The Google-Motorola Deal: Why Android will never be proprietary

Ever since Google announced it was buying Motorola, industry watchers have speculated if Google was going to make Android a proprietary/closed source platform exclusively for Motorola's devices. That will never happen and here's why.

The Financial Perspective: Revenues & Gross Margins

Google's revenues from the mobile segment are currently derived from advertising, while Motorola's are from device sales through carriers and retailers. So let's compare how much money Google can possibly make over the next few years by following its open source strategy versus a Motorola-focused proprietary strategy. 

For the purpose of this analysis, I have taken very conservative estimates for Android revenues to emphasize my point. I have also restricted my analysis to smartphones, so the numbers are even more conservative.

First, let me list out my assumptions for this analysis:

Proprietary Strategy

Average Selling Price - Motorola's average selling price has been estimated by Forbes as $226.30. However, this most likely includes sales of feature phones as well. So I have considered the average selling price for smartphones in the US, which is about $135, added to the average carrier subsidy of about $280.

Gross Margin - Gross Margin is essentially the difference between the price at which Motorola sold a smartphone and the manufacturing cost of the device. Motorola's Gross margins over the last few years have consistently hovered around the 25% mark, so that was a safe estimate to take.

Annual Growth in Gross Margin - This annual increase in gross margin would be driven by increased prices, as following a proprietary strategy would most likely put Motorola's devices at a premium in the market.

Open Source Strategy

Average Revenue Per User (ARPU) - This is an estimate of the advertising revenue Google makes per year on every Android user. The details of this analysis are mentioned here.

Annual Growth in ARPU - This is an extremely conservative figure, given that growth in ARPU is driven by growth in user base. An ARPU growth of 10% is probably more realistic, but I've taken this figure to be on the safe side.

Average Daily Android Activations for 2012 - Given that android activations have already reached 850,000 per day, it is a fairly safe assumption that they would surpass the 1 million mark this year. So I have considered an average figure of 1 million for the year.

Annual Growth in Activations - This is an average growth rate in daily activations from 2012-2016. This, again, is a fairly conservative figure as daily activations have grown by more than 100% over the last year. This growth should be driven by a sharp increase in global smartphone penetration, which is currently around 30%.

Active Android smartphones discarded - This is an estimate of the percentage of active android smartphones from the previous year that are discarded in the following year. This excludes refurbished, reused or re-sold phones since those would still be active android devices from which Google can earn advertising revenue. Just to add, and I'm sure this is fairly obvious; this number is much higher than any reasonable estimate. I have taken this figure to get an even more conservative estimate of advertising revenue.

Comparison of Revenues & Gross Margins

Based on the assumptions highlighted above, let's first have a look at Google's mobile advertising revenues from the Android platform, only considering smartphones sold from 2012-2016.

Wow, that is considerable growth from Google's current open source mobile strategy. Now let's have a look at the sales volume Motorola would need to achieve (taking into account both device sales revenue & advertising revenue from those handsets) to meet these revenue targets.

This volume growth is much higher than any reasonable expectation from Motorola, considering their revenues over the last 3 years have mostly been flat. In addition to this, Motorola's marketing & distribution expenses (Motorola's operating margin is currently negative) would far outweigh Google's running expenses (including a mobile advertising revenue share with carriers & OEMs). Therefore, the actual expected volume growth could be significantly higher than this. 

Expecting Google to turn Motorola into another Apple-like success story, to just match a conservative estimate of their mobile advertising estimates is asking for too much. Google is many things, but a great consumer marketing company, it is not.

Google's Options

At this point, it is clear that Google did not buy Motorola to convert it into the manufacturing arm of a proprietary Android platform. Rather, Google primarily bought Motorola for the following two reasons:

1) To acquire Motorola's patent portfolio to defend the Android platform against frequent attacks from Apple & Microsoft

2) To prevent Motorola from using its patent portfolio to attack other Android manufacturers

Now, Google has a couple of options in front of it:

1) Sell Motorola's Hardware Business

It would make sense to sell Motorola's hardware business, as it would put other Android manufacturers at ease. There have been rumors of Huawei being an interested acquirer, and the deal would make sense as long as the valuation was acceptable.

