Android is currently riding on a wave of euphoria having blasted in the global and Australian smartphone market this year.  However, is this  just a honeymoon period, or is Android here to stay?  Android is based on a radically different business model to the established players of the declining Symbian and the mature Apple iOS (hardly breaking new ground with a naming convention there).

The Android business model is based on the open source Linux operating system – founded on a passionate merging of socialist ideals and advanced technology where software is poured in to a creative commons to be shared by all of humanity, free of charge.

Android is no exception, however Google is no charity either.  Google have chosen Android because it suits their business model of supply chain integration to drive down costs, and broaden their market for their core business of search and advertising.

This business model, by driving down costs, will commoditise everything it touches, the process by which consumers come to expect products and services to be low cost, undifferentiated and possibly even free.  This suits Google just fine, but offends established players such as Apple who rely on healthy gross device profit margins, while Google’s business model relies on broadening their market reach to more consumers with free or cheap services and products.  Apple and Google could not be any more different, and Apple are not happy about it having launched a proxy lawsuit against Google via HTC.

A comparison of relative profit margins in mobile device manufacturers reveals that on company operations, Apple enjoys EBIT(1)  profit margins of 40%, compared to Microsoft at 38%, Nokia at 4.9% and Dell at 4.1% (Forbes Magazine 2010).

In terms of gross margin on products, on the iPad alone, Apple enjoys gross margins of up to 55%, with concerns raised when the gross profit margin falls to ‘only’ 40% (Forbes Magazine 2010), with up to 60% gross profit for the iPhone (Elmer-DeWitt 2010)

Conversely, Nokia and HTC fall to almost half of this figure at just over 30% gross product profit margin.

So there is a lot to lose, as Nokia have shown with their declining profit margins and their CEO coming under increasing pressure to do something about it.  Meanwhile Android, based entirely on ‘free’ is becoming very popular with device manufacturers, who don’t have to pay royalties to use Android, and consumers, who enjoy cheaper devices and a more ‘open’ platform, in contrast to the Apple ecosystem ruled over by the benevolent dictator Steve Jobs.

2010 will be a very interesting year in the smartphone market, and only one true winner will emerge: the consumer.

Definitions

(1) Earnings Before Interest And Tax, otherwise known as Operating Profit is a measure of profitability that takes in to account the operating structure and expenses of the organisation such as marketing and R&D.  EBIT does not include potentially anomalous measures such as depreciation and asset write-downs structured to minimise taxable company income.

References

Forbes Magazine. “Apple Suffers Mildly From Slimmer iPad Margins.” Forbes.com. 14 April 2010. http://blogs.forbes.com/greatspeculations/2010/04/14/apple-suffers-mildly-from-slimmer-ipad-margins/ (accessed June 07, 2010).

Elmer-DeWitt, Philip. iPhone gross profit margin nears 60%. 02 March 2010. http://tech.fortune.cnn.com/2010/03/02/what-doth-it-profit-an-iphone/ (accessed June 07, 2010).

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Apple just won’t give up.  Having entered the ‘mobile space’ and declared sovereignty against any other newcomers such as Google (likely due to their joint chairman Eric Schmidt ‘defecting’ to Google a year or so ago), Apple has declared all out war against many mobile companies and is now embroiled in a fight with Nokia, HTC and Google

This is likely to be a long and very dull drawn out lawsuit that Apple hopes will stall the development of Android, perceived as being its main competitor.

What is curious though, is that until Apple decided to sue everyone else, Nokia had quietly accepted Apple violating Nokia’s mobile patents.

Is there a slight scent of hypocrisy in the air?

via Apple Filing Another Case Against HTC « Moby1 blog.

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Following my earlier thoughts on Australia’s unsustainable export composition

The ABC has reported that yet another deal has opened up for Australian coal exports, this time for brown coal which is low grade coal.

This concerns me for two reasons:

1) Australia is continuing its reliance on coal exports to prop up our enviable lifestyles and this leaves the Australian economy dangerously exposed to a volatile global economy – and in case you need a reminder (graph taken from the Department for Foreign Affairs and Trade)

2) It further increases Australia’s responsibility for global greenhouse emissions. In the rush to move Australia toward a ‘low emission’ economy, we are conveniently pushing our responsibility further out of our awareness by ignoring where our imports come from – name China – who may not yet share our growing enthusiasm for low emission economics – while we happily base over one quarter of all our national exports on the most polluting export we can dig up and ship out as fast as the ships can take it.

