Apple vs. Google: Who's going to win the great mobile-phone war?

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Jan. 7 2010 5:07 PM

Apple Vs. Google

Who's going to win the great mobile-phone war?

Illustration by Robert Neubecker. Click image to expand.

Over the past few months, Google's mobile operating system has roiled the tech industry. Android debuted on a host of fantastic phones, won praise from reviewers and customers, and generally got everyone in a froth over the next big tech war. It's Apple vs. Google in a fight to the death. En garde!

This week was an especially good one for Android. On Tuesday, Google launched its own Android phone, the Nexus One, that it will sell directly to customers via the Web, bypassing the wireless carriers. Not that the carriers seem to mind—they're all jumping on the Android train, too. Verizon, which blanketed the airwaves over the holidays with ads in support of the Android-based Motorola Droid, will provide service for the Nexus One next year. (At the moment, the phone works best on T-Mobile; you can get it for $179 with a two-year contract, or $529 without.) On Wednesday, AT&T also joined forces with Google. The carrier best known for hosting the iPhone announced that it would launch five Android devices in 2010. AT&T's move means that every major mobile carrier in the United States now offers Android devices.

Which brings us to the question of the moment: Is Apple doomed to repeat its mistakes of bygone decades? More than a year ago, I wondered about just this scenario—Apple seemed to be putting itself in the same sorry position it was in back in the 1980s, when it began to lose the PC war to Microsoft. Android, too, appears to be reliving Windows' early success: Just like Microsoft once did on the desktop, Google is pushing its OS to a wide range of portable hardware. The Google philosophy has a couple advantages. Over the long run, it will push down prices for Android phones—device manufacturers like Motorola and HTC don't have to invest as much as Apple does in making an operating system; they get Android from Google for free and then compete with one another on price. Google's multidevice plan also sets up Android to attract lots of third-party apps. The more Android devices there are, the more the OS comes to seem like a universal mobile platform. For developers, the calculus goes like this: Make an app for Android and it's instantly available on loads of devices on every carrier. Make an app for the iPhone and it works only on Apple hardware—the same sort of closed ecosystem that sank the Mac's fortunes against Windows.

In an impassioned screed at Silicon Alley Insider this week, Henry Blodget warns that Apple's "insistence on selling fully integrated hardware and software devices, instead of focusing on low-cost, widely distributed software" is shaping up to be a "strategic mistake." But is it really fair to analogize today's phone wars to the personal computer battles of the 1980s? A decade or two is an eon in the tech business, and much has changed since the Windows-Mac face-off—especially the certainty that an "open" tech strategy always wins. Apple's determination to tie its proprietary software to its own hardware may have some disadvantages, but it also carries distinct upsides that could, in time, win the day. For one thing, Apple's closed model allows for better, less buggy devices and a generally cleaner user interface. Perhaps more importantly, it also generates oodles and oodles of cash.

Why isn't Android's "open" platform a guaranteed pathway to tech riches? First, it has the disadvantage of having to work correctly on dozens of different hardware configurations, while Apple's iPhone OS has to work on just a small set of rigorously tested components. This doesn't mean that Android is destined to be as buggy and prone to crashes as Windows has sometimes been, but it does increase the chances of error. Also, like Windows, Android gives hardware makers wide leeway in customizing their devices—sometimes for the worse. Sure, you can buy a Windows laptop for less than the price of a MacBook, but it'll come stuffed with crapware and other revenue-enhancers. If dozens of cell-phone manufacturers adopt Android and compete with one another to build the cheapest cell phones on the market—basically the same business straits that many Windows PC makers find themselves in—they may feel pressure to clog their devices with useless junk. Apple, meanwhile, could position itself as the "premium" mobile company, just as it bills itself as a high-end PC maker—you may pay a little more, but you get a better experience.

And let's not forget the value of focusing on premium gear. Conventional wisdom in the tech industry holds that Apple long ago lost the PC war to Windows—but that's only if you measure winning by market share. There's another way to measure success, though: dollar signs. Though it sells far fewer machines than its Windows competitors, Apple's higher prices allow it to take a huge slice of revenue in the computer business. Last October, according to the market research firm the NPD Group, Apple got nearly half of all the money spent on desktop machines at U.S. retailers, and more than one-third of the money spent on laptops. So Apple is making a lot more money by selling a lot fewer machines—isn't that winning?

In a similar way, observers have missed how much cash Apple is raking in from the iPhone. Because of accounting rules, the company currently splits every dollar it makes on the iPhone over eight financial quarters (the length of a typical subscriber contract)—as a result, its earnings statements tend to understate the iPhone bonanza. Over the last year, though, Apple and other tech companies have lobbied the Financial Accounting Standards Board to change these rules; last fall, the board agreed. In the future, Apple will report iPhone sales fully in each quarter, and consequently its stated revenues are bound to rise dramatically. Indeed, by some estimates, Apple already dominates the phone business, despite its relatively low sales. In the third quarter last year, Apple sold 7.4 million iPhones. Nokia, meanwhile, sold an order of magnitude more devices—108.5 million phones. Guess what, though? Nokia booked just $1.1 billion in operating profit for all those sales, while Apple, according to the research firm Strategy Analytics, made $1.6 billion. And that doesn't even count all that Apple is pocketing from the App Store; some estimates put app sales at more than $2 billion a year, 30 percent of which Apple puts in the bank.

What's the point? The market for smartphones is growing rapidly, and Android's strategy looks well-suited to winning a lot of new customers. But even if all those Android phones outsell the iPhone, Apple will still keep its profit margins high—and will still likely keep printing money.

There are a couple more reasons to be skeptical that the Windows-Mac history will play the same way twice. Windows managed to win lots of customers because it ran more software than the Mac. At the moment, however, it's the iPhone that claims the largest app marketplace (nearly 130,000 available apps vs. Android's 16,000). To be sure, Apple may not be able to sustain that lead in the face of all those new Android devices (and given the abysmal way it treats developers). But even if Android's app market beats Apple's, I doubt that the number of available apps will ever be a big selling point for any mobile vendor. Notice that nobody shuns the Mac anymore because it runs fewer programs than Windows—that's because much of what we do on computers happens on the Web. That will be true of phones, too; as long as the iPhone continues to run the Web, the size of its app store won't be a big deal.

And as long as we're studying Microsoft-Apple history, we'd be wise not to miss a more recent chapter, one that proves that Apple's efforts to tightly integrate its hardware and software aren't such a bad idea. Remember that like the iPhone, the iPod was a "closed" device—Apple designed its hardware; it made the desktop-syncing software; it built the online store; and it took charge of all of the marketing. In 2004, Microsoft tried to take on the iPod with a plan called PlaysForSure—a relatively more open system in which Microsoft tried to build a music service out of devices built by many different manufacturers. Obviously, that tack failed: Soon Microsoft was forced to scrap PlaysForSure and go the Apple route—it put out the Zune, for which it designed the hardware and software (though by then, it was too late).

There's something similarly ironic about the Nexus One. Google is fond of touting the advantages of its open Android model, and I agree that there are many. But it's interesting to note that when it wanted to build the ultimate Android phone, the search company decided to go it alone, designing both the hardware and software from top to bottom—just like Apple.

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Farhad Manjoo is a technology columnist for the New York Times and the author of True Enough.