Competitive advantages are an interesting thing: While investors are known to spot them just about everywhere they look, the sustainable ones are often few and far between. A space that has been known for fleeting competitive advantages (in what looks like a perpetual game of king of the hill) is consumer tech: In a couple years’ time, despite the proclamations that the current champion is here to stay for good, leaders and laggards find themselves completely jumbled in a new order that at one time seemed unimaginable.
In the recent past, I’ve heard an interesting idea repeated in multiple articles/blog posts: Many people seem to believe that consumer lock-in, due to app downloads, will result in consumers who are tied to one mobile/tablet ecosystem (iOS, Android, etc.) and will rarely abandon that ship. To be clear, this argument is not based on app availability (parity is already occurring in that arena – for example, Microsoft recently announced that their app store will have 46 of the top 50 mobile apps in the next few months) – this idea suggests that one-time iPhone buyers (as the most prominent example) will not abandon Apple for the simple fact that they’ve made a monetary commitment to the ecosystem beyond the hardware purchase.
Some people agree with this wholeheartedly – and admittedly, I think that this is clearly applicable for some people (although I think that encompasses a small percentage of the general population); however, I think the numbers show that as a whole, this “lock-in” is overstated, to say the least.
Let’s start with an important number: 45.6 billion – that is Gartner’s estimate for the total number of worldwide mobile app downloads that will occur in 2012. This number is only relevant in terms of the global smartphone user base – which according to research from the firm Strategy Analytics surpassed the 1 billion mark for the first time ever in the third quarter of 2012 (they estimate it will cross the 2 billion mark in just three years). From here, we start with one of our first impressive statistics – this implies that the average smartphone will download nearly 46 apps in this year alone; this suggests a lot of activity, and the potential for serious lock-in.
However, the numbers start to change as we look at actual investment by consumers: from the same Gartner data, we have our next key figure – 89%, which is the firm’s estimate of the number of apps that will be free of all those downloaded in 2012. That’s a number that seriously drives down the ecosystem lock-in of the vast majority of these 45.6 billion downloads (again, as I noted above, assuming some level of parity across ecosystems, which will continue with time):
From there, we have even more reason to question the lock-in of these 5 billion downloads; per Gartner’s data, apps between $0.99 and $2.99 will account for nearly 90% of paid-for downloads in 2012, and more than 95% in 2016. Again, here’s the breakdown for lock-in apps:
|Cost of $0.99 to $2.99||87.5%||4.375B|
|Cost more than $2.99||12.5%||625M|
Let’s try and put some numbers to this: Of 5 billion paid applications, nearly 90% (4.4 billion) cost under $3; I’d bet it’s weighted towards the $1 end, but let’s assume the average cost is in the middle at $2 – that’s a total spend of $8.8 billion across those 4.4 billion applications. With the remaining apps (600 million), we’re not sure of the cost – but let’s be generous and assume its $10 per app (again, I would bet that it’s much closer to the low end, probably around $5 or so) – that gets us another $6 billion, for a total of $14.8 billion.
Using our generous estimate of $14.8 billion, this assumes that global users, on average, spend about $15 per year buying apps for their phones – this is equal to about 7% of the cost for a new iPhone from ATT or Verizon, before considering the cost associated with the 2 year plan (for the cheapest contract-free model on the Apple website – the 16GB iPhone 5 – this $15 a year is just 2% of the $649 price point). If we use $1.50 and $5 as our figures for the above calculation, the spend per user drops to under $10 per year – and considering most consumers are looking to ditch their hardware after 24 months, suggests a lifecycle investment in apps of under $20.
Think about this in comparison with another consumer electronics device – video game consoles. When the Xbox 360 was released in 2005, there were two versions, ranging from $299 to $399. At the time of the release, Microsoft announced that certain games (279 of them) would be compatible with the new system – meaning that games purchased for the Xbox console would still be playable on the 360. If I remember correctly, new games sold for $50 at that time (compared to $60 on average today) – meaning that a library of 3-4 games had a cost equal to 50% of the new console; as a corollary, and assuming the users other option was a PlayStation 3 (cheapest model priced at $499 upon release in 2006), switching to the new platform included additional – and most importantly, considerable – software investment (assuming one wishes to continue playing those games). This investment, as a meaningful percentage of the overall system cost, likely kept many users glued to Xbox and PlayStation alike (which also had capability with some old games).
As I noted above, there’s no question that some people are fully dedicated to certain ecosystems: naturally, some consumers have spent $50, $100, or even more purchasing apps, and are similar to our hardcore gamer. My contention is that those individuals are far outweighed by normal users who largely download free apps (essentially an Xbox owner with no compatible games), and would be able to switch with little to no pain – the additional cost is a drop in the bucket when compared to the all-in cost of new hardware, extending ones contract, etc.
My opinion is that the argument for consumer “lock-in” on mobile devices is simply overstated. As always, I welcome thoughts of others, particularly those that differ from my own.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.