Thanks to Symbian, the EU5 countries (France, Germany, Italy, Spain and the UK) had an earlier start in the conversion of phone usage from non-smart to smart devices. According to published comScore data, in July 2010 the EU5 were at 26.6% penetration of smartphones and the US was at 22.8% ((The population is defined as adults using phones for themselves. Meaning it excludes children and phones purchased by companies.)).
However, with the aid of mobile operator subsidies, by the beginning of this year, the US caught up. According to comScore EU5 reached 57% penetration in March 2013 while the equivalent figure for the US was 58%.
Using the logistic curve model introduced last week, it's possible to get an approximate categorization of the adopters of the technology:
As with the previous analysis, the graph identifies the following dates:
The Innovators' period ended in the EU5 approximately in September 2006. (The equivalent period ended in the US in February 2007.)
The Early Adoption period ended in the EU5 in August 2009. (US: December 2009).
The Early Majority period ended in the EU5 in August 2012. (US: September 2012)
Late Majority will end in the EU5 in November 2015 (US: November 2015)
Therefore if we want to suggest that saturation happens near 100% then the answer to the question in the headline is "the end of 2020." If we want to suggest that saturation is the end of the Late Majority then the answer is "two years from now."
One final observation: the two markets appear to be converging thus placing the analyst in the comfortable position of forecasting the adoption of smartphones for a total population of 425 million people ((see previous note)).
If we define saturation as the end of the "Late Majority" period then the number of new-to-smartphone users remaining for the combined EU5 + USA markets is 110 million of which 59 million will adopt in the US and 51 million in Europe. They will all join ecosystems in the next two years.
Gartner reported that PC shipments totaled 80.3 million units in Q3. Subtracting an estimated 4.4 million Macs yields an estimated 75.9 million Windows PCs. ((The total will be less than this as some PCs will not ship with Windows))
This total is lower than the total shipped in the same period of 2008.
The graphs above show the Gartner data and the split between tablets and PCs. ((Tablet and Mac data for Q3 is not yet available))
If we include all iOS and Android devices the "computing" market in Q3 2008 was 92 million units of which Windows ((Windows including Windows Mobile or Windows Phone)) was 90% whereas in Q3 2013 it was 269 million units of which Windows was 32%.
Any guesses on what this market will look like in 2018?
The pattern may be that companies either have short post-trauma lives of about two to three years or relatively long post-trauma lives lasting 4 to 5 years. What determines this life expectancy and how long do RIM, Nokia and LG have?
These comments came right after BlackBerry (then RIM) announced a loss and thus entered what I called the "post-traumatic" phase of its existence. ((The analysis began earlier, in June 2011)) The observation I have been making is that once a company begins to generate negative operating margins from phone sales, that phone business never recovers.
The question then becomes one of gauging how long they have before the business is sold, dissolved or merged. Since that update, both Nokia and RIM have tentatively agreed to be sold. If the sales go through then we can update the graphs as follows:
[Graph note: solid bars in the second graph indicate companies which exited and thus the duration of life post-trauma. Hollow bars indicate the companies have entered post-tramuatic period but have not yet exited. Lines extending from the hollow bars indicate life expectancy henceforth.]
It turns out that Nokia and RIM did indeed have "two to three years" of life left under the same ownership. Two years to be precise. But as Nokia and RIM change hands (and are thus re-classified in the graph above) HTC enters the schedule. ((Note that there are many companies not listed which also exited. I simply did not have data for Palm, Panasonic, NEC, BenQ, Alcatel, Hitachi, Casio, Fujitsu, Handspring or Danger or many other asian brands which are no longer in this business.))
HTC has just confirmed that they have lost profitability for the first time since going public in 2002. As the clock begins running the alarm is now set to a much tighter 2 years. The implication being that HTC will change ownership or control no later than mid 2015.
But there is a post-script to this story. LG, you may note, has not exited phones. In fact, it seems to be recovering nicely. Doesn't that give hope to HTC?
I don't believe it should. The caveat to this short post-tramuatic life expectancy hypothesis is that it applies mostly to companies which derive the bulk of their sales from phones. Companies which are conglomerates or which can offset losses from phones with cash flows from other businesses tend to live longer.
This does not mean however that LG's survival is assured. The factors at work in the phone business place continuing stress on the weakened while favoring the strong only temporarily. The dynamics are nothing like those in consumer electronics or in the computer industries. Reversals of fortunes are breathtaking.
