Google Nexus One is Out. I Still Like Apple's Chances. by

I’ve been reading the latest flurry of iPhone / NexusOne articles and blog posts making the rounds, and I just can’t resist commenting.  Walt Mossberg gives both products a thumbs up, and Michael Arrington says the Nexus One is better than the iPhone (um. okay).  But, once again, all too many analysts and pundits are trying to compare what’s happening now to what happened with the Mac and the PC back in the 80′s/90′s… essentially comparing Apple to, well, Apple.  And comparing Google to Microsoft.  There are some valid similarities. But they’re missing a few key things that make this round different.  In particular, those who want Google to come out on top cite Bill Gurley’s article on the subject. Gurley, first of all, paints Apple as dependent on receiving a share of the subscription revenue of the Telecom partners – but this was, to my knowledge, only true of the exclusive partners – e.g. AT&T.  Second, I believe when Apple renewed its contract with AT&T and revised the pricing to the consumer downward dramatically, that it gave up that subscription revenue in exchange for a lower consumer price. Gurley goes on to make much of the difference in price point.  But, as Arrington states:
The Nexus One is available “in large quantities” starting today at Google.com/phone. An unlocked GSM version of the phone that will work in most countries is $529. Google is also offering a subsidized version of the phone – also unlocked – through T-Mobile for $179. The service plan offered by Google is 500 minutes/unlimited SMS/unlimited data for $80/month. T-Mobile’s termination fee is $200, and some users might be tempted to buy the T-Mobile version and terminate immediately, paying just $379 for the unlocked phone. Google says that users terminating too soon will be charged the full price of the phone, however. But even the T-Mobile version of the phone can be used overseas on trips by slipping in a different SIM.
So… how was that cheaper than an iPhone exactly?  Oh. It wasn’t.  You can pick up a 3G iPhone for $99, with 8Gb of memory, rather than the anemic 190MB or so of app memory standard for the Nexus One.  After all, the whole point of these things is to run Apps right? Gurley pushes the point that cheaper to carriers will matter!  But doesn’t explain how, exactly, that ends up being the case (except, possibly, with respect to Verizon):
The Android strategy results in phones at much lower prices with much more diversity which will hit a broader set of demographics. Apple can and will quintuple its current market share and still have a small portion of the overall cell phone market.
But unless the carriers start paying me to take phones, I’m not sure that the prices don’t get appreciably close to zero and therefore not matter to me or anyone else.  The real cost will end up being in the telecom services. Mr. Gurley is also overlooking a more obvious analogy to the phone market: the mp3 player market.  And the reason to look at it?  Volume.  Apple is the biggest or one of the biggest buyers of the memory that goes into these devices, in the form factors required.  Apple’s sheer volume of orders allows it to pull off a rare double-whammy against the competition:
  1. Buy vast quantities of memory at guaranteed prices, often much lower than competitors can get, and with supply guaranteed or prioritized over other buyers.
  2. Actually drive UP the cost of these same components for competitors by buying so much capacity that the spot market is left with too little supply – causing painful price spikes for other buyers (Apple’s competitors).
The memory purchasing advantage is significant.  And Apple gets to consolidate its purchasing power across iPod, iPod Touch, and all three iPhone versions.  Certain economies of scale are not about software cost, and this time around Apple is the one with the economies of scale in hardware – and this advantage is one that even phone manufacturers with much larger marketshare (e.g. Nokia) don’t share – because they don’t buy such massive quantities of flash memory. Also, like the mp3 market before iPod, the mobile phone business is a big, existing business with high unit volumes.  Many industry analysts assume that Apple cannot win a majority of share in a market because someone (Microsoft or Google) will offer an OS that will take away the mass market by being cheaper.  But what Apple understands is that below a certain price, cheaper just means “less good”, not “better”.  Apple’s profit share of the PC business far outstrips its unit share.  Its profit share of the mobile business even more dramatically outstrips its unit share. While I think part of Gurley’s analysis is dead on:
Users won’t switch in mass from the iPhone to the Android. It’s the other 3.95 billion cell phone users that are highly likely to consider Android a step up from their current feature phone.
