Platform Winners and Losers (developereconomics.com)

Developer Economics 6th edition is the largest ever research on app developers. This State of the Developer Nation report captures insights from over 7,000 app developers from 127 countries, from the US, China, India, Israel, UK and Russia, stretching all the way to Kenya, Brasil and Jordan. This report paints a truly reflective and accurate picture of the trends in today’s global app economy.

Developments throughout 2013 have shown that the first phase of mobile ecosystem wars are drawing to a conclusion with only a few wildcards left to play. The duopoly is here to stay for the next 3 years. Android has firmly established its stronghold with 81% of smartphone sales in Q3 2013 and is now expanding across many new “screens”: Internet of Things, wearables, automotive, entertainment and education. iOS is clearly trailing behind Android in terms of user reach, but is still the most valuable platform by revenues. Windows Phone has momentarily picked up momentum during Q3 2013 while BlackBerry 10 is in trouble, having undershot its sales target by a wide margin.

During 2013, global smartphone sales exceeded those of feature phones, reaching 55% of total handset sales. In developing countries all over the world, $50 Android handsets are fast replacing feature phones and opening up new opportunities for innovation in business, commerce and education.

On the handset front, Samsung, the leading Android handset maker, continues to dominate the smartphone sales market with 31% of the smartphone sales in Q3 2013. Samsung’s Q4 2013 results showed somewhat reduced profits, declining 18% on a quarterly basis despite the holiday season. Samsung is facing increasing competition on both the high-end smartphone market, by Apple and on the low-end market, by a number of Chinese vendors.

In the forefront of the Android assault on the smartphone market are Huawei, Lenovo and LG, having displaced HTC from the leaderboard. HTC, had figured in the top smartphone places for a number of years but has now slipped and is facing serious troubles, following a number of bad quarters. This is indicative of the cut-throat competition among Android OEMs where opportunities for differentiation are increasingly diminishing, particularly following Google’s steps to regain control over the Android ecosystem by moving several key APIs out of Android and into Google Play Services. As several key markets are maturing, most of the growth comes from the low- end part of the market spectrum where margins are low and competition is fierce.

But the picture is not rosy outside the Android camp either, with two of the most prominent handset manufacturers of yesteryear either changing hands or changing direction. Nokia’s handset division has been acquired by its partner Microsoft at a bargain valuation. BlackBerry is putting a brake on the revival plans for its handset division, and focusing on enterprise solutions. The writing on the wall for both Nokia and BlackBerry has been there for some time: they were caught off guard by the change in the basis of competition caused by the iPhone and Android. Today, a healthy ecosystem – iOS or Android – is the hygiene factor for handset sales, with differentiation coming only out of a tightly integrated supply chain, as we predicted two years ago in the Apple and Samsung profit recipe.

Meanwhile, Apple seems to have had a very successful iPhone 5S/5C launch, including a low cost model. At the same time, its Q4 2013 revenues grew at 13% in Q4 year-on-year, below investor expectations, and much slower than the smartphone market at 41%, pointing to a product innovation gap post- iPad. Apple has also finally struck a deal with the world’s largest carrier, China Mobile, which boasts more than 750 million subscribers. The deal is likely to give a boost to iPhone sales in China, an increasingly important smartphone market due to sheer size.

Windows Phone sales picked up significantly in Q3 2013, showing a 140% increase year-on-year, fuelled primarily by low-end device sales. According to Kantar, Windows Phone sales in the three months running to Oct 2013, reached double-digit figures in some Western European markets. While this is certainly a positive sign for Microsoft theywill continue facing an uphill struggle, in an increasingly unfavourable race against the two runaway leaders, iOS and Android. For latecomers to a market dominated by strong network effects, the developer acquisition costs are astronomical. Microsoft’s developer acquisition costs are in the $10,000s as indicated by the funding levels available through the AppCampus onboarding program.

2.1. Platform developments

2013 was a year that cemented the Android/iOS duopoly beyond any doubt. Android reached 81% of smartphone sales in Q3 2013. Moreover, Android continues to dominate Developer Mindshare with 71% of developers that target mobile platforms, developing for Android, according to our latest survey of 7,000+ developers. With the market flooded with Android handsets, the surprising fact is that Android’s Developer Mindshare has not increased any further. For digital (but not only) businesses targeting mass markets, having a presence on Android is becoming a must. Even if the financial rewards from direct downloads are still lagging behind iOS, Android’s massive user base is a good enough reason to justify the investment in the platform, for all developer segments, from Hobbyists to Enterprise IT developers.

iOS shows a slight drop in Developer Mindshare from 57% to 55%, a decline which is, however, within the limits of statistical error. As we will see further ahead, iOS continues to provide better monetisation options for most developers and this is reflected in the stability of iOS Developer Mindshare despite a declining sales market share (from 15% in Q3 2012 to 13% in Q3 2013). Despite continuous talk about the “Apple effect” waning off, there is no such sign among developers, most of whom still view iOS as the most rewarding and engaging development platform. iOS commands the highest developer loyalty, being the preferred platform for 59% of its developer base, as we will see later on, in a section where we discuss how developers prioritise platforms.