Publicly, Mr. Lazaridis and Mr. Balsillie belittled the iPhone and its shortcomings, including its short battery life, weaker security and initial lack of e-mail. […]
Internally, he had a very different message. “If that thing catches on, we’re competing with a Mac, not a Nokia,” he recalled telling his staff.
The whole article is worth reading, detailing as it does the decision process inside BlackBerry during the painful disruption of its core business.
What struck me most however was how similar their decisions were to those of Nokia at about the same time. Consider:
The engineering priorities placed on optimization around constrained hardware. Although engineers knew how to build the right products, the business priorities caused them to be deployed in the wrong direction.
The delays these misdirected efforts caused. Mobile phones have narrow windows of opportunity but long lead times. A strategic mistake is very costly and most probably impossible to remedy. In the case of BlackBerry, buying QNX came too late while for Nokia the deprecation of Symbian was catastrophically managed.
The feedback loop from network operators which shut down any initiatives for improved user experiences. Your best customers provide all the wrong information when the market is being disrupted. Ignoring them is impossible while complying is a strategic mistake.
The demand from network operators to develop "killers" to competing platform-based products ((Ironically, Nokia was asked to do a BlackBerry killer)) and the subsequent "jumping at the opportunity".
Listening to large buyers at the expense of users. While BlackBerry was guided to omit consumer features from its enterprise buyers, Nokia never secured enterprise buyers of any significance ((though they tried very hard to get them)). Nevertheless it created the "E series" business-friendly phones which suppressed features like cameras and music.
The celebrity sponsorships and wasted promotional efforts in the face of structural failures. This is manifested today by HTC as well.
The parallelism of this synchronized failure can be seen in the following graph showing smartphone volumes.
The striking thing is how the two companies peaked are almost precisely the same time and how that moment (end of 2010) was not related to the entry timing of their nominal disruptor.
Recall that both companies cite the iPhone as the factor which caused a shift in the basis of competition. But the iPhone launched in mid 2007 (at the beginning of the graph's date range.) BlackBerry had 16 quarters of growth after the iPhone and Nokia nearly the same. The stock prices of the companies also prospered for a period long after the iPhone entered the scene validating a do-nothing approach. So this is the crux of the incumbent's dilemma: how do you rally a response when you don't feel any pain? It's worse actually: how do you embark on a painful course of action while feeling comfortable and safe?
The reason the companies did not suffer immediately from the iPhone was because it (and its Android equivalents) took time to reach the core customer bases. Remember that the iPhone was not "good enough" to be an enterprise product at launch and Android was not the first to serve the low end of the market, where Nokia was dominant.
Vision is worth exactly nothing without timing.
But enough about ancient history. The crucial question is what does it teach us. It's tempting to suggest that this disruption is happening again with the iPhone today.
There is one big problem with this. The iPhone was not a low-end disruption. It was exactly the opposite. The BlackBerry and the Nokia products were striving for the low end. They observed the discipline of constrained resources. They were expanding into emerging markets. They watched every fraction of a penny on the bill of materials. The low end was manna for the whole industry. Even Microsoft with Windows Mobile was better positioned for the low end than Apple.
Instead, what Apple did was unthinkable. It entered with a high end product. It even promoted its high price ($500, subsidized!) This is why it was laughed at.
Theirs was "the Mac in a phone" idea. The reason it worked was that it was not a phone. The reason it worked is because it was the hardest disruption to spot:
A new market disruption ((The reason Clayton Christensen and his disruption consulting black belts could not spot it is mostly because new market disruption requires deep industry domain knowledge))
Disruption is not a process that merely rewards breaking convention. Any fool can rebel against the status quo. To change it requires a process that rewards asymmetric competition. Finding a way to be seen as irrelevant and yet conquering at the same time. Being disruptive is, above all, being imperceptibly valuable.
For iPhone the core asymmetry was that it was a computing product and not a telecommunications product. Every decision thereafter flowed from the calculus of computing and not the compliance with telco convention. The ecosystem, the rapid rate of improvement, the rich user experience, the tie into other product lines.
It was this asymmetry which confused every observer. Predicting how a high end product can conquer the low end is fiendishly counterintuitive.
