Industry

Apple reached fourth place in ranking of top phone vendors by units sold. I guess that makes it a "top tier" vendor.

So how did it get there?

Here is a chart showing how market share evolved since the quarter when iPhone launched:

Units sold and shares.

The chart shows how this cohort of eight vendors has fared over the past 3.25 years. The squeeze on Motorola and Sony Ericsson is plainly evident. What's harder to tell is how the tiny players in the smartphone place fare in the ranking of "top tier".

Here are the same vendors with their position in the volume leader league table over time:

Lots of interesting patterns here which I'll leave to the reader to interpret.

I am dead serious. I am now convinced that we have enough data to determine for a fact that Apple will not only see a dramatic decline in quarter-on-quarter sales in units of the iPhone this January-March quarter (which is the predictable pattern and no surprise) but that we will also see a decline in iPhone market share against at least HTC and Blackberry;  that would be demoralizing news in itself. I know now that the numbers are clearly stacking up so, that the annual sales level of iPhone units, will result in a decline in iPhone annual market share in 2010.

via Communities Dominate Brands: iPhone in Memoriam: A History from its Peak Moment of Success. But who copied whom?.

Contrary to the loud and emphatic proclamations above, the data shows that the iPhone's market share gains have been steady.

The following chart shows iPhone market share by quarter with a 4-quarter moving average. Total market size is reported by IDC.

LG saw its profit fall apart today as its summer results were hurt by its weakness in phones. Its profit plunged 99 percent, down from $805.6 million a year ago to $6.7 million. The Korean company was dragged down by its mobile group, which had a record loss of $270 million. The company's total phone shipments also dropped, going down 10 percent from year to year at 28.4 million.

via LG profit collapses based on shrinking phone sales | Electronista.

Q3 numbers show that LG had a drop in ASP as well. The unit numbers are down sequentially from 30.6 million in Q2.

Google likes to market itself as "Open" in contrast to "Closed" alternatives.

Apple likes to market itself as "Integrated" in contrast to "Fragmented" alternatives.

These dichotomies are judgmental and meant to portray "us=good" vs. "them=evil". Neither gets to the point of how the two companies are structuring their businesses relative to the mobile computing value chains and clouds the judgement of observers.

I propose using a more informative and less judgmental distinction. It's a division defined clearly by Clayton Christensen in his classic "The Innovator's Solution" from 2003.

He introduced the concept of interdependent vs modular systems.

Interdependent systems have linkages between elements ranging from product components to the members of a product value chain. Essentially, the pieces communicate or interface via non-public or non-licensed protocols and have only specific partners (e.g. the iPod and iTunes).

Modular product architectures, on the other hand, are similar to the concept of plug-and-play and resemble building blocks, consisting of standardized interfaces, enabling parts to be easily swapped in and out and multiple suppliers or partners to compete.

Neither of these architectures is "good" or "bad". They are natural ways to organize according to what business model or point in the evolution of a technology you are at.

Interdependent architectures are the only way to rapidly and competitively improve the performance of not-good-enough systems. Modular architectures are the only way to squeeze profitability from more-than-good-enough commoditized technology.

Interdependent systems often lead to higher performance than modular systems because the system is optimized. Engineers can iterate more rapidly to squeeze the maximum performance from sub-systems by connecting them in ways that makes the best complete solution. In contrast, modular systems often lead to lower costs because there are a greater number of suppliers, since interfaces are standardized and pieces can be swapped in and out.

Interdependency is often required to raise the performance of a new solution. In contrast, modularity is required to lower the cost of an overserving solution.

Continued interdependency often drives the performance of that solution beyond that which the target market is willing to pay for. The target market then frequently turns to modular solutions which, at that point, often offer good enough performance along with modularity-driven advantages such as lower cost, convenience, or other benefits.

So the question is not whether one is better than the other but when either one should be used.

Modular architectures are often the solution when interdependent architectures prove too costly. Interdependent architectures are the solution when modular architectures are not good enough or can't solve new jobs that users discover they need to solve.

Apple's value systems, priorities and processes are all tuned to interdependent architectures. Google's value systems, business models and competencies are all tuned to modular architectures.

Apple solves the problems of new markets, Google solve the problems of over-served markets.

So the winning[1] strategy depends on detecting where a product lies in its march up the performance trajectory. Before it's good enough, interdependent systems win. After it's good enough, modular architecture wins.