HTML5 has become a bit of a misnomer since it is a technology stack rather than a fully-fledged app ecosystem. Developers employ HTML5 technology in a number of ways: to develop mobile websites, web apps, hybrid apps or use HTML5 code within native apps to display web content. In that sense, HTML5 can be viewed as both a deployment platform (on- browser) and a technology that can be used beyond the browser (off-browser), through tools such as PhoneGap, Appcelerator, Firefox OS and 10s more.

We have split the HTML5 Developer Mindshare to reflect this point: 37% of mobile developers use HTML5 as a platform, i.e. to develop mobile websites or web-apps, while another 15% use HTML5 to go beyond the browser, with hybrid apps or a HTML5-to-native tool (e.g. Appcelerator Titanium) to target native platforms.

A further 17% of developers indicated that they use HTML5 in a very narrow context, e.g. to display documentation in an otherwise native app. Overall, about 70% of developers use HTML5 in one way or another, but that just shows the strength of the technology rather than just the mobile web as a platform. HTML5 is still far off from being an app ecosystem as it lacks distribution, retailing and monetisation services in the form of a large-scale app store. On top of that, the issues that have been plaguing mobile HTML5 browser apps continue to exist, namely a performance deficit compared to native, lack of deep hardware API access, lack of mature tooling and some level of fragmentation across browser environments. However, the impact of these issues on mobile HTML5 development depends on the development route selected: as we found in our research on HTML5 vs. native development, off-browser routes like PhoneGap, Appcelerator or FireFox OS can mitigate issues relating to performance or API access. In spite of these issues, HTML5 remains a very attractive cross-platform development route for developers, 16% of whom indicate their intention to adopt the platform.

Windows Phone Developer Mindshare has finally moved upwards, following positive market signals in the last two quarters. As we have frequently highlighted in past reports, the developer intent has always been there, with Windows Phone figuring at the top of our Developer Intentshare chart, but needed positive market signs in order to convert this interest into Mindshare. While the 26% Developer Mindshare is still less than half of that for iOS, Microsoft can now claim that over a quarter of developers that target mobile platforms are now actively developing for Windows Phone. True to the network effects that govern app ecosystems, increased sales have led to a rise in Developer Mindshare. Developer interest for Windows Phone is still there, with 20% of developers indicating that they plan to adopt the platform; but having seen how difficult it is to translate intent to action in the last two years, we can safely say that the only way that Microsoft can recruit these developers is an aggressive sales strategy.

There are challenges ahead though for Microsoft: with just a fifth of the app catalogue of iOS and Android, Windows Phone store is not what has attracted consumers to the platform. Low cost devices and a great Metro UI are good enough to attract some customers but in order to compete with the duopoly, Microsoft needs to work on the developer front, and improve both the quality and the quantity of apps available. Microsoft has been buying developer interest since the platform came out, but only with strong device sales will developers be convinced – and Windows Phone sales are still very low compared to Android, with Microsoft claiming just 4% of global smartphone sales in Q3 2013 against Android’s 81%. With the Nokia acquisition behind it, Microsoft now has to get the Finnish handset maker to learn from the agility of its Chinese and Korean competitors.

As a latecomer to a mobile market dominated by strong network effects, establishing a credible footprint in mobile remains a formidable challenge for Microsoft. We believe that Microsoft may be better served in the long-run by leveraging the Android ecosystem as the deployment platform for Office and Server businesses which are still growing.

Windows 8 Mindshare has remained stable at 21% tracking poor sales of Surface devices up until Q3 2013. But the recent uplift in Q4 2013, combined with a high developer interest (18% of developers indicate that they plan to adopt Windows 8), is likely to have a positive effect on Windows 8 Developer Mindshare in the first half of 2014. It is still unclear, however, whether Microsoft’s tablet strategy will pay off in the long-run. When Apple launched the iPad it took a bold and risky approach that broke away from conventional thinking around computing, and the payoff was huge; but Microsoft is being more cautious and is clinging on to its PC heritage, delivering a hybrid desktop-mobile solution. It may be the wrong strategy: mobile is now redefining personal computing and not the other way round.

