First, Google, not Apple, should be very, very concerned about this development. Amazon has basically taken Google’s engineering resources / output and said “thank you for your free work, we’ll take it from here.” How many times did Amazon mention Android in the device description? Does the device look at all like an Android device? Does it offer any Google services by default? Will Google have to pay to be the default search on a tablet that was designed using Google software (think about the irony in that)?

Second, this leaves most other tablet vendors still scratching their heads about what to do, and this is the best example of asymmetrical competition. I would elaborate, but John Gruber had this excellent paragraph from his post that sums is nicely already:

Attack from a position of strength. Build on your previous successes. That’s what Apple does. That’s what Amazon is doing here. The other guys — the Samsungs, HTCs, Motorolas, RIMs — can’t match Apple’s hardware design, don’t even try to match Apple in terms of original and differentiated software, and struggle to match Apple’s prices because they don’t have the economy of scale advantages Apple does. Those guys can’t match Amazon either, because they have no content to sell. Amazon can give away the razor because they’re already in the business of selling blades. The other guys don’t even have blades to sell.

It’s true that Google has a strategy of commoditizing adjacent markets to turn them into ad-based businesses, which falls into its sweet spot. Many of Google’s most successful products besides its core search are of this nature: email, maps etc. GIving away Android for free is certainly commoditizing the mobile handset market: of the 300k daily activation number which Google touts, people speculate a large portion are what analysts traditionally call “unbranded” or “other” phones. In general this conforms to Google’s strategy; however, the flaw here is that in my view Android is disrupting other branded manufacturers like Nokia / Samsung / Motorola far more than it is challenging Apple and iOS devices. In other words, it may appear that Android is mainly a counter to the iPhone, but in reality it is killing Apple’s main branded competitors.

Allow me to expand on this point, because it probably appears counter-intuitive. Before Android powered smartphones hit the market, Apple was certainly in a league of its own with the iPhone. While it was rapidly capturing share of device profits (the famous 5% unit volume – 40% profit share charts), the incumbent device brands – Nokia et al. – still had the comfortable mid to low end market volumes, which would give them time to develop competing OSes. Now along comes Android, which, while it gave them a quick boost in terms of time to market of credible iOS challenger devices, also opened the floodgates to a whole range of unbranded competitors. These new comers – Huawei, ZTE etc. – play the same volume game as Nokia / Samsung et al. And we know so far Samsung / Motorola have not drastically reversed their financial performance thanks to Android – so what’s the next possible scenario? Would it be possible they continue to slip in unit volume, and be weakened further at the onslaught of the Android clones?

At the same time, I think Apple is sufficiently differentiated from the unbranded players  in terms of value propositions (very different consumer segments), so the Android clones do not pose a significant threat to Apple.

The flaw here is that Google did not limit who could use Android – a complete lack of platform control. If Google’s strategy does indeed include undermining Apple, it should have limited Android to a handful of brands, so they could compete effectively with Apple. Furthermore, I would also argue that Apple’s primary issue currently is not Android, but its own supply chain and distribution restrictions (e.g. AT&T exclusivity). The big fanfare of Android activation numbers have done little to stop iPhone stockouts all over the world – in China where the iPhone 4 is obscenely priced, supply is still tight. Admittedly I don’t have conclusive data on iPhone supply constraints – but if we take this assumption as true (and there are certainly indicators and proxies in favor of this), it would show that Android has done very little to halt Apple, and is causing far more headaches to Samsung etc.

The second fundamental flaw is that going back to the original strategy, carriers still stand in the way of Google’s profit realization, if and when the mobile devices are completely commoditized (the death of Apple and RIM). Mobile network operators have far greater influence over consumers than wireline operators – in most cases, people choose a mobile operator first before choosing a handset (Apple being the prime exception / disruption), whereas you choices over which wireline operator and which computer brand to buy are completely separate decisions. Because mobile operators “own” the consumers, market power dynamics dictate that Google cannot expect to extract substantial profits. I know this sounds abstract, but until Google can demonstrate to operators that “I can make your customers leave you for another operator”, operators could and should squeeze mobile advertising profits out of Google. Again, Google’s lack of control expedites this – Verizon can sign up Bing as the default search on its phones etc, but there also are many other ways to play this profit squeezing game.

