Of iPhones and Androids: A Tale of Two Business Models

Unless you lead a very sheltered life, you have probably read all kinds of stuff about Apple's new 3G iPhone. Yes, the retail price will be $199 for the 8 GB model. Yes, that makes people who bought an iPhone on May 15th for $399 really mad. But they shouldn't be. A new 3G iPhone is actually more expensive to own and use than its 2.5G predecessor. When you combine the data plan, voice and text messaging, you will pay between $220 and $270 more for the new device.

The 3G iPhone is an object lesson in the "walled garden" value proposition: a closed system, available in over 70 countries worldwide, using a time-tested, carrier subsidized business model.

There's nothing industry leading here... of course there is! It's not Apple's job to lead the industry in anti-carrier business models, it's their job to increase shareholder value. I've seen estimates that put Apple's revenue for "Steve Job's Excellent Adventure in 3G" between $6 and $7 billion, depending on which model sells best. This sounds like a good day at the office.

Let's compare and contrast this "old fashioned" model with its open source, would-be, competition: Google's Android platform.

Like so many people, the Search Gods are not in love with walled gardens. Like us mere mortals, they dream of a day when any manufacturer can market a device that is interoperable, usable everywhere and features applications created by an open source community of dedicated technophiles -- Gootopia!

Google likes this idea so much, they created Android: the first truly open source code base for mobile phones. They developed the system with the idea of giving it away to manufacturers in return for allowing Google to place ads inside android mobile programs. People who have seen the demo (like me) are blown away by the capabilities. Depending upon your point of view, it's designed to be either an iPhone knock-off or an iPhone killer. At the moment it's neither because no company has signed on to make a phone.

At the very least, a handheld device running Android software would compare favorably to an iPhone. Some say that with Google behind it, it would be much, much better. So, why hasn't anyone jumped on the model?

We might be able to gain some insight from David Wood, Symbian's Research Chief. He said, "People have been predicting the success of open source for some time [but] fragmentation is easy, and integration is hard."

What about the carriers? Certainly if Google could find a carrier willing to sell an Android phone at retail, someone would agree to manufacture it.

And now we come to the tale of two business models. Without a walled garden, there is no incentive for any carrier to market the device. When you think about the extreme competition in mobile and the difficulty of the retail business, it doesn't take long to come to the conclusion that open source is not a good fit.

What carrier would be willing to market a device that you could easily use with another carrier's plan -- or worse, in Kevin Martin's new free national wireless broadband cloud? How would you debug open source applications across carriers? With the downward price pressure on pure bits, where could an Android manufacturer or carrier value-add and charge more?

I've seen a bunch of articles in the past few days taking Apple to task for not reinventing the telecom business. But, if you think about it. There is a real reason that the subsidized handset model has evolved. Some have called it a drug. Others liken it to the holiday sales every month that plague the retail business. (Yes, there is a holiday in every month of the year except August and that's when retail has their "back to school" sales. Why would any customer ever buy anything that was not on sale?)

The key take-away from the new 3G iPhone hype machine should be the same as the key take-away from the 2.5G iPhone hype machine. Apple sells benefits, while everyone else sells features. Since average consumers are only interested in benefits: calling someone, texting someone, photo galleries, video playback, maps, web browsing, email, etc. The technical features that enable these benefits are uninteresting or just plain confusing. How much RAM does the phone have? How many mega pixels is the screen? How fast is the data transfer rate when it's plugged into a USB port? Answers to these questions do not sell phones to average consumers. And the biggest share of wallet will go to the products that get the biggest share of mind.

I've heard that over 20,000 developers submitted their applications for inclusion in the Apple 3G iPhone store and only 4,000 were accepted. Is there an application in there that will benefit you? Of course there is. Will you buy a 3G iPhone to get that benefit? Apple is counting on it.

Open source mobile or Walled Garden mobile with opportunities for developers to enhance the user experience? Congrats, Steve! I think you got it right again.