2) Hold on to Motorola for now

It might make sense for Google to hold on to Motorola for now, because Motorola owns some significant distribution relationships with retailers, carriers & cable TV operators, which could come in handy for Google. Google is making a major push into tablets & television, with the Nexus tablet & Google TV, and Motorola could help with that. This strategy carries the risk of alienating other Android hardware vendors, but considering the success and market penetration some of them have seen on the Android platform, it is not a very big risk. OEMs could always fork Android, like Amazon did, but there are some considerable risks with that strategy.

Conclusion - This analysis is not exhaustive in any way, but it does highlight the fact that even though Google has a few options in front of it when it comes to Motorola, using Android as a proprietary platform on Motorola's devices is not one of them.

The Google Nexus Strategy Shift: Top 5 Reasons

Recent reports from the Wall Street Journal have stated that Google plans to expand its annual Nexus device program to five OEMs, from its previous approach of partnering with a single manufacturer. Google also plans to sell these devices online through the Play Store. Let's take a look at the top five reasons for Google's strategy shift.

5. Add New Revenue Stream

Google already revealed plans of selling devices through the Play Store, when it began selling the unlocked Galaxy Nexus for $400. Now, Google plans to expand the Nexus program to five OEMs - Samsung, HTC, Motorola, Sony and Asus. With five Nexus devices, Google would be able to generate greater sales volume and with the stated operating profit margin of 10-15%, it would be a decent amount of incremental revenue. However, since this isn't a core revenue stream for Google, it is unlikely to have been the primary driving force behind this decision, but merely an additional benefit.

4. Reduce Carrier Influence

Reports are conflicted on whether the Nexus smartphones sold through the Play Store would be subsidized or not. WSJ reports that it will be free of carrier restrictions, as the currently available Galaxy Nexus is, but Forbes claims that they will be sold with carrier contracts. 

Both strategies have their advantages, as a contract-free device gives Google more control over what services & applications are available on a device - for example, Verizon currently does not allow Google Wallet on the Galaxy Nexus in favor of their own payment service. However, selling devices with carrier contracts would create greater sales volume as prices would be lowered thanks to carrier subsidies.

Carriers themselves could benefit from a contract-free strategy as it would reduce the subsidy burden from their bottom-line. Based on recent moves carriers have taken against subsidies, it is possible that they may be more open to this approach than they were previously.

The only reason I haven't ranked this higher is because I'm not very certain of the power balance here. If Google decides they do not want the Nexus devices on the Play Store to be sold with a carrier contract, do OEMs still have freedom to negotiate independent carrier contracts for Nexus devices? If they don't, this may be more of a risk than a reason for the strategy shift, at least for the smartphone segment.

3. Greater Emphasis on Tablets

This is a fairly obvious reason. Google has made their plans for the tablet market very clear with their partnership with Asus for the upcoming Nexus tablet. The interesting part is that the Nexus program has not only been expanded to five OEMs, but that the program includes both tablets & smartphones. In effect, we might see more than one major tablet launch from the Android camp this year. The obvious inference here is that these tablets would cover price points from $200-$400 and screen sizes from 7-10 inches. Given that these devices would most likely receive a substantial marketing push as well (depending on the OEM), it makes Apple's decision on the iPad Mini even more important.

However, Google's partnership with Asus was already aimed at a major move into the tablet market, and this just highlights Google's commitment to the tablet market.

2. Reinforce OEM Partnerships

In my opinion, this was one of the major reasons for this strategy shift. It wasn't a coincidence that this report leaked just before China cleared the final hurdle for the Google-Motorola deal to go through. Hardware vendors in the Open Handset Alliance were wary of any preferential treatment Motorola may receive thanks to this deal. With the new Nexus program, hardware partners would have employees working out of Google's Mountain View, Calif. headquarters, in close collaboration with the Android team, which effectively removes any stigma from the Motorola acquisition. This collaboration may also create an additional deterrent against any move by OEMs to fork Android and reduce their motivation to seek other operating system choices.

The only reason this hasn't been ranked higher is because I feel like the next reason was paramount in guiding Google's long-term strategy.

