a16z Podcast - a16z Podcast: Apple and Google Won the Mobile OS War, But a New War Has Already Begun

Episode Date: March 13, 2014

Apple and Google won the mobile OS war, but the next war – to build big businesses on top of Android and iOS – is just beginning. Andreessen Horowitz Partner Benedict Evans untangles what the next phase of mobile means for entrepreneurs, Apple and Google's competitors, and consumers eager for the next great gadget.

Welcome to the A16Z podcast. I'm Michael Copeland, and I'm here with Benedict Evans, who's actually just joined Andrewson Horwitz recently, moved all the way from London. He's a long-time mobile analyst and an all-around smart fellow. Benedict, welcome. Hello. Great to be here at A-16-Z. Z. Z, as they say. It makes a good band name. Z-Z-Top. Well, you have to start the band. So let's talk about mobile, which you like to talk about and think about. There's been a lot of sort of Windows OS, Windows Mobile, sort of news out recently out of Mobile World Congress. But is the war for the mobile OS already over?

Well, short answer, yes. But it's not quite clear what that means in as much as Apple has about, well, in the launch quarter, they have about 10% of all the phones sold on Earth. And Android has another 45% to 50%, although only about two-thirds of those are Google Android and one-third are in China and don't have any Google services. And the remaining half all thereabouts of the phone market will convert over the next three or four years to phones running smart OSs, or there'll be a kind of a residue of 5% or 10% of people who really can't afford them. And actually the interesting question is how many people have an affordable date?

a plan rather than how many people have a phone running Unix or some other operating system. And all the remaining grace is going to be at super low prices. You know, it's going to be at $50 or $75 or $25. And there's a little bit of skirmishing around the edges. Yes, so you've got Firefox, you know, playing one rather eccentric business model over one side. And you have Microsoft's Windows phone, which is now being combined with Nokia. selling in fairly small numbers in a certain number of middle income and emerging markets

exclusively at very low prices. So if you look at Nokia's ASP, they're really only, it's very clear they're only selling the low-end phones. They're only selling the 520 or the 530 and the 610. And they also could give geographic sales, and I think they only sold 5 or 600,000 units in the USA last quarter. So for all the advertising and the buzz around the big. fablets with the great cameras, nobody at all is buying those devices. All Windows phone

sales so far have been to people, arguably, who don't even really treat them as smartphones. So, you know, that may change. And, you know, there's some interesting things around what Microsoft might do with that, what Nokia is trying to do with Android. But the core, I think, is that you have iOS and you have Android, and then you have people building stuff on top of Android to greater or lesser extent, whether that's the Chinese who are using stock Android, but not using Google because there's no Google in China or whether it's Amazon who built a tablet and are probably building a phone

on their own custom fort version of Android and now Nokia have got a fort version of Android as well. But that's almost like, I don't know, it's like looking at the Second World War and arguing about who's going to beat the Italians, you know, it doesn't really matter. For all practical purposes, we have two substantial ecosystems.

And, you know, as things play out with the current dynamics, which aren't really going to change in the next two or three years, we will end up with seven, eight, nine hundred million iOS devices in use on Earth. It's probably about 500 now. And we'll end up with two, maybe three billion Android devices in use on Earth. Billion. So a factor of, you know, five or six times. Well, there's probably three and a half to four billion mobile phone users on Earth. There's quite a lot more SIM cards, but lots of people have multiple SIMs, especially you can go. market's like India or Africa for coverage and for also to get on network pricing deals and

so on. So you've got three and a half to four billion people on earth. You've got a phone. You're probably only really as a developer or a technology company. It's probably the top two billion to two and a half billion of the people who are really spending money. And the other half it's you're looking at people who are spending a dollar, five dollars a month, two dollars a month, one dollar a month and buying a $20-30 phone, which is where the half of the market it is now. And so the question is, well, what happens on top of that platform? Right. I mean, have we seen

this play out before in the PC landscape, for example? Are there analogies that we can point to to see where we're headed next? Well, this is the question. Apple will top out, you know, so there's a very obvious argument that says that the biggest ecosystem

has a gravitational pull that sucks in the developers and sucks in the usage and that becomes self-fulfilling, that it's got the best app, so that's where the consumers you want the best apps go and so that's where the developers go and it's a sort of virtuous circle and that's certainly what happened with Microsoft right 20 30 years ago um the problem is that there's a professor at my old college at Cambridge said the only thing that history teaches you is that something will happen and you know the dynamics of the PC industry was so different

that it's really quite unhelpful to draw that comparison for example the kind of the critical period of the PC industry most of the sales were corporate and corporate buyers wanted 1,500 generic boxes that they would put out of people's desks. So they didn't care what they looked like, they didn't care how easy the user interface was because they were never going to be reconfigured and they were going to run one app. And they wanted a quote from five vendors and they picked the lowest quote. And so Apple didn't have product market fit. And Apple, Winel did.