So where is the smartphone on its evolution? If it's still early days, iPhone will keep growing. If it's saturating and improvements are neither valued nor used, then it's time for a modular approach.

Place your bets now according to your vision.

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By winning, I mean capturing the bulk of the profits in the industry.

Sales from its handset business climbed 20 percent to $2 billion last quarter, helping to narrow its loss to $43 million from $216 million a year earlier. The division had an operating profit, excluding some charges, of $3 million. Motorola said it shipped 3.8 million smartphones last quarter.

via Motorola Profit Tops Estimates on Rising Sales of Droid Phones - Bloomberg.

Motorola shipped a total of 9.1 million phones. This is down 33% from the year-ago quarter's 13.6 million units but up 10% sequentially from 8.3 million last quarter.

I'll summarize the top tier vendors' unit volumes, sales value, price and profitability in a few days.

CHART OF THE DAY: If AT&T Is So Bad, Why Is It Beating Verizon Every Quarter?.

AT&T just signed up 2.63 times more subs in Q3. They've been adding more subs every quarter since Q1 09.

Another point is that both are adding subs. So who is losing?

One of the most hotly debated subjects in the mobile phone business is the importance of market share. It's also a topic of lore in the PC industry. Briefly the two arguments are:

• Market share matters more because it drives network effects which ultimately drive competition out of the market, creating the opportunity for monopoly rents.
• Profit share matters more because profit is the only fuel that can drive innovation. Any macro downturn or shift in strategy can cause a company to cease investing in unprofitable projects.

The old disruptor's adage: "Be hungry for profits and patient for growth" is challenged by the equally disruptive: "Grow share with lower prices in exchange for new revenue sources."

There are many rich anecdotes to support each strategy, but how about some data? Fortunately we have some: the market and profit shares for vendors covering 80% of the world's largest technology market over a three year period. The vendors are a good proxy for the market, the time frame is long enough to cover seasonality and anomalies and the market is very big (over 1.2 billion devices) and very broad (world-wide).

The only question is how to measure success. One measure is how various strategies benefit the asset owners, i.e. the share holders. Benefit to society, employees and consumers are very difficult to measure. But share holder benefit is easily obtained by measuring change in share prices.

So, here are two charts:

1. The percent change in market share vs. percent change in share price for the top mobile phone vendors.
2. The percent change in profit share vs. percent change in share price for the same vendors. (see note 1 for time frame discussion).

I showed the R-squared value of the correlations. (See note 2 regarding LG and Samsung). At r-squared of 0.36 share price is not well correlated to market share while at 0.76 it is rather well correlated to profit share. To a financial analyst this would seem obvious. After all, share price reflects the present value of future cash flows which are clearly coupled to profit and hence to profit share growth. However, as many technology observers would point out, market share determined the success of Microsoft and Google, and to some degree Nokia.

High market share can cause competitors to be starved of components or ecosystem developers. At the same time, high profit share can cause competitors to be starved of capital.

What does this analysis add to the argument? Note that this data covers a hardware business. Is hardware relevant? It does not scale as rapidly and has a short shelf life. It's also notoriously difficult to distribute. However, outside of the service revenues for cellular voice and data, device hardware is the only pool of money that has any material dimension in the industry. It's also the pool of money with the highest margin in the industry. For the time being and the foreseeable future, hardware is the only business model worth anything in mobile computing.

The data shows that in this particular but substantial market profit share is closely correlated to shareholder value creation. It also shows that profit loss is closely correlated with shareholder destruction. The dominant data comes from Apple and Nokia, which appear to be polar opposites in performance on both measures.

In other articles I've shown how profits have shifted from incumbents to entrants in the smartphone disruption. This shift has resulted in direct benefit and loss to the owners of the two asset classes. To suggest that market share alone is a determinant of "success" in the device market must exclude the effect on shareholders and, ultimately, the management and employees of the companies concerned. The virtuous/vicious cycles will be fed by the profit variable more than any other.

I don't think the market share argument holds water in this market and this data supports my belief. It may be that as value shifts over time away from hardware the benefit will shift as well, but business models alternatives to hardware have not emerged after ten years of experimentation. If anything, the idea of selling hardware as a way of capturing service revenue was pioneered by RIM and perfected by Apple. Nothing I've seen so far is challenging this model. Whoever attempts to siphon the device pool of money (which has remained fairly constant over the smartphone disruption) needs to solve system-wide problems like the dependence on the network and the life-cycle of portable electronics.

