Lead, innovate or assemble: three choices for handset OEMs as mobile starts to look like the PC industry
+8 rating
Loading ...- 10 comments
- view license
[Android has triggered more changes to the mobile industry than anyone had imagined. Research Director, Andreas Constantinou looks at the profound changes taking place and how the handset OEM market is shaping up].
Mobile industry connoisseurs used to smirk at the notion that the mobile industry was any similar to the PC world. How can the two industries be any similar when the software, services, channels to market, operator control, regional economics, and range of experiences were all so different.
This is so last decade. The march of software has irreversibly changed the economics of value in the mobile industry. Google’s Android and Apple’s iPhone have caused disruptions that threw all analyst predictions off the chart. Industry pundits used to project a linear growth for ‘open’ operating systems (Symbian, Windows Mobile et al) that saw them take over an increasingly large share of mobile handsets sold.
But the evolution of software has been anything but linear in the last two years; Google’s Android, an operating system that was greeted with skepticism in 2008 become a launchpad for just about everyone working within the mobile industry.
Network operators/carriers saw Android as an opportunity to reduce their dependency on two players, Apple and RIM whose stellar sales were depriving operators from any negotiating power. Operators have always tried to divide and conquer amongst their suppliers, for example working in 2002 with HTC and Windows Mobile to reduce their dependency on Nokia, or in 2007 using a three-pronged OS strategy (WinMo, Symbian, Linux) to reduce their dependency on Microsoft. Android allows operators to deliver iPhone or BlackBerry –like devices at much higher levels of customisation and at much lower subsidies.
Handset OEMs saw in Android the opportunity to develop iPhone clones at less-than-iPhone prices for operator customers. In 2008-9 most Android projects were kicked off by operators, while in 2010 OEMs are investing in Android big-time. LG and Samsung, who used legacy real-time OSes for 90% of their high-end phones in 2009 have now 10s of Android projects in the pipeline for 2010-11.
Software developers saw the opportunity to enter the mobile ecosystem of downloadable apps – in the role model set by Apple’s App Store – in the most approachable and developer-friendly platform ever created for mobile.
But the biggest changes are yet to appear.
Android has triggered a mass arrival of 10s of ODMs from China and Taiwan eager to create me-too touch-screen handsets. Qualcomm and Mediatek, the chipset vendors powering the majority of feature phones today have launched or preparing to introduce out-of-the-box Android designs that reduce the time to market for Android handsets to 6-9 months (or circa 3 months once Mediatek’s design hits the market). Platform development for Android has dropped to the $300 per engineer-day mark, while big outsourced development centers are being set up in Asia dedicated to Android handset development. All these developments will allow Android touch-screen handsets to hit the €150 mark retail price.
The new world order: Lead, innovate or assemble.
The developments triggered by Android have made it possible to replicate the economics of the PC industry, leaving mobile industry insiders dumbfounded. Last decade’s rules and role models no longer apply. Instead there are three role models emerging for handset manufacturers in the world of commoditised software: leaders, innovators and assemblers.
Assemblers. Dozens of contract manufacturers can now take Android and deliver fully-featured, high-end handsets at made-to-measure requirements, but at price points and wow-factors only enjoyed previously by top-5 manufacturers. Think iPhone me-too experience at €150 retail price.
Innovators. The price pressure from assemblers will force the top-5 OEMs to innovate-or-die. With the innovation moving out of the pure user interface domain, widgets or touch innovations or no longer the ‘wow’ factor. To claim higher prices at €300 (and a respectable margin above the BOM) the top-10 OEMs will have to innovate.
Handset innovation lies in three elements: firstly, novel industrial design (think Nokia’s ‘listick’ or sports handsets of 2006) that will break the boring mould of today’s form factors and plastics. Secondly, novel use of sensors that will enable user interactions only imagined so far. Thirdly, use of shelf space within the commonly used applications (idle screen, menus, browser chrome, app store) to promote and monetise from third party content. Yet innovation will have to be balanced with application compatibility. Already we ‘ve seen how Android implementations have created fragmentation headaches for developers.
Leaders. To reach the top-tier of handset pricing (circa €500) handset manufacturers have to deliver new product experiences. This is the privilege enjoyed by Apple, RIM (and Amazon Kindle to an extent) who have integrated hardware, software and services under the same roof. You can buy Mediatek-powered iPhone clones in China (Shanzai in local speak) for $75, but the experience is laughable to an iPhone user. Only by controlling and integrating hardware, software and services under the same roof can a manufacturer deliver new product experiences that can command top-tier retail prices.
Mass producers. Naturally, emerging markets where retail prices are at circa €50 make up the majority of the mobile handset market – at least revenue wise. And while assemblers can produce low-cost devices, they won’t have the economies of scale to make a profit at €50 retail price. Mass producers, i.e. companies with the supply chain sophistication and negotiating power of Nokia and Mediatek can do that.
The picture that emerges for the mobile handset market in 2015 (the predictable future) is surprising in many ways. We estimate that the top 5% of the market will command as much revenue as the bottom 50%, but with a higher profit – for example Apple and RIM today bring in around 55% of the industry’s profits. The middle two segments (what some observers call mass-market smartphones) will generate much higher revenues.