Microsoft Winel did. That's clearly not how phones get bought. Phones get bought by individuals on fit and feel. the user experience and design, and they're not, by and large, are sold on specs. At least they're not sold on, they're sort of sold on some of the experiences that some of the specs can provide, but they're not sold on RAM. And so Apple now does have product market fit. It's selling exactly into the kind of buying environment that seeks what they've been doing for 30 years. But I think there's a sort of broader point, and you know, the specific ecosystem point.

as I said it's a presumed for the sake of argument that there are winner takes all dynamics around smartphone mobile operating systems as they were with PCs that that's where everything is so that's where everything is well Apple's going to have 800 million users

before there's time for those effects to kick in right now imagine you are Marks and Spencers or Target or Bank of America or Carrefour or Aldi

or Walmart you've mentioned Carrefour but you're in the United States now. Yeah, well, any retailer. Right. And it is a specific point of it. It is actually a country-by-country issue. Right.

If you are Carrefour in France, right now you have an Android app and an iOS app. Do you have a Windows phone app? Probably not because there's no Windows phone users in your country. And the people you do have Windows phone are, you know, it's too small to be worth holding with. But you're not going to pull the iOS app, the iPhone app, because that's only a third of the subscriber base. Right. You're not even going to pull it if it was. to drop to a quarter or even 10% of your subscriber base.

And actually, if you were to look at share of value right now, it's probably three quarters of your basket size. And so the market share number doesn't work in quite the same way. You know, if you were a software developer 30 years ago, when you were saying, right, we're going to invest $10 million making an application for Windows. Do we invest another five making it for Mac? and there's no offices, none of our target customers have bought a Mac, the answer was no, and that became completely self-fulfilling. But if you are, as I said, a supermarket or a bank

or a movie chain, movie cinema, theatre chain, or any other modern, you know, service that feels like it needs to be engaged with its customers online, you don't think, do that kind of calculation, you think, okay, where are our customers, where is a significant number of our customers, what are the touchpoints, where do we need to be? And Windows phone and BlackBory are locked off the bottom end of that. Right. But, you know, there's a vicious circle here and also a virtuous circle. You know, it's extremely hard to kill an ecosystem as long as the product's good and the

customers keep buying it. You know, the way that BlackBerry killed its ecosystem, in effect, was by having a product that was no longer competitive. But I don't think anyone would look at an iPhone and say it's not a competitive product. It might, it would cease to be a competitive product if there were no apps for it. Right. But how do you get that? You mentioned value, and it has been the case for a long time, that iOS has sort of the value has accrued to iOS far more than to Android that ecosystem.

Do you see any shift in that, you know, just by sheer footprint and or by Google in some sense catching up or those people who are using Android catching up? I think it depends. So there's a couple of ways to look at this. The first is that consumer behavior is often shaped by self-selection. That is to say, what is the kind of person who goes out and buys a $600 phone? What is the kind of person that goes out and buys a $100 phone? And that's different in different markets. So in the US, you can get a Galaxy S3 for free.

I would imagine, I'd have to look at the pricing. You can get a good mid-range smartphone for free. So why would you buy a $100 smartphone? The only people who are buying $100 smartphone is the people who actually genuinely don't care. Right. Whereas in Indonesia, someone who's bought $100 smartphone saved up for that and they care a lot.

But then you look at the Western European market, there's a pretty clear correlation between people who buy high-end phones and the amount that they're interested in and engaged with all the things that you could do with them. And the people who buy low-end phones don't. And when you then look at the market share of high-end phones, it's half, two-thirds, three-quarters iPhone, and the rest goes to high-end Android phones.

And then, you know, the problem with looking at those value sizes is that, effectively, Apple's only got the good customers. Android has all the customers. So it's got some good customers. It's also got some moderately good customers. It's also got grandma, who went to the store and said, I need a new phone, and they gave her a $100 Android phone. And so within that, so you've got a much lower average for Android.

Concealed within that, you've got a big chunk of people who are worth having. Right. But then when you add that up, you get to, you. you still get to, you know, an actual basket size or an e-commerce transaction or, you know, payment rate on Android that's half what you see from iOS. And that's, as I said, it's really just a function of price. You know, the corollary of that, of course, is that if Apple was to make a $150 phone, their average would collapse because they'd be getting loads of people who don't care.