In contrast, spotting low end disruption is a parlor game. There is little challenge in observing a cheaper alternative competing as a commodity. For evidence look at how markets react. Whereas they could not understand the value of the iPhone (or iPod or iPad) they reacted instantly to the whiff of a commoditization play. Angst surrounding cheaper alternatives pervades. ((The contrarian should note that commoditization plays are hard bets to win since everybody can spot them.))
The problem with the low end disruption thesis is that low end is also much easier to respond to, especially now that everyone read the book. The incumbent simply needs to have a flexible cost structure and a vast margin to dip into. Most failures to respond to a low end disruption come from companies stuck in a high cost structure not from a failure to see a low end alternative. ((Christensen case studies almost always cite how the low end disruption was perceived easily but the response was felt to be marginally worse than not responding or fleeing upmarket.))
Apple's costs are mostly variable and their fixed (R&D and SG&A) are growing far slower than sales. There are huge margins and more cash being spun out than anyone can figure out what to do with it.
The distressed response to the low end tends to be a retreat into the higher margins and an abandonment of existing customers.
I don't see Apple doing either. Rather, it is gradually adjusting its portfolio toward lower end alternatives. Note that demand for the lower end product is far less than for the high end. Instinct would suggest that they should have stuck with the 5S alone. But it moved down anyway. It also did so with the iPod, iPad and Mac mini.
The idea that Apple is vulnerable to the low end is a relic of an idea. It goes back to the Mac of the 1990s, at a time when the world-wide computing market was orders of magnitude smaller than today and where purchasing and development decisions centralized in the hands of a few large companies ((essentially B2B as Ben Thompson points out)). And even when looking at that competition, the Mac somehow managed to survive.
That's not likely to be the case for those who found themselves in competition with the Mac in its pocketable re-incaration.
Horace: Apple is an interesting company to study because its success comes from being a serial disruptor. This is a very rare type of success formula. I am trying to "reverse engineer" its operating model and I hope that such a model is one which others might learn from if they were to emulate it. The trouble is that very few others seem to want to emulate Apple. Why that is is also an interesting question.
Niaz: […] Do you think apple has lost its image that it has created over the years as a center of innovation and building excellent products?
Horace: I cannot comment on how Apple's image is measured by people in the industry. I have been listening to commentary on Apple for about a decade and I have never seen any change in pattern. The company has always been perceived as a failure by a majority of observers. With respect to its products, I also do not see a change in the pattern established over the last decade.
Niaz: Are you optimist about the future success of Apple? Like after 10 years and then 20 years?
Horace: Let me put it this way: if there were no Apple then somebody will have to invent an Apple to do the same thing Apple does. In that sense I'm optimistic that there will be an Apple in some way in perpetuity.
Niaz: What will be the next big innovation from Apple?
Horace: I have no idea but it's likely to involve refining new user interaction methods. Similar to the breakthroughs that came from the use of a mouse, a scroll wheel and a touch screen. It means making computers better at gleaning our intentions without our getting involved in explaining them.
Niaz: Will Apple, Google and Samsung be the major player for the future of computing? Or we can hope to see some new faces?
Horace: I am fairly sure Samsung will not be because they have not yet grafted software and services to their operating structure. I would give Amazon a higher probability in being a successful platform alternative.
Niaz: In 2011 you’ve written a blog post ‘Steve Jobs’ Ultimate Lesson for Companies’ on Harvard Business Review Blog and you have cited ‘A leader should aspire to do more. A leader should claim to have left a legacy not just on their company but on all companies.’ As you know Google, Amazon, Samsung, Facebook … all have learnt lifetime lessons from Steve Jobs. What do you think about the impact that Steve Jobs have created?
Horace: He led by example and like all great leaders sacrificed much as a way to inspire others to follow him. He also spent time in the wilderness and chose asceticism. This gave him authority. Many historical figures had the same quality. The problem is that few business leaders have it but I don't see why they shouldn't.
Much more on evaluating Tim Cook's performance, the iPhone portfolio, the rise of Android, Microsoft/Nokia, wearable technology and disrupting Google. Check it out on eTalks.
One of the enduring mysteries of the iPhone has been its lack of a portfolio. After six years it seems that Apple has finally acquiesced that there should be one, albeit currently limited to two items. The second enigma is related to the price, namely why does Apple ask so much for its phones? At an average sales price of $600 it's a shocking premium to the average phone, and with a six year run, a shocking resistance to the corrosive effects of competition.
