Apple vs Google buddies

Apple vs Google's buddies

Apple revolutionized the mobile world when they introduced the iPhone in 2007. This one device from apple caught everyone by surprise and changed the way mobile industry was organized. In one day in 2007 there was a new niche segment created, that of touchscreen smartphones. It promised and to a great extent delivered a new and superior user experience and changed the expectations from a phone.

Though it gained a lot of media and public attention there was only a small segment of users who would pay up 600 odd dollars to get such a sophisticated device. Phones were not supposed to cost that much even when they came packed with never before seen capabilities.

In the year of 2008 Google, with an eye on the future where they anticipated the users adopting touchscreen devices, with an objective to protect their search engine dominance launched the first Android operating system with HTC Dream. Google also provided this operating system to all manufacturers and they can in turn tweak the software to suit their hardware and/or user experience specifications.

Google tried and succeed in leveraging the low cost manufacturing base in Eastern Asia to produce touch screen smartphones at a mass level. Google along with its low cost manufacturing buddies brought the smartphones to the common man, who would not have paid 800 dollars for an iPhone. This becomes evident from the below two chart on the global iPhone and Android phone annual sales in unit terms from their birth

(Courtesy: Statista)

In the above graphic we see that from the same beginning iPhone had global shipments of 150 million units while for Android based phones it was 450 million in 2013. This article intends to analyze the above difference using the “Threat of substitutes theory” which says

1. “A substitute is a product that performs the same or similar function as another product. Microeconomics teaches that the more substitutes a product has, the demand for the product becomes more elastic. Elastic demand means increased consumer price sensitivity which equates to less certainty of profits.”

1. “Substitute good: Different goods that, at least partly, satisfy the same needs of the consumers and, therefore, can be used to replace one another. Price of such goods shows positive cross-elasticity of demand. Thus, if the price of one good goes up the sales of the other rise, and vice versa. Also called substitutes”

The scope of this article revolves around three principal points of Price, Quality and Switching cost

1. An attractive price of substitutes: The price of substitutes acts as a ceiling to the price of the subject product. An attractive price of a substitute inhibits an industry from reaching its profit potential. The Asian manufacturer were primarily responsible for mass production of the touchscreen phones which they powered by Android OS and thus were able to offer devices which were way cheaper than that produced by Apple. Users who wanted to try out this new technology were able to have it for a price far lower. The fact that a user can get an Android powered phone for as low as 50 dollars put things in perspective on the extent of influence of this factor.
2. Increased quality of substitutes: If the quality of a substitute is high, there is increased pressure to increase the quality of the subject product. The initial user experience for the android powered phones were not as good as iPhone but, with continuous improvements in the hardware and Android OS, it has caught up with iPhone. For a decently priced Android phone the performance and experience now is comparable to that of iPhone. (No offences to the iPhone cult)
3. Low switching costs to consumers: Switching costs to consumers can come in the form of monetary costs (transferring cell phone service: termination and initiation fees) or lifestyle switching costs (switching from driving a car to public transportation).
4. Monetary Cost
5. With most of the major telecom provider across the world offering devices both iPhone and Android at low on long term subscriptions makes the actual cost of acquiring them very low. The initial low price of Android devices enables the telecom companies to give them away at throw away prices. I brought my Galaxy S3 Mini for 11 dollars on a two years contract whereas an iPhone would have costed 200 dollars for the same term contract.
6. Even if someone wants to acquire such a device the cost is gives the Android phones advantage as discussed in point 1 under “An attractive price of substitutes”
7. Lifestyle switching cost: Apple iPhone initially had an advantage when it was seen as a novelty and everyone wanted to have a share of it. The initial advent of Android and its continuous improvement has reduced the gap between iPhone and Android phones in terms of experience, richness of OS and number of applications available. Today a user can consider both iPhone and an upper end Android device and be assured of similar user experience to a large extent. Switching from an iPhone to an Android is thus not a very difficult decision in terms of cost or lifestyle.

In the final analysis though Apple and others will continue to exist with varying degrees of profits but this rivalry facilitated by Google has made sure that the search engine giants dominance has extended from desktops to smartphones and is under no threat in the near to medium term.