1. Commoditization of Hardware

Driving the pace of hardware commoditization is the single largest factor driving Google's strategy shift. In the long run, hardware is always commoditized and differentiation is driven by software. In the early stages of an industry, hardware carries as much value as software - think of IBM in the early days of the  PC market. But as the industry matures, hardware tends to become cheaper and less differentiated. Today, when you buy a PC, how much does a hardware vendor matter? Hardware vendors are usually chosen based on hardware quality, price and after sales service - this is about as close to a definition of commoditization as we can get.

The most important purchasing decisions regarding hardware are usually related to product category - For example, different screen sizes & form factors (desktops vs. laptops vs. netbooks in the PC market). Once an industry evolves, hardware vendors put greater emphasis on making sure they cover all product categories.

With the expanded Nexus program, Google would have greater control on the user interface elements and customizations on a greater number of devices on the market. Being able to minimize carrier/OEM customizations and applications would make more devices adhere to the stock "Google Experience". An additional benefit would be that Google would be able to push out quicker updates to a larger number of devices on the market and reduce android fragmentation. 

Conclusion - As we've seen there are many benefits Google can gain from their expanded Nexus program, but the two most important reasons were to reinforce OEM partnerships and to drive commoditization of hardware over the long run. This strategy could also see Google making a greater impact on the tablet market, starting this year. All things considered, the strategy shift looks to be the right move to make at this point in time.

The New iPad & the Tablet Market

With the launch of the new iPad in the rear view mirror, it's time for the annual iPad sales hysteria. Since its introduction in 2010, the iPad has dominated & defined the tablet market. iPad & Tablet sales have been zooming over the past year, with annual growth in excess of 250%. However, in Q4 2011, the iPad's market share dropped to 57% as compared to 39% for Android tablets. Even with this drop, absolute sales numbers for the iPad have seen phenomenal growth, which emphasizes the staggering growth of the tablet market.

Now, as with the launch of any major Apple product, the iPad will see a spurt in sales & market share this quarter. But what will the iPad's market position look like in this industry in the long-term? In order to understand this, we need to understand the primary product & market segments in the industry. Industry segments typically evolve over time and have a greater impact as an industry matures. We have seen the beginnings of this kind of segmentation starting to form, with the launch of products like the Asus Transformer Prime and the Kindle Fire. Let's have a look at these segments and how they would affect the iPad, as well as the industry at large.

1) Media Tablet Segment

A media tablet could be described as a generic term for any touchscreen-only tablet. Obviously, this segment was created by Apple, with the launch of the iPad. This segment currently accounts for the lion's share of the tablet industry and with the launch of the Amazon Kindle Fire, this segment has become significantly more competitive. Since buyers of media tablets are predominantly average home users, the usage patterns are skewed primarily towards browsing and media consumption. For these users, the key factors affecting their purchasing decision comes down to brand, pricing & a large application base. This is the primary reason why the Kindle Fire has managed to be so successful in such a short span of time. Based on the target market for this product segment, the screen size and the price of the majority of products would be at the lower end of the market (7+ inches & $200-$400). This segment will start to get significantly more competitive later this year, with Google set to launch an Asus manufactured, quad-core, Nexus tablet at $200 and Amazon set to launch the upgraded Kindle Fire.

2) Hybrid Tablet Segment

A hybrid tablet is essentially a high-end tablet, with the added functionality of an attachable keyboard dock & trackpad. The form factor is similar to an ultrabook and it is also mouse-compatible. This segment was created by Asus, with the original Asus Transformer and has grown in popularity with the launch of the Asus Transformer Prime. Now, other PC/Tablet manufacturers have taken notice of this segment and have begun launching similar products. Typing long emails/documents has long been a nightmare on touchscreen-only devices and Hybrid tablets have come to prominence as a solution. In addition, it is far more comfortable to use & carry, as compared to a tablet with a connected or bluetooth keyboard accessory. In terms of usage patterns, hybrid tablets could be used for productivity or high end gaming, apart from media tablet uses. Based on these usage patterns, the target segment for hybrid tablets is primarily high-end home users/power users and in the long run, enterprise users. For these consumers, the key factors affecting their purchasing decision are most likely processing power, a keyboard dock, long battery life & a large, high-end application base. Based on this target market, the screen size and the price of the majority of products would be at the higher end of the market (10+ inches & $400-$600).

