‘Winning’ and ‘losing’

A recurring argument in tech commentary is whether market share or profit share is a better indicator of success in the mobile industry. If it’s market share, then Android is winning, because Android runs on way more phones than iOS. If it’s profit share, then iOS is winning, because iPhones generate way more profit than Android phones. This is an important debate because… well actually I have no idea.

Might I kindly submit that the market share versus profit share debate, like much of the “journalism” surrounding Apple and Google, has more to do with tech culture war shenanigans than actual analysis. Arguing over which single metric best indicates who is “winning” is reductionist and silly. There’s no good reason for it, other than to satisfy a partisan streak that, to one extent or another, resides at the heart of almost all tech commentary. I’m of the opinion that market share and profit share are valuable data points, but like any other types of data, they’re only useful when placed in the proper context.

But I guess that puts me in the minority, given the countless articles and blog posts and tweets on this subject that are squirted into existence each week. John Gruber of Daring Fireball recently linked to a Techpinions post by John Kirk arguing the pro-profit case:

Not only do the high priests of market share have it wrong, they have it exactly backwards. The company with the lower market share and the higher profits has all of the leverage. The goal is to INCREASE, not decrease, the ratio of profits to market share. Increasing market share at the cost of profits is a recipe for disaster, not a formula for success.

It’s a very microeconomics-y piece about margins and price elasticity, the basic point of which is that it’s entirely possible to squeeze disproportionate amounts of money from relatively small slivers of a market; indeed, Apple’s been doing it for decades.

Okay, sounds good. The problem I have is with Kirk’s main thesis, which is that Apple is totally, unambiguously dominating its competitors:

Apple may or may not do well in the future but right now, and contrary to popular belief, they are winning the smartphone wars and winning them handily.

The word “war” implies that for one side to win, the other must lose. The entire post is written in the context of a war between iOS and Android. But while Kirk does a good job explaining how Apple is smoking the competition in terms of profits, he doesn’t connect that premise with his conclusion that Apple is “winning.” His argument only makes sense if you assume profits equal success, and more profits equal more success. To boil his case down: profit share is more important than market share, because Apple makes more profits than its Android competitors despite its paltry market share, and of course profits equal success; therefore, Apple is winning. Huh? It’s a circular argument, where the conclusion doesn’t follow from the premises without resorting to tautology.

In truth, profits do not ipso facto guarantee success in business, especially in the volatile, disruptable world of technology. Followers of Apple should know this better than most, after witnessing the company’s stock price collapse in recent months despite record profitability. Yes, profits are nice. They pay the bills, and Apple’s cash war chest provides them security in case of pesky unforeseen circumstances. But after a certain point, which Apple arguably zipped past tens of billions of dollars ago, what good are profits if they aren’t being invested back into the company? They already have a giant Dr. Evil-sized mountain of cash too big for it to spend wisely. Apple may want to consider Matt Yglesias’s suggestion to sacrifice a few points off their insane profit margins in exchange for some more market share.

Market share is desirable for the network effects it creates. Essentially, the more users a platform has, the more developers are incentivized to create great apps, and in turn, the more users are attracted to the platform. Conversely, the fewer the users, the fewer the apps, and in turn, the less attractive the platform becomes.

The iPhone, iPad, and iOS should not be seen simply as money generators, but rather, like the iPod before them, as strategic investments vital to Apple’s future. The iOS platform needs more than money to sustain it. It needs a healthy ecosystem of developers and customers. To be clear, Apple is currently doing extremely well on each of these fronts, and market share is only one factor in this equation. But it’s not unimportant.

Regarding Android, it represents almost the reverse case of iOS. Profits aren’t completely unimportant, but market share takes precedence. That’s because Android isn’t a product of Samsung, or HTC, or any of the “also rans,” but of, hello, Google! Profit-sharers with their pie charts have a tendency to talk around this fact, but if you want to do a comparative analysis of iOS and Android, you have to look at it from the point of view of Apple and Google. If Samsung disappeared in a poof tomorrow, Android would live on; one or more other phone vendors would simply take its place. If Google disappeared, however, Android would cease to exist as we know it. Android is clearly a Google endeavor.

From Google’s perspective, the profitability of Android smartphones is important insofar as it wants vendors to continue making great devices. But Google gives away Android for free, so profit isn’t really a huge concern, at least directly. So what is Google’s objective with Android if not to generate profits?

Android is a strategic investment in Google’s core business of online services. The biggest threat to Google is that people stop using Google Search, Maps, Gmail, and YouTube and start using alternatives. Today that’s almost inconceivable, but anyone familiar with the words “Microsoft,” “Blackberry,” and “Nokia” knows that it’s not as distant a possibility as it may seem. Android was created because Google had a vision of a post-PC world controlled by its competitors and acted to stop it. In that, they’ve been wildly successful. Google is now a primary player in the post-PC revolution — or, if you’ll forgive me, the game of phones. (I’m so sorry.)

Most of Android’s challenges are unrelated to profit or market share. Why do all the best apps continue to be developed for iOS first, despite Android’s larger market share? Why does it lag behind iOS in customer loyalty and satisfaction? Why hasn’t Android’s success on phones translated to more success in tablets? These are real problems, but like those facing Apple, they’re not insurmountable.

Another important distinction is that Android is not nearly as vital to Google as iOS is to Apple. If Android were to disappear in a poof tomorrow, Google would be worse off, but their core business would remain intact. Google’s online services are used overwhelmingly even on iOS devices, and their supremacy in that field is so great that it will likely take years before a worthy competitor emerges to unseat them. However, if iOS were to disappear, Apple would implode. They’d be completely screwed.

Fortunately for both companies, neither of those scenarios is likely to happen. I’d say Apple and Google are extremely well-positioned for the future, financially and strategically. I can very easily envision a future a decade from now where both companies continue to thrive. Whether that comes to pass depends greatly on strategic challenges each will face in the next few years, particularly with regards to the still-nascent Internet/cloud revolution. (But that is a topic for another post, one which I intend to revisit leading up to Apple’s Worldwide Developer Conference in June.)

My wish is that the tech press and commentariat waste less energy on measuring the comparative success of iOS and Android, and recognize that Apple and Google are acting under a very different set of circumstances and objectives, not all of which intersect with one another. The post-PC market is big and dynamic enough for more than one player to thrive.

It’s not about “winning” or “losing.” Jay Yarrow at Business Insider generally does a good job avoiding this trap in his rebuttal to the profit caucus. But though his post is full of good points, I still think he’s a little too caught up in the notion that for iOS to win, Android has to lose:

If you work at Apple, or you love Apple’s products this should be burning you up. You should be furious that Android, which you believe to be an inferior product, is on more phones than iOS, Apple’s software.

It’s tempting to view the Android-iOS — and by extension, Google-Apple — rivalry as a zero sum game where one’s glory necessarily means the other’s downfall. That kind of binary, black-and-white dynamic lends itself well to exciting headlines and gripping narratives, but it’s not very illuminating. The truth, as always, is more complex. If “winning” is defined as one entity triumphing over another, then neither Android nor iOS are winning. But if we use a more nuanced understanding of success, it’s entirely possible that both Android and iOS are winning. Indeed, I believe that’s exactly what’s happening.

When you play the game of phones, you win, you die, or both you and your competitor coexist in a state of healthy competition.