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.  

Microsoft and Nokia

It’s been very clear that for some time that Windows Phone was not working. It isn’t failing, exactly - sales are drifting slowly upwards and it’s ahead of Blackberry in some markets (as though that was an achievement), but it sold 20-25m units in the last 12 months where Android sold 430m or so (and perhaps another 150m in China) and the iPhone 143m. It’s irrelevant in the scope of the industry, and for Microsoft that counts as failure. For Nokia, meanwhile, simple finance was an issue: Microsoft’s announcement says that operating break-even is 50m units, a long way off at current growth rates. So, something had to change.

There’s lots of detail in the transaction structure to pick over. Why is Nokia licensing the brand instead of selling it when it has no consumer-facing business? Why isn’t Microsoft buying Here, the location platform? Why are the patents licensed instead of sold? Why did Microsoft take on the featurephone business?

I have thoughts on some of these, but they’re not really important. What matters is what happens next.

My initial reaction, like many, was that this changes nothing. Windows Phone is failing because of a classic vicious circle: consumers will not buy it because it has very few apps, and developers will not target it because very few consumers own one. There may be 20-30m Windows Phones in use, but there are 250m iPhones and over 900m Android phones out there. As a developer, any investment you make in Windows Phone is investment you’re not making in iOS or Android, and that opportunity cost delta is huge. There are other issues (distribution and sales commissions most obviously) but those are secondary: the ecosystem itself is sub-scale and that is self-perpetuating.

So, the acquisition solves Nokia’s problem (running out of cash) and hence is a tactical move by Microsoft: it prevents the only significant Windows Phone OEM from exiting the market. It is possible that Nokia threatened to switch to Android otherwise (the relevant contracts are getting close to renewal), rather as Motorola threatened to sue other Android OEMs before Google bought it.

But ownership by Microsoft will not of itself change the sales of Windows Phones. If anything, it will decrease them, since it prompts other OEMs to give up on it entirely. It will not make more developers make Windows Phone apps or more consumers buy the devices. And it does little or nothing for Windows on tablets. Something else needs to change.

However.

Microsoft IS going through a fundamental strategic change. Steve Ballmer is leaving - possibly pushed out. It is moving from a business line to a functional structure, and reorganising to become a devices and services company. The (misfired) Surface was one step towards devices, but owning a handset manufacturer is a much bigger one.

Suppose, for the sake of argument, that Microsoft does make a significant change in strategy - something that would give it a much better chance to become relevant in mobile. Owning Nokia - both the featurephone and smartphone parts - might well be part of that.

That is, is this a doubling down on the existing, failing strategy, or a foundation for a new one?

Nokia then and now

These two charts show the handset business in Q2 2007 (when the iPhone launched) and Q2 2013, 6 years later. The players have changed a fair bit.  

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(Note: the axis scales are the same but the bubble sizes are relative within the chart. Industry revenue is a fair bit larger now).

Blogging in haste over a 3G connection on the Eurostar - which was a crazy Nokia vision, once. 

Lumia and BB10

Interesting to compare the replacement of the legacy platforms with the 'future saviour' platforms at RIM and Nokia. Neither is going terribly well.

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Of course, the underlying problem is that though both platforms are perfectly OK (though with their flaws), they're radically sub-scale. iOS now has about 400m active devices (iPhone, iPad and iPod Touch, though obviously with overlapping users) and Android over 800m, plus China. Lumia and BB10 combined have sold a little over 23m units in the last 18 months.  As a developer, why would you target these?

It's also interesting to ponder what would have happened if both companies had swallowed their pride and gone with Android, or even forked Android. I don't actually think Blackberry would be in a better position, but Nokia might have been. 

Cameras

Interesting that both Apple and Nokia are running campaigns around the camera. For Nokia this is a real point of differentiation: the Pureview camera tech is very good. For Apple it's part of the broader lifestyle positioning: don't worry about widgets, just enjoy your phone. 

