1. US Customer Decision to Purchase an iPhone vs. Android phone not based on Apps
In his article, “iOS versus Android. Apple App Store versus Google Play: Here comes the next
battle in the app wars,” Steve Ranger from ZDNet quotes Thomas Husson, a Forrestor analyst,
as stating “Apple makes margin mostly by selling hardware,but apps are really what creates the
loyalty to the ecosystem, be it from a consumer standpoint or for developers.” The underlined
portion of the previous quote is a common misperception of the smartphone market. Apps are not
the driver of consumers’ decision to purchase an iPhone over an Android phone in the US market.
This is one of the main conclusions of Bresnahan, Orsini, and Yin’s paper on "Platform Choice
by Mobile App Developers," 2014, three economists at Stanford University.
The smartphone market is a two-sided market. On one side are customers who purchase
smartphones and use apps, on the other side are app publishers that develop apps. Two sided
markets are defined as markets that have indirect network effects. A direct network effect occurs
when a customer’s value in purchasing a good is increased by the number of other customers who
own that good. For example, the telephone, if you are the only person who owns a phone, the
phone is worthless to you. But if someone else owns a phone, then you have another person to
talk to and the value of the phone increases. As more people buy phones, there are more people
to talk to and the value of owning a phone goes up. As the network of phone owners grows, the
value of owning a phone increases. That is a direct network effect. The value to a consumer of
purchasing a good is directly related to the number of other customers who have purchased that
good.
An indirect network effect occurs when the demand of a good depends on the presence of a
complementary good, which in turn depends on the demand of the original good. (“The
Economics of Two-Sided Markets,” Rysman, 2009). For example, the demand for a DVD player
is zero when there are no DVDs to buy, but when studios release movies on DVD consumers
have incentive to purchase DVD players. As more people buy DVD players, there is more
incentive for studios to release movies on DVD,the demand for the complementary good
increases as the demand for the original good increases.1
1 The difference between an indirect network effect and regular complementary goods is that the value of
the original good increases as more complementary goods are available with indirect network effects.
Think of a left shoe,when the complementary right shoe is available, the value of the ‘system’ of shoes
goes up. But the value does not increase with each new right shoe that is available. In a two sided market
such as DVD players, the value of the DVD player to consumers increases as the number of
complementary goods,movies available on DVD, increases.

2. DVD Two Sided Market with Indirect Network Effects
This is the point Husson is getting at in his statement above. In fact, customers usually follow
complementors and complementors follow customers. (Complementors – companies that
produce a complementary good.) The more customers there are on a platform, the more incentive
complementors have to produce for that platform. And the more complementary goods there are
on a platform, the more customers have incentive to get on that platform. Normally this leads the
DVD’s
DVD Player
Customers
DVD’s
DVD Player
Customers
DVD’s
DVD Player
Customers
DVD’s
DVD Player
Customers
DVD Player
Customers
DVD Player
DVD’sDVD’s
Customers

3. market to tip to one platform or another, where all the customers and all the complementors line
up on a single platform. (“Coordination and Lock-In: Competition with Switching Costs and
Network Effects,” Farrell & Klemperer, 2006) There are numerous examples of this, VHS vs.
Beta video standard, DIVR vs. DVD,to name two.
Market Share Tipping to Android or iOS
However,in the US market for smartphones there is a roughly even split between iPhones and
Android phones. Let’s examine customer choice in the US market.
A customer’s decision to purchase an iPhone or Android phone is based on the customer’s
preference for one phone over the other. Customers’ utility function for owning a phone can be
described by the following equation:
Upr = upr + apr
Where Upr is the utility for customer r on phone p, apr is the utility from the apps available on that
platform, and upr is the utility from all the other features of the platform. Other features include
the design of the phone, the ease of payment for purchasing apps on that phone, the quality of
cellular networks available for that phone, etc. In the US market, the distribution of demand for
apps is highly skewed, the top 20 apps account for 80% of the market. (Bresnahan,Orsini, Yin,
2014) The top apps are available on both platforms. Not only are the top 20 apps, but the top
0% 100%
100%
iOS Market Share
AndroidMarketShare

4. 200-300 apps are available on both platforms. Since essentially all the apps that customers use
are on both platforms, the utility of apps can be taken out of the platform utility equation above.
Let p = i for iPhone and p = d for Android phone.
Uir = uir + air and Udr = udr + adr
When a customer buys an iPhone Uir > Udr , so
uir + air > udr + adr
But since all the apps customers use are on both phones air = adr.
we can subtract air and adr from the inequality to get uir > udr.
Apps are not in the equation. Clearly apps aren't what drive loyalty for smartphones.