Competition in Smartphone Markets

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Notably, the sufficiently large number of user-base also creates barriers to enter the market. The very first firm in this market enjoys the greatest advantage and has a possibility to dominate the market.

[pic 4]

Figure 4: The continuous cycle of network effects.

Figure obtained from: Critical Mass Note.

Furthermore, multi-sided platforms (MSPs) “enable direct interactions between two or more distinct sides and each side is affiliated with the platform” (Hagiu and Wright, 2015). Within these distinct groups, a member of one group benefits from having its demand coordinated with members of other groups. (Evans, 2003) Functionality of MSPs can perform in 2 types: search costs reduction and shared costs reduction. For instance, facilitating the match between apps developers and users is efficient to reduce research costs.

In the case of smartphone markets, each platform has at least two sides of customers: application developers and users. A major characteristic of MSPs is a “chicken-and-egg” problem of launch and user adoption (Caillaud and Jullien, 2003; Evans and Schmalensee, 2010), which means “the demand on each side tends to vanish if there is no demand on the other” (Evans, 2003). A feasible strategy to get both sides on board is cross-subsidisation, which means subsidizing one side of the platform, as to boost both sides. It is possible that all the platforms converge on the same pricing strategy. Evans (2013) argues that “they all discovered that it made more sense to charge developers relatively modest fees for developer kits.”

There is one notable challenge facing the firms to reach a critical mass and manage to maintain it. As indicated in (Figure 5), the growth of total value of Apple positively depends on the improvement of its own installed base, but negatively depends on the increase of the installed base of Android, and vice versa. Previous examples such as the PC competition between Microsoft’s Windows operating system and Mac platform as well as the social media competition between Facebook and My Space, have demonstrated this intriguing relationship. The dynamism provides opportunities for a business to dominate the market and force its competitors out.

[pic 5]

Figure 5: Platform Competition

Figure obtained from: Lecture notes: Critical Mass

Growing fast and big at the beginning stage of the market has become essential. In the first place, setting a lower price when introducing a new product with network externalities is crucial to create an installed base and reach the tipping point.

In the second place, Google uses open approach and family creation. Open source strategy states that Google decided to share intellectual property and open its systems to external firms and individuals (Parker and Alstyne, 2014). It allows Samsung, HTC and other manufacturers to use Android’s ecosystem in order to enlarge the user base. In addition, Android creates an enormous “family” of supplementary devices and adequate softwares. Rysman (2009) suggests that rules for openness often include the issue of compatibility and multi-homing.

In contrast, Apple employs the close approach that no other smartphone producers could use the iOS platform and it “has fairly strict rules for how applications look and behave its devices.” (Lohr, 2011) When the iPhone was initially introduced, the firm had already owned a large installed base of iPod and iTunes. iPhones could stimulate the same customers of previous products and contents and enjoy its user base. Further integration of iTunes platform strategy with its overall vision as a “digital convergence company” is the key. (Robinson, 2011)

The Future of Monopolistic Market

Arguably, the future of this rapidly growing smartphone market is ambiguous. Internetwork externalities and economies of scale provide possibilities for winner-take-all battles. In theory, as iOS and Android are incompatible with each other, Android who currently has a larger installed base share which can be seen in (Figure 6) would attract more customers and unseat iTunes dominance. However, Robinson (2014) argued that Apple’s restriction strategy has been considered as an innovation over the last decades. Adhering to this strategy could make it difficult for competitors to accomplish.

[pic 6]

Figure 6: US smartphone installed base share. Figure obtained from: http://www.techthoughts.net/2012/07/global-smartphone-market-share-trends.html#.UtdYR_RDtnJ

Critically, the smartphone market is a multi-homing market and is not supposed to tip. With the presence of compatibility, platform differentiation and lower switching costs, platforms could emerge. Highly demanded apps have a strong tendency to multi-homing for both platforms, which means an equilibrium with divided platform choices exists. The tie between iOS and Android is rendered stable. (Bresnahan, Orsini and Yin, 2014) Several platforms would keep competing and survive.

Conclusion

This study sets out to investigate the revolution of the smartphone markets with economic theories. As the monopolistic competition over physical producers gradually evolves into platform differentiation, both Google and Apple applied its core business strategies to gain comprehensive installed bases. Undoubtedly, the highly dynamic smartphone market would grow substantially and in the foreseeable future, there would be more new entrants to the market. Principles of multi-homing market show there might be more than one winner in this battle, depending on how platforms will differentiate themselves.

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References

Bresnahan, T., Orsini, J. and Yin, P. (2014). PLATFORM CHOICE BY MOBILE APPS DEVELOPERS. NBER Working Paper.

Caillaudand B. and Jullien.B. (2003). Chicken & egg: Competition among intermediation service providers. RAND Journal of Economics, 34 (2), pp. 309-328.

Chamberlin, E.H. (1933). The Theory of Monopolistic Competition. Cambridge: Harvard University Press.

Cusumano, M. (2010). Technology strategy and management: the evolution of platform thinking. Commun ACM, 53 (1), pp. 32-34.

Evans,