The poignant thing, of course, is that Nokia doesn't have Instagram, or many of the other photo-sharing services: it had to launch the new 925 with Hipstamatic (remember that?)

Both, incidentally, are doing good advertising at the moment, unlike some others in the space. Although I'm not sure about the wisdom of a close-up on the ISO settings in the Nokia spot...

The end of black and white

The Nokia 105 rightly got a lot of attention last week: a €15 phone with a 35 day stand-by battery life. This will improve tens of millions of peoples' lives.

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Almost unnoticed in the press release, though was another milestone: Nokia says it has made its last phone with a black & white screen.

One of these plus a small 3G tablet or phablet might be a good combination for some people. After all, 12.5 hours talk time is longer than the standby time for some smartphones.

Market share

This chart shows both the revenue share and the unit share of global handset market in Q4 2012. (This was an iPhone launch quarter, which means Apple's share is a little larger than normal). 

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This is, of course, a combination of public data (eg Apple revenue and sales,, Samsung revenue) and estimates from various sources (the 'Other' is pretty speculative, and could be argued at various different levels), but there's nothing terribly controversial here. A couple of observations: 

  • The dominance of Apple, Samsung and (in volumes) Nokia is clear
  • Apple had around a third of the revenue in the industry despite selling only about 10% of the units: that's what selling phones for an average of $619 gets you
  • Conversely, most of the volume in Android is at significantly lower prices than Apple (a blended average in the $200-250 range), especially in the 'other' category, which really reflects low-priced Chinese manufacturers targeting the $150 sweet spot. 
  • Smartphones in total had about 50% of the volume of the market, but around 80% of the revenue

This gives a pretty good illustration of some of the key questions facing the industry in general and Apple in particular. How much more growth is left in the market? How many more people will convert from non-smart to smart phones, and at what prices? And with Apple already taking a third of the revenue in the market, how much more can it grow?

Below: the same data in a more compact form. 

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Device prices, self-selection and a Catch 22

One of the many challenges faced by BB10 is that the launch hardware is priced to compete head-on with the iPhone 5 and high-end Android phones, yet the platform lacks the range and depth of apps that those devices can offer. Nokia's Lumia launch faced exactly the same problem 18m ago.

The obvious argument is that these new platforms would do rather better at a lower price point, competing against mid-range Android and the residual featurephone base, where the target customer cares less about apps and the user experience is more differentiated (i.e. the mid-range Android experience is less good than the high-end one).

However, if you only target users that don't care about apps, then your install base will never be an attractive market for developers, and you never will get apps.

This seems to be what is happening with low-end Android tablets. Google (arguably) tried to short-circuit the 'no users therefore no apps therefore no users' issue by selling the Nexus 7 at cost, carrying an effective subsidy in its working capital and making the device cheap enough that people would overlook the lack of apps. It remains to be seen just how many actually sold as a result: the launch quarter sales were a little over 2m, though with limited distribution, and we don't yet know how many were sold over Christmas (though some people have had a guess). Meanwhile the Nexus 7 is not even the cheapest Android tablet on the market - devices at $100 or even lower are to be had, though with very poor performance. (The Kindle Fire is available as well, but that's a rather different proposition, with more going for it than price.)

The challenge with all of these tablets, though, lies in the choice presented to consumers. In effect, they are asked: "would you rather buy this Apple tablet with lots of apps, or save $100 or so and get this black plastic thing with far fewer apps?"

That's a perfectly legitimate question to ask, and Christmas was one big A-B test as to what tablet proposition people actually want. However, what does it tell you if someone says 'I want to save $100 and get the cheap-looking one with no apps'? Are they a good target for any publisher or developer? This is at the root of the staggeringly low engagement on Android tablets that all publishers report - under 5% of what they see on the iPad: self-selection by the users. People who buy cheap tablets are effectively declaring that they value the saving over the apps.

