switching costs are nil and the best apps are launching on Android before iOS. When (and if) that happens, it’s also easy to envision me transitioning away from using services from Google and other 3rd parties on an Apple device to using those same services on a device featuring Google’s own operating system. And I suspect that many early adopter Apple fans will feel the same way.

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Hat Tips:

App Annie, BGR, Business Wire, CNETImage Credit: Flickr

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