A mobile lesson from the PC clone wars

Posted on July 27, 2010

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On my recent flight back from LAX to Sydney I had time to catch up on some light reading. Accompanying me on the 14 hour flight has a copy of Matt Ridley’s The Rational Optimist and the Wall St Journal.

Matt’s book on how prosperity evolves is a great read for anyone looking of a entrepreneurial pep talk. His discussion on how innovation is all about “ideas having sex” reads like a Genome update of Arthur Koestler’s ideas on Bio Association (See  The Act of Creation) but there are some excellent insights into the Economics of the Web and how the future is all about becoming an Exchange Specialist. As he say’s at the end of the book: Dare to be an Optimist!

The tone of the front page of the business coverage in the WSJ was set by Apple’s quarterly results and the news that Nokia share price had rebounded following speculation that Nokia was in the market for a new CEO.

The Journal quoted a Gartner analyst suggesting the current CEO had lost the confidence of investors and what Nokia needed was somebody from Silicon Valley (e.g. Steve Jobs) to take the company in a new direction.

An interesting idea but I was left wondering how effectively the Silicon Valley’s “CEO as Hero” culture would compliment the Finnish Collaborative Intelligence Culture that is the benchmark of Nokia approach to business.

During my travels through San Francisco, Chicago and LA I had observed that although the Apple Stores are packed with enthusiastic youngsters playing with iPhones and iPads the hotel lobbies, conference rooms and airport lounges are populated by road warriors conducting demonstrations on their netbooks and laptops while communicating with the rest of the world on their Blackberry.

So, if my recent travels are any indication, it would appear Apple may have won the hearts and minds of the technosavvy youngsters but it is yet to make an impact in the premium market of the mobile movers and shakers of the business world.

This left me wondering what would it take to make Apple the Microsoft of the Mobile World?

At the moment Smartphones represent 21% of the market. The real growth opportunity is in the 79% of market that has yet to make the transition. At the moment Apple is probably looking to grow its 3% market share to 15%. If it can achieve this it would become the third largest mobile phone manufacturer in the world based on today’s rankings. In contrast Microsoft’s Windows currently owns in excess of 90% of the PC operating system market. Could Apple ever achieve this level of growth in the mobile phone market?

Back in 1991 when Microsoft first released its GUI operating system (OS) it was popular among the Apple to community to dismiss Windows as a “Dyslexic Mac”. History tells us that it was the “Dyslexic Mac” that won the OS Wars and Apple was relegated into a niche player in an industry it revolutionised – if not invented.

When Microsoft originally launched Windows I wondered at that time why Apple did not release the Mac OS for the Intel Chip so that the PC clone manufacturers could choose between the two platforms. The answer was of course that Apple believed itself to be a hardware company and the Mac OS software provided Apple with its competitive edge. That’s why Apple tried to protect its IP from Microsoft in the courts.

Imagine what may have happened over the past 20 years if Apple had decided back in 1991 it was really a software company that made gadgets and not a gadget company that leverage its propriety OS software as its competitive edge to sell more gadgets? Imagine what Apple’s revenues and share price would have looked like today if it, instead of Microsoft, owned over 90% of the PC OS market share?

Today Apple represent 3.6% of Global PC sales. That figure is not far removed from the 3% market share Apple currently retains in the Global Mobile Phone Market. Which leads me to speculate: What is the ceiling of Apple’s potential growth in the Mobile Phone Market? and is there a potential growth strategy that can deliver Apple significantly higher market share?

What if the iPhone represents a unique opportunity to learn and profit from past mistakes? What if instead of pursuing the current “Walled Garden” Hardware strategy Apple reinvented itself as a software company and opened up the iOS to all device manufacturers? What if every mobile phone manufacturer could develop an iPhone iClone complete with Apple’s OS and Apps market tomorrow? What would happen to Apple’s bottom line?

With 14 hours of flight time ahead I thought here’s a prime opportunity to find out. What follows are my calculations. If you find any errors in the logic or the arithmetic then please let me know. They could be blinded by jet lag.

Let’s begin by taking a look at Apple’s existing revenues. According to the WSJ Apple posted revenue of $15.7 billion and net quarterly profit of $3.25 billion. That’s a profit margin of 20.7%. Applying that average to the iPhone revenues means the iPhone delivered an estimated $1.1 Billion in profits to the group. Assuming the iPhone to be a premium margin product group lets double the profit margin to $2.2 Billion per quarter (i.e. 41.4%).