So we sit in our solar powered homes, with our low emission cars, and wear many proud badges declaring our achievement, while the bulk of our consumer goods are produced in high emission economies.

The net result of this is to create a bubble of blissful ignorance around Australian consumers while through our exports and overseas consumption, may in fact be the most polluting people per capita on Earth, regardless of all the wind farms and solar panels on our roofs.

Coal is an incredibly important commodity to the Australian economy, one which we must, eventually, move away from. It should be seen as a stop gap measure while Australia builds up more economically and environmentally sustainable exports for the long term, not something to be celebrated.

Otherwise, considering where our imports come from, and what we export, we may as well be honest with ourselves and stop pretending we are an environmentally sustainable nation, however low our domestic emissions fall.

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For those who are interested in what happened to Nokia (Remember them?  Apparently they still make phones), Symbian 3 is starting to make an appearance although it has not yet appeared on any devices, and Nokia is reported to be moving to the Mego platform (a Linux derived OS like Android, except backed by Intel rather than Google).

http://www.mobile-review.com/review/symbian-3-en.shtml

I am really not sure what all these manufacturers hope to achieve by dazzling developers with a bewildering array of mobile platforms to choose from, and I don’t think it bodes well.  Some platforms may find niche markets such as in the developing world or for certain market segments, however I don’t see a mainstream future beyond Android and iPhone for the foreseeable future.

The CEO of Nokia has recently come under some criticism for this and has stated that Nokia needs to improve their execution.  Well, no significant platform improvement since the Nokia N95 in 2007, 3 years ago, would suggest that yes, there appears to be a problem with execution.

Lets hope Nokia regain their strength however, as the mobile market has benefited greatly from their innovation and contribution to technologies that they have generously allowed other companies to use.

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It seems the open architecture of Android is both a strength and a weakness.  Here’s hoping that Android does not suffer the same problems that have maligned Microsoft operating systems for many years – from the ongoing security issues inherant to the open development models that allowed the very platform to succeed in the first place.

Android apps ‘open to snoopers’ – Technology – News – iTnews.com.au.

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The Wall Street Journal is speculating that Google is planning a music download service.

Google is renowned for shaking up established business models, sending game changing earthquakes through established markets.  It is too early to determine if this will be a good or a bad thing, but it will surely up the ante in Apple’s fight against Google.

Google Plans Music Service Tied to Search Engine – WSJ.com.

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Frank Zumbo  writes in the Herald Sun (Road to NBN may leave a debt mountain) of questions we should be asking about the NBN.  As a nation building project, it would fill the nation with pride and drive our small isolated nation steadfast in to the 21st century, no doubt.

However, I have several concerns with the NBN proposal

1) Can the Australian economy afford another 20 or 40 billion (more likely 60 billion after inevitable delays and blow-outs) to be imposed on businesses already struggling to rebuild after the GFC?  With our public debt already very high, and our levels of private debt threatening to destabilise the economy, it is uncertain if questionable large scale projects of this nature are necessary right now except for political reasons.

2) What is the economic benefit of a blanket nation wide broadband network, over incremental upgrades of poorly served areas, such as Gungahlin in Canberra which has suffered for well over a decade from very poor Internet reliability, if it can be obtained at all.  I am fortunate to be serviced by an extremely reliable and very affordable Internet connection care of Internode, as are many others.  I do not require an NBN in my life at the moment, I have everything I need for now.  The NBN will open up new business models such as digital media content delivery.  However there again, what is the benefit of this over a rail system upgrade in Sydney to reduce worker commute time for example?

3) What about submarine cables?  This is my main concern that I have been raising for many years.  It appears that in our rush to begrudge ISPs of charging higher prices than in other countries, and to build a national broadband network, we seem to forget that most of our Internet traffic is international, that Australia is a long way away from anywhere else, and that few other countries want to connect to us.  This means that Australia has a limited capacity of self funded submarine cables to link us to the world.  All the NBN in the world won’t change that, in fact it could bring our network to a screeching halt if this is not recognised, like building many freeways leading to a main road.  You get a traffic jam.  Few seem to recognise that Australia has only 3 or so main cables, and that the only reason we have been enjoying falling Internet prices in the last year or so is due to the PIPE cable coming on line (the cable that almost went bankrupt due to a lack of private and public sector interest).  At around 2.5 terabit/s capacity, the PIPE cable has been the single most significant Internet event in recent Australian history, yet almost no one knows of it except a few informed investors. (Note – I will update this post as more information comes to hand on the Australian submarine network and its current capacity).  So I question if building the front end first (NBN) before building the real infrastructure needed to make it work (submarine cables) is a wise move.

