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The Science of Hitting
The Science of Hitting
Articles (447) 

The Myth of Mobile Lock-In

December 20, 2012 | About:

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):

Free 89% 40.6B
Paid 11% 5.0B

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:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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Tonyg34 - 4 years ago    Report SPAM
you may also in certain circumstances own the app, meaning you may put it on additional devices or transfer your software to a new device, when you log into your google account. I mean your online google account like your email, igoogle, etc. you need not use an android phone (but you would need internet access to use certain apps through google)
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Good point - offerings that are not tied to the hardware. Thanks for the comment!

Portfolio14 - 4 years ago    Report SPAM
Great post. Much more rigorous than my free-wheeling thoughts I wrote a while back:


The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Great post to you as well - agree with your free-wheeling 100%!

William.b.thomson - 4 years ago    Report SPAM

I think that you are mostly correct. To put it into perspective, I personally got so excited about Windows 8 that I abandoned all my Apple products, except the iPad and went to Nokia, Dell, etc. The transition was virtually free to me. Anything I really needed was available and mostly free. I expect to transition the tablet also but haven't done it yet.

The one caveat to this thesis is an odd one. Frankly, I found myself nervous about the transition. Many of us become quite attached to our mobile lifestyles and digital "ecosystems". Breaking up with your digital partner requires a small leap of faith.

The general point, however, about competitive advantages is very relevant. Thank you.
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM


Thanks a good point, and I certainly concede that their are other factors in this equation - I think many people might hold on to an ecosystem unless their incentivized to switch. I'm very interested to see how this all plays out in the coming years. Thanks for the comment!


I don't know enough about RIMM to provide an educated response (but do like the look of BB10); in terms of Microsoft, I think their commitment to the space and what they bring to the table (Office, Xbox, Skype, etc) will prove successful with time. As someone who has a touch PC with Win8, I really think that players in the industry (namely Apple) who do not think this is the future of computing are flat out crazy - and I think Microsoft has a clear lead and the most compelling offering for the convergence of devices (of course I may be biased as an MSFT shareholder!)

I need to know more about app development (for example, the work needed to build an app that works on Windows phones, Windows tablets, and PC's) because that can prove very important over time as well - unfortunately, I don't know a dang thing about it at this time (if you know, PLEASE tell me).

There's one thing I do know: this will be very, very interesting over the coming years...
Humble Money
Humble Money - 4 years ago    Report SPAM
Short comment: I did not see a mention of iTunes / music lock-ins, which is quite relevant as some people do have large libraries. And the other is the effort required in moving phone contacts and files (e.g. iCloud) to the new ecosystem, re-installing apps and getting used to the new user interface (similar to the lock-in of bank accounts (e.g. BoA) because people do not want to go through the hassle of changing their accounts). These are not explicit (financial) lock-ins but should not be underestimated.

Then again, it depends on how invested people are and some people just want a phone with some apps.

For the rest, I tend to agree with this article, though I haven't done much research myself.
SeaBud premium member - 4 years ago
The article is correct in the narrow US market but more importantly in the world market. Consumers in other countries do not have the broad affinity for the Apple ecosystem nor the funds to pay for Apples' extreme margins. Carriers in the US are weary of subsidizing Apple and in other countries are refusing to subsidize Apple at the traditional levels.

As to Itunes/contact transition, both Google/Win8 support easy platform transitions. For example, either smartphone allows access to your itunes library with a simple set-up procedure. Likewise, contacts can be ported using a "transfer my data" Nokia app. Continuing the international theme, my experience is that users in non-US countries are more tolerant (and frankly, proficient) at setting up and managing electronics/data and are less likely to pay for what Americans call "ease of use."

Second, Microsoft learned from Apple that security/stability is prized by the average consumer over open source code. If Microsoft provides a stable, user friendly experience in Win8 (which is what I hear but have no deep knowledge of) AND porting to Microsoft 8 is easy (itunes/contacts etc.) then it is hard to understand how Apple maintains its margins AND keeps market share (they obviously can cut prices, thus margins, to retain market share but this would be a very painful experience for shareholders). If Win8 is a problem in terms of stability or security then all bets are off.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Those are good points, and important to the question at hand; as noted, this article looked to specifically address the idea of financial lock-in from app purchases - which I think is clearly overstated. Thanks for the comment.


Interesting thoughts - thanks for adding them.

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