The mobile industry is starting to look scarily close to the PC industry, both in terms of business models and profit vs revenue patterns.
What do readers think? Is the PC future for mobile inescapable?
- Andreas
you should follow me on twitter: @andreascon
Andreas, a very good analysis. Spot on the sensor technology helping to differentiate. One thing that makes mobile phone industry different from PC and eventually slows down its commoditization is the complex set of IPRs involved with the production of cell phones. Those with a good library of IPRs have an advantage over the newcomers who have to pay for everything. With cross-royalty deals and revenues from royalties the big players like Nokia can have more room in setting the margin for for its products. Eventually, we can expect the further industry consolidation and I fear some Japanese vendors may follow the steps of Philips, Siemens and others who had to abandon the mobile phone market.
Yes, the realignment of handset value is inescapable. I would not call it the "PC future" or "wintel future", but I get the meaning.
Having had a close up "on the scene" view of PC industry from 1980's to now, I saw big potential with Androids announcement. I knew then that big changes were coming to mobile. MS mobile becomes roadkill and Nokia's franchise is altered forever.
I expect increasing competition as players fight for positioning w/in this new value alignment.
The ones who win and thrive are ones who match their intrinsic strengths to this new market alignment. The ones who fail? Those who fight the new alignment and misapply or misdirect their resources.
Tek
Alex,
" Japanese vendors may follow the steps of Philips, Siemens and others who had to abandon the mobile phone market."
Agree, several Japanese players will exit.
Already, most Japanese vendors are weak outside of Japan.
My colleagues in Japan blame DoCoMo. I would blame the handset vendors themselves. If they were not so hung up on domestic competition, but emphasized more global market share … they would see more success outside Japan.
Tek
Mobile is not PC industry. There is more reach and more unit sales per year, there is always a place to find new market share in some corner of the customer needs.
And the top of the pyramid will be a very windy place. The companies in the bottom of your pyramid will climb up (produce similar but cheaper devices) and pull prices and margins down, as they have the power to do that.
IPR owners will do well in any case.
It is interesting that Microsoft is actually moving "up the pyramid" with it's upcoming WP7 OS. From replicating their PC-OS business model on mobile they are moving heads on with Apple & RIM to take much more control over the overall user experience. No skinning of OS. Strict HW requirements. .Net and Silverlight development environment for apps… It's going to be "windy" on the top.
As for the current dependency between devices and content it will be interesting to see what HTML5 can pull out of its sleeve. It looks promising for "free", but lacks some crucial parts for content owners to feel comfortable…
Andreas, wonderful analysis as always. My one observation:
"Only by controlling and integrating hardware, software and services under the same roof can a manufacturer deliver new product experiences that can command top-tier retail prices."
Regarding RIM – in the US, Blackberrys are buy one-get one free with a steadily declining ASP. Its hardly top tier/Leader pricing, while iPhones retain their price and margin advantage three years after initial product introduction. I don't think you can use RIM to support a strategy definition/generalization. The strategy realization is unique to Apple with its overall superior user experience, and no one else is in the same league.
Alex,
Good point about IPRs – I guess these are prevalent in RF and input output (sensor, touchscreen gestures) domains, which will impact the margins of the 'innovator' segment. I also see a second wave of OEM consolidation in view of reducing margins.
TektonikShift,
I agree – and I think all the OEMs can see this 4-tier shape of industry emerging, question is how fast they can reposition and execute.
Jack,
Agreed on the regional diversity of the mobile industry. And agreed that the top of the pyramid will be windy, but the trees at the top have very deep roots – i.e. expertise and in-house integration capability across the complete hardware + software + services stack – so they will be *very* difficult to unseat. Think about it this way: who apart from Apple and RIM has been able to create new product experiences? Or see how Sony Ericsson's new product experiences (Cybershot and Walkman) were short lived, as SEMC could not tie in the content/services end of the stack.
ChristiAN,
Windows Phone 7 is a vertical proposition with a hoizontal revenue model ($$$ per-unit royalties). As such it doesn't appeal to the leader, or the innovator or the assembler segments.. Pretty much as if it was designed to fail.
Tim,
I was not aware of rapidly dropping ASPs for BlackBerry. Do you have any data points you can share over email?
Andreas
Apple maybe a vertically integrated powerhouse. But it does not control one very very important aspect of customer experience, carrier service. AT&T is the worst carrier in US. expensive and completely worthless with the worst customer service. And this single thing alone has allowed android the wriggle room to outsell Apple IPhone in first quarter of 2010 in US
Cell phone accessories are as important as cell phones. A cell phone without a proper case is prone to damage. Why take the risk!
Carriers are afraid of Google but they had no other choice. I'm sure, Google will try to launch Google voice worldwide.
Microsoft CEO don't understand licensing is not a good strategy this day on mobilephone market. And they try to catch up with Google and Apple but they need to focus on Android.
visionmobile 2005-2012
visionmobile 2005-2012