How does this affect the iPad?

The new iPad and the iPad 2 are still essentially high-end, high priced ($400+) media tablets, without the added functionality of a hybrid tablet. As these segmentation trends start to make their mark over the next year or two, the iPad will be caught between these two worlds. Apple could tackle this problem by introducing a smaller, low priced iPad (much to the dismay of the late Steve Jobs) or by introducing an iPad with a dockable keyboard. Introducing a smaller, cheaper iPad would make Apple compete on far lower margins, risking their industry-leading operating profit margin. While, introducing an iPad with a tablet dock would undoubtedly cannibalize sales of the Macbook Air, which is a considerably high value product for Apple. Both strategies have their pitfalls, but they will be necessary if Apple expects to continue to be a major player in this industry.

Market Outlook for 2012

Most analysts estimate the tablet market to grow by about 100-150% this year. But  driven by the launch of the upgraded Kindle Fire & especially the $200 Nexus Tablet, I expect sales to beat analyst estimates. Based on these product launches, I expect Android Tablets to pass the iPad and capture over 50% of market share by the end of the year. The iPad would see massive growth in absolute sales numbers as well, but will not be able to match the growth of competition. I have already covered my expectations from Windows 8 tablets and a late launch in Q4 2012 would mean they would have a minimal impact on the market.

Will Windows 8 Succeed: An Analysis of the Tablet & PC Markets

Long story short, no, I don't believe it will. Keep reading to find out why.

Microsoft has been marketing Windows 8 (due to release in Q4 2012) as a "no compromisesoperating system" for both PCs and Tablets. Sadly, this is false.

Windows 8 essentially targets the following markets:

1) Enterprise PC sales & upgrades

2) Consumer PC sales & upgrades

3) Tablets with x86 Architecture (using similar processors as PCs)

4) Tablets with ARM Architecture (using similar processors as iPads, Android Tablets, etc.)

Let's tackle these markets individually.

1) Enterprise PC sales & upgrades

Many corporates have already announced their intention to steer clear of Windows 8 upgrades, as the new UI would bring additional training costs along with it. In addition, they don't see the need to upgrade to an operating system that does not bring too many other benefits with it to their existing hardware (Storage Spaces, Reset and Refresh are not enough to compensate for the new Desktop without the start button and the Metro "Start Screen").

Regarding enterprise PC sales, new PCs may still come with Windows 8 pre-installed, but these sales have been reducing as corporates put off hardware upgrades in favor of acquiring tablets. Noticing this trend, companies like IBM have even begun offering leases on iPads and Android Tablets. Windows 8 would do nothing to slow this trend.

My argument against enterprise tablet sales for Windows 8 is presented in the dedicated tablet sections below.

2) Consumer PC sales & upgrades

Again, very few consumers would upgrade to Windows 8 as the new UI offers no real benefits with existing hardware.

It was only in late 2011 that Windows 7 overtook Windows XP as the most used version of Windows. Clearly the upgrade cycles for Windows upgrades have very long lead times. And by the time Windows 8 gets it's turn, the PC market may not exist in its current form anymore, as PC sales have been cannibalized by increased spending on smartphones and tablets. Windows 8 will join Windows Vista on the fringes of the world of desktop OS's in the PC's twilight years.

Another factor to consider is the launch of Ultrabooks with Windows 8. Now, Ultrabooks have been out in the market for a while, but sales have been disappointing due to high prices. These high prices have been driven by large SSD hard drives and x86 hardware optimized for the compact form factor. Now with Windows 8, ultrabooks would ideally need to incorporate touch input as well, which would drive prices even higher, with no chance of truly making an impact on the market.

3) Tablets with x86 Architecture

This is an easy one. In the future, this will overlap with hybrid ultrabook form factors (think Asus Transformer & Transformer Prime). If ultrabooks are too expensive, x86 tablets would be even more expensive and priced out of the market. Even though these tablets would be capable of running legacy windows applications (with shoddy touch support) and have full office functionality, if consumers aren't buying an ultrabook for $800, they sure as hell aren't buying a tablet for $1000.

