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Apple faces threat from China, bellwether in battle against Android

Gregg Keizer | Sept. 2, 2013
Without a really cheap iPhone, Apple's app ecosystem is at risk, says analyst

And that's where things start to get ugly for Apple. Or so Benedict Evans, an analyst with U.K.-based Enders Analysis, has argued.

In a report published in early August, Evans maintained that without a low-priced iPhone in its portfolio — and by low, he meant as low as $200 to $300 — Apple risked losing mind share among developers. In other words, Apple needs market share as much as profit margin for the iPhone to continue being a credible smartphone brand.

Like Khalaf, Evans saw the danger stemming from developers' decisions.

"Developers are starting to move from creating new products on the basis 'iPhone, then maybe Android' to 'iPhone and then Android' or even 'iPhone and Android at the same time,'" Evans said in his report. "We do not see Android becoming a first choice this year, but it is no longer optional for any publisher seeking real reach. If total Android engagement moves decisively above iOS, the fact that iOS will remain big will be beside the point — it will move from first to first-equal and then perhaps second place on the roadmap."

If that happens, Apple is in a world of hurt.

"This is a major strategic threat for Apple," Evans continued. "A key selling point for the iPhone is that the best apps are on iPhone and are on iPhone first."

Evans believed that Apple's critical advantage — the App Store — which has driven a "virtuous cycle" to boost iPhone sales and reap enormous profit for the company, could begin to crumble in 2014.

"If that does happen then the virtuous circle of 'best apps therefore best users therefore best apps' will start to unwind and the wide array of Android devices at every price point will erode the iPhone base," Evans wrote. "Part of the reason for spending $600 on an iPhone instead of $300 on an Android is the apps."

Evans point? Apple must jump into the shallow end of the smartphone price pool with a lower-cost iPhone. "The financial value of a cheaper iPhone cannot be considered in isolation," Evans contended. "A large part of its purpose is to defend sales of the high-end model."

China's example could be seen as the harbinger of the unwinding that Evans feared.

"Absolutely, China is a bellwether," said Khalaf. "While the iPhone's number of units in China are smaller, its engagement has been dramatically higher than on Android."

By "engagement," Khalaf meant a user's app acquisition and usage practices, including the number of apps he or she downloads, how much is spent on those apps and how much time is devoted to using those apps.

But in China, the engagement race is now neck-and-neck, with time spent on apps per consumer evenly balanced between Android and iOS.


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