Apple 2.0

Covering the business that Steve Jobs built

Android's gift to Apple

December 20, 2010: 7:34 AM ET

Google may, paradoxically, be making the world a better place to sell iPhones

Source: Asymco

You might think that the almost viral spread of Google's (GOOG) free and open-source Android operating system would eventually drive down smartphone prices and put pressure on Apple's (AAPL) proprietary iOS -- and on Steve Jobs' enviable profit margins.

But an analysis of the eight largest mobile vendors' average selling prices posted overnight Monday by Asymco's Horace Dediu suggests that something quite different is happening.

Apple's average iPhone prices have actually gone up since Android was introduced, and although there has been some price erosion among the other top vendors (orange line in the chart above), it is surprisingly small.

What's going on?

According the Dediu, the smartphone market is growing so rapidly (90% per year), that there is limited direct competition between smartphones and a lot of competition between smartphones and so-called feature phones. It's the feature phone makers who are having to slash their prices to compete.

"The only correlation with pricing power is whether you build smartphones or dumb phones," he writes. "The more smartphones you build, the more price you can charge. This is regardless of platform."

Dediu has long argued that the phone market should be studied as a whole because the competition is not between platforms but between smart and non-smart. "Android," according to Dediu, "is expanding the market without crushing pricing."

"In a way, this is all good news -- even for Apple," he concludes. "A world full of smartphone users is a better addressable market for iPhones than one filled with voice products. iPhone's traction was always in markets which had been seeded by some smartphones: the U.S. with [Research in Motion (RIMM)] and Europe with [Nokia's (NOK)] Symbian. Such a smartphone-soaked world will have better mobile broadband infrastructure, users with more demanding tastes and awareness of the value that a smart device can bring."

Maybe letting Google CEO Eric Schmidt sit on Apple's board of directors wasn't such a bad idea after all.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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