For over a year, I’ve struggled to quantify something that I’ve felt was a truism in the iPhone vs. Android battle. I still can’t fully quantify it with evidence, but I think the market is beginning to bear out what I’ve thought was the case.

For a long time, I’ve believed that the consumers who buy Android devices and the consumers who buy iOS devices (I’m talking Android phones to iPhone, primarily) are fundamentally different types of consumers. It’s not to say that there aren’t some similarities, and there’s not crossover – but I believe this to be the case.

Fred Wilson, a very successful VC, has stated that the future belongs to Android (or at least that there are going to be a lot of Android devices around). Similarly, a WSJ reporter wrote a piece that stated (subscription required) that the descent of the price that your average Android device is bringing will force Apple’s hand and make them lower the price of the iPhone.

Let’s state these theses:

1. A crapload of Android devices in the market is good. My question – for whom? Google? App authors? Telcos? Device manufacturers (OEMs)?
2. Android’s falling price will cause Apple to have to match it. My question – why? I don’t believe that Android consumers are Apple consumers, and vice versa.

I contend that they are both wrong.

In 2007, Apple shocked the world by releasing a phone. A REALLY EXPENSIVE phone. But this phone did something important. Every phone before it had been a device seemingly designed by committee, to meet the business goals of a wireless telco. This one was designed for the consumer first. Apple’s first foray into cell phones (the ROKR E1, in 2005), used badge enginering and iTunes compatibility to try and make an impact. It wasn’t an Apple product at all. The impact was a dull thud.

Apple surely learned a lot in that exercise, first of which I believe was that a device that promised any Apple experience needed to be a full Apple experience. The backstory is now the stuff of legend, but with partner AT&T (not Apple’s first choice, but one lucky/wise enough to go along with Apple’s approach), found an ally willing to cede control of the device experience in exchange for temporal exclusivity of the device. I contend that this act, right here, putting Apple design first over everything else is what founded the basis of Apple’s success with the iPhone, and why both of the theses above are wrong.

Take a look at this image:

How Apple’s cycle progresses:

1. Apple delivers what customers want (in 2007, a phone designed for consumers by Apple, not by and for the telco)
2. Customers (with, generally, higher than average discretionary income) pay a premium for devices
3. App vendors arrive
4. Customers pay a premium for apps
5. App vendors thrive (process repeats as Apple expands the capabilities of iOS annually or faster)

Step 1 for Apple was delivering the first iPhone. Remember, this phone had NO 3rd party apps at launch. It had the ability to pin web pages to the home screen, and these could be designed to be “application-ish”. No dev ecosystem or tools, no App Store, no sales revenue. Oh, and it also had a very premium price of $599, and was locked to AT&T’s network.

But it had a touch-driven user interface, accelerometers, a very usable web browser, powerful email client, a camera, iTunes media integration and an Apple fit and finish to the device and software that recalled what Mac fans were used to.

That’s where we were in 2007. People paid through the nose to get a phone that put some aspect of design in front of telco business requirements.

Those initial customers and a crazy, excited jailbreaking community who pushed the bounds of the platform further and further (and still do) encouraged Apple to reconsider their “App story”, and later open the App Store. Tons of vendors arrived. Lots probably failed, a few probably succeeded, and a handful exploded to incredible success. Remember, these are games and apps for $.99-$9.99-ish. I don’t care who you are. If you paid the reduced $399 price for the first gen iPhone or slightly less for the 3G and 3GS when they came out, even $9.99 isn’t going to break the bank for an amazing game or app. In an era when a console game sold for 5 times that – and that was high-end apps. Few sell for more than that… App vendors grew, took chances on new apps that pushed what the platform could do, and they made money for it. Apple took this success and refined each successive version of the iPhone, which has not dropped in price (for the current top-end phone) since the 3GS. Combine this with the reasonably stable dev ecosystem (strong dev tools, a relatively consistent set of devices to support) and it creates a strong market, and a happy place for ISV’s to try and make money from paid apps for iOS.

iPhone customers pay a premium for their phones – and I contend, that same ethos passes through to the iTunes store. Apple customers buy far more content and apps than Android. So while it’s well and good that Fred sees a glut of Android devices, I don’t see that as a good thing – at least not for Android. And unlike the WSJ reporter, I don’t see it doing anything to the iPhone’s price, either. The iPhone’s content attach rate, the spend per consumer per phone is what created, and continues to rapidly grow, the Apple app ecosystem, Apple’s marketshare, and Apple’s revenue figures. Why does Apple give away iOS, and effectively give away OS X Lion? Because Apple doesn’t make money in operating systems anymore. They’re a content company. Usable hardware and a usable OS are a wormhole into the content portal (and the sale of their own apps) where Apple makes more and more of their revenue. In gaming consoles, where you lose considerable money upfront, the key is attach rate. Apple has made mobile phones no different, except they aren’t hemorrhaging money to establish and continue to grow their market share. Through increased spend, prototypical Apple consumers continue the virtuous cycle of market expansion. The question is whether Apple can sustain that enough as the market expands beyond prototypical/legacy “Apple” consumers to consumers who may be more thrifty.