And so that's why they're not going to do that. I mean, the iPhone 5C is as far down market as they go? No, I don't think that's true. You have to think about, as I sort of make the mass a different way, you have to think about the average and the absolute. That's to say there's a billion Android users off the top of my head, maybe 100 million of them have got $500 and $600 phones. Right.

And those guys are worth having. Right. But if you apply that to the average, the average is crappy. Right. Whereas Apple has only got the $600 phones, so their average looks really good, and they've probably got two or three times more high-value customers than are on Android. Or maybe they've got the same number.

You know, it depends how you analyze it. So you have to, can be careful, sort of thinking about the mass of the average versus the absolute. Looking at the 5C, I mean, kind of analogies get horribly overused, but it is kind of useful to think about Apple as BMW in a bunch of different ways. First of all, BMW does not sell as many cars as Toyota sells mopeds. They probably don't consider that to be a major existential problem. Right. And, you know, there's a lot of mopeds in Android land, and there's a lot of Lexus.

in Android land and BMW care about Lexus but they don't care about the mopeds and so to their product portfolio which like with a fine

thing about the five series it was like Apple only made a BMW 7 series and now they make the 5 series but BMW makes an S3 series and they also make an AC you know they make some smaller cars as well they don't make mopeds

right but they do go down they have gone down that progression and maintain the quality level and I think today it would absolutely be possible for Apple to make a $300 phone that would, you know, to use Johnny Ives' line would be a phone that they could be proud of.

In much the same way that if you go out and buy a VW golf, you know it's not an Aston Martin, but that doesn't mean there's anything wrong with it. Right. So let's talk about the, if the sort of OS wars over, the mobile OS war is over, does the war shift? Yeah, it's all about what happens on top.

And so what does that mean? And who else gets to play in that landscape? Well, there's a big war and a small war. There's a small war which is people trying to build platforms on top of Android, which is Amazon and Nokia and perhaps Microsoft in the future. And in that case, it's a lot easier to see what problem they're solving for themselves and what problem they're solving for the consumer, frankly. But the more interesting thing is when you look at what it means to say a smartphone

or to say the mobile internet, and if you think about how the desktop internet worked, we've probably all had this conversation where you explain to some, somebody that the internet and the web are not the same thing. But for all practical purposes, they were. There were a few things like Spotify and Skype around the edges, but basically for 20 years, the internet and the web were the same thing. And that's not the case on mobile. On the desktop, you had this box on the screen and everything happened in that box. And there was a little bit of fighting 15 years ago about who got to make that box. And the Andresen in Andresen Horowitz

has some opinions about that. No doubt. But frankly, all the innovation was happening inside the box. And you go to mobile and the browser is just one of a dozen different things that you could be doing or two dozen different things that you could be doing on that device. And none of that settled yet either. I mean, if I was to say that I installed a app on my Android smartphone in five years time, I don't know what any of those words would mean. I don't know what installed would mean because is that a web app? Is it something happening within a messaging system? Is it a card that's being loaded dynamically by the operating system is I hold my phone up to a menu outside a restaurant.

Has that been installed? I don't know what app would mean for the same reason. I don't know what Android's going to mean in five years' time. I don't think anybody knows what Android is going to mean in five years' time and how that interacts with Chrome and how that interacts with Google Play Services and where the innovation and the levers of interaction will sit on that platform. And of course, there's also wildcard about what you mean by phone. You know, we may be sitting here waving our hands in the air or looking at watches or looking

at you know smart glasses and you know the thing that's really missing in that space is more city acronyms you know Samsung gave us the fablet but we really need to be talking about the smotch and the wablet as well to kind of go with it I hope not I'm wearing a swatch smotch anyway just to poke a little bit on that theme do you um do you think that um the control goes away from Google and Apple in that sense that like you know if there's all these different players if we don't know like who owns the relationship or are you seeing signs that the relationship is you know sort of shifting i mean apple certainly has a tight hold but in the android world does google get to have the relationship or is it something else it's an interesting question about what google is trying

and there's a facebook story in here as well of course but there's an interesting question as to what it is that google and apple are trying to do um and i think in a sense the problem that people have looking at these businesses, is there actually, in a sense, much simpler than people think. Apple makes three, four, five hundred dollar boxes with circuit boards inside with a great experience. They're not going to buy an airline so they can replace the in-flight entertainment system with iPads. Right.