The obvious answer to why Apple asks so much is because it can. Anybody would if they could. That's a poor question. So the right question should be: why does anybody pay this much? One could answer that few do and it's not a mystery that some feel better paying more simply because they can. But those who pay Apple's prices are, mainly, not consumers. They are operators. Exactly 270 of them.
So then let's re-ask the question: Why do so many operators pay so much for Apple's phones? We can't answer that with the psychological slurs usually directed at the brand. Surely Operators aren't competing in beauty contests or need to soothe their collective egos. The decisions operators make on whether to range a phone are driven by hard economic realities: ARPU, churn, network costs, depreciation, ROI, etc. Some clearly can't make the iPhone fit their economic models and indeed about two thirds of them don't. But the most prominent ((Arguably the most important)) do. DoCoMo, the largest in Japan just did after holding out for five years. Verizon held out for years, as did T-Mobile. China Mobile's acceptance also seems imminent.
But that still leaves the question of why are those operators who do carry the iPhone willing to pay so much for it? I only assume that their decision process is likely to be rational. Mainly because we have a large enough sample but also because there is a lot of money at stake requiring quite a bit of internal consensus and vetting before committment. We have to conclude that operators place the orders because they obtain value from the iPhone even when it's priced at a premium to the average alternative.
The question which follows then is how do they obtain value? I've argued that this follow-the-money process leads one to conclude that the iPhone helps in moving users to higher revenue data services. These are more profitable services for operators and the subsidy model creates more loyalty and thus reduces churn and creates a stable cash flow which can then be leveraged through debt to upgrade networks and attract yet more loyal iPhone users.
Therefore the iPhone is "a data service salesperson" receiving a large commission (in the form of a price- and hence margin premium) for doing what few others can do. In that sense the iPhone is hired by the operator to do a unique and valuable job and is paid well for doing it.
This answers the question of why Apple can get away with charging so much for its phone: because operators love it. The entire product depends on a reward system and for years we've heard fears that it's going to end. But it hasn't. Operators love subsidies and they've been honing them for long before the iPhone showed up. ((Recall that the first iPhone was sold without subsidy and with a separate, secret revenue sharing plan. It did not last because it was cumbersome and because operators convinced Steve Jobs that their way was better.))
But this is not the end of the money trail. The premium is initially paid by the operator but they tend to get most of that payment back from the consumer. In other words the subsidy that inflates the iPhone price is at least partly if not mostly paid by the consumer in the form of a higher phone bill.
You won't see it itemized on your bill, but it's likely that $10 to $15/month from a subsidized phone service plan goes toward paying for your phone.
So in a way, Apple has managed to place itself on many people's monthly phone bills. It's a nice place to be. It's nice for the same reasons operators like post-paid customers: predictability. It's also nice because recurring services are a better business model than products; they have higher levels of loyalty and are more "sticky".
But this placement is not transparent. It smacks of misdirection. The link is not made in the mind of the consumer that they are paying for a phone through their service plan and many see it as a thinly veiled con. The value of the iPhone to the user may be evident through its use but the payment for that value is not.
But in many ways this is similar to how many services are valued: through bundling. We pay for the value of a great retail experience through a higher price on items purchased. But we still associate that price with the good sold not with the place where it was bought. We get great value from Google's services but don't know how to quantify the cost of their peering into our minds. In fact the whole Internet and all business plans that are built on it depend on a subtle "something for nothing" type of misdirection. The Internet runs on the arbitrage between a consumer service market where everybody consumes but nobody pays and a separate data market where nobody consumes and everybody pays.
The iPhone could thus be finally understood as a complex service business. It captures value through the phone bill but delivers value through a screen. A misdirection magic trick which many have tried to pull off. It's essentially tapping into the $1.3 trillion communications market, skimming profits by delivering the "content" which lights up the wires.
It's great except it does not work everywhere. Not yet at least. The complexity of services means that they are usually found in more advanced so-called service economies and rare in less developed so-called goods economies.
Economists have observed this process and even have a name for it: servitization: The process whereby almost all sufficiently advanced products are indistinguishable from services.
As a service, the iPhone's strengths are easier to understand. Its weaknesses as well. Services simply don't work in economies which don't have robust institutions of credit, capital intensive infrastructure and distribution networks.