Overall, I just don’t think the economics or the social benefits of the National Broadband Network in a fragile economy where the recession has not hit us, yet, is a smart move without these and other questions being answered before extracting another 20 or so billion dollars from Australian businesses and citizens to fund it.

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It seems conflicting views of the Australian property market have begun to emerge, as could be reasonably expected around this time in the cycle before someone realises the emperor may be scantily clad.

House price growth to slow says expert | Herald Sun.

Economists predict 22pc house price rise

The emergence of diverging opinion in mainstream press heralds some interesting times ahead the for the Australian economy, and possibly some quite positive changes. A consensus is emerging that a bushfire of some description will burn through the property market at some point in the near future, however it remains to be seen where this bushfire will range from winter backburning to catastrophic firestorm.  I am optimistic, considering Australia’s less lax bankruptcy and default laws than that in the USA, and the psychological obsession Australian consumers have with housing, that any bushfire sparked when the bubble bursts, will be of moderate intensity and clear weedy undergrowth to make way for a newer healthier market to grow through. In other words, it will be positive for the Australian economy and for housing affordability. With any luck, it may also re-align investment activity to assets that are actually productive, i.e. businesses.

Some others however are less optimistic and talk of a crash, a raging bushfire that will leave a wake of devastation and economic ruin.  I am not yet one of those commentators, although I represent but one of many diverging opinions.

Interest in the Australian Property Market

Curiously however, interest in the Australian property market has gradually declined in search terms on the Internet since 2004, while news reference volumes have dramatically increased in volatility since the breakout of the GFC.  However interest has spiked recently.  Less curious are the search origins, with English, and then ‘Chinese’ as the dominant languages, and Hong Kong and Singapore presenting significant search origins, as to be expected by reports of foreign investment in to Australian property.

If anyone has any thoughts on any of the above, I would like to hear from you. Please feel free to leave a comment with your thoughts.

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A further example of Apple orienting its business models around phone networks - ITNews Khidr Suleman writes:

Apple iPhone 4 micro-SIM not compatible with iPad – Hardware

Telco networks have been battling commoditisation for a number of years, the process by which margins decline and a company can find itself in the never ending trap of declining R&D / marketing budgets and the war of attrition against their competitors.  It is a vicious cycle that can push telcos to become little more than ‘dumb pipes’ providing only the raw commodity of data and voice, regardless of the high levels of capital investment required to set up the networks in the first place.

One response is to seek to create artificial market distoritions that do not rely on supply, demand or scarcity.  In this model, profit margins are protected by essentially building walls around customers to create an illusion of scarcity.

Apple appears willing to help telcos with this process by not allowing customers to combine data allowances between their devices, forcing customers to purchase two separate data plans.  Why?  Perhaps Apple and the telcos need each other.  Apple for the sales channel, and the telcos for the demand driver.  At first glance it appears to be a good match.

However, other companies, sucha s Nokia, that have embraced telcos at the expense of customer value, have generally not fared well in the long term.

Only business models that are founded on real scarcity and real demand, rather than an illusion of scarcity and demand, can succeed in the long term.

Either that, or build real value adding margin enhancing services on top of the commoditised ‘dumb pipe’.

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It seems Google have ruffled more than a few feathers at Apple, ever since their joint chairman Eric Schmidt decided to defect to the ‘Dark Side’ (Google).  I am somewhat ambivalent about this development, as it appears Apple entered the advertising space, more than Google in to the mobile space which apparently Apple feels Google should not enter (not that Nokia complained about Apple entering its market)

Analysis: Apples ad strategy invites investigation – Technology – News – iTnews.com.au

This fight will continue for at least a year or two, and I suspect the main instigator will be Apple.

For what purpose I am not sure, and if this will benefit Apple in the long term, I really can’t say with any certainty.

What are your thoughts?

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