Shelly Palmer is the host of MediaBytes a daily news show featuring news you can use about technology, media & entertainment, Managing Director of Advanced Media Ventures Group LLC and the author of Television Disrupted: The Transition from Network to Networked TV (2006, Focal Press). Shelly is also President of the National Academy of Television Arts & Sciences, NY (the organization that bestows the coveted Emmy® Awards). He is the Vice-Chairman of the National Academy of Media Arts & Sciences an organization dedicated to education and leadership in the areas of technology, media and entertainment. Palmer also oversees the Advanced Media Technology Emmy® Awards which honors outstanding achievements in the science and technology of advanced media. You can read Shelly's blog here. Shelly can be reached at [e-mail]

Follow Shelly Palmer on Twitter: www.twitter.com/@shelly_palmer

Comments

[Sundialsvc4]

I don't want an advertisement showing up on my phone.

No sale.

Click.

[Markvli]

Shelly,

I think the larger point here is what are the implications of the open-source model for other business sectors? Certainly user-generated content spawned a new wave of companies using consumers to create their content. But now the question is how many other sectors can take advantage of users to not simply create the content but to create the product, as Apple has with the iPhone SDK.

I think that companies in the offline and online worlds that find ways to do that will lead in the future, quite possibly. The notion that efficiencies are achieved by allowing the consumer to drive the product rather than R&D is largely untapped in most sectors. The Obama campaign is a great example of this in the political realm - where supporters not only interact sharing user-generated content on the campaign website, they also create offline events and thereby help shape the campaign itself.

[wordjunkie]

Just to be accurate, the list of "benefits" you described are not benefits, they are still features. Web Browsing, for example, is a feature. The benefit is that "you can stay connected anywhere." Video playback is a feature, but the benefit is "watch movies in your car!" Benefits refer to the consumer, not the product. Hey, just an old school marketing dude keeping it real.

[axt113]

Everyone talks warmly about the Iphone, i've used it I don't see the hoopla, its useless for actual work, its nice if all you plan to do is watch videos and surf, but without a keyboard, any typing becomes unwieldy.

Apple has succeeded in creating hype and making a device that people want because of its looks, but I don't consider it a useful machine

[MemeOfConsciousness]

Shelly, you're a little behind the times. Samsung, HTC and LG (I think Motorola, too) are all manufacturing Android phones. Didn't you see the debut of HTC's Dream phone at the Android IO conference? Here, have a gander, this ought to blow your shorts up. :)

http://www.youtube.com/watch?v=arXolJrLVEg&feature=related

Android phones will be debuting in the latter half of this year. There's even rumor of an actual Google-branded gPhone coming from Samsung in 2009. Check I Cringely's archives for Feb. on PBS.

Also, with regards to a carrier, look to the Sprint/Clearwire JV and imagine Android on WiMax steroids.

"Sprint and Clearwire also announced today that five innovative technology, content and communications leaders – Intel Corporation through Intel Capital, Google Inc., Comcast Corporation, Time Warner Cable Inc. , and Bright House Networks – have collectively agreed to invest $3.2 billion into the new company.

…Google will partner with the new Clearwire in the development of Internet services, advertising services and applications for mobile WiMAX devices. In addition, Google will be the search provider and a preferred provider of other applications for the new Clearwire's retail product.

Google will partner with the new Clearwire on an open Internet business protocol for mobile broadband devices. The new Clearwire will support Google's Android operating system software in its future voice and data devices that it provides to its retail customers.

http://investors.clearwire.com/phoenix.zhtml?c=198722&p=irol-newsArticle&ID=1141103&highlight=

[axt113]

I hope the Dream is all its cracked up to be, i'm thinking of buying a new phone but haven't found one that fulfills all my needs/desires

[Sumocat]

"Apple sells benefits, while everyone else sells features." --That is the best comparison I've read of how Apple sells their product vs. the other guys. It's also an apt description of how they design products. The fact they alone build both hardware and software is a considerable advantage in the field of smart appliances. The other guys can match them on features, but no one has anywhere near their experience when it comes to building software that uses those features. As phones become more powerful, Apple's advantage will become more pronounced.

"I've heard that over 20,000 developers submitted their applications for inclusion in the Apple 3G iPhone store and only 4,000 were accepted." -- Those are actually the developers accepted for the beta program. Presumably once the software development kit (SDK) is out of beta testing, it will be available to anyone. Still, 4,000 is a good start.

Regarding Apple's failure to "reinvent" the telecom business, it should be noted that Apple made their exclusive deal with Cingular, not AT&T. While they were able to arrange new deals with Cingular, like at-home activation, when it became AT&T, they had to contend with the considerable inertia of that mammoth. Apple simply got outweighed.