The 3rd Ecosystem: Beyond iOS And Android

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 |  Includes: AAPL, AMZN, BBRY, GOOG, MSFT
by: Panabee Research

Summary

Unlike the desktop market, the mobile market will feature more than two operating systems.

AMZN and MSFT are logical candidates to prevail as a third ecosystem, but a Chinese company may be more likely.

As Wechat and Line proved, assumptions from the desktop world may not translate to mobile.

On the desktop, there were essentially two ecosystems available to consumers and developers: Windows and Mac. Many pundits believe the same situation will unfold on mobile where a duopoly of Android (NASDAQ:GOOG) and iOS (NASDAQ:AAPL) rules consumer smartphones. Line, WeChat, and other messaging apps, however, demonstrated that facts from the desktop world may not translate to mobile as they have successfully monetized, whereas desktop pioneers like ICQ and AIM failed.

There are many reasons to anticipate the emergence of a third, if not fourth ecosystem, on mobile. First, and most importantly, the market size: eMarketer forecasts more than 5 billion smartphones in 2017. Even if a third entrant never captures more than 5% - 10% of the market, this still produces a universe of 250M - 500M devices. By comparison, Apple in 2011 drove roughly 15 billion downloads on the back of 200 million devices.

The primary hurdle for any new ecosystem is attracting developers and sustaining them with sufficient revenue. In 2013, 600M iOS devices generated $5B in developer earnings, yielding about $8.33 per device, whereas Android saw $900M generated from 900M devices, yielding about $1 per device. Assuming the new ecosystem monetizes as well as Android, this suggests a pie of $250M - $500M available for developers to claim. Even if users monetize at $0.50 per device, this creates a non-trivial pool of $125M - $250M to support developers willing to venture outside of iOS and Android. The market opportunity seems ripe, if these projections hold, for both the hardware manufacturer and enterprising developers.

The next issue is whether some company has the resources to capitalize. Establishing another front in the smartphone war demands not only expertise with hardware, software, and developer relations, it also requires the financial wherewithal to underwrite massive upfront costs and sustain operations until the ecosystem grows large enough to attract developers organically. At least two companies qualify today. Microsoft (NASDAQ:MSFT) owns $80B in cash and boasts tens of thousands of loyal developers while Amazon (NASDAQ:AMZN) is popular among developers and generates substantial cash from retail operations and cloud services. Both have launched competing mobile platforms, but it is unclear if these tech titans can vault into the top two or will remain content as the number three and four players.

BlackBerry (NASDAQ:BBRY), on the other hand, is burning cash quickly and seems more primed for acquisition than for independence. BlackBerry's expertise with enterprise security and IT sales is an attractive asset for another manufacturer looking to sharpen its corporate offerings.

More naturally, an alternate ecosystem will survive where the competition is presently weak or not yet dominant: China. Only 5,000 of the 1.4M apps in the Apple App Store, or 0.33%, include support for the Chinese language. By contrast, nearly 78% of the apps, or slightly over 1M, support English (based on my internal analysis). Because of cultural and geographical differences, converting apps between languages is not as simple as translating button text and header labels. Games like Scrabble make no sense to those who only speak Chinese while services like Foursquare must compile a reliable database of stores and restaurants in China before launching there. The software advantage enjoyed by Apple in North America and other parts of the world is substantially marginalized in China.

Investing Implications

The mobile operating system landscape is far from finalized. At least one other ecosystem will survive, which suggests John Chen's attempt to revive BlackBerry is not as foolish as pundits claim. Amazon and Microsoft are currently best positioned, however, to claim the third spot. Their resources allow it to withstand the long and expensive ramp-up time to build a competitive developer ecosystem while their business models allow them to derive smartphone profitability through other services like search and commerce. In the long term, monitor China closely as cultural and language differences offer a hospitable environment in which to grow another operating system and fend off the attacks of Apple and Google.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.