Android is in its death throes! Well, this may be overstating just a bit, but in a detailed, 79 page report titled Clash of the Titans, authors Heather Bellini and Bill Shope of Goldman Sachs (GS) lay out a scenario in which they foresee Android steadily losing market share.
They remark (p 7) that Google's (GOOG), Android OS:
…runs the risk of platform defection resulting in a steady decline of Android smartphone share (estimated to be 55% in 2012) starting in CY13. While we are modeling 48% smartphone share for the Android in 2016, we note this number could prove optimistic…
In my previous post I argued for an even steeper decline, although for other reasons. Let's look closely at the Clash of Titans report. (The report is available to GS clients only.)
The report focuses directly on mobile device adoption and projected market share, and thereby at the following companies:
It covers several specific areas:
- Survey Results
- Tablet & Smartphone Share Issues
- HTML5 and TV Issues
- Grading the Group (the 7 stocks listed)
(They also offer an interesting Appendix: The early platform wars.)
In this post I will be ignoring the last issue, and touching #3 only marginally.
We surveyed over 1,000 people in the United States to understand their smartphone and tablet ownership, which services they use for music, videos and e-books, as well as the key drivers behind their purchasing decision for each device.
The survey covers the choice of smartphone and tablet, and various usage and purchase decision issues. (All 1028 respondents owned smartphones, 68% owned tablets.)
For the purpose of this discussion, the most interesting finding is this:
We asked the respondents who do not currently own a tablet what the key criteria would be if they were to purchase one. The majority (at 40%) noted the ability to use applications across their smartphone and tablet as the most important factor. Similarly, the other key criteria were related to the ability to share content on both devices.
This will come up again later.
A new model
One of the unique things about this report is that it come up with an interesting new model to describe the industry - that the driving force for value is in the bilateral User <-> Complement relationship. A complement is a service provider such as Facebook, or the Kindle Reader app. The purpose then of the device is to provide a physical vehicle - an enabler - for this interaction, and the underlying platform (operating system: Android, WinMob 8, BB 10, iOS) is viewed as a support system for the enabler.
Accordingly, the platform is the foundation that enables the market to exist… while the complements are the products or services that sit on top of the platform and are utilized by the end user…
This is an interesting take that shifts the focus onto the user interaction in a new way, and dovetails into the important point that is at the heart of this discussion.
What it is that users want?
When asked what they want when moving to a new device, after familiarity of the operating system, the most important thing was the ability easily pass apps, music and photos between the two.
By having both devices as part of the same ecosystem, consumers will be able to truly leverage the ecosystem as content migrates seamlessly between devices.
This, therefore, should give Android a big lead, because it has the largest smartphone share - right?
The problem here is that Android has yet to put a strong contender into the tablet field to challenge the iPad's dominance. There is nothing wrong with the Amazon Kindle Fire, it's a fine machine. But no rational person realistically puts it as equal to the iPad. The size and performance and features of the iPad put the KF to shame, and now there is even the iPad mini to challenge in the smaller sized, lower priced category.
"…we think the tablet will move into more of an anchor position, and will have increasing levels of influence on future smartphone purchases."
This means that it will be the tablet choice that will drive the next choice of smartphone. But since the tablet field is dominated by iPads, this means they consumers will go more and more to the iPhone.
If left without a meaningful competitor in tablets, we believe Apple's dominant share of tablets will act as an anchor that pulls its smartphone share… steadily upward over time.
It brings us back to the opening quote that Android risks entering a new era of steady decline that would begin in 2013.
While we are modeling 48% smartphone share for the Android in 2016, we note this number could prove optimistic…
I would like to add to this the following factors, not mentioned in the report, that may further pressure the Android system.
1- The iPhone has the highest satisfaction rating of all smartphones according to several studies, such as reported here. This prevents customer defections and helps to bring in new ones. Once in, the ecosystem also creates a wall against defections.
3 - Customers in the iOS camp share high satisfaction and many have a real dedication to the platform. While there are also many who are dedicated to Android, there are other Android users who like a particular device, and many who just have a real antipathy to anything Apple. These last two groups have little dedication to Android itself, and would happily move to a BlackBerry or Windows phone or tablet should they find a compelling reason to do so, or another particular phone they like.
I believe that these new contenders will eat a lot more out of Android's share than out of Apple's.
All told, there is a growing set of pressures building against Android. Its newest OS seems to be a significant improvement over previous ones, but now several new pressures are on.
The GS report addresses some very serious concerns regarding the need for users to have a strong tablet entry to solidify the ecosystem across devices. It makes a very good case for its model.
Additionally there are other issues referred to in my previous article of security and encroaching competition.
Altogether, these pose challenges to Google.
Disclosure: I am long AAPL.