In other words, you can sell to a high-end user and hope that they'll forgive the lack of apps. That's hard, and you won't sell many. Or, you can make a cheap device (setting aside the technical challenges RIM and Nokia faced in actually doing that), which is rather easier to sell with no apps - but then the user base you do get is even less likely to buy apps. Catch 22.

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. 

Announcement season: Amazon, Nokia, Apple (and Moto)

The next fortnight seems to be a sort of ad-hoc announcement season: we have flagship announcements from Amazon, Nokia/Microsoft and (probably) Apple. These are the key points that seem likely. 

Nokia/Microsoft: September 5, 10 EST (3 PM GMT)

  • Certainty: Nokia will show new handsets running Microsoft’s new Windows Phone 8 operating system
  • Desirable: better US distribution, devices at lower price points
  • Possible: NFC, Pureview camera tech
  • Possible: Windows 8 Tablet

This should be the point that Nokia can merge the long-term ‘cool future tech’ projects with the emergency ‘get Windows Phone models to market’ side of the business and start making really differentiated handsets again. I hope. 

Since the event is in New York, I’ll be looking for expanded US distribution: serious disappointment if it does not make at least one (LTE model) available on Verizon Wireless. On a global basis, the key issue (setting aside ‘coolness’) is price – will it be able to get the cost of entry-level Windows Phone below $200 wholesale? 

Amazon: September 6, 10:30 PST (6:30 PM GMT)

  • Certainty: lots of impressive-sounding but actually meaningless stats on Kindle sales
  • Near-certain: New Kindle Fire, maybe at a new price ($150?) or with significant new selling points
  • Probably (but probably boring): new B&W Kindles with slightly better screens
  • Possible: international launch (Lovefilm in UK?)

The Fire has sold 6-8m units but is no longer a unique price/proposition offer, especially if an iPad mini appears, and Amazon needs to do something about that. Adding 3G and/or going to a lower price would be the obvious moves. International launch (bundling Lovefilm in the UK, where it at least has the media rights?) also on the cards. 

Apple: September 12 (rumoured)

  • Certainty: new iPhone, speed bump (better chip, battery, camera etc)
  • Probable: new design, LTE (at least on US bands)
  • Possible: NFC and mobile payments, new ‘iPad Mini’ (though this may come at another event), lower price points for the discounted older iPhone models
  • Wild card - cheaper new iPhone model

Apart from bumping the iPhone back to the top of the tech pecking order, there are some interesting choices for Apple to make. The immediately pressing one is LTE: this was the vast majority of VZW’s non-iPhone smartphone sales and is becoming a competitive necessity in the USA. It’s less important elsewhere, but would obviously be a big boost to LTE deployments in Europe, if it supports European LTE bands of course. It has the potential to be… interesting in the UK, where only Everything Everywhere has cleared 1800MHZ spectrum and has permission to ‘refarm’ it for LTE. 

TD-SCDMA is another wild-card (Google it).

And finally, an ‘iPad Mini’ at $250 combined with a Kindle Fire at $150 (both realistic possibilities) would simply obliterate the ‘official’ Android tablet market, what’s left of it (which is not much). 

Motorola/Intel, 18 September

Android phones. Posssibly a tablet or two. Running Intel chips.

It’ll be interesting to see if Motorola has changed the industrial design language at all, which has been very male so far. 

Interestingly, the announcement is in London. That might signal an attempt to get distribution for Moto in Europe - at the moment it’s invisible here. 

Nokia has two problems, not one

Transient

You really can’t claim to understand the trouble Nokia is in unless you look at BOTH of the lines on this chart. 

Nokia has a clear story for the smart business. You might or might not believe it, but it is there and it is coherent. 

But the non-smart story is just as important, and Nokia doesn’t really have a story there at all. This is the land of $40 quad-SIM handsets from Konka and $70 shanzhai Androids, and S40 is seriously challenged - down 30% from March 2010 to March 2012 in a growing market. 

And nothing Elop should or shouldn’t have said would make a blind bit of difference to that.