In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service increases as more people use it.

The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook being more useful the more users join.

The Android market is now effectively 70% of the size of Apple's App Store, and is growing at a faster clip. Once you pass 300,000 or so applications, you have reached critical mass. More importantly, Android has surpassed iOS, as well as Blackberry and Sybian/Windows 7 to capture majority market share AND handset activation rate. This puts it on the path to create and retain the "network effect" effectively shutting out competitive parties once users, accessory vendors, solution providers, consultants and developers standardize on Android as the de facto standard - as was done on Windows for the last 30 years, and as iOS was on the verge of becoming. In each instance increasingly excess profits were derived from increasing less investment.

What makes Android even more competitive is the extreme diversity in hardware available, all running a common and rapidly evolving OS, as compared to the relative dearth of diversity on the iOS platform. On that note, the quarter after Verizon launches the iPhone..

From Endgadget:

Verizon is seriously diversifying its portfolio today with the official in-store launch of four new smartphones. Three of them roll up in Android gear, though they all have major selling points beyond Google's software. LG's Revolution is the sole LTE-capable handset of the bunch, bringing with it a 4.3-inch screen and pre-installed Netflix for $250. The Droid X2 undercuts it on price, at $200, but doubles the core count with its Tegra 2 processor and ramps up resolution to qHD (960 x 540). Gaming aficionados can spend the same amount on the Xperia Play from Sony Ericsson, which offers a slideout gamepad and unique PlayStation Certified status. Bringing up the rear is HTC's well-traveled Trophy, a 3.8-inch Windows Phone that accepts it's a little late to the party and therefore slices $50 off its asking price, with a $150 levy before the obligatory two-year contract. What say you -- buy, try, or keep waiting?

As noted in the post AT&T’s Q1 Record Results Show That There Is More Money In Android Than There Ever Was In Apple: How Do You Compete With Less Than Free?, one can expect AT&T, the original home of the iPhone in the US, to do the same. By selling old iPhone models at cut rate prices and significantly increasing its commitment and investment in the Android platform, AT&T actually INCREASED its revenues and earnings AFTER losing iPhone exclusivity to Verizon. With this knowledge under the respective carriers belts, one could wonder what they feel abut the ROI on Android.

Last week, I wrote New Taiwanese Tablets Show What So Few Have Suspected: Apple’s iPad 2 Is An Expensive Toy!, as excerpted:

Several months ago, amid all of the hoopla of the iPad 2 launch, I illustrated that, although Apple will sell a lot of tablets, those sales will come at increasing decreasing margins. Those who have not read it or do not follow the logic are recommended to reference Competition Heats Up In The Mobile Computing Space On Many Fronts – Prices Driven Down Once Again By The Big Players and more importantly Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! and The Tablet Pricing Wars Have Commenced, Targeting Apple’s iPad 2 Which Is Not Even For Sale Yet…

The comparison of the iPad 2 to that of a toy was not an exaggeration. You see, the iPad 2 excels at content consumption, but literally sucks at content production. Enter a product with margins cut (meaning lower prices) that bests the iPad at both content consumption and production. And this product is just the 4th out of about 400 to be launched in the next year! Here is an example of said Taiwanese Android tablet, which is currently the cheapest Honeycomb tablet on the market - by far - at $400. For those that don't know, Asus makes this tablet. They are the company that totally disrupted the PC world by introducing the concept of the netbook. Nothing has been the same since as margins have collapsed and form factors have changed dramatically towards the ultraportable. Did you really think they would not get into the tablet game with an incentive such as a free, revenue sharing, best of breed OS such as Android? Keep in mind that Apple (wisely) reinvented the tablet category in an effort to staunch market share loss to the netbook category. Apple did not want to get sucked into a pricing war and damage its historically fat margins. They achieved their goal through the iPad, which sports 42% to 53% margins (multiples of that of netbooks) while remaining relatively unchallenged until the introduction of Honeycomb. Now Asus is bringing the netbook margin compression game to the tablet arena. The tablet space is very strategic to Apple for that is the major revenue driver expected to assist the company in diversifying out of its heavy reliance on the iPhone (itself facing very heavy competition, as referenced above) for over 70% of its profits).