It's also the reason why Apple is so slow to penetrate all markets. It's not in the business of selling phones. It's in the business of enabling and creating services.
My assumption going into this, sixth iteration, of the iPhone was that we would see the expansion of the iPhone into two distinctly positioned products: a low-end C and a high-end S. The assumption was based on what what we saw with the iPad: the regular iPad and the mini iPad.
By using the iPad as a template, my exercise in August was to forecast what the pricing ((Revenue/unit to be more precise)) might turn out to be for such a split-personality product.
I expected the 5C would replace the "low end" n-2 variant ((Older by two generations as the iPad mini replaced the iPad 3)) and the 5S would continue as the core product. This is reflected in the original graph as devised in mid-August:
The surprise was that the 5C was not "low end" in any way other than having a plastic case. It has a minor spec increase over the 5 but is otherwise a 5 feature set in a plastic skin. It also is priced as if it was the continuation of the 5, with a modest reduction in ASP.
In addition, the continuation of the 4S and 4 (in China at least) means that the old strategy continues more-or-less unchanged.
Knowing the line-up and pricing all that remains to understand is the positioning, or how the products are defined relative to each other.
This is where there might be a shift happening. Under the old model the n-1 variant was meant to be a modest volume contributor to the portfolio, being essentially a cognitive illusion which encouraged buyers to stick with iPhone n at the expense of competitors. However, the new n-1 product (the 5C) has a distinct positioning that makes it seem fresh and not a lesser, stale version of the flagship. It is designed to appeal as a legitimate upgrade for iPhone 4/4S users. It is, in other words, not meant as an illusion, and not focusing attention on the flagship ((It might still be an illusion for many but I'm suggesting that it won't be for most.)). Rather, it is meant to be a genuine, core product.
As a result, I expect the mix of iPhones to be more evenly split between the C and S variants. I expect the C to even become the most popular version in the mid-term. My expectations are shown in the following graphs.
There are several implications for this shift in positioning:
Apple is recognizing that the market is actually "segmentable". This is the notion that one size does not fit all--a radical idea for the brand. Its mechanism to address it is a "good+better" portfolio. Note that this is not at all like the iPad where the Mini is actually suited to different tasks. The iPad can be thought of as a "small+big" portfolio. The iPhone shows a clear delineation within the same product.
It is signaling that the premium may be more than what the mainstream needs. This is a corollary to the segmentation implication above but stands on its own because it also implies that the iPhone C is "good enough" and the S is more than good enough (or, to spin it another way, it is for "more demanding" customers.) It also implies that the premium "S" version will be a lower volume contributor.
The third implication is that the basis of competition is shifting. ((It has always been expected to shift, but the timing is where all the value is captured)) The shift is toward competing for late adopters in advanced markets and with early adopters in trailing markets. The new C model is still not suitable for trailing markets as it still over-serves and is over-priced ((This post deals with the iPhone portfolio structure or the placement of iPhone models relative to one another. It does not deal with a separate question of why the overall pricing is so high. That question needs to be dealt with as a discussion about the jobs iPhone is hired to do and by whom. I'll re-visit this job-based segmentation of the market in a future post.)), but it is at least signaling the "end of the beginning" phase in the smartphone market.
In summary I'd say that the C signals the beginning of the "good enough" phase which was also evidenced by the increasing mix of the older models during the last year. Financially it shows up as lower ASP, which, as the graph above implies, I expect to drop to $600 and lower during the next year. Margins may not be affected much as the C is still very highly priced relative to its cost of production.
Finally, if the good enough alternative is being "pinned" by Apple as the mid-range it also begs the question of why there isn't a specific "low end" version. It took six years for Apple to fork the product into two variants. Maybe it will take another year for it to stretch to a third. ((For more on the subject see S is for Service.))
In the "Race to a Billion" there is a graph showing Android reported activations and iOS cumulative unit sales alongside cumulative console sales. The contrast between mobile phone platforms and game consoles is striking, with an order of magnitude difference in consumption. The best performing console to date is the Wii with about 100 million units sold so far.
[UPDATE: Thanks to Danny Nemer cumulative sales of Sony's PlayStation 2 (using production shipments from FY 2000-05 and recorded sales for FY 06-12) is 155.81 million units]
However, that is an incomplete picture of the game platform business primarily because consoles are not the entirety of the business. Mobile (but dedicated) gaming platforms have been sold for some time.