Let’s take a look at Android now.

How Google’s cycle progresses:

1. Google delivers what telcos want (a free operating system. Actually, Google pays the telco)
2. Telcos lock down/fork devices, flood market (craplets on the desktop, custom shells, locked firmware, no updates)
3. Bottom drops out of Android handset market (due to oversupply)
4. Budget-sensitive/feature phone buyers buy Android (when your customers love you for your free email, it may also be an indicator of their willingness to spend actual money)
5. App vendors fail to thrive without ad-sub apps

Yeah, I know, a bunch of you are going to get ticked at me here. “What do you mean delivered what the telcos want? Android is open source, you eediot!”

Sure. Yeah. For you and your friends that enjoy mucking with source, that’s all well and good. Consumers don’t give a crap about open source. But carriers have fallen in love with Android because it’s cheap (they get their own OS to even customize down to a source level) and Google pays them due to revenue Google will get off of the Internet traffic from the handsets. So OEMs got paid to put an open source OS on devices instead of blowing their own money to build their own OS as some had before, and many of them put custom shells and glued down applications – tricks OEMs used to pull with Windows CE/Mobile years ago. Most importantly, many phones ended up hosing consumers, with devices abandoned months after release, provided with few if any updates. Any enhancements Google added to future versions, and more importantly, any security fixes, are unavailable to a huge category of consumers.

So now we’ve got telcos all trying to grab a sword and take a swipe at Apple, trying one device, failing, trying another, failing, trying another… flooding the market with devices that are effectively identical to consumers, and many are, frankly, cheap. Failing to succeed at a 1:1 price range to the iPhone, telcos begin to cut prices and take the devices downmarket. This fails to dissuade the typical iPhone buyer, typically with more discretionary income to spend (or waste, depending on your POV). Now, as many, including Fred, point out, this leads to a shipload of Android devices hitting the market. Um. Yay?

If you have a ton of devices coming out, flooding the market, driving prices down, you begin to attract a different category of consumer. Beyond the open source devotee, I argue that Android now attracts consumers who historically might have only gone for a feature phone. But because they are generally more budget/value conscious, they buy few or any commercial apps. The little statistics we get out of Google on Android app sales reflects this hypothesis – far more free, ad-driven apps appear to be downloaded on Android than for-pay apps.

This of course doesn’t bother Google any at first, because they’re getting ad traffic from the phone itself, and now from more and more ads in apps. But the telcos hose themselves by forcing prices down, and hurt themselves and their OEM partners as the bottom falls out of the Android market. Congratulations, you’ve just replaced feature phones with Android, and there are a lot of them. But Fred’s wrong. That’s not good for app vendors. Sales are good for them, not a skinny vig off of in-app ad revenue. It’s great for Google, though. Compare this to Apple, where ISV’s are broadly making money, and Apple is making considerable revenue off of device sales, content sales, and app sales – and the constant sales of millions of iPhones would seem to indicate that the WSJ reporter is incorrect, consumers are still willing to pay a premium for a consumer-driven experience.

The vicious cycle continues here for Google – though we see Google trying to wrest control back from the telcos in the form of Android anti-fragmentation clauses in contracts to try and prevent further disintegration of the Android experience.

For Apple the platform begat the ecosystem which pulled in the developers, and attracted more consumers into the ecosystem to buy apps. As I’ve said before, a platform is nothing without apps. If a device doesn’t have any more use cases than the phone or PC you’ve already got, why would you switch? Google may glut the market with devices, but without an app ecosystem of consumers willing to pay for apps, few commercial app ISVs will try, and fewer apps will pull in less and less non-ad-driven revenue. Great, so Google gets ad revenue, consumers get any app they want as long as it has an ad, and they get the user interface that their OEM designed, not the one Google did. Android is a Trojan horse that harms the telcos and OEMs more than they imagine. Making more and more devices. Selling them for less and less. Combined with the fact that Android users consume more bandwidth (again, great for Google, bad for the telco), and it sounds like a recipe for harming yourself with consumers who want more and more from you for less and less, and competitors striking back at you with devices that look, act, and feel just like yours, or better. No wonder the telcos are trying to lock down Android. Sounds more and more like 2006 all over again.

The question is, as Microsoft tries to break into this market, what happens to them? More on that in a bit.