They're not going to buy a TV company. They're not going to buy a mobile operator. They're not going to buy an air freight business. They make boxes with circuit boards in, and they try and make them the best boxes they possibly can. Right. And Google is a vast machine. learning engine that spent 15 years stuffing the stuffing itself with data and web search is an

expression of that just as you know buying books is an expression of amazon as a logistics platform right amazon isn't a books company um and web search is an expression of google's machine learning platform so is gmail so it's map so it's now so is the advertising platform that pays for it all but those are all applications that sit on top of you know in a little sense but a metaphorical sense They're all things that sit on top of an underlying machine learning project. And so Google is not in the hardware business. Well, $12.5 billion later and then selling Motorola again. Yeah, well, it wasn't $12.5.

Because it was nine and a half with cash, and then they sold the cable business. But, yeah, I mean, that was basically an enormous pattern infringement fine as much as anything else. I think, no, but the issue is, you know, just as, you know, Apple is not a cloud company, although it would sort of like to be sometimes but it's only a cloud company and as much as it needs to be a cloud company and there's a question for the you know coming back to our point about ecosystems

the poison pill for Apple is not only having 800 million active devices is Google doing something in the cloud that Apple can't do that means you have to buy a not Apple device but it's hard to see how Apple you know to my point about what Google's trying to do you know Google is not in a one-to-one

fight to the death with Apple you could argue it's in a one-to-one fight to the death with Facebook, or even potentially with Amazon. But Apple is a channel. You know, for Google, Google, the objective is reach, reach for that people can use its search, you can see its advertising, also reach that it gets information back into that learning engine. And of course, that's what Google Plus is about.

You know, Google Plus is not a search engine, social network, for heaven's sake. It's about indexing the users. It's page rank for the users. Right. And so for Google, that means the sort of the, As I said, the platform war ended in Google and Apple both won because Google and Apple both got what they wanted, but they wanted different things.

And everybody that goes out and buys an iPhone is using Google Search and Google Maps as long as Google Search and Google Maps are good. And Google's problem is making sure that maps and search are good. And for Apple, if you're using Google Maps or Google Search or an iPhone, that's not a problem as long as you're buying an iPhone, and you'll buy an iPhone as long as the iPhone is good. And that's Apple's problem.

So let's shift gears a little bit. And you mentioned Facebook, but if you are an entrepreneur and somebody who wants to insinuate yourself into this ecosystem, you know, how do you do it these days? And going forward, how do you, I guess, preserve your own leverage in the face of this massive footprint by Google and Android and Apple and iOS? Well, I think there's two ways to think about this. One is that a smartphone is a richer and more complex and more sophisticated platform than the web. And it's also a vastly bigger platform than the web.

I mean, we kind of threw around some big numbers earlier. But, you know, there will be, as it might be, three billion smartphones on Earth with a massive range of income and capability and someone and income of the users. As massive as there are people, right? Yeah, exactly. It will effectively be half the population of Earth will have a smartphone. And that compares with something like 1.5 billion PCs,

and those PCs are either shared at home or locked down at work and don't go anywhere. They're not really portable. And so you have twice the number of devices, those devices, as I said, and those then devices are in everyone's hand all the time, as opposed to being in a desk or in a study or shared with your brother or something. And so the size of the internet gets two or three or four or five times bigger, just as a consequence of the shift from PC to mobile. And it still baffles me.

I get flamed by daring to compare smartphone cells to be. PC cells. So people think that smartphones are like, still think the smartphone is a toy. Right. It's like thinking a PC is a toy and real men need mainframes for God's sake. The smartphones are the dominant computing platform and the dominant internet platform and will completely supplant PCs in importance. And they have a much more rich and much more complex set of options and opportunities and ways of engaging with users and of course ways of gaining users. And you can see that in a very small way in the acquisition of WhatsApp, which was like a fantastic case study of everything that's going on online.

And one of the things that illustrated is just how big you can get if you get really lucky with the right idea and execute really well. You know, 10 years ago, let me put it another way, in the time of the first internet bubble, you know, a prototypical startup, an archetypal startup, you would have 100 people and you'd have raised $10 million, and you'd have a million users. Right.

And now... If you were off to the races, yeah. Yeah, exactly. And now you'll have raised $1 million and you'll have $10 people and you'll have 100 million users. Right. So the whole thing's been completely turned on its head. And mobile is a big part of that. So that's one sort of point about scale.