However, his assumption that android customers will be price sensitive and Apple customers price insensitive, seems off-base to me.  Can Apple drop the price from $99 to $10?  Sure it can. Because that is just the subsidized price from the wireless provider.  If Apple asks for less money from the carrier, that can be passed on in the form of a lower up front payment. Gurley states: “Some will argue that the best product will win the market and that Apple will still dominate the smartphone market. The history of the personal computer market is no omen for this thesis. ”  Well true enough, but then again the mp3 market is an omen in support of this thesis.  I’m not sure why the mp3 market isn’t relevant to Gurley’s analysis. Time will tell – and if Google’s Android produces better phones (and ecosystem) than Apple’s iPhone and Appstore ecosystem, then everyone will clearly be better off for it – and if they don’t achieve this high bar, they’ll still have raised the bar for anyone who doesn’t want to buy an iPhone but still wants a smart phone (as Mossberg states, the Blackberry UI is looking more and more antiquated by the day).  I just think the pundits and analysts are underestimating the benefits of scale that Apple currently has – much larger benefits than you would think with only “one phone” on the market… After writing this, I found a few other posts that are more aligned with my way of thinking.  One, by none other than Henry Blodget which makes the point (quite rightly) that actually Google is not now in the phone business.  This is the HTC Nexus One, on the T-mobile network.  Google actually just set up a storefront.  And wrote Android.  And probably provided technical advice (much as it did for Droid). Its a pretty compelling argument.  However, the new Android-based phones *are* increased competition for the smartphone category (including the iPhone).  I just think it really puts more pressure on the Blackberries and feature-phones than it does on the iPhone.  I also think everyone is underestimating the lock-in value of having an iPhone – if I switch phones I have to buy new apps… different apps maybe… and maybe I’m happy with the App ecosystem I’ve got! And then Dan Frommer argues that the customers service for the Google Phone won’t be what we’re used to if you buy from their online store, because you’ll have HTC, Tmobile, and Google to deal with, depending on your issue.  Google doesn’t own the customer relationship… Nothing insurmountable, but it may lead to bad press down the road as people run into inevitable service problems.  These problems happen in the Apple/iPhone world too -but Apple is in a better position to fix them and protect the brand. Finally, Pogue of the NYT hits on a few sour notes, starting with the smaller selection of apps (about 1/10 of what is available on the iPhone – this is such a strange mirror image of the old Windows vs. Mac debate… ):
Worse, even if you find a lot of good ones, you might not have anywhere to install them… the Nexus allots only [190 megabytes of storage space] for downloaded apps. The Nexus also does not come with any iTunes-style companion software… There’s no physical ringer on-off switch… Sadly, the Nexus One also lacks a multi-touch screen like the iPhone’s…. Finally, the Nexus just doesn’t attain the iPhone’s fit and finish.
Note the storage space (my emphasis) – my nearly 2 year old iPhone 3G has 8Gb of storage space for apps… about 40x as much… Of course, as the Insider points out, his take on the business model is even more scathing. Read the Insider article or the NY Times original for more… Of course, for the “drank the Google Phone” kool-aide crowd there is this piece by Brian Sheehan arguing that Google will own mobile.  It isn’t a bad piece of writing – I just don’t agree that Google and Apple will forgo giving the iPhone most of the same integration advantages.  I do think that Google is enough of a “swing for the fences” company to do audacious things like buying fiber optic cable (oh wait, they’ve already done that)… So maybe they really will get into telecom.  We’ll see. On the other end of the spectrum, Stewart Alsop crushes the Droid in his review.  It isn’t Nexus One but one could assume that Nexus One would have to be a big software improvement to make Stewart happy…