Analysts all know that Android smartphone hardware is being commoditised and the implication is that value is moving up into the cloud. The idea is that hardware OEMs will no longer be able to earn profits, and the only profits in the ecosystem will be gained by players who own cloud services. Thus Google will profit as will Xiaomi, which supposedly has a good cloud business in China.
I disagree. Whereas I agree that hardware is being commoditised, I do not assume that the beneficiary will necessarily be the owners of cloud services. Instead, the profits will simply be made in any layer in the value chain which provides a service/product which has not been commoditised (i.e. products/services for which customers are willing to pay a premium). This layer is not necessarily cloud services or even services in general. It could even be hardware components.
What is important to realise is that all cloud services are not created equal. There are cloud services which provide little added-value and are hence easily commoditised. On the other hand, there are cloud services which provide immense value which can not be replicated by competitors, and which earn disproportionate profits. Hence there will be unprofitable and commodity cloud services, just as there are profitable and differentiated ones.
One of these commoditised services (there are actually quite a few) is the Android App Stores. We know, for example, that there are more than 10 of these in China (1, 2) with huge numbers of downloads and revenue. Obviously, from a technical point of view, creating a good App Store is not difficult. Here, I’d like to point out that Japan has its fair share of App Stores as well.
- AU Smartpass App Store: This is the app store for the second largest carrier in Japan. For 3 USD per month, users can download as many apps they want from the AU Smartpass App Store. Included in this monthly fee, subscribers can also get a free anti-malware service, a “find my phone”-like service, data backups, 50GB of cloud storage, etc. The application for this store is prominently placed on the top screen of the Android devices that AU sells, just next to the Google Play App icon.
- Softbank App Pass: This is the app store for the third largest carrier in Japan. The price is similar to the AU store at about 3 USD per month.
- Rakuten App Store: This was just released on August 19th. Reportedly, it has about 390 applications and will offer 10% discount on the price of apps in the form of loyalty points. Developers will also be paid 75% of the regular price, as opposed to 70% for Google Play. Essentially, Rakuten will run this app store on only 15% margins as opposed to 30% margins for Google Play. The interesting thing here is that in addition to being the largest e-commerce company in Japan, Rakuten also owns an MVNO and will preinstall this App Store application on all the devices that they sell.
What is clear to me is that App Stores are a commodity business. Although Google Play currently has, and will probably continue to have the largest selection of apps in the world, this does not mean much if the most popular apps are being sold on alternative app stores at significant discounts or as an all-you-can-eat package. Customers will purchase most apps from the cheaper app store, and only download apps that they cannot find there from the Google App Store. Unless the Google App Store matches the prices of the other App Stores, Google will lose business.
It will not be difficult for other countries to replicate this business. You don’t necessarily have to match the vast number of apps in the Google Play store; you just have to get the more popular titles (for your country) on board, and promise a higher revenue share for the developers, while discounting for the customers.