Of course, Google could hope for a “Wintel”-like end-game, where they dominate the OS space and split the spoils with the operators; but operators can foreclose that outcome by actively playing one OS off another. I’m sure strategists at the operators are already plotting this out, and I wouldn’t be surprised if Nokia, which has long been an outsider to the US market, is called in by the operators to facilitate a bigger and better OS war.

Personally, I believe that on so many layers, this topic is really a non-topic. It provides entertainment value, no doubt, in the form of daily tech soap opera (bloggers jumping on every new data point released and typically extrapolating it beyond meaningfulness to arrive at flame-bait headlines). But from an industry analysis point of view, or a company analysis point of view (scrutinizing Apple / Google), the market share comparisons are really just one data point – it’s meaningful, but certainly not to the degree that the blogosphere claims it to be. Apple’s future is not in jeopardy if iPhone loses pole position to Android.

Over at Wired, Fred Vogelstein takes a crack at this topic. His main point is that if you sum up all the iOS devices (iPhone, iPod Touch, iPad), they are still outselling Android, by as much as 42%. While this may be encouraging to the Apple camp, there is no reason we can expect this to hold, especially when other Android powered devices (e.g. Android tablets) eventually hit the market.

I don’t have any doubt that Android devices will outsell iOS devices. If it hasn’t happened already, it will happen soon. There is no reason to believe an OS from a premium manufacturer (Apple) with an extremely limited range of SKUs can outsell, on a pure volume basis, an OS that is free to use and which is backed by some of the biggest consumer electronics companies in the world. On a dollar value basis, it might be a different story, but still not that likely. On a dollars of profit generated basis though, highly possible (Apple generates more profit than rest of mobile industry combined, with only 3% unit volume share).

That said, the main reason people are obsessed with these market share numbers seem to be the underlying assumption that iPhone and its eco-system will lose its draw to developers, and by extension to consumers, if it is relegated to a minority market share. I think there are at least a couple of counter-arguments to make here.

First of all, being the minority market share platform does not translate into a lack of quality apps, to the extent that it will hamper mass-premium consumers’ (Apple’s core segment) interest in the platform. For example, if you flip the argument over the number of apps in the Android vs. iPhone app stores on its head, you may well say that even though Android has a smaller number of apps, the eco-system is already sizable enough, so that for any functionality there will be “an app for that”. Another example would be none other than Macs – what’s the market share that Mac OS holds in all personal computers? Single digits? Do mainstream Mac users complain about the lack of quality apps (note the emphasis on mainstream – specific categories like hardcore gaming is lacking on the Mac, but even that is seeing improvement)? Holding these two examples, I would argue that with the developer community Apple has already amassed, it would be hard to foresee a drastic dying out of quality apps, even if Android floods the market.

Secondly, if you take a step back and look at the broader trend in computing, it is definitely headed in the direction of platform-agnostic. Some tech purists would even decry the whole notion of apps – everything should be realized on the browser, over the web. If you look at the desktop space, there is indeed the trend of “fat” clients (local apps) losing out to “thin” clients. Indeed, Google is perhaps one of the biggest proponents of this – its whole challenge to Microsoft is based on the browser. If we believe that the same trend will apply to mobile devices, then the apps craze we are experiencing really is just a transition phase – at some point, most of the apps you want would be delivered to you on the browser, as opposed to an app you download (again, Google’s Gmail mobile version on the browser is arguably better than Apple’s Mail app). And let’s give credit where credit is due – when Apple launched the iPhone in 2007, Steve Jobs’ initial vision was to have web apps (browser-based apps) instead of local apps. The app SDK and the app store only came out a year later, due to popular demand. (So you could say that Jobs had already envisioned an end-game where the browser was the point of delivery for apps, not the app store – his vision was perhaps just ahead of its time.)

