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Fat margins squeeze Apple against Android

iPhone subsidies can't beat 'free'

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Open ... and Shut There are a million ways to over-analyse iOS versus Android market share, but one thing is often overlooked: Apple's high-margin strategy depends upon buying customers through subsidies, and may not be able to keep pace with Android's low-cost model over time.

Google's Android growth - 250 per cent in 2011 - is particularly impressive because, unlike Apple, Google no longer has to subsidise smartphones and tablets to the same degree as Apple, as Android is free. This could be the key to winning in emerging markets which Apple can't subsidise enough to bring costs in line with consumers' ability to pay.

To be clear, people seem willing to stretch their budgets to afford a smartphone. After all, smartphones have taken off with youth as even more important than a car, some surveys show. And recent Nielsen data suggests that even on poverty-level incomes of less than $15,000, 56 per cent of 18 to 24-year-old Americans own a smartphone.

But what kind? Well, Nielsen didn't track that, but an NPD study shows that 57 per cent of first-time smartphone buyers buy an Android. Why? Probably because that's what they can afford, and possibly because Android devices come in a wide array of shapes and sizes, unlike the iPhone monoculture.

But cost is likely the biggest driver for Android, and it's why Android is exploding in emerging markets while the iPhone struggles to keep pace, as I've argued before. Apple counters its high-price, high-margin strategy, as Twitter's Chris Aniszczyk points out, by using older models to cover less affluent buyers.

But even the older models cost more than $500 unsubsidised, which is a losing price in developing markets or even in the US.

Regardless, if faced with an older-model iPhone or the latest and greatest Android device, it's likely that many buyers are going to Android. While it's too early to pick a winner in the iOS-versus-Android battle, the data seems to indicate that older, more affluent buyers gravitate toward iOS devices. Because they can. Both iOS and Android are soaring, but there are far more people on the planet who don't qualify as "wealthy," and Apple simply isn't going to be able to convince these "99 per cent" to buy an older iPhone, and it certainly can't afford to buy everyone a phone through subsidies.

As The Wall Street Journal reports, Apple has stumbled over the past year in financial crisis-ridden Southern Europe, as consumers went with $200 (or less), unsubsidised Android phones and shunned the iPhone. US carriers pay an estimated $400 for every iPhone contract, which is likely not a sustainable market worldwide.

Apple is going to have to figure out how to be cheap if it wants market share.

Historically, the Cupertino-based company has cared more about profits than market share, and arguably will forfeit market share to retain its business model. But ultimately the mobile ecosystem is going to revolve around one big player, and Google's low-cost strategy positions Android to be that player unless Apple can figure out a way to be both cool and cheap. Apple has increasingly cut prices in laptops, so maybe it will do the same in mobile.

But those costs are going to have to be cut on Apple's side. As Android devices sell well, carriers are going to become less willing to pay to inflate Apple's margins with subsidies. ®

Matt Asay is senior vice president of business development at Nodeable, offering systems management for managing and analysing cloud-based data. He was formerly SVP of biz dev at HTML5 start-up Strobe and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register.

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