iPhone, Android and how market share impacts exclusivity

A major headline appeared yesterday evening on the Internet: "Apple Continued To Lose U.S. Marketshare Despite Spike From iPhone 4 Sales."

The news: Apple's iPhone 4 did not reverse its slide in marketshare in the U.S., which dropped by 1.3 percent in the three months ending in July. Worse, the share of smartphones using rival Google's Android operating system grew by five percentage points, according to ComScore data.

It's easy to jump to conclusions here: that Motorola, HTC, Samsung et. al. are doing what they had advertised they would do: wash over the AT&T-only iPhone with an Android army on all U.S. carriers. (To broaden the scope, the same tactic stands for overseas markets -- dominate areas where Apple's exclusivity contracts won't allow it to.)

Until now, Apple's strategy has worked. It has bent carriers' wills toward its own terms (no carrier crapware, etc.) on a global scale. But as Tricia Duryee points out, the holes in its contractual plan are starting to show as Android expands its global reach:

Interestingly, it's not because Android is more widely available. In fact, Android is only available on 59 carriers vs. 154 for iPhone, but the issue is that Apple lacks deals with some of the world's largest wireless carriers—Verizon Wireless (VZ, VOD), Vodafone (NYSE: VOD) Germany, NTT DoCoMo (NYSE: DCM) and China Mobile.

Of course, the real question isn't how many carriers, but how many customers those carriers have. The numbers suggest that time is running out for Apple to keep consistent market share with its current deals, at least on a global average. (Naturally, some markets can still support iPhone exclusivity.)

That means Apple is reaching a tipping point. One of the most popular questions I receive as a ZDNet editor in a daily basis is, "Do you think Apple will bring the iPhone to my carrier?" The answer to that question is always yes, eventually. But when?

Season after season, the tech press gets excited that maybe, yes, possibly Apple will bring the iPhone to Verizon. Or T-Mobile. Or even Sprint. But it all comes down to the numbers: is the iPhone still a hot enough item that Apple can afford to be exclusive?

Like an Ivy League college, if Apple sees slowing demand, it must open its doors to those who it previously would not have let in to keep attendance in check. (In this case, those would be folks who refused, or were unable, to swallow the bitter pill that is AT&T.)

There's no doubt that the iPhone 4 is a hot, in demand product. But if that's not enough to woo users to AT&T, Apple's got a business case to move to another carrier: it's sitting on a hot item, but AT&T has become a blocker to reaching those customers.

These latest market share figures suggest that's the case. (Though for a complete picture, we'd need to see the latest figures on how Verizon, AT&T, Sprint and T-Mobile are growing or losing subscribers.) Not content to lose business -- and with AT&T at a saturation point -- Apple will open up to the next carrier.

That deal won't be as sweet as the first, but it will be favorable, and the carrier that wins will be the one that's most willing to give in to Apple on its demands.

(My hunch? T-Mobile, who lacks a marquee handset the way Verizon (Droid) and Sprint (Evo 4G) do, and in turn, continue to lose U.S. subscribers. But it all depends on how confident carriers are in their own Android prospects; e.g. was the Evo a one-off success for Sprint or not.)

The bottom line is that it all comes down to negotiations; that's business. But to all doomsayers who suggest that Android will overtake Apple -- "the analysts suspect that Android’s install base could outnumber iPhone's in as few as five quarters," Duryee writes -- that's making the big assumption that Apple won't do anything about it.

There's no doubt that Apple would eventually lose market share. It had a critical first-mover's advantage for the modern touchscreen smartphone as we know it today, and continued to ride that for the last few years.

But as that lead fades -- and it must, as the marketplace becomes more saturated with competition -- Apple's mission shifts to continuing to set the pace, stay one step ahead of rivals and convince every customer it can that the iPhone is a superior product.

From what I've heard anecdotally, that's already the case. If the iPhone were offered side-by-side with an Android handset for the same price on your carrier, which one would you choose? For most people, I'm inclined to think the former.