Bailout

The winner-takes-all smartphone

By Felix Salmon

Baruch reckons that Apple has pulled off something very clever indeed: a “phase transition” in the mobile-phone market.

Before Apple came along, he says, phones were a bit like PCs, or blenders: a handful of different manufacturers would fight for market shares which had a tendency to mean-revert. But the iPhone has changed all that: because the iPhone is much more about software than hardware, the market-share characteristics in the smartphone space are going to look much more like the kind of markets dominated by Google or Microsoft or Autonomy or Oracle.

Apple?s achievement has been to shift the focus of the high-end handset market from voice to apps and browsing. Any old hardware would do for voice and SMS… now it is how nicely your phone can email, surf the web, and most of all, how rich and easy is the ecosystem of applications, that determines whether people buy your product or not. That?s software; precisely the type of market where monopolies or duopolies emerge.

You can see why Joseph Menn says that the iPhone app store “might prove to be the most important thing Apple has ever created”. It locks people into an Apple-controlled ecosystem, just like the iTunes Music Store did with iPods.

The app store isn’t perfect: the system for getting apps approved is lengthy, capricious, and bereft of accountability. And for all the obstacles which exist before your app is approved, Apple never seems to unapprove an app if the quality of service suddenly falls off a cliff. (It’s a bit like the ratings agencies in this respect: you have to sweat and pay to get a bond rated in the first place, but once the rating exists, it’s rarely revisited.)

But then again, no one ever said that Windows or Office was perfect, either, and both of them retain their cash-cow monopoly status to this day. The iPhone will always have competition, of course. But will it fight for every percentage point of market share, eventually ceding ground to a better product? Or will it end up dominating a new category — what David Pogue calls “app phones” — in much the same way that Google dominates search?

My feeling is that Baruch is right, and the latter outcome is likely to prevail. Consumers are lazy: outside the hard core of gadget geeks, people don’t spend a lot of time worrying about whether they’ve got the best phone on the market: instead, they’ll just buy an iPhone and be done. Assuming, that is, that Apple drops its exclusivity arrangement with AT&T. Because that really can be a dealbreaker.

Full post as published by Macroprudential on December 21, 2009 (boomark / email).