It’s When, Not If, Android Gets Bigger than iPhone

I was surprised to see that there was no small amount of angst when NPD published the results of a survey that showed Android OS had surpassed Apple’s iPhone for total number of smartphones in use in the U.S.

There’s a lot to poke at when it comes to NPD’s data. The biggest thing, of course, is that it was a survey, and not based on the kind of manufacturer and retail sales data on which the firm usually bases its reports. While the number of participants was high, some 150,000 people, it was still a survey.

Even Apple made a rare public comment about the report, telling The Wall Street Journal: “This is a very limited report on 150,000 U.S. consumers responding to an online survey and does not account for the more than 85 million iPhone and iPod touch customers world-wide. We had a record quarter with iPhone sales growing by 131 percent, and with our new iPhone OS 4 software coming this summer, we see no signs of the competition catching up anytime soon.”

It’s not like Apple to be defensive, but our readers were even more so. The comments on TMO and from Mac fans at other Web sites was as if NPD had said Apple was about to go out of business.

The reality is that I would be very surprised if actual sales data from NPD and IDC don’t end up directly refuting the results of this survey. Indeed, IDC’s global report for the smartphone market for the same quarter appears to do just that — at the end of the day, I don’t even understand why NPD released a report like this based on a survey, and had I better understood its nature, my coverage would have been slightly different.

But that’s not the point of today’s column — it doesn’t even matter if NPD’s survey accurately reflects the actual marketplace — because from my view it’s only a matter of when, not if, Android surpasses iPhone in total units in both the U.S. and global markets. And that when isn’t likely to be that far off.

For one thing, there are already more Android devices either on the market or announced than you can shake a stick at. There are multiple manufacturers making a myriad of devices. Some of them are aimed at broad markets and other aimed at specialized or niche markets, and there are Android smartphones that will run on just about every mobile network on the planet.

Then there’s the tablets and the netbooks, both real and in the works. Android has a real shot at taking a lot of market share from Microsoft and Linux in those markets.

In contrast, Apple sells essentially two models of iPhone, one of which comes with two capacity options. In most of the world’s market, they are locked to one or two carriers. Apple’s iPod touch isn’t limited to a particular carrier (in that it’s not a phone), but it also comes in essentially one model with different capacities. As for the the iPad, it is so far locked to one carrier in the U.S., though the WiFi-only model has no such restrictions.

This is the way Apple does business, but we’ll get to more of that in a moment. In the meanwhile, within a year or two at most, we’ll see scores, or maybe even hundreds of different models being offered by dozens (and dozens) of vendors and carriers. When you have that kind of opponent competing with a tightly controlled, high-end product line offered through tightly controlled carriers, it is inevitable that Android OS will surpass iPhone in total units sold sooner or later, and I expect it to be sooner.

The kicker, however, is going to be that Apple will retain the top end of the market with the iPhone just as Macs own the top end of the computing market. Apple will be making the lion’s share of the industry’s hardware profits — or at least a vastly disproportionate share — as Android devices become more and more commoditized.

I mean, seriously, Verizon is giving them away in a two-for-one promotion! That will move some units, but not at a profit on the hardware.

For the near-term, Android’s growth will at first be fueled along with the growth of the overall market, but eventually Android OS devices will pass Apple’s iPhone unit sales, and even while iPhone unit sales continue to grow, its market share will retreat. Heck, I think even BlackBerry is going to lose share to Android, and Nokia — currently the world’s largest mobile handset maker — will have to embrace Android in one fashion or another, or continue to get trounced.

But Apple will be there all along with all its usual control pushing the industry with its dominant mindshare and minority market share, just as it pushes the PC industry’s direction with Macs, but even more so. Not only will Apple be content with owning just the top end of the market, that is undoubtedly what the company actually wants.

Apple CEO Steve Jobs and COO Tim Cook have both talked about how the low end of the PC market offers no hardware profits, in part because it is made up of high maintenance customers who have the highest support costs. I believe this true to a greater or lesser degree in the device market, and I don’t see Apple managing its business in this market any differently than it does for the Mac.

If you remember, Mr. Jobs said Apple was shooting for 10% of the smartphone market. Right now, Apple has 16.1% of the global smartphone market, and an even higher percentage of the U.S. market. As long as iPhone sales grow and the user base gets bigger, I think Apple will be pleased as punch to rake in the profits while all of the Android-chasers flounder around and wonder why Apple gets all the press.

The App Store will continue to grow and become more refined, and the user base will continue to expand. That will continue to attract the developers, despite Apple’s strict controls over development.

In fact, I am audacious enough to predict that there will be more iPhone OS apps made long after Android passes iPhone in market share. Between the Android platform’s fractionalization, the lack of any kind of app cohesiveness or an online store that is a true destination, more developers will make more money on iPhone OS apps, and that will be that.

The iPad is going to follow the same curve, too, though I think it will reign supreme longer. Apple may even be able to hold on to the same kind of dominant market share it has enjoyed with the iPod, but we’ll have to see about that.

One way or another, though, as long as Apple dominates the most profitable end of the market, the company and its shareholders will be satisfied.

So fret not when Android devices surpass the iPhone in unit sales so long as Apple continues to sell more iPhone OS devices at the same time (and reaps all the profits while doing so). It will happen, but it won’t matter.