4) Tablets with ARM Architecture

Now, this is where Microsoft and a lot of analysts feel the growth of Windows 8 is going to come from. ARM hardware is cost effective and with the launch of nVidia's Tegra 3 processor, offers processing power comparable to a PC, with console quality graphics. If these tablets are priced similar to most Android tablets, and below the iPad, why wouldn't they sell? It's Windows after all, right?

Wrong! Windows on ARM (WOA) does not offer legacy application support - Meaning, none of your windows programs, games or hardware accessories will work with these devices. The only applications that can run on it will be metro applications, from the yet to be launched, windows appstore (which work with x86 tablets as well). It will come with a "mobile optimized version of office", so a consumer's choice is between Apple/Android tablets with a whole range of apps to choose from and semi-functional office to a blank WOA tablet with Office. Considering these are content consumption devices, the choice is obvious.

For content consumption, app selection is one of the most important criteria. App selection is driven by number of developers. Number of developers is driven by app revenue. App revenue is driven by sales volume. Sales volume is driven by usability. Usability is driven by..... you guessed it.... app selection. This chicken & egg situation is caused by Microsoft's late entry into this market, which I think will be the downfall of Windows 8 (this same explanation can be given to explain Windows Phone's problems as well).

Microsoft Office for iPad & Android: Smart Move?

According to some of BGR's sources, Microsoft is poised to release Microsoft Office for the iPad and Android tablets by November of this year. Let's take a look at why this would be a great decision for Microsoft.

Now, Microsoft has consistently denied reports of releasing Microsoft Office for non-Windows 8 tablets, but rumors about this have been swirling for months. If this does end up happening, this would most likely be under pressure from Microsoft's Office division that has been looking at entering the high-growth tablet market for a while now. Steve Ballmer & Steven Sinofsky have always wanted to put all their eggs in the Windows 8 basket, but they've probably been pressured into a diversification strategy by Kurt DelBene, president of the Office division. 

Let's take a look at the immediate benefits this move would bring:

1. Disassociation of Microsoft Office from Windows 8

This move insulates the revenues of Microsoft's Office Division, from the Windows 8's prospects. If Windows 8 fails to make a dent in the tablet market market, which seems likely at this point, and with Office not available on other tablets, Microsoft would have missed out on a huge revenue opportunity. By launching Microsoft Office on other tablets, Microsoft could ensure revenues from the growth in the tablet market, irrespective of Windows 8's performance.

2. Combat Competitive Cloud-based Services

Onlive Desktop & CloudOn have already released cloud-based MS Office solutions for the iPad and Android tablets. Onlive has a free and premium offering, while CloudOn is a purely free offering, and both services deliver MS Office to tablets, while cutting Microsoft out of any current or future revenues. Microsoft had attempted a legal offensive against these services, but CloudOn was found to comply with licenses and Onlive changed their code to make sure they complied as well. 

This is a huge risk for the the Office division. While CloudOn and Onlive are still in their early stages of development & usability, it is best to enter the market to put an end to competition in the tablet market, before they gain some traction. 

Conclusion - Microsoft would be smart to follow through with this move. Even if they believe Windows 8 will be a rousing success, it is best to hedge your bets.

Proof of the iPhone's Dependence on Carrier Subsidies: A Market Share Analysis

I have previously written about the impact of carrier subsidies on the iPhone and recently, there have been some more articles stating that this may pose a risk to Apple. But before we accept or reject this assertion at face value, it would be prudent to find out just how much of an impact it has. We can do this by delving into a statistical analysis to isolate the key drivers of the iPhone's country-wise market share. So let's dive right in.

Analysis Inputs

To start off with the analysis, we need to create a shortlist of a few key drivers that could have a major impact on the iPhone's market share. If these inputs do not have much of an impact, then the analysis would show us as much, so this initial shortlist doesn't have any bearing on the actual outcome of the analysis. So here's my shortlist:

1) Brand Strength & Product Quality (Difficult to quantify)

2) Purchasing Power of consumers in a given country

3) Carrier Subsidies

Even though Brand Strength could not be directly included in the analysis, the percentage of variation in the iPhone's market share that is explained by changes in purchasing power & carrier subsidies, would give us a hint of the dependence on brand/product quality or any other factors as well.

