Excellent: Android Ecosystem is Low-Margin, Fragmenting

Strategy Analytics has published some fascinating figures on the smartphone market:

Global smartphone operating profit grew 31 percent annually from US$16.2 billion in Q4 2013 to US$21.2 billion in Q4 2014. Android hardware vendors combined took a record-low 11 percent global smartphone profit share, down from 29 percent one year ago. In contrast, Apple iOS captured a record-high 89 percent profit share, up from 71 percent in Q4 2013.

Specifically, Android manufacturers' profit went down from $4.8 billion to $2.4 billion, while Apple's went from $11.4 billion to $18.8 billion. Amusingly, many commentators are citing these figures are "proof" that the Android ecosystem is a failure, and that Apple is a shining example of how to do it.

This is exactly wrong.

What the figures really show is that Apple is price-gouging its customers, extracting unreasonable levels of profit by virtue of its monopoly. In the world of Android, by contrast, the fierce competition that exists between fungible manufacturers has driven down profit margins to razor-thin levels. Open source, and the level playing field that it creates, is a great way for maximising the benefits to customers, rather than companies.

There's another benefit, although the Strategy Analytics post mistakenly frames it as a problem:

Android’s weak profitability for its hardware partners will worry Google. If major smartphone manufacturers, like Samsung or Huawei, cannot make decent profits from the Android ecosystem, they may be tempted in the future to look at alternative platforms such as Microsoft, Tizen or Firefox.

That's good, because the last thing we want is a monoculture, as the disastrous Windows experience demonstrated. In fact, we are already seeing some very interesting moves to fork Android in various ways - such as the following:

Cyanogen, the startup seeking to offer a version of Android stripped of Google services, has sought funding from a wide range of technology companies for its next round of financing.

The company has talked to a broad range of companies that includes Amazon and Microsoft, people familiar with the discussions told Re/code. Cyanogen is hoping to appeal to strategic investors seeking a legitimate alternative to Google’s version of the Android mobile operating system. For this same reason, some potential investors have backed off for fear of reprisal from Google.

Obviously, it's rather interesting to see Microsoft mentioned as being a possible investor, but it has always adopted a pretty cynical approach to embracing, extending and extinguishing rival standards in the past. Not that it will be able to do that here, of course: the open-source basis of both Android and Cyanogen mean that they can never be shut down - people can always fork the code to create new incarnations.

Moreover, it's good that forks are being considered - others worth mentioning are the growing number of Chinese variants that are taking the smartphone world by storm - because they offer a way of introducing competition that existing users can migrate to relatively easily. That's another huge problem with the Apple ecosystem: its success is predicated on the fact that customers are locked in to its technology, with no hope of a painless escape to competitors. The shackles may be gilded, but they are still shackles.

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