Scale and polarisation in mobile

There are lots of ways to look at the global handset industry, but the polarisation evident in this chart is pretty compelling. Not shown - the hundreds of 'other' manufacturers, mostly in China.

The CFO of Qualcomm recently described the industry as a barbell - Apple and Samsung at one end, then the smaller and mostly sub-scale players (though some, such as Sony, are showing signs of increased health, albeit from a low base), and then at the other end, invisible, the Chinese. 

As an aside, this also illustrates the way that Apple has become so cyclical that it's really only the December quarter that gives a good directional steer.  

Polarisation, continued

A simple picture: this is global handset revenue for the major branded OEMs. Samsung and Apple dominate, Apple is very cyclical, everyone else looks very sub-scale. 

(All revenue, not just smartphones. Sony and Blackberry haven't reported their most recent quarters yet.)

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HTC and Samsung

It should be pretty obvious that Samsung (or even just Samsung Electronics) is a much larger company than HTC, with much more financial firepower. But it's interesting to look at some of the ways that scale affects things. Marketing is a good example. 

Both companies disclose a 'sales and marketing' line. For Samsung this includes activities for the TV and domestic appliance divisions, but the way the spending has grown in recent years suggests that the great majority of the spending is for mobile - and of course the brand is the same anyway, so advertising for TVs will also bleed across to phones.

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Where is this money going? Well, Samsung discloses a split in the 'sales and marketing' line - around 40% is advertising and the rest is 'sales promotion expenses' - a lot of which is sales commissions. 

In Q4 2012 Samsung's budget was 13 times HTC's. Samsung hasn't disclosed the Q1 number yet, but if it dropped to, say, $2.5bn in Q1, the same proportionate shift as at the beginning of 2012, it would be about 19 times bigger. It's actually a little hard to see given the scale, but HTC's budget is down 40% year on year, to just $130m, a tiny amount. And given their operating profit was zero in Q1, they can't afford to spend much more.

In the handset market today, having a lovely product is necessary but insufficient. This chart ought to show why.

Incidentally, Apple doesn't break out a sales and marketing line (it only gives the advertising spend): in 2012 Apple spent about 25% as much as Samsung Electronics directly on advertising, some of which was obviously for iPads as well. However, it has contracts requiring mobile operators to spend money on advertising as well, so this isn't a direct comparison. 

The sad decline of HTC

HTC has now given up every penny of revenue growth it picked up from Android.

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Of course, some sort of fall-off was to be expected, given the age of the portfolio and the overhang from the upcoming HTC One. But this is horrible, especially given China is supposed to be a key market and this was the Chinese New Year buying season.

THe HTC One is a very nice phone, incidentally. But then, last year's portfolio was nice too. In today's handset market, nice hardware is necessary but insufficient to compete.

Amazon Phone

And so it begins. Amazon is taking advantage of years of poor Google execution and moving to fill the void. It is finally deploying the pieces it has put in place over the past few years to start moving its purchasing and content ecosystem into phones at the OS level. Content first. Apps, photo sharing, contacts etc soon. And some time in the future, perhaps, a Fire Phone.

This sort of pre-load / embed solution is lower-risk and easier to execute than a full-on 'Fire Phone', with a completely forked Android and custom hardware: phones are harder than tablets in all sorts of ways. HTC makes it and (with VZW) distributes it, Amazon adds the sizzle.

I saw a job ad that's almost certainly for Amazon the other day: "Head of Strategic Mobile App Partnerships", in Luxembourg, working on "a groundbreaking new mobile platform". More to come, I suspect. This certainly won't be confined to Verizon Wireless in the USA. 

I also wonder how long this will be an HTC exclusive. HTC could certainly use the help, but I'd expect all the Android OEMs to be interested: all of them except Samsung are struggling and they have no love for Google. But of course if all Android phones have this then they're back to selling commodities. 

And how does Google react? It has the power to withhold access to Google Apps (GMail, Google play, maps etc) for devices that fork Android, but additional preloaded services are hard to fit into that category. Moreover, how soon will Amazon be able to offer all of that functionality itself? Maps are probably the biggest hurdle - but now we have Nokia offering its own (equally good) maps in an iOS and HTML5 solution on all mobile devices...

