This week, in our summertime reading series on mobile ecosystems, we summarise the UK Competition and Markets Authority’s views on competition in the supply of mobile devices and operating systems.

The CMA’s report unequivocally states that Apple and Google have a de facto duopoly over operating systems for both smartphones and tablets: 75% of smartphones in the UK are either iOS or Android devices; Apple edges Google out slightly in the market share, with around 50-60% of smartphones running iOS, and around 40-50% of devices running Android; and Apple is also the largest manufacturer of mobile devices, while Android devices are manufactured by third parties (e.g. Samsung) under licences from Google.

Limited retail level competition

The CMA’s survey evidence found user’s buying decisions were influenced by the following factors:

Switching

Given the high penetration of smartphones, most new phone purchases are for replacement phones, and so the CMA reasoned “that the competitive conditions faced by suppliers of mobile devices and operating systems will largely depend on the behaviour of and barriers to switching for existing users.”

The CMA found that only a small group of users is willing and able to switch. Basically, consumers enter Apple’s or Google’s mobile ecosystems the first time they purchase a mobile device – and like the Hotel California, once you check in to one ecosystem, you never leave.

Survey evidence showed that users are more likely to switch to Apple devices than away from those devices, but the numbers are still relatively limited: during 2020 10% or less of users who purchased a new Android device had switched from an Apple one, while between 10-20% of users who purchased a new Apple device had switched from an Android one.

The CMA identified some ‘traditional-sounding’ barriers to switching:

• Transferring data, apps and managing subscriptions across the iOS/Android divide is cumbersome. Even though many third party apps have an iOS and Android version, Apple prevents developers from requiring users to link developer accounts to their Apple ID (although users can choose to do so). This can mean that, as developers seamlessly track subscription accounts across their apps in iOS and Android, a user may have to cancel and re-set up their subscription accounts when shifting from iOS to Android;
• The lack of availability of Apple’s own apps and services in the Android environment. Apple says that the integration between its apps and its operating environment is at the heart of the customer experience it can offer users.
• Users of multiple Apple devices may lose access to shared functionality between Apple apps, services and connected devices. For example, Apple Watch cannot be used in conjunction with Android devices, while AirPods offer limited functionality when used with Android devices.

But the CMA thought the big reason for user unwillingness to switch is that buying a phone is more than just a hardware decision: Apple and Google users become part a part of an entire mobile ecosystem:

“..operating systems [i.e. iOS vs Android] are two-sided platforms that exhibit indirect network effects, whereby the benefit derived by users from using a given mobile operating system depends on the volume and quality of content they can access on that platform. In turn, content providers are also more likely to make their content accessible or develop native apps for mobile operating systems that have a larger number of users.” 

Pricing

The CMA noted that Apple devices dominated the sale of higher priced devices, whereas devices using Android dominated the sale of lower priced devices

Consistent with the higher price of Apple devices, Apple’s revenue mostly comes from selling hardware exclusively (loaded with its operating systems). In effect, this means that Apple has an incentive to maintain the price of its hardware. In contrast, Google’s primary source of revenue comes from advertising rather than the sale of its devices or licensing Android OS, which is made available free of charge. As Android OS is free, Google indicated that it encourages more developers to create apps and web-based services creating more opportunities for Google to generate ad revenue. The CMA found that this aligned with the lower cost of devices running on Android OS.

The CMA commented that “all other things being equal, we would expect the increasing price gap between iOS devices and those using other operating systems to lead to users switching away from iOS devices and constraining Apple” but on the contrary, the evidence was of very low rates of switching. While the CMA noted price is generally a top factor by those who have recently purchased or are intending to purchase a device, generally the cost of a device is a lesser consideration for iOS users than for Android users, as Apple users place more importance on usability and a connection with the iOS system when compared to other manufacturers.

Barriers faced by new mobile phone manufacturers

The interim report found that manufacturers face significant demand and supply-side barriers to entry and expansion, including economies of scale; upfront and ongoing R&D costs required to develop, maintain and innovate; ensuring the device comes with a wide variety of apps and services; and brand loyalty to existing brands which requires attracting existing users from other brands. While many of these factors are surmountable if manufacturers use the Android OS, this does not place a significant constraint on Google (because of its control of the Android operating system used by the competing handset manufacturers), and it placed no material constraint on Apple (because it does not licence third party manufacturers to make iOS handsets).