It is important to mention that we are benchmarking these drivers with the iPhone's market share, and not absolute sales volume. It is obvious that carrier subsidies & purchasing power would be directly proportional to sales volume, since higher sales volume can be achieved at lower prices, while selling to consumers who have higher disposable income - These factors would affect all smartphone manufacturers & not just Apple. So we need to understand if these drivers have a greater impact on the iPhone's sales volume and hence, its  market share and understand the implications of that impact.

So, our first task is to compile a list of countries along with the iPhone's market share in that country, the average carrier subsidy given to the iPhone and a measure of purchasing power parity (PPP) of that country. I managed to get a hold of data for the following 11 countries (the limiting factor for the selection of these countries was the availability of subsidy data):

Market Share - The market share figures here are for sales in the most recent quarter or year (based on availability of figures). The only case where I had to take the market share for active devices was for Canada, as I couldn't find any alternate data (I've performed a sensitivity analysis of this data point just to make sure, and the variation is insignificant). 

Market Share figures for USA, UK, Australia, Germany & Spain are from Kantar Worldpanel. The US market share for the iPhone seemed a little inflated to me, as they seem far higher than what all the other research firms have reported. But it wouldn't be right to ignore just the US figures from Kantar Woldpanel, so I performed the analysis separately with both Kantar Worldpanel's US market share numbers, as well as NPD's numbers to ensure this didn't skew the analysis. 

Here are the sources for market share figures of the remaining countries - China, Japan,India, Greece & Portugal. Kantar Worldpanel did include data for a few more countries, like France & Italy, but unfortunately, for these countries I was unable to uncover any reliable data on subsidies.

PP Index - This indicates the purchasing power of the consumers in the respective country, indexed to the US. So, the US has a PP index of 100%, while the purchasing power of other countries is a number relative to the US. I calculated the purchasing power index by taking the ratio of the country's nominal GDP to PPP adjusted GDP, as per IMF estimates.

Subsidy Index - This was the trickiest part. According to most reports, the most popular iPhone model is the 16GB iPhone 4S, and last year, it was the 16GB iPhone 4. The subsidy index is essentially the percentage of the retail price of an iPhone that has been subsidized by carriers. 

In order to calculate this, I have considered the subsidized price of the 16GB iPhone 4S on a two year contract in relation to the unsubsidized retail price. I believe this is representative of the average subsidy per iPhone because of two reasons. First, this was the same price that the 16GB iPhone 4 sold at before the iPhone 4S was launched. Second, older iPhone models, like the current 8GB iPhone 4 are being sold completely subsidized and the higher end iPhone models (32GB and 64GB) are being sold with the same absolute subsidy amount, but with a higher retail price - this means that the subsidized percentage is smaller. Hence, the average subsidy level would fall at around the same level as the 16GB iPhone 4S. In any case, the most important part of the data is the way the subsidy pattern changes across countries, which would be the same irrespective of the iPhone model we use to index the data against.

Here are my sources for the country-wise iPhone subsidy - USA, China (China Telecom),UK (Vodafone), Australia, Japan, Germany, Canada (Telus), Greece & Portugal. Spanish carriers have already stopped carrier subsidies and Indian carriers have so far refrained from this practice as well. For some countries, I had to consider data from individual carriers, as all carriers did not separate device cost from data usage cost.

Correlation - The correlation between iPhone market share & the subsidy index is incredibly high, at 85%. When we consider NPD's market share data for the US, this becomes even higher at 90%. Meanwhile, the correlation between iPhone market share & the PP Index is just 56%. But just by looking at these figures, we cannot conclude that iPhone market share is dependent on carrier subsidies. We have established correlation, but not causality.