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Notes:

1. The dates when performance was sampled are are July 1 2007 to July 1 2010. The latest quarter (3Q10) has not been included in this data as it has not been fully reported. The data will be updated with the latest quarter as soon as it's possible.
2. For many competitors the share price is dependent on more than performance in the mobile phone market. In particular, LG, Samsung, Motorola and Apple have diversified product lines which affect their share prices. Two of those companies (LG and Samsung) are conglomerates and their share performance is dominated by businesses other than mobile so I did not include their data in the correlation measure (though their place on the chart is shown). Motorola and Apple's stock prices were, to a very large extent, driven by their mobile phone performance over the same period so their data is included in the correlation analysis. The other vendors have been primarily focused on mobile phones.

In the last article on the share of PCs highlighting the unwillingness of market analysts to categorize the disruptive iPad as a PC I imply that Gartner does not "get it".

This is partly willful and partly instinctive. The willful ignorance is due to a belief that their customers (IT managers mostly) do not want to hear about the iPad as a viable technology. Certainly there is a lot of anecdotal evidence that the iPad is unworthy of consideration as a business tool.

However, there is also increasing evidence that IT does in fact get it. I have met several senior IT managers who are whispering that the iPad will change everything. For us to decide which way the wind blows, we need to think harder about the process by which technology gets adopted in large IT organizations. Understanding how the technology is hired by IT managers to improve their career prospects unveils who wins and who loses in IT.

The main hypothesis I put forward is that IT is an example of "rule of man" not "rule of law". The idea that law or "standards" (as doctrine is known by the jargon,) defines the products in use is a conventional myth. Standards change and they change quite dramatically based on who's in charge. The "standard" during the 70's was the Mainframe, the "standard" in the 80's was the DOS PC and the "standard" in the 90's was client-server and in the 2000's it was the web. Each new standard was a violation of the previous standard. So how did this change happen?

Each evolution of technology standards affects the career of the IT manager. The adoption of technology is the primary driver for advancement in the profession. In most cases the technology being adopted is sustaining. In rare cases it's disruptive and can cause unforeseen re-distribution of IT power (and wealth).

As IT is a cost center, naturally, organizational behavior (or, in the vernacular "politics") dominates the decision process. Senior managers look at each technology and ask: how can this help me achieve my career goals? Let's try this exercise with various innovations that have come along in the last few years.

1. The Web in 1998. As IP based networking was catching on, the new technology offered a new way to tie existing assets together. It was also a completely new communication channel with customers. This was a great opportunity to increase IT consumption. It would lead to more work, more budget, more visibility and even a strong link between the profit centers of the company and the IT world. The web was an opportunity. It led to a firestorm of adoption.
2. OSX in 2004. As Windows PCs were widespread and, given the support infrastructure behind them, worked well enough, an IT manager would look at a Mac and see no opportunity to increase their value add. They could not offer new software tools with it, and the old tools would probably not work without debugging. They could not move a Mac to new use cases and could not increase headcount to support it. The Mac was not a career opportunity.
3. The iPad in 2010. As an IT manager looks at the iPad (and smartphones in general), he sees a similar opportunity to the Web ten years ago. The company users love their devices. Top executive love their devices. They see consumerization happening and there is no denying the explosive growth. There are challenges with integration but these devices are not a direct threat. The iPad is an opportunity to migrate to a completely new form factor and increase IT consumption.

What this means politically is that the manager who figures out a way to roll out mobility in the organization will get the same uplift in his career as his predecessors did when they brought in disruptive waves. Those periods have become the stuff of lore and legend. Every IT manager with ambition is looking to create and ride a new wave. If the person is a mid-level manager, they will scramble to be the champion of the new technology and become a rising star. If the person is a high-level manager, they will see it as a way to protect their empire by co-option. Jostling for a vehicle to bring in the technology will begin. These vehicles are typically vendor relationships. Small vendors (example) have a better chance as the traditional vendors (for example SAP) and integrators are not quick enough with product development and don't have the products to sell.

This IT manager's job-to-be-done analysis is crucial to understanding the adoption of IT technology.  Sustaining IT products do not sell themselves even if they are superior. Conversely, new products cannot be kept out of an organization even if they violate standards. What matters is whether they help the decision maker to achieve personal goals.

My own intuition, having worked in such an organization (albeit briefly), and after a few conversations, is that the iPad and the mobile devices it represents is going to influence a generation of IT spending.

Even though Gartner doesn't, IT goes get it.