What is Amazon's strategic objective? This isn't really about selling content and apps on mobile - even Apple makes no money doing that. Rather, as with the  Kindle Fire, Amazon is trying to create buying devices. Mobile devices sit next to Vogue and How To Spend It, and on the coffee table in front of the TV. They are ready and waiting for a call to action, to capture purchase intent. Amazon is a leveraged play on the conversion of physical retail to ecommerce, and mobile is the means of acquisition. 

Mobile uncertainty

Smartphones are moving from a high-end luxury to a billion-unit-a-year business. Yet one of the fascinating things about the industry right now is just how many companies are in serious trouble, and how many things are totally uncertain. We could easily see a major handset brand get bought or just disappear in the next 12 months, but every single handset company faces fundamental and often existential questions: 

  1. Will Apple make a cheaper phone, moving below $600 new? How would it do it? (How) would it maintain segmentation? Would that be a $300 phone? A $100 phone?
  2. Will Microsoft make its own phone? Will Windows Phone finally get any traction?
  3. What happens to Nokia if Windows Phone gets no traction? What if it does? Does Microsoft buy it?
  4. What is the future of Nokia's featurephone business? How big will Asha be?
  5. How much longer will RIM survive? Who will buy the wreckage?
  6. What happens to the struggling Android OEMs, HTC, LG and Sony? Is there an M&A roll-up here?
  7. What is Google going to do with Motorola? Shut it down? Break it up? Let it carry on running into the ground? Or give up on the firewall?
  8. Is Google's whole approach to Android sustainable? Will it move more towards Nexus handsets, or does that remain just a low-volume showcase?
  9. Is Samsung's leading position sustainable?
  10. Will the Chinese move up-market and become major consumer players in the West?
  11. Will the Chinese try to buy a non-Chinese OEM? RIM? HTC? Would they be allowed to?
  12. What is the future of the subsidy model? Will operators (and consumers) move decisively away from them? What would have to change to do that?
  13. (late addition) Will Samsung remain committed to Android, refocus on Windows Phone, fork Android or all of the above?
  14. (late addition) Will Amazon make a 'Fire Phone'?
  15. (late addition) Will Apple's monopoly of the high-end ($600+) phone market continue, or will Android/Windows Phone improve to the point they can take it on head-to-head?
  16. (late addition) Will Intel become relevant in mobile? Would it do a big acquisition? Panic and buy an Android OEM?

I have pretty considered opinions about most of these - but there are no clear answers to any of them. Massive amounts could change, quite easily, in the next year to two. 

The continuing decline of HTC

HTC's decline continues: a short spike upwards at the beginning of the year after they launched a solid, coherent portfolio, has been followed by a return to rapid decline.


As seen with the Palm Pre and Nokia Lumia, good product is no longer enough for success in the handset business: you also need scale. Samsung's run-rate annual marketing budget is now $11bn, which is more than HTC's run-rate annual revenue of $8.4bn. Even though HTC is plugging into the ready-made Android ecosystem, an advantage denied to Palm and Nokia, the product still isn't shifting.

I'd suggest that the largest real threat to Samsung's 50%+ share of Android units comes from the cheap generic Chinese (based on Mediatek chipsets), and to some extent the Indians, not the other branded OEMs. 

There are so many challenged handset OEMs (Nokia, RIM, LG, Sony, Motorola, HTC) that some sort of roll-up strategy sometimes gets talked about, but it's hard to see how M&A would really solve the problem. And of course the US concerns about security almost certainly mean that Huawei and ZTE can't act as buyers, which would otherwise be the obvious next development.

The only vaguely plausibly buyer I can see is Microsoft - there are plausible reasons for it to buy any combination of Nokia, RIM and HTC, but equally plausible reasons not to. 

HTC's problem

HTC's revenue over time: steady growth doing Windows Mobile, explosive growth with Android, at first, and then somehow it all went horribly wrong. There's a pretty similar picture for every other Android OEM except Samsung.