Regression Analysis

Our goal now is to test if a causal relationship exists between iPhone market share & the Subsidy/PP Index. In order to do this, we need to perform a multiple linear regression analysis with iPhone market share as the dependent variable & the Subsidy Index & PP Index as independent variables. In order to explain the output of the regression analysis, I will have to delve into some statistical principles. So, to make this easy for readers, I've separated the output into two sections - Statistical Interpretation & Practical Interpretation. Readers who are unfamiliar with statistical principles can just skip to the next section.

Statistical Interpretation

Here is the output of the multiple linear regression analysis (with Kantar Worldpanel's US market share figures):

On first glance, we can clearly see that R Square of the model is 0.735, which indicates that that our model is quite robust. The F Significance is just 0.5% which is well within the 5% significance level, implying a confidence level of 99.5%. The Subsidy Index has a p-value of 0.7%, which is also well within the 5% significance level. However, the PP Index has a p-value of 48% and hence is not statistically significant.

If we use US market share figures from NPD, the R Square improves to 0.855, with an F significance of just 0.04%, i.e. a confidence level of 99.96%. The Subsidy Index has a p-value of 0.1%, i.e. a confidence level of 99.9%. Even here, the PP Index has a p-value of 15% and hence is not statistically significant. This shows us that while, NPD's US market share numbers improve the model, they give us essentially the same results.

Now, since PP Index is not statistically significant to our model. I also ran a simple linear regression to see just how strong the impact of carrier subsidies is. Here is the output of the simple linear regression analysis (with Kantar Worldpanel's US market share figures):

This is really the clincher. The R Square is 0.717 when we use the Subsidy Index as a single independent variable. The F Significance is just 0.1% and the Subsidy Index also has a p-value of just 0.1%.

When we use NPD's US market share figures, the R Square improves to a staggering 0.809. The F Significance is 0.2% and the Subsidy Index also has a value of 0.2%.

This again proves just how robust our model is and conclusively proves that the iPhone's market share is heavily dependent on carrier subsidies. 

To ensure that this is correct, I have also measured the impact of carrier subsidies on Android's market share. I assumed the same carrier subsidy percentage for Android, as that is likely even if the absolute subsidy amount differs. In addition, the subsidy index across countries would definitely follow the same pattern. The results showed no statistical significant results as the R Square was just 0.076, with an F significance of 85%.

Practical Interpretation

Based on the outputs of our regression analysis, we see that the iPhone's market share is heavily dependent on carrier subsidies but, interestingly, does not depend on purchasing power in a given country. More than 70% of the variation in the iPhone's market share can be explained exclusively by carrier subsidies. This figure improves to more than 80% if we consider NPD's US market share figures, which not only proves the dependence of the iPhone's market share on carrier subsidies, but also that our model is fairly accurate. We have also been able to prove that carrier subsidies have no impact on the market share of Android smartphones.

Using the derived coefficients from the regression analysis, we can derive an estimation of the iPhone's market share in any country:

iPhone Market Share = 6.3% + 0.305 x Subsidy Index

The intercept of 6.3% gives us an indication of the impact of Apple's brand strength on its market share and a rough estimate of the expected market share in a world without carrier subsidies. Clearly, this is far lower than the impact carrier subsidies have on its market share. 

The value of the intercept may not necessarily be accurate as it may depend on the brand loyalty for Apple in that particular country as compared to other manufacturers. But the model can accurately estimate the impact of changes in carrier subsidies on the iPhone's market share. For the US market, this translates into the iPhone losing roughly 4-5% in market share for every $100 reduction in carrier subsidies.

Conclusion - Based on the output of the regression model, it is clear that the iPhone derives most of its market share thanks to carrier subsidies and the impact of other factors like brand loyalty are comparatively low. Stay tuned for my next article on why the iPhone is so dependent on subsidies & why this will be a big problem for Apple.

Request - I have done this analysis with whatever data I've been able to find, after a considerable amount of research. However, if anyone has access to more reliable market share and/or subsidy data, across a larger set of countries, please do email me and I will update my analysis (giving you due credit for sourcing the data, of course).