In stark contrast to the Microsoft camp, it is a sad story for BlackBerry. Having finally launched BB10 in March 2013, after a series of setbacks, BlackBerry was too late to turn the tides and saw handset sales falling quarter after quarter, taking on a number of massive write-offs due to piling stocks of unsold devices. BlackBerry is now backing off their handset business, outsourcing manufacturing to Taiwan’s Foxconn and repositioning itself as a enterprise mobility services player, rather than a handset maker, capitalising on its long experience dealing with enterprise customers. BlackBerry is now clinging on to the loyal developers that it has amassed throughout the years, with BlackBerry 10 more or less retaining its Mindshare from Q3 2013, while Developer Mindshare for BlackBerry 5/6/7, now a fading niche market, has declined to 5%.

The challengers

Firefox OS now claims a 7% Developer Mindshare which is by no means competitive compared to Android and iOS, but presents a solid foothold for a platform that launched a commercial handset just six months ago. On top of that, 14% of developers indicated that they plan to adopt the platform. Mozilla aims to create an app ecosystem centred around HTML5, by adding ecosystem features and capabilities that are currently missing: web app discovery, distribution, and monetisation. This has certainly grabbed developers’ attention, but Mozilla also needs to get consumers’ attention and work on device sales to kickstart a positive feedback loop that can give the platform a fighting chance. Handsets running Firefox OS are now available in 13 countries across Europe and Latin America: Brasil, Colombia, Venezuela, Peru, Uruguay, Mexico, Germany, Poland, Hungary, Greece, Spain, Serbia and Montenegro. But with more than 15 operators initially backing the platform, its spread seems rather slow; Telefonica has been the only operator to put its money where its mouth is, claiming half of all country launches, while Deutsche Telekom has only launched in Germany and Poland.

Meanwhile, Mozilla has been busy recruiting partners, not only in mobile devices, but also on the smart TV front, with Panasonic planning to deliver smart TVs based on Firefox OS. Panasonic cites openness as the main reason they decided to side with Mozilla, claiming that Google and Apple already have too much control on other major platforms – and implying that openness correlates to device sales. Mozilla’s mid-term plans also include a tablet, with early developer versions being delivered by Foxconn, and even a desktop implementation which chipset manufacturer VIA has been working on. While commercial products are not expected to come to market anytime soon, they certainly indicate some level of industry interest around Firefox OS.

Mozilla aims to build on the momentum and the inherent advantages of HTML5 to create an app ecosystem that extends beyond mobile and across several screens. The discontent with the duopoly is apparent and almost transparent across the mobile industry players. We believe that competing with Android and iOS head on is a game with a predetermined outcome. Instead, players should look to leverage the strengths of the Android ecosystem, and acquire Android users onto their own meta-ecosystems – much like Amazon and Facebook have successfully demonstrated. HTML5 as a development tool, rather than a full web platform, is a much stronger weapon in this, second phase of the ecosystem wars.

Tizen has been off to a slow start with Samsung recently announcing that no device will be launching in the US in 2014. At the same time, NTT DOCoMo, a key partner in the Tizen project, postponed a launch in Japan, one of the key targets for Tizen’s launch. With these setbacks in mind it looks increasingly unlikely that Tizen will become a challenger, even if it manages to launch in other regions. Our own initial assessment of the platform in Q3 2013 indicated that the Tizen SDK was still a long way from being ready for mainstream developer adoption, lacking the polish and ease of use that developers now take for granted in iOS and Android SDKs.
Ubuntu did not manage to secure its ambitious $32 million crowdfunding target on Indiegogo, that would go towards development of Ubuntu Edge. This high-end device would double as a desktop when connected to an external monitor and keyboard, delivering a converged desktop/mobile experience. In parallel, Ubuntu Touch, an Ubuntu mobile OS continues being refined and early developer preview versions are available. However, unless Ubuntu manages to convince an OEM about the viability of Ubuntu-powered handsets, it is unlikely that we will see commercial Ubuntu phones anytime soon.

Jolla Sailfish OS, based on Meego, an earlier attempt from Nokia to build a next-gen OS, has launched and has already shipped pre-booked devices from its first production batch. The OS can run Android apps, powered by a pre-installed app store by Yandex and can run on the same hardware specs as Android. While the OS may be popular with enthusiasts, building enough momentum to survive in a globally entrenched duopoly will require more marketing cash than Microsoft has poured into Windows Phone, which Jolla doesn’t have.
In light of recent changes in Google Play services, it is doubtful whether competing platforms such as Jolla and Ubuntu, that rely on the Android app ecosystem, will be able to leverage this ecosystem in the mid- to long-term. Google has moved 10s of its own apps and APIs outside the Open Source android Project (AOSP) so that Android apps that rely on certain Google apps and APIs – including Calendar, Location API, Maps, Push Notifications, Account syncing & authentication – will not run directly on forked versions of Android, unless explicitly modified for the forked OS version. Most developers will not invest the extra effort required to port their apps unless porting gives them access to 10s of millions more devices or markedly higher revenues per user.

