Why Chaps Who Build Apps Prefer Apple To Android And Windows

| About: Apple Inc. (AAPL)
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Only a few weeks ago, a commenter on one of my articles said (about the new Nokia Lumia 900 smartphone):

I know a few people who have gotten Lumias and they ALL say the phone rocks but unless the app selection increases fast they will be headed back to Android. What is taking so long?!?

Of course I wanted to know which important apps were missing, but it appeared that the answer was not so simple. Right now Windows Phone has had over 100,000 titles registered, although up to 20% of that number may have been withdrawn for various reasons, still leaving over 80,000 available.

However recently I came across information in an article in The Guardian to suggest that there were other forces at play.

Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) both have more than half a million apps available and the number of Android devices is growing faster, yet app developers still look to Apple's platform first.

Statistics from app store analytics firm Distimo show that in the first 4 months of 2012 the Google Play store added 100,000 apps compared to 63,000 for Apple's App Store and 35,000 for Microsoft's (NASDAQ:MSFT) Marketplace for Windows Phone.

But follow the money - a big factor for the important developers, who can easily spend thousands writing a new app - and it's a different story. Distimo and analyst firm CCS Insight launched their App Vu Global service in early April 2012, tracking downloads and revenues from the app stores. Its initial findings claimed that Apple's App Store is generating $5.4m every day in app sales for the top 200 grossing iPhone and iPad apps. For Google Play, their estimate was just $679,000 for the top 200 grossing apps on Google Play, or about 12% of Apple's revenue.

Part of that has been because iPhone users have shown themselves willing to pay for apps in a way that Android users so far have not. In January 2012, Apple said that since 2008, when its App Store opened, developers had been paid a total of $4bn, of which more than $700m was paid in the last quarter of 2011 alone. Google hasn't given a comparable figure, though Horace Dediu, who runs the Asymco consultancy, puts the figure for Google's total app sales in 2011 at $300m - meaning developers would get $210m in total.

Bloomberg has also reported that Apple is expected to upgrade its tools for developers in the battle to stay ahead in the battle for the loyalty of developers.

The success of Apple's App Store has helped create an economy for downloading mobile applications that will reach $58 billion in sales in 2014, according to Gartner Inc. More than 25 billion apps have been downloaded from Apple's store, and developers have received $4 billion from the sales, according to Cupertino, California-based Apple.

Commenters on the Guardian article included app developers who made a number of points that may be summarized as follows:

  1. It is easier to develop for Apple because it has few devices, whereas Android has many, which creates problems with hardware compatibility, different screen sizes, and testing for many devices.
  2. Android and Windows users are reluctant to part with money to pay for apps, whereas iOS users are a wealthier crowd and much more likely to pay for apps they like. This is because Apple make products for people with money. Android phones are aimed at the mass market.
  3. Games that may sell well on Apple need to be made free with embedded advertising on Google.
  4. The structure of Windows Marketplace is such that once an app falls off the new apps listing, it is much less likely to be discovered by customers.
  5. The Windows environment and tools are easier to program with.
  6. Developers are more likely to get paid by Apple and less likely to have their work pirated than with Android.
  7. A developer who has completed an app for iOS may have to make a choice between porting it to other platforms or developing another app for Apple, which may be a more cost efficient use of time and resources.
  8. The use of code neutral development platforms is not yet widespread.

What conclusions can we draw here?

There are three competing ecosystems: Apple, Google, and Microsoft.

Apple makes its money primarily from the sale of devices (phones and tablet computers), with sales of music and books from its Apple Store, and sales of apps secondary sources of income. Apple has no proprietary search engine, although its voice driven personal assistant Siri has the potential to interface with information services like Wolfram Alpha or indeed Google, and it is possible that Apple will seek to acquire one of the smaller search engine companies in the future. Certainly Apple has enough money to do this.

Apple has also announced the introduction of a proprietary map and driving directions service integrated with Siri, though this does not include downloadable maps and can only be used when there is a wireless connection. Maps can be used to drive business to paid advertisers.

Google is primarily an advertising business similar to a billboard company that posts advertisements along highways, but in this case it is the information superhighway. When Google invented a search engine that blew away earlier competition like Yahoo!, Hotbot, and Lycos, what amazed users was that it was so fast and accurate. This domination of searching enabled Google to make huge amounts of money by selling virtual advertising billboards adjacent to search results.

With the trend towards smart phones and tablets, Google saw its business threatened and acquired the Linux-based Android operating system for mobile phones and tablets which it gave away free to device manufacturers. The reason for this philanthropy was that with Google installed as the default search engine in Android devices, a huge volume of traffic was driven to Google's advertising business.

Google also has Google Maps, which, in similar fashion, can guide travelers to business locations, especially hotels and restaurants, where they will spend money.

Microsoft is a diverse software and hardware business, built around the domination of the Windows operating system in its various incarnations in personal and business computers. Microsoft has its own search engine, Bing, which is competing for the same business as Google's search engine, though with relatively little success so far.

Since the dominance of desktop computing is being rapidly overwhelmed by portable devices that connect to the Internet, it therefore makes a lot of sense for Microsoft to get an operating system onto a large number of devices, so that it can drive search traffic to its own search engine.

Now that Microsoft has formed a partnership with Nokia, Nokia's proprietary NavTeq and Drive assets can be considered to be part of the Windows ecosystem.

Investment Conclusions:

  • This information points to Apple retaining its strong position as the premier platform for better off consumers, the demographic that includes those who want to and can afford to pay to download apps.
  • The real dogfight in the app wars will be between Windows 8 and Android when Windows 8 emerges, but neither will touch Apple. If Windows Phone succeeds this will slow the growth of Google's Android system, and hence of Google's search and advertising business, but won't affect Apple very much.
  • In its struggle to achieve parity, it makes sense for Microsoft to pay developers to develop key apps for their own ecosystem, because ultimately the aim of having a sought after app collection is to drive traffic to Bing.

Of the three companies Microsoft has the lowest p/e, pays a dividend, and has a very aggressive share buyback program that is almost certain to lead to increased earnings per share over time. If Windows 8 is successful in mobile devices, Microsoft could succeed in directing some of Google's Web traffic to Bing and cut into Google's revenue growth.

Apple has shown explosive growth thanks mainly to the iPhone, with the iPad playing a supporting role, and looks to be very secure in its position as the device provider of choice to affluent consumers. Apple is the most popular choice of app builders and is likely to maintain its lead.

Google has the highest price to earnings ratio at 17.36, which suggests that it could be the most vulnerable to any challenges to the status quo posed by the advent of Windows 8 or to any macroeconomic catastrophe. Google could also be vulnerable to losing traffic to any future Apple search engine, to Siri, or to Apple's maps and driving directions applications. Google also appears to be the least desired destination for cutting edge app builders.

My own perspective is that the huge profits that have been made so far in the short career of the smartphone (or hand-held computer as we should probably call it) may only be the start of mobile computing.

We are perhaps in the same position as the automobile industry in 1908, when Henry Ford introduced the Model T. At that time it would have been difficult to anticipate the scale of the automobile industry in the years to come.

The Interstate road system was only started in 1956, 48 years after the Model T. The information superhighway of today will probably look very primitive a few years down the road, so there is probably room for all three ecosystems to expand provided that science continues to make global prosperity feasible.

Disclosure: I am long AAPL, NOK, MSFT.