Now let’s set an OEM licence fee of $20 per phone for other manufacturers (e.g. Samsung, Nokia and Sony) seeking to licence the iOS for their smartphones. Note: From memory Microsoft was charging somewhere between $8-$15 for an OEM licence of Windows Mobile so for argument’s sake we’ll set the Apple iOS OEM Licence at $20.

How many $20 iOS OEM licences would Apple have to sell to double its mobile phone profits?

Let’s do the maths. $2.2 Billion divided by $20 equals 110 Million Units per quarter. Last year global mobile phone sales averaged around 400,000 per quarter. Interestingly enough Nokia sold around 110 Million per quarter (inc 20 Million Smart Phones).

So if Apple and Nokia could strike a deal over the iOS then Apple could double its profits as Nokia converts its customer base into Smart Phone users. Meanwhile Nokia could achieve the injection of Silicon Valley innovation the investor and analysts are looking today for without having to totally rebooting its smartphone strategy.

The Windows OS currently retains over 90% market share of the PC market. So if Apple’s strategy evolved into turning the iOS into the Windows of the Mobile World its profits would more than double. (i.e. 400 Million Mobile Phone units per quarter * 90% Mobile OS market share * $20 iOS OEM Licence Fee = $7.3 Billion in Quarterly Profits).

If Apple was to adopt this strategy then everybody in the value chain will benefit. The Apps and Games market for Apple’s developers would explode. 8 Million new devices per quarter becomes 400 Million new devices per quarter. Mobile Phone Manufacturers and Telcos would be able to deliver to their customers a genuinely revolutionary smartphone experience without having to invest heavily in R&D and licencing costs. Customers would benefit from lower smartphone prices as the mobile iClone revolution creates a plug and play platform comparable with the original PC clone of the 1990′s.

This strategy isn’t restricted to the iPhone. Consider the growth potential if you applied this same strategy to opening up the iPad, iTouch and the iPod for cloning by the mobile device manufacturers. You could extend this idea further by opening up the PC desktop, laptop and netbook markets to the Apple OS

Back in 2007 Apple revolutionised the Mobile Phone market with a revolutionary new handset. In 2008 it revolutionised the Mobile Phone market with a revolutionary new App Store. I wonder if Apple’s vision is big enough to revolutionise the Mobile Phone market by providing it with a revolutionary OS and Apps platform that is capable connecting all of the world’s future mobile devices?

Will this happen? Probably not. After all why would Apple change a winning strategy? But in light of Matt Ridley’s ideas on how prosperity evolves through the interactions of Exchange Specialists it was interesting to spend some time explore the idea of how Apple could evolve from a niche electronic gadget company into a global mobile exchange platform.

[Update 29-7-2010] The WSJ has reported that Google’s Eric Schmidt is now talking up Android a potential $10 Billion plus business for  Google. The rational being if Android can secure a 25% share of the global mobile handset market then  Google should be able to generate at least $10.oo per handset in advertising revenues. Google is already achieving $20 per internet user so if anything the figures he is quoting are probably on the conservative side. As depends if Android can disrupt Nokia’s position.

Again Nokia already has this global reach to execute the Google strategy but it lacks the mobile advertising platform. While Apple has the potential to also profit from this model but only it if it radically rethinks the strategic value of its iOS as a mass market – as opposed to premium market – platform. Then again Apple may just focus on providing a premium advertising platform

Either way it will be interesting to see which OS strategy proves to be the more profitable over the long term. Google’s “open source” or the Nokia and Apple “Walled Gardens”.

Futher Reading: [Updated 9-9-2010]

[updated 6-10-2010]

“The Android model is messier, but by putting Android into so many hands at so many companies, Rubin believes he has created an accelerated form of evolution, where the species diversifies and improves at hyperspeed. The struggle between Google and Apple today looks a lot like the battle between Apple and Microsoft in the PC era…  “The industry is repeating itself,” Rubin says.” – Newsweek’s Android Invasion

[updated 21-10-2010]

“It’s clear to me that the only reason Android has enjoyed so much success is that Google has given the carriers pretty much everything they could ask for, and the carriers have responded with the ton of marketing dollars and subsidies that Google needed in order for Android to have any shot to compete with the iPhone.” – Silicon Valley Insider

[updated 29-10-2010]

“An open-source strategy generally favors challengers in a market, not incumbents.” - Symbian: A Lesson on the Wrong Way to Use Open Source – Matt Asay

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Posted in: Apple, Google, Mobile Phones, Nokia