Amazon’s Kindle Fire ecosystem is also powered by a modified version of Android so it is directly affected by the migration of key APIs outside AOSP. In order to maintain app compatibility between Android and Kindle Fire, Amazon has to provide its own version of any Google API that is not available in the AOSP version, and app developers need to support these APIs explicitly in their apps. Amazon has already been doing this, by providing a number of its own substitute APIs (Maps, In-app purchases, Game Circle), which makes Amazon resilient to the new Android API control points. Revenues generated on Amazon’s App Store are high enough for developers to justify the added investment.

2.2. Regional outlook

Android now dominates Developer Mindshare across all regions. With an installed based that exceeds one billion users and relatively low barriers to international expansion, developers worldwide are adopting Android as it opens up opportunities within and across borders.
Western Europe and North America show an elevated Developer Mindshare around 60%, contrary to the rest of the world. These two regions show the narrowest gap in Developer Mindshare between iOS and Android, with iOS trailing by 7 percentage points. iOS still holds a strong smartphone sales market share and installed base in Europe and North America, which are the most mature markets in terms of smartphone penetration: in Q3 2013 ComScore reported a 51.8% market share for Android vs. 40.6% for iOS in the US. Europe and North America present higher monetisation potential in terms of average revenue per user, and both regions have a strong presence of Hunters, the developer segment that aims to monetise apps directly, via paid downloads. Developers in these two regions are also more likely to have the purchasing power to afford the higher startup costs associated with iOS development.

In South Asia, South America and Middle East & Africa, HTML5 takes the second spot in Developer Mindshare, leaving iOS in third place. It’s worth noting, that these numbers for iOS and Android developers also include those that publish hybrid apps, i.e. native apps with HTML5 code, that target Android or iOS devices. South America continues to show a strong preference towards HTML5, which attracts 64% of mobile Developer Mindshare in the region, almost as high as Android. These regions, comprising mostly of emerging markets, will have an important role to play in shaping ecosystem dynamics in the future, as local smartphone penetration rises and they become prime sources for global app consumption. As such they should not be underestimated by platform vendors but should instead be treated as targets for their mid-to long-term developer outreach strategy.

Windows Phone has picked up pace across all major smartphone markets (Asia, North America, Europe), gaining Developer Mindshare in each one of them, reflecting a rise in sales market share compared to last year. Its lowest Developer Mindshare score is in North America, where iOS and Android dominate sales by a very wide margin, leaving Windows Phone at around 5% of quarterly smartphone sales. While North America and the US in particular is a key region, it seems particularly difficult for Microsoft to break consumers’ reluctance to buy Windows Phone devices. In light of this, Microsoft should focus on building its presence in other markets, such as South Asia, where it is stronger and which will fuel most of the growth in smartphones in the next few years. The trade-off is, of course, that the lower ASPs that Windows Phone devices will generate and potentially lower returns for developers that target these regions.

iOS first vs. Android first: a question of priorities

A common theme across the app economy revolves around the concept of “iOS first, then Android”. In a recent note we showed that this is true only in some parts of the world and, in particular, the areas where iOS exhibits higher than average market share, especially North America and Western Europe. The picture of platform priorities is split globally, as our Q1 2014 results show. Looking at the platforms that developers prioritise by region we find that Android and iOS dominate every single country. iOS leads in North America and Western Europe, while Android wins in every other region. The differences are more pronounced in Asia, where 46% of mobile developers prioritise Android vs. 28% for iOS. Considering the impressive growth of Android in these regions, Android is a key strategic target for developers. Even if iOS generates more revenue per user, the sheer difference in the user base makes Android the number one priority.

South America, which used to be a stronghold for HTML5 development, is now turning towards Android, following the rising sales of the platform, which now commands over 70% sales market share in the region. HTML5 remains quite strong in the region, with HTML5 Developer Mindshare at 64% not far behind Android’s 71%. We should note that the map contains only those countries where we had a sufficiently large sample to obtain reliable results.

The popular perception of “iOS first, then Android”, is only true for those parts of the world where iOS has a sufficiently large user base to justify higher investment than Android. Regional platform priorities are split, more or less along the lines of platform sales: Android is developers’ priority platform in regions where it has a significant market share advantage over iOS. But in regions where iOS has a higher than average market share, it becomes the priority platform.

Prioritising the platforms that lead locally is a strategy used by developers across all regions, but it may not always be the best one. In Spain, for example, Android dominates in sales market share but iOS leads Developer Mindshare. i.e. developers are not building for the local leader but for the platform that presents the best opportunities for them. We have previously reported that most app sales actually <come from outside developers’ own region. In light of this, developers should consider prioritising regions rather than platforms, targeting those regions that will bring better results, rather than the platforms that prevail locally