The revenues and margins of the iPad are already slipping, and we have just seen the introduction of only 1% (roughly 5 out of 400) of the Android Honeycomb tablets slated to be released over the next year. Production issues stemming from China and Japan don't help any.

Competition is about to surpass intense!

This is an example of how this Taiwanese tablet that undercuts the cheapest Apple product by a full 20% ($100) can easily be used to do REAL WORK in terms of content production as well as recreational activities such as content consumption. It can literally serve as a Wintel desktop/notebook replacement for 70% of the computing populace. As an iPad owner, the biggest drawback (by far) is the inability easily create content. The Asus Transformer is literally an ultra  portable PC with an 18 hour battery! I have pushed my personal device to 24 hours with modifications!

Now you can see how the comparison of a very inexpensive device such as this literally reveals the fact that the Apple iPad is a fat margin toy in comparison. Although it does a lot to enrich Apple's coffers, it does relatively little in terms of actual productivity. Herein lies the danger to Apple. If Google and its hardware partners, Samsung, Asus, LG, HTC, Acer, Motorola, et. al. succeed in marketing and spreading the word, Apple's market share will plunge unless it sinks significantly more of its resources into R&D and/or drastically cut prices. Either one (or both) will have the same results whether they win or lose... MARGIN COMPRESSION! Compression will occur whether Apple succeeds or fails in its bid to drive off competition. It's a given. Hence, my proclamation from the iPad 2 launch date: 

Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof!

Here are some anecdotal examples of said proof. The first video was taken by me via smartphone as I strolled into a local BestBuy in Union Square, NYC. it's pretty much self explanatory and illustrates the vaunted, allegedly unassailable Apple experience originating from Apple's most capable marketing gurus. A cute couple was considering buying one, and they just so happened to be next to me as I was running the iPad through its paces in comparison to the Asus Transformer (the modified BoomBustBlog Optimus Prime edition):

The post, New Taiwanese Tablets Show What So Few Have Suspected: Apple’s iPad 2 Is An Expensive Toy! contained other 3rd reviews of the Transformer vs the Apple Ipad 2...

This space will get even more competitive as Asus has form factor disruption on tap. It looks to be creating a super-powered Android smartphone that powers a thin tablet, which in turn has a keyboard attachment. Thus, consumers don't have to choose between, or purchase, all three form factors (smart phone, tablet PC, or notebook). Ingenious, and guaranteed margin killer to boot! And if that fails, there are other innovative launches in the upcoming months coming from HTC, Motorola, Acer, LG, Dell, HP, RIM, and about 115 other vendors. The competitive field looks quite dangerous, indeed!

Of course, despite all of the evidence produced which clearly delineates material margin compression is in the cards for America's favorite company - Is The Evidence For An Apple Margin Collapse Now Incontrovertible? Thursday, May 19th, 2011 - there are still many who ascribe to Apple's magical user experience as a differentiating factor. I am an owner of an iPad, and have bought my son several iPods. I can attest to the fact that the superiority of this "user experience" is more a manifestation of marketing than actual fact. This is good for Apple short term (actually, an increasingly shorter term), for it is a marketing master, but medium to longer term its a very significant risk. Even in the short term, as competition gets its marketing act to together consumers and businesses alike may see that the Apple emperor hath no clothes! Samsung, who controls the production of chips and LG who controls the production of screens that go into over 75% of Apples profits, have both decided to withhold superior technology for their competing Android products rather than produce them for Apple. The Samsung Galaxy S II is a perfect example, sporting the proprietary Exynos chipset which is both faster and more power efficient than all of the current tech being mass produced. I suggest interest parties read the review of this in comparison to the iPhone. It is a very precarious position to be in when one relies on one's most aggressive and largest competitors to supply the most important components driving 75%+ of your profits! Apple is currently in said position.

Other links of interest:

• New subscriber material available for immediate download: Apple – Competition and Cost Structure. I urge all professional and instutional subscribers to contact me directly if you have any questions or comments regarding this research and analysis. I am available via phone or email.

• Looking at the Results of Google’s “Negative Cost” Business Model Employed Through Android Monday, May 2nd, 2011
• My Thoughts on Roger McNamee’s View of Google and Mobile Computing Sunday, April 17th, 2011
• Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google Tuesday, April 19th, 2011