Android, China and Addressable Markets

The smartphone market in China is exploding. Depending on who you talk to, there were anything from 40-50m smartphones sold in the last quarter, compared to around 19m in the USA. Combining Baidu and CNNIC data, it looks like there were around 180m smartphones in China in Q2, of which 65m were Nokia Series 60 (a rapidly shrinking base), 30m were iPhones and about 80m were Android. Running the growth forward, there are probably now 120-130m Android phones in China.

That means that of the 500m or so active Android phones in the world today, a quarter to a third are in China.

Using the word ‘Android’ to describe these devices is somewhat problematic. The great majority of them come with no Google services: no Google Maps, no Google Play and no Gmail or Google Calendar. These cannot be installed by the user either, without a great deal of fiddling with ROMs. Google Search is of course largely blocked in China, and those devices that do have Google Play can only download free applications: purchases are not supported. Even the Samsung Galaxy S3 comes in this condition: no Google services AT ALL.

In other words, these devices are ‘orphaned’ from Google in an analogous way to the Kindle Fire. They provide no Adsense revenue and, equally importantly, give Google none of the signalling information about user behaviour and intention that, for example, feeds Google Now. The damage done to Google by fragmentation can be overstated – a forked messed up Android 2.2 phone in Turkey with no Google apps still drives search traffic – but these phones do not even do that.

This does not exactly mean that they do not constitute an addressable market for developers: they have much the same mix of Android versions and hardware specifications as devices in other parts of the world, and if you localise the app and offer it for free, or place it on one of the several dozen Chinese app stores – or just sell it from you own website as many Chinese devs do – then you can find users in China. It won’t be easy, though.

Apple has its own problems in China. It has struggled to find the right payment mechanisms for the App Store, and the iPhone is not available officially on the largest operator, China Mobile, which has 700m of the 1.1bn mobile users in the country and a higher proportion of the best ones. This will probably change in the next few months, due to the iPhone 5′s ability to support the China-only TD-SCDMA 3G standard that China Mobile uses. But in any case, the ~30m iPhones in China (half of them on China Mobile regardless, as it happens) all have something much closer to the same services and apps as we do in the west.

There is no one ‘smartphone’ market

China is the specific issue, but there is a general issue here as well. Talking about global unit sales is important in one sense, but if you want to understand the evolution of ecosystems, addressable markets for developers and indeed addressable markets for manufacturers, you need to look on a more local level. Hence, for example:

• 50% of smartphone sales in the US are iPhones
• On the other hand around half of European mobile users are on Prepay and almost certainly will not buy an iPhone (unless it is a second hand one, which is an interesting topic in its own right)
• In China, the hot smartphone price point is ‘RMB1000′ – which is around $160 – BEFORE SUBSIDY.

This point is crucial. Many Americans , accustomed as they are to a pricing structure that conceals the underlying price of the handset, make the mistake of thinking that Apple sells a ‘free’ phone. It does not. The iPhone 4′s unsubsidised price is over $400. Conversely, you can buy any number of very basic 2G Android phones for under $50 at wholesale.

In other words, the cheapest phone that Apple makes costs around ten times the cheapest Android that a kid in Nairobi, Jakarta or Shanghai can get his hands on.

At this point, people sometime point to the strong-selling Galaxy S3 as proof that Android sells well at high price points. THe problem with this is that the S3 has (according to Samsung) sold 30m units in the last 6m or so, but Samsung sold perhaps 90m smartphones in the same period, and Android sales were close to 200m. Most of the volume is at MUCH lower prices than the iPhone.

This price difference is hugely important for market share, but it is also hugely important in understanding what it means to say that Android has ’70-80-90% of the smartphone market’. It has that much of smartphone units, but it has nothing like that much of the addressable market for the typical VC-based mobile app-focused startup in London, San Francisco or Berlin. If one then considered the inarguable fact that Android users, even in the West, have a different demographic profile (which is code for ‘they tend to have less money’), then that app development prioritisation looks a lot more complicated than the crude ‘Android is winning’ narrative might suggest.

Forbes