The new battleground of smartphones
Apr 08 2014
Apple’s iPhones (and its tablet siblings) were great mobile devices to some. To others, specially in developing countries, they were not just phones — they constituted a chic range of designer accessories that signalled status. Last year on September 20, when iPhone 5s and 5c models were launched, the longest ever queue was observed at the New York City’s flagship Apple store. It sold 9 million handsets in the first week itself. But the question is: will it march in the same manner and pace in the next three to five years? Even in a country like India, there is a large and growing segment called Bharat. China, likewise, is not just Shanghai and Beijing. Its tier II and III cities and rural markets are booming. While the leading manufacturers of smartphones, Samsung and Apple together creamed 99 per cent of the industry profits, the sands were shifting.
In the developing world, the market for smartphones is fragmenting at a furious pace. According to IDC, the share of cheap smartphones (priced at under $80) sold by smaller players outside the ‘Big 5 Club’ was 40 per cent in 2013. Just four years ago in 2009, the share was only 20 per cent. Even this does not provide the full picture of disruption. Members of the ‘Big 5 Club’ themselves are causing tectonic shifts. Nokia, for instance, has joined the bandwagon of cheaper smartphones with free applications and music stores. In India, Micromax and Karbonn rank second and third respectively. In Bangladesh, Symphony has 50 per cent of this market segment. Watch the march of MediaTek in Taiwan and Spreadtrum in China. Do you remember the company called Legend? It was a fledgling personal computer manufacturer from China. It grew strong in the local Chinese market, then bought the personal computer business of IBM and emerged as a global player called Lenovo. It had an entrenched market share in China. On that foundation, it built scale and became a cost leader. With unflagging determination, a bold acquisition strategy and with a bit of luck that comes with it, Lenovo broke from the pack.
What happened in the personal computer hardware arena is playing out in the smartphones space. Screen sizes are increasing, processors are fasters, cameras are better, more and more free applications and services are being bundled, and yet prices are falling in absolute terms. The improvement in price or performance is not showing any signs of fatigue.
Even among the disruptors there are mavericks. In February at the Mobile Congress in Barcelona, Mozilla (the developer of the Firefox browser) announced a smartphone which will run Firefox operating system (OS) with Spreadtrum chips for less than $25. This Nano among phones is not a lone play in innovation. It is being backed by Telenor of Norway which manages mobile telephone companies in developing markets like Grameen Phone in Bangladesh. In a bid to change the game, the players are doing unheard of things. Nokia, ostensibly with the blessings of Microsoft, has launched Nokia X, which will run Android applications. Microsoft, which is acquiring the handset business of Nokia, is making its Office suite of products free on iPhones with some conditions attached.
Although it is buying a device manufacturing facility from Nokia and will sell smartphones, at the core of its being, Microsoft is a tools, applications and solutions company. Thus, it will do what it takes to increase its market share even if it means it has to sleep with its enemy Google. It is a classic example of ‘coopetition’. What is at stake is the large emerging market for smartphones and smart devices on which applications will ride, trades will be done and content will be displayed, delivered, enjoyed and sold. To Google, it matters little if Android runs on a Samsung device, a Kindle or a Nokia X. But for Microsoft, it is a big deal. Apple has bought back shares worth $14 billion which constituted less than 10 per cent of its stockpile of $160 billion in cash. It has more cash than Google and Microsoft put together. But its share prices are declining. Wall Street wants Apple to do something smarter with its mountain of cash than pay dividends or buy back stock. It expects Apple to perform an encore in its journey in breakthrough innovations; perhaps, not phones but other undreamt of devices. Maybe wristbands, smart watches, iTVs and intelligent spectacles!
It is also strange that Apple is not using the power of its ecosystem to replicate Intel’s Celeron strategy. Intel won the day by cannibalising some of its own market share to produce a great chip that was much cheaper than Pentium, but had many of its advanced features. Apple has stayed away from the red ocean of the cheap smartphone market space, bloodied by price-cutting sharks. But thereby hangs a tale. Only time will tell if it has lost a rare opportunity of dominating the entire food chain.
The problem for the kings of the hill, that is, the ‘Big 5 Club’, is that as great smartphones are produced at outstanding price points with attractive applications bundles, their market share gains will not be restricted to developing countries alone. They will indeed invade Europe and North America where there are millions of value-for-money customers. The leaders of the smartphone market are at crossroads. Will they join the battle for the minds and wallets of these customers or move to a new space of uncontested innovation? A new battle is about to begin.
(The writer is managing director of Deloitte Consulting, India. These are his personal views)