To give a better picture of the game business we prepared the following graphs. The first shows Nintendo's product lines with actual unit shipments (shown as colored dots in millions of units per quarter) and the trend (shown as trailing twelve months' average trend lines).
Note that fixed and mobile products are both shown on the same graph. The picture that emerges is that for Nintendo, its mobile platforms combined are more popular than its fixed consoles with a total of 186 million mobile devices sold since 2003.
There is also a pattern of generational change. The GBA, DS and GameCube era was superseded by the DS Lite, DSi, Wii era. The Wii era (or generation) was significantly more popular than the GameCube generation. If there is a problem however, it seems to be that the new generation devices or consoles are not forming a new era. The Wii U and 3DS are not growing nearly to the level of the previous generations and have faded quickly.
To summarize, the unit volume graph for Nintendo is below. ((This is a smoothed graph showing what sales would have been if they had been evenly spread out over a 12 month period. The actual sales would total to the same area but would be much more seasonal and thus noisy.))
To confirm that this is indeed disruption we should look at the pattern for another competitor in the console market: Sony. ((We would like to show the pattern for Microsoft but there is no regularly reported Xbox shipment data.))
The graphs above combine both Nintendo portable/consoles and Sony portable/console sales. Note the similarity in patterns of growth. It's one thing to suggest that Nintendo consoles have "failed", it's another to show that Nintendo consoles and portables have failed, and yet another to show that two competitors in the games business seem to be failing in unison across all their product lines. The cyclicality is also over a long period of time: The peak for the combined Sony/Nintendo was in 2008, five years ago.
The chief criticism to the industry-wide view of decline is that there is a new generation of consoles right around the corner. This is the eighth generation of consoles which, it is presumed, will bring growth back to the industry.
But the Nintendo 3DS, launched two years ago, was meant to kick off the eighth generation, and the PlayStation Vita was Sony's response. Then the Wii U was also billed as the successor to the Wii. They have so far failed to re-ignite growth. One might reply that they were merely appetizers and that the main course of the next gen are the PS4 and Xbox One.
Will they create growth again? Surely not for Nintendo, but I would argue that not for Sony or Microsoft either. There might be a burst of sales at launch as the hard core gamers upgrade, but they are unlikely to recruit new gamers the way the Wii did. In other words the PS4 and Xbox One are unlikely to win against non-consumption.
That is where mobile is the clear winner. More people will hire mobile devices for their primary gaming activity. And as mobile devices get inexorably better, they will be hired for use in the setting where consoles have been king: the living room.
The implications are that Nintendo, Sony and Microsoft are beyond the point of no return in this industry. Gaming, as a business, cannot be sustained as a platform independent of a general purpose computer. Like other "applications" that used to have systems built around them conforming to their needs (( Applications such as word processing, financial calculation, media editing, music playback, etc.)) the dedicated-purpose solutions came to be absorbed into the general-purpose platforms. And the modern general purpose computer is the smartphone. (( One interesting question is why didn't the general purpose personal computer absorb console gaming. My answer is that personal computers could not conform to the experiences around the "10 foot" interface and still function well at their main jobs. In contrast, mobile devices through screen sharing have the ability to be much more malleable.))
UPDATE: I added Microsoft console shipment data which became available after 2008.
Put another way: Why is it that everyone wants to copy Apple’s products but nobody wants to copy being Apple?
Being Apple means, at least:
Insourcing all aspects of operations which affect the customer experience. Increasingly that has meant insourcing everything, a toxic idea to every MBA-trained professional since forever.
Organizing functionally and having no product level P/L responsibility. That also means removing almost all incentives for employees to climb ladders and thus prove their worth.
Developing products using integrated "heroic" efforts which shun every best (or even adequate) process for product development.
I asked somewhat rhetorically because it's an open question. Apple's operating model and devotion to integration have been asymmetric to technology dogma for decades. To the casual (read: naïve) observer, pursuing the Apple way seemed also to be tied to one individual. You could not "be Apple" unless you were also Steve Jobs and there was only one of him.
But it seems I did not give enough credit to other observers.
According to Microsoft, they began negotiating the buying of Nokia assets in earnest (coincidentally) in February. It has, also since February, been planning a massive re-organization along functional lines. Thus, by owning significant hardware operations and organizing functionally, Microsoft might go about two thirds toward "being Apple-like". The development process is the final hurdle and it may be a bridge too far, but my thesis that nobody wants to copy Apple is now in tatters.