The CMA pointed to the demise of the once powerful Blackberry as an example of a phone manufacturer wanting to enter using a different operating system: “BlackBerry told us that iOS and Android overtook existing mobile operating systems through the development of ‘vast application ecosystems for Android and iOS creat[ing] compelling experiences for consumers that drove adoption of these mobile operating systems'.”

Barriers faced by competing suppliers of operating systems

The CMA concluded that the barriers to entry of competing operating systems are high, largely because of the indirect network effects (see above). As the benefit to users of an operating system increases with the volume and quality of native apps that they can access on that operating system, developers of a new OS face a ‘chicken and egg’ problem: while a new OS needs a critical mass of users to attract developers, it also needs a critical mass of developers to attract users:

“While an alternative operating system may be able to replicate some of the factors users care about (e.g. in terms of the features and functionality they offer) if an alternative operating system is only able to offer users a limited app selection then the operating system is less attractive…Similarly, while factors that app developers care about could be matched by rival operating systems (e.g. in terms of development tools) if an alternative operating system is only used by a lower volume and value of users then the operating system is less attractive to developers and in turn manufacturers who would find it harder to ensure their devices provide access to a larger volume of high native apps, including the most popular and successful native apps.”

The CMA gave the example of Samsung’s decision to stop using Microsoft Windows OS because consumers were familiar with Android and expected it, as well as the extensive range of apps and functionalities offered by the wider Android ecosystem, which Microsoft Windows could not match.

The CMA also said that the power of the indirect network effect was demonstrated by competition within the Android ecosystem itself. There are three different versions of Google’s Android:

• Android with Google Mobile Services (GMS), a collection of popular Google apps including Play Store, Google Maps, YouTube, and Gmail as well as a selection of Google proprietary APIs (or Google Play Services) which the manufacturer pre-installs on the phone;
• Android without GMS but which still meet the Google compatibility requirements. The only current example is Huawei which, following the a legislated US ban, relies on Huawei’s Huawei Mobile Services instead of Google Mobile Services;
• Android ‘Fork’ which falls outside of Google’s compatibility requirement. For example Amazon operates a vertically integrated model like Apple, with the Fire OS only being used in Amazon’s own tablets.

OS developers and device manufacturers using other versions of Android face a step challenge competing against GMS equipped devices. Huawei reports that after it was banned from using GMS, this single change resulted in Huawei’s share of smartphone sales dropping from 20% in 2019 to below 2% in 2021. Amazon’s Fire Phone was launched in the UK in September 2014, but exited smartphones a year later.

The CMA considered that Google’s Android licensing practices bound device manufacturers into GMS, allowing Google to leverage its market power in search engine functionality and advertising to protect its position in mobile operating systems:

• The revenue sharing agreements are conditional on device manufacturers using a compatible version of Android and licensing Google’s apps and APIs included in Google Mobile Services (including the Play Store). New OS entrants are unlikely to attract manufacturers away from Google’s version of Android, as a switch away would mean that manufacturers are likely to miss out on significant financial benefits paid by Google for preinstalling or meeting requirements in relation to Google Mobile Services;
• If a manufacturer wants to pre-install one of Google’s apps included in the GMS suite then the manufacturer has to pre-install all of them and place the Play Store on the default home screen and the rest of the apps in a ‘Google’ folder on the default home screen.
• The revenue sharing agreements also reinforce Google’s position in search advertising. This is because manufacturers’ use of Android allows Google to access extensive first-party data which is likely to give it a substantial advantage over smaller rivals in advertising.

Conclusion

Apple and Google essentially argued that the CMA is ‘missing the forest for the trees’: that, as we can see on the screens in front of us, taken together, the individual policies, design and rules of each of the iOS and Android ecosystems have, in different ways, created dynamic, innovative, if not transformative environments delivering substantial benefits to consumers and third party developers – pull away one element, and you could lose the whole structure.

The CMA’s response (maybe even its vaguely stated ‘counterfactual’) was:

“…it is clear that Apple, Google and others have improved the features, functionality and performance of their mobile devices and operating systems over time. However, it is difficult to understand how high this level of innovation is and whether it could have been higher with greater competition…..such innovation may also be driven by the need to encourage users to replace existing working devices with an ‘upgrade’ i.e. Apple and others may to some extent be competing against older models of their own devices.”

Read more: Mobile ecosystems