I think the second point is that we're kind of in a pre-page rank phase for how people discover and engage stuff online. That's to say an app store now looks a lot like... It looks a lot like Yahoo. 20 years ago I mean it always sounds like I'm trying to do a comedy routine when I describe this it's like there was a website

that listed every website that there was and you could scroll through them all and it was news when there was a new website you know it would like you'd go to Yahoo you'd go to I swear to God you'd go to Netscapes what's hot page and it would say you know the

the Morningwood Arkansas elementary school has got a website it was like that was on the front page of your browser when you laid into browser and you know you see this to me my point is that's what an app store is now right you know you can browse every app that there is but there's a million apps so we haven't we haven't moved to the point where we discover okay how do we know what's going on and part of that is some sort of manual creation part of it is better search in the app stores and it's you know it's a generic problem for both apple and google they've got a million apps in their store

but I don't think that is an execution problem it's not a question of improving the execution of what they're doing now I mean to me a startup that says we made an app and it's in the app store and it can't be discovered is like a writer who says I wrote this book and it's in Amazon and no one can discover it there it's like well they've got 25 million scoots

they can't put your book on the homepage necessarily so it's up to you and yet when you say it's up to you, well, but there's no SEO, there's no SCM equivalent. It doesn't follow that the answer is that Google will do better search or deep linking or any of these initiatives is the answer. But clearly we lack an answer, and we lack an answer also in a much, much more complex world because, as I said, it's not just about apps in the app store. You know, if I was to send you a restaurant review in a messaging app,

you probably shouldn't arrive as a dumb URL string as a piece of text. what should happen is that the restaurant review should appear on your phone screen and you should be able to interact with it and then you should be able to save it to your home screen and then you say well what's just happened have I just installed a native app does it matter right does it mean anything to talk about html 5 versus native code not really what matters is you know how does it get onto your phone how do you interact with it and all those questions frankly are still wide open and to some extent those are in the hands of apple and google as a platform owners who can make kind of elemental changes and in what can be

done on the on the platform but they're also in the hands of facebook they're in the hands of WhatsApp you see companies like line and we chat in particular being very aggressive in trying to turn their messaging systems into um social platforms application platforms engagement and identity platforms um on top of the smartphone or neutral to whether you're on iros or android so there's a sort of swirling soup of interaction and engagement and user acquisition and identity and payment sitting on top of iOS and Android that Apple and Google have some control over in that they can offer new options. But they don't really direct control the direction of it. Right. So it sounds like what you're saying in some ways, and this relates to

Yahoo's that, you know, this war is over. Going back to Yahoo, Yahoo won that war, but it turns out there was another war to be fought and engagement won there. It's actually, it's like talking about browser wars. Uh-huh. You know, it's like I don't think, um, Mark Zuckerberg spent a lot of time thinking about Internet Explorer versus Chrome versus Safari versus Firefox. Right. You know, it'd be kind of, you know, by the early 2000s, it just kind of became irrelevant. And yes, you know, it might have gone another way, but it didn't.

And I think, you know, to a degree you could suggest that smartphones sort of might go in that direction. Now they might not if Apple or Google or both, you know, extend their platform, depending on how they continue to extend their platforms. platforms in terms of what you can do on the device. But, you know, and clearly Apple in particular is being very aggressive. I mean, there's another sort of an interesting contrast to draw here. So if you look at what Apple is doing in the way that they evolve their platform, because they own the whole stack, they're doing lots of stuff that's quite hard that you can only do if you know what Bluetooth chip is in the phone.

Right. So you see Airdrop, you see Ibeacon, you see a lot of the local wireless discovery things. You see, incidentally, you also seeing. like using the M7 motion processor to reduce battery life, which again is really tough if you don't make the whole stack. And in contrast, of course, you see Google lifting all their innovation up the stack into the cloud, into Google's play services, into now, into maps, into plus and so on. And so Apple is moving down the stack and Google's moving up the stack, both of them, of

course, into their comfort zone, into a place where it's hard for the other to follow them. So you do have this kind of interesting contrast as to what's going on in iOS and what's going on in Android. But beyond that, you know, as a third party, you've got these two big platforms. There's a lot of common denominators between them. There's some interesting stuff on some that's not on the other and vice versa. But by and large, you know, the generality, there's 1.4, 1.5 billion people on Earth who've got one of these things today.

Well, Bennett, I want to thank you for this discussion. It sounds like one more is over, and like you said, there's all sorts of things swirling around. And there's another war of foot as we speak. So we will be talking more about that. And I would love to sit down and have you untangle Amazon for us, for example. So Benedict, thanks very much. And we will be doing this on a regular basis. Great.