And it gets worse. We can see a similar, though far weaker, example in Google's approach to integration. Their purchase of Motorola did not result in an integrated business, with Motorola being kept at arm's length and allowed to wither on the vine. Crucially, while Google bought Motorola's IP, Microsoft only licensed Nokia's. Microsoft clearly valued Nokia for something different than what Google valued Motorola for.
Nevertheless there is a semblance of similarity. We can generalize enough and say that Apple (iOS), Google (Android/Chrome) and Microsoft (Windows (Phone)) are all becoming near facsimiles of each other. They are all producers of Software, Services and Hardware. Each came from a different basis but expanded into areas which were missing.
Google started with a service, expanded into systems software and bought into hardware.
Apple started with hardware running its own software, expanded into application software and is developing services.
Microsoft started with software, expanded organically into services and bought into hardware.
All three major platform companies are now racing to offer that which completes them as an integrated producer and eliminates the dependencies on others as a modular producer.
This is re-integration of the computing industry--a reversal of the dis-integration brought about by the personal computer. Mobility, it turns out, was as important to the evolution of the computing value chain as microprocessors were to the previous era. It just had the opposite effect.
I should point out that Apple was more lucky than enlightened through this sea change. Having always been integrated, Apple was out of favor during one period of the computing epoch, but, simply by surviving, its model came back into favor in the next. I don't think anybody there foresaw just how dramatic the shift would be and how important their structure was to being successful.
But there is one company which seems left out of this discussion. Samsung is absorbing a large part of the available profits in computing today and it's not an integrated hardware/software/services player. Does this mean that there is room to be a module in an interdependent world?
I argue that no, there isn't. Samsung must either stretch into becoming one of the ecosystem contenders or be relegated to a commodity hardware company--a path clearly visible when looking at Chinese entrants. Samsung itself benefited from disrupting from below and should be aware of the threat it faces as it races up-market. More importantly though there is the ability of creating new markets altogether. This new market creation and rapid iteration due to integration is what the Google/Microsoft/Apple trio are seeking.
Without the components of software (ecosystems included[1]) and services, Samsung will depend on the good graces of suppliers. They may not be as keen to share when profits accrue to the whole rather than the part.
In June of 2011 I asked "Does the phone market forgive failure?" Not much time has passed since but the answer still seems to be no. The trigger I was using for this point of no return when the vendor began making losses.
The list at the time consisted of 13 phone vendors who either merged, were liquidated or acquired after this trigger point was reached. There were no examples of vendors who recovered. Since then two more vendors reached the threshold (Nokia and RIM) and a third will do so this quarter (HTC). One vendor (LG) may be recovering but Nokia has just been acquired and RIM has put itself up for sale. Some Japanese vendors like Panasonic have also called it quits since then. So the score so far is about 18 triggers, 15 exits and three pending.
Some of this data is summarized in the following graph:
It shows that post-trauma life expectancy is now running at about 2.5 years. As RIM is only in its second year, one could perhaps expect another 6 to 9 months of independence. HTC could go on until 2015 but the smaller the company, the more vulnerable, so HTC's exit time should be shorter.
The exception might be LG which seems to be recovering. As a conglomerate, LG is much less vulnerable and might have the resources internally to sustain the phone business indefinitely.
The following graphs show the most visible global phone brands and the approximate percent of value they captured since 2007.
The graphs each show trailing four quarter average of shares of units shipped, revenues, operating profits and smartphones shipped. I also averaged the four shares into a single share number called the AMP index (Asymco Mobile Performance).
Note that this data ignores those "other" vendors whose financials are not available.
I placed all AMP indexes on the same graph and looked for some patterns. The result is shown below.
It's not much to go on, but there seems to a pattern where each vendor reaches a peak share, though that peak varies greatly in value. If the pattern holds, we could perhaps anticipate a peak for Samsung in one year or so.
I'm searching for some hypothesis of what is happening and what is causing this pattern, if it is a pattern. The instability of the market is certainly a pattern. (Many markets would show horizontal lines for many years rather than what we see here.)
But the constant turnover and the periodicity of success and failure is a characteristic of either a market where there is a hidden hand (operators? regulation? etc.) or one where disruptive change is extremely consistent and rapid.