Digitimes reports:

only a handful of companies may get into WP7 when it arrives, they added. HTC may end up controlling 70 to 80 percent of the market simply by being one of the initial partners

via Taiwan phone makers balking at Windows Phone 7? | Electronista.

Confirming my assumption that "Android is clearly the darling of “Others” who are being shunned by Microsoft".

Social games on iPhone, iPad and iPod touch devices are competing for television viewers.  In fact, these apps, tracked on the Flurry network alone, comprise of a daily audience of more than 19 million who spend over 22 minutes per day using these apps.  Treated as a consumer audience, its size and reach rank somewhere between NBC’s Sunday Night Football and ABC’s Dancing with the Stars, and only 4 million viewers shy from beating the number one prime-time show on television, FOX’s American Idol.

via Flurry.

I cannot tell from the original article if the iOS audience is US only and therefore not clear whether the TV shows compete for the same eyeballs, but the data shows just how far apps have come to capturing attention.

Windows Phone had its day in the sun yesterday. After discarding its previous seven-year effort with Windows Mobile, Microsoft started with a clean sheet of paper. However, whereas the software has been re-built, the business model has not. WP is still a licensed operating system whose primary customers are mobile phone vendors. With Symbian mostly out of the picture, WP becomes only the second viable commercially licensed mobile OS, after Android.

So with two licensed platforms in the running, how do we measure success in the licensing business? Units sold to end users is one metric. But that data will have to include the performance of vendors and operators and other distributors. And it will take a year to do valid comparisons. The only indicative metric we have available today is how many devices have been committed by vendors.

As WP is out of the gate with device announcements, we can actually measure this. We can plot each vendor's commitment to various platforms as an early indicator of strategic success. To that end, here's the methodology: I took all smartphone vendors and tallied how many SKUs they have announced or leaked for either the WP or Android platforms (source: pdadb.net). I then plotted each vendor on two "commitment axes" (see notes below).

The more to the right a vendor lies, the more committed they are to Microsoft's platform. The more to the top a vendor lies in the chart, the more committed they are to Google's platform. The vendors which don't have any licensed products lie below the origin.

What we can observe is that Microsoft has pulled several, though not all vendors partially to its side. The level of commitment is not yet very high and it has not likely reduced their commitment to Android. In other words, points are moving to the right but not (yet) down.

Framing the platforms this way helps us discuss how the market might evolve with these questions:

1. Is Microsoft's re-entry going to peel vendors away from Android. In other words, will points move down as well as to the right.
2. Is there motivation for some vendors to move to their own platforms like the non-committed? We've shown that profits accrue disproportionately to the vendors below the origin. As a result, is the pool of available top tier vendors going to shrink?
3. Will vendors commit to single platforms or maintain this split OS loyalty strategy? Will we see LG migrate to WP exclusive and will Others remain exclusive in Android?

I'll throw out my predictions to start:

Microsoft's strategy is aimed at top tier vendors more than to the "others". This is due to a lesson they learned with Windows Mobile: having a ton of SKUs does not guarantee a healthy ecosystem (a lesson that Android has not acknowledged as true). There are positive and negative consequences. The positive is that Microsoft control the experience better, create a better brand and can participate in an effective dialogue with operators. The negative is that they are going to deal with a diminished licensee pool.

On the second question my prediction is that vendors are going to move "down and to the left" away from the licensing model. If they can't go direct to that quadrant, vendors will consolidate portfolios around one licensed platform. The distribution of commitment I forecast will look like this:

Maintaining multiple platform development teams is expensive. Branding is also confused. The upside is that you get to play the operator's divide-and-conquer game of platform dilution (aimed at the non-licensing players in the lower left corner).

In particular, Samsung, with Bada, is likely to find ways out of license-land. Sony Ericsson may stick with Android and LG may move to Windows exclusively. That really leaves only HTC and Dell as licensees with multiple licenses.

This axial alignment is not a healthy thing if you are a platform vendor. Having one or two dedicated customers means the power of the buyer is much higher and their wishes become your command.

Which leaves only one true prize in the game: the "others". Android is clearly the darling of "Others" who are being shunned by Microsoft. Can "Others" become the lever for Google to pry open the market? History and the tangled web that is operator distribution does not point in that direction.

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Notes:

1. I considered products announced only since Jan 1, 2010
2. I did not consider any Windows Mobile legacy commitments
3. "Other" vendors are off the scale with over 100 SKUs but represented as having 40 SKUs so as to be kept on chart