Nexus 7 Sales Volume: Estimate Based on Supply Chain Data

How many Nexus 7 units have Google & Asus sold so far and how many do they expect to sell this year? Those are the questions everyone wants an answer to and I'm going to attempt to do just that. Digitimes recently reported that suppliers will be shipping 4 million touch (OGS) panels for the Nexus 7 in Q3 2012. Based on this, and some other data we already have, we can make an educated estimate of the Nexus 7's sales volume.

Q3 2011 Production & Sales

Production Volume

From the Digitimes report above, TPK Holding & Wintek are the suppliers for the Nexus 7's OGS panels. The two companies shipped one million units in June and 1.4 million units in July. Including the 1.4 million units in July, they have received orders for 4 million panels in Q3 2012. These figures should be equal to the number of Nexus 7 units going into production in each of those months/quarters. We also know that the initial shipment volume delivered to Google was 600,000 units in June. We also know that Google had initially estimated sales of 3 million units by the end of the year. This means that after looking at initial demand, Google & Asus may have roughly doubled their estimates and cranked up the production volume.

Using these figures with Little's Law gives us a cycle time of 2.5 weeks, i.e. it takes 2.5 weeks to produce and deliver a Nexus 7 unit to Google. Since monthly production volume stays at roughly 1-1.5 million units, production capacity is unlikely to be a constraint. Therefore, we can assume a constant cycle time and calculate the total Nexus 7 orders delivered to Google at the end of each month.

Sales Estimate

Once we have the Nexus 7 units available with Google, all we need to do is calculate the initial "sell-through rate" to get an estimate Nexus 7 sales so far. The Nexus 7 went up for sale in mid-July and the 16GB units were sold out in a week and we heard initial reports of sell outs of the 8GB version in 3 weeks. Since we know the size of the first production batch was one million units, it is a reasonable estimate for sales volume at that time to be the same. Also, since we know that Google had ordered more 8GB units (as compared to 16GB units) the "sell-through rate" would be about 2-3 weeks. In order to normalize the sell-through rate for demand fluctuations throughout the year, we can assume a conservative sell-through rate of 4 weeks throughout the forecast period, i.e. any batch of Nexus 7 units delivered to Google take about 4 weeks to be sold (either online or to stores). 

Based on this, we can derive the following sales estimate for Q3 2012:

Based on the 4 million units produced, we can estimate a sales volume of approximately 3 million units in Q3 2012. This was approximately the same as Google's original estimate for sales in H2 2012 (Jul-Dec). 

Q4 2012 Production & Sales

Now, Q4 is where this gets a little more challenging. The original report from Digitimes states that monthly shipments of OGS panels are expected to drop to 0.1-0.4 million units because of increased competition from the iPad Mini and the new Kindle Fire. It is a little unclear if this is the shipment per supplier or the total number of shipments. In any case, such a production drop is extremely unlikely as there is tremendous market demand for high quality tablets at that price point. While the competition will have an impact on market share, rapid market expansion will ensure healthy Quarter-on-Quarter (QoQ) shipment growth for major devices. In addition to this, Q4 is usually a period where demand surges because of holiday sales.

In order to set a benchmark, let's take a look at the impact of the last two high profile tablet launches on the QoQ shipment volume growth of their competitors.

As we can clearly see from the chart above, major tablet launches have had no adverse impact on the sales growth of competing tablets. Based on this data, 35-40% seems to be a reasonable estimate of QoQ shipment growth of the Nexus 7 in Q4 2012. However, the fact that we have two major tablet launches coming in Q4 (New Kindle Fire & iPad Mini) could cause a greater negative impact than seen previously. Therefore, it may be a better idea to consider a larger range of production volumes. 

Taking a 35% QoQ sales growth as a mean estimate, with the limiting condition that sales are unlikely to fall from Q3 to Q4, we get a sales estimate of about 3-5 million units in Q4 2012. This takes the total sales estimate in 2012 to 6-8 million units. These numbers would be a huge boost to Android tablets in their market share battle with the iPad and, in combination with the new Kindle Fire, would put them well on track to meet my mid-2013 market share expectation.

Conclusion - Based on these data points, the estimate for the current sales volume of the Nexus 7 is over one million units. In total, we can expect about 3 million units to be sold in Q3 2012 and another 3-5 million units to be sold in Q4 2012.