If you sum these two arguments together, the bigger point is that iPhone will not lose its richness of apps in the face of Android capturing majority market share – it’s big enough already of a market so that there will be quality apps developed, and apps will be platform-agnostic anyway down the road. As long as Apple continue to bring innovation to its devices, it should not be overly worried about losing market share leadership – its whole strategy is founded on premium products, which implies that it won’t be market leader from a revenue / volume perspective. That’s why I wrote the headline of this post.

PS: Also, for people who continually say this will be a rerun of Apple vs. Windows in the 80s, please pause for a moment and reflect on the Mac’s continual resurgence over the last decade. This is again very indicative of the broader trend. In other words, one could almost claim that the “network effects” so famously championed by Wintel is close to becoming irrelevant, because the Internet has leveled the playing field for the small market share OSes.

PS2: And even if we are to talk of the platform wars of the 80s, we should get the facts straight. The following is my reply on a Quora question (similar topic really) awhile back:

First of all, it’s not really windows vs. mac, but PC vs. Mac. I would say by the time windows 3.0 came out, the platform war between PCs and Macs (at least the first war, not including Mac’s resurgence in recent years) was already over.

If you look at this article on Ars Technica, http://arstechnica.com/old/conte…
as early as 1986 PCs already had over 50% market share of computers, and it over-took the mac platform’s shares a few years before that. So in that sense, there never was a windows:mac war, at least not until very recently.

I think one key distinction between the platform wars of the 80s and android:iPhone is that in the 80s it was primarily driven by b2b, not b2c. IBM was late to the personal computers space, but they were the driving force behind making personal computers legitimate for business – they could go to a sales pitch with a business client with a perhaps inferior product but still sell it, and they could generate serious developer interest in developing for the PC. The killer apps of the 80s were spreadsheets and word-processors, sold to businesses. Apple could have better versions of such products on macs, but they couldn’t sell to businesses as quickly as IBM and clones like Compaq could, which is dictated by company structure and channel strategy – they are positioned as a consumer products company, and the only verticals where they made serious progress were education and publishing (where their products were clearly far far superior). That’s where the network effect kicked in and made Macs a niche.

Flash forward 25 years, and smartphone adoption is primarily driven by consumers, not businesses (blackberries being the exception). This is in Apple’s core area of expertise. It will still be challenging to fend off a group of competitors’ collective efforts (Samsung, HTC etc.), but as long as Apple retain a significant portion of the market, it will be in good shape. Apple doesn’t need to be market leader to be hugely profitable and have a sizable eco-system of 3rd party apps etc. – just look at macs today, as a general consumer you have majority of the apps you need to be happy with it (games being one major exception, which is also therefore a good business opportunity).

So back to your original question, I’d say Android:iPhone will play out very differently compared to Windows:Mac. Android might still end up with a more market share, but iPhone will have enough share and a big enough eco-system so that Apple won’t have to go through the kind of existential challenge it had back in the mid 90s.

There is no doubt that Android has been a success, especially in terms of offering consumers more choices. US consumers now have a perhaps overwhelming number of smartphones to choose from, across the major carriers. This is certainly a great development.

What I want to focus on in this post, however, is looking at Android from the eco-system players’ perspective – Google, the handset manufacturers, the carriers, and the app developers. My position is that while Android is full of promise as a platform, some fundamental dynamics of the eco-system will make it very challenging to navigate, especially in terms of financial gains – at the end of the day, these players are in it to profit.

I would like to start by going through each player’s objectives from participating in the Android eco-system. Starting with Google, its objectives are:

• Gain a permanent foothold in mobile, ensuring Google’s future when the web becomes increasingly mobile-driven
• strategically, prevent dependence on Apple in mobile, limit its bargaining power
• Increase traffic to Google properties, most notably search, which will in turn grow Google’s ad revenue
• Offer users a consistent Google user experience across mobile devices
• “Lock” users into Gmail, Google Maps, Youtube etc. (think Microsoft shipping IE with Windows)
• Develop a mobile go-to-market channel for future Google products

In essence, it’s all about Android being the hook which will retain the user in using Google products.

