At WWDC, one of the slides indicated that iOS had a much larger market share than Android, and another slide showed that there were much more iPhone devices out there than Android. This was met with a lukewarm applause by attendees and I think I know why: they thought Apple was lying.

While both facts are true, they can be confusing. Android is growing faster and is selling more phones than Apple is selling iPhones. There is lots of news lately about Android overtaking iPhone. But these articles are comparing Android, the operating system, against iPhone, a device. Yes, when pitted against each other, Android is winning the market share war.

But that's not a fair comparison. When pitted against any other phone, iPhone is winning by a very clear and distinct margin. When comparing profit margin, iPhone is winning by an even larger margin. The iPhone got a year head start, so there are more iPhones out there than Android phones. When you compare iOS, the operating system, against Android, the operating system, there are more iOS devices being sold because iOS represents iPhones, iPod touches, Apple TVs and iPads. In each of the device categories it appears, iOS devices out-sell all other devices, and in all cases except for phones, iOS devices out-sell all other devices in its respective category *combined*.

So why doesn't iPhone have more market share right now? If Android is growing faster in the phone category, Apple will not be able to define the future of phones, as they clearly want to do. If Android ends up being installed on 80% of phones in the future, protocols like FaceTime are just not going to catch on if they only work with 20% of your friends' phones. And FaceTime is no longer a selling feature if none of your friends are already on it. Apple would be forced to adopt protocols someone else made instead of defining their own.

First of all, right now smart phones are less than 10% of the market, and everyone expects it to be near 100% within the next few years. There is huge opportunity there for growth and the battle for market share is just beginning. Apple has so far been limited by how much supply it has, not how many phones it can sell, so they have aimed for the upper-end of the market with a $200 price point. Apple is in the business of selling high-quality hardware so this is an easy target to hit.

Now that supply constraints have relaxed a bit, Apple has brokered a deal with Verizon which indicates to me that they are ready to grow. The Verizon deal was stage one. What is stage two?

The iPhone 5, expected this Fall, is another part of this deal. Many potential Verizon iPhone buyers have held off since they don't want a phone which will be obsolete in a few months, so the iPhone 5 will be the biggest launch yet. Since each previous iPhone has doubled its beginning sales from the previous year (and that was with an AT&T-only phone), I would expect this one to continue this trend and possibly exceed it, even at its standard $199 price tag.

But what about that price? Android phones can be had for free with a service plan. If the average user just wants Angry Birds and a bunch of free apps, how does Apple expect them to fork over $199 up front? Keep in mind that they are already asking users to pay for a monthly data plan.

One solution would be to cut the device's price in half. At $99, a phone with hardware similar to the iPhone 4 might still give Apple a hefty profit since the price of the individual components have decreased due to economies of scale. They already did this with the 3GS and the 3G when the iPhone 4 and 3GS were released. But last year's Apple device can't necessarily compete with this year's stampede of Android devices.

Maybe another way to compete against free Android phones is to offer...wait for it... a free iPhone. This would be an iPhone 4 running iOS 5, with a required unlimited data plan. AT&T has phased out its unlimited plan and Verizon has announced plans for it, and I think it's because they plan to re-introduce it for $10 more per month. If you want an iPhone 4 for free, you can have it as long as you buy this new plan. The carriers are happy because they get users to sign up for a beefed-up two-year contract (they are in the contract business and not the device business), and Apple is happy because a good chunk of that $240 goes back to them and (more importantly) they have a more attractive deal for lots of people.

A few other thoughts and predictions:

• If the $10 / month unlimited plan indeed happens, I would expect the price of text messaging to drop. This is a feature that is in trouble with the new iMessages and the plethora of chat apps available on Android and iOS. By lowering the price of texting they make the iPhone 4 more attractive to buyers. Look for Sprint to try this out first.
• A free (or even $99) phone leaves out repeat iPhone buyers—why would an iPhone 4 user upgrade to a cheaper phone? These users are willing to pay $199 and are too important to be ignored. In addition, Apple loves to one-up themselves year after year, and are not going to rest on their laurels while competitors catch up to the Retina display and FaceTime. Apple has to create another $199 device this year to capture these buyers and hold the attention of the press.