Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
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 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.
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?
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.