What about the handset manufacturers’ objectives?

• Develop handsets that rival the iPhone’s value proposition, capture market share in the booming smartphone segment
• Differentiate from competitors
• Reduce OS R&D costs

And the carriers:

• Retain some degree of control in the device, unlike Apple’s terms with AT&T
• Prevent becoming “dumb pipes, up-sell users on carrier VAS (value-added services) such as mobile video, ring-tones, gaming etc.
• Reduce Apple’s bargaining power
• Differentiate from other carriers

There is one thing all players agree on – counter the iPhone; but beyond that, there are some immediate points of tension. As smartphones seem to converge on the single big touch-screen form factor, hardware manufacturers will find it increasingly difficult to differentiate in shape and design. In that sense, HTC / Motorola / Samsung would very much want to tweak the UI or customize the OS, but that would quickly run into conflict with Google’s wish to offer users a consistent experience; and practically speaking, UI may really be too much a core part of the OS for the manufacturers to customize. Hence, manufacturers face the dreaded prospect of following the footsteps of PC manufacturers – low differentiation leads to low profits.

At the same time, carriers and Google’s interests aren’t that well-aligned, either. Google recently shuttered its Nexus One online store, which was hailed to disrupt the status quo of handset distribution by offering a contract free model instead of the typical carrier-subsidized model. Obviously this did not please its carrier partners. On the flip side, carriers perennial fear of becoming “dumb pipes” drove them to loading up Android phones with hard-to-remove bloatware, which consumers generally dislike and probably is making Google cringe – and just serves as more ammo for Apple’s value proposition of a refined experience.

My point here is that the logical implication of these interlocking conflicts is compromise. Google aggressively wants Android to become the de facto mobile OS – so much so that not only is the OS free to manufacturers, Google is also reportedly sharing search revenue with carriers / manufacturers. (Pretty amazing that you can think of this as almost the opposite of Apple’s original iPhone terms, where Apple got a share of AT&T’s revenue.) Manufacturers will get away with deals such as putting a Baidu search box on the phone, which would obviously go against Google’s interests. Carriers will get to keep their finger in the OS.

Sometimes these compromises result in degraded user experience, such as bloatware. Most often, they call into question the financial returns on Android. It would be a very difficult task to model how much incremental revenue Google will generate by owning Android, as opposed to not owning an OS and just receiving mobile search traffic from all devices. Manufacturers will get to ride the smartphone boom for a while, but then will again be hard-pressed for innovation – again, the PC manufacturers come into mind. The biggest winner from all this seems to be the carriers – especially Verizon – they finally have options other than Apple, and they can keep their old business model.

The second post shows a fairly slick youtube video of Flash on Android, through a Farmville demo:

If you look closely enough, you can see that 1) there is an issue with mouse hover-overs; 2) for a intensely interactive Flash app, there is “money left on the table” in the sense that it is not customized for touch and the controls feel clumsy (or maybe it’s just the demo person…).

Which leads me to the provocative title of this post. The whole demand for Flash on the iPhone and other mobile platforms is based on how it gives consumers the “real web.” However, if you think about the main uses of Flash, which is 1) video 2) games 3) ads, I would say that consumers don’t care about whether ads can be displayed, and as the above example illustrates, games (and other forms of highly interactive Flash usages) probably need to be redesigned anyway (which calls for custom apps). Which leaves video – and this is where the competitive landscape plays an interesting role. The biggest video site, Youtube, is owned by Google, and Google is definitely going for HTML5 + H.264 and moving away from Flash. (Tangent: Google is also getting some criticism for not truly supporting the open web, as H.264 is a licensed technology.)

So the bottom line is, while Flash has dominance on the web now, it definitely faces the danger of becoming completely irrelevant in the mobile space. This may not be a terrible thing – moving to a unified standard such as HTML5 and away from proprietary codecs – except of course for Adobe.