Market

The smartphone market grew to about 100 million phones last quarter. The volumes grew sequentially and as a result reached a new record share of 27% of total phones shipped. The chart on the left shows how this market evolved over the last few years.

I've added each platform's contribution.

While much of the focus will be on who had what share, the better question might be who has the better chance to beat smartphone non-consumption? Non-smart devices are still the dominant competitors. Though it's getting easier to win against them, they still have some compelling competitive advantages.

What the chart shows is that Android (and phone versions of iOS) have taken share from direct competitors but have taken more from non-consumption. Rather than focusing on rivalry between platforms, minds should be focused on the shape of the smartphone adoption curve.

The market is largely un-penetrated and yet some argue that "it's too late" to enter or that "the game is over" and winners have already been decided. This is an argument that we are at the beginning of the end. Once the market is predictable it's discountable. Once it's discountable it becomes economically uninteresting.

I've argued that this is far from certain. In a short span of a few years, a decades old business has been re-defined. But that was just the device side of a larger business. Smartphones have been, so far, sustaining to the telcos who capture the vast majority of revenues and are thus the true incumbents.

If and how they will be affected by further evolution of smart devices and new business models around them remains to be determined.

The challenge with any performance metrics is that there is no single measure of business performance which is conclusive. The last few posts have covered mobile phone vendor performance measured by various methods. Growth (sequential, yearly and compounded multi-year),  margins, shares (units, profit and sales), rankings and time series. I've distinguished between smartphone pure plays and the diversified. Each is trying to shed light on what is a multi-dimensional puzzle.

I've used various charting tools and visualizations and they each render some clues, but the following chart is one of my favorites. It shows the way operating profit was distributed among the top vendors.

The areas each represent the profit from mobile phone sales in Q1. The horizontal axis shows the volume of units and the vertical the profit per unit. It thus shows how "efficiently" profits were captured a unit basis. It also shows at a glance the different strategies employed and how they reflect performance. It shows who made money and who didn't. It shows the magnitude of differences.

The shape of this chart has not changed in the last few quarters but it prompts speculation on how it might change in the following few years.

I struggled to find a catchy name for this type of chart but @JustinD put it well here. Rawr indeed.

I produced two alternate views of the primary mobile phone brands in terms of volumes sold and operating profit in Q1.

These views[1] allow a comparison by categorized competitors. I grouped dedicated smartphone vendors (SMART) vs. diversified and used color coding for profitability (blue colors indicate loss-making vendors).

The same view is drawn for profitability. Loss-making competitors are excluded.

This view shows how 16% of the volumes for the smartphone vendors generated 75% of total profits. As smartphone penetration grows, those vendors who maintain a diversified portfolio will continue to see their average price and profitability slide.

I've suggested before that I don't see non-smart devices being interesting to vendors in the near term. Each additional dumb phone added to a portfolio will decrease a company's operating margin. The market dynamics are such that I think non-smart phones will disappear entirely from branded portfolios in 3 to 5 years.

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Notes:

1. These are called "tree views". I used Many Eyes experiment from IBM Research to create these charts.

Operating profits for the eight vendors I track increased at a compounded 25% over three years. As with revenues, the growth is concentrated. The following chart shows operating profit growth across three time frames: three year compounded, year/year and sequential. Loss-making vendors are excluded from this chart.

Looking at individual performance, the following chart shows how each vendor performed over time:

The mobile industry has historically been unforgiving. Companies that fall into unprofitability tend to stay there or exit/merge. This has claimed many: Ericsson, Siemens, Alcatel, BenQ, Palm, Sony, Toshiba, Handspring, NEC, Hitachi, Casio.

LG, MMI and Sony Ericsson are all in the same precarious situation. We'll have to watch carefully whether a recovery is possible for any of them and whether Nokia will reach the same rocky position.

Looking at operating profit shares, the picture is plain to see. While RIM, Samsung and HTC have maintained profit share, between 2007 and now, profit share has mostly shifted from Nokia to Apple.

But this does not tell the whole story. Here are the absolute amounts of operating profit from mobile phones. Exactly three years ago Nokia was earning 47% profit share or $2.35 billion. This past quarter Apple's 57% was equivalent to $5.23 billion, more than twice as much.

Finally, the league table shows how Nokia has now dropped from second to fourth in the last quarter. Not only Samsung, but RIM has overtaken Nokia as well.

It's become routine to see Apple at the top of the list of profit earners from mobile phones.

Revenues for the eight phone vendors I track increased overall during the last three years. The compounded annual growth was about 13%.  However the growth was not evenly distributed. The following chart shows revenue growth across three time frames: Three year compounded, year/year quarterly and sequential quarterly.

I separated the incumbent companies from the "entrant" smartphone vendors for contrast.

Looking at individual performance, the following chart shows how each vendor performed over time:

The share of revenues is shown in the following chart (I highlighted the smartphone cohort):

The ascent of the entrants is shown in the league table below:

The headline that Apple became the biggest phone vendor in the world by revenue has already flashed across the feeds of the world. It's another straw on the camel's back. But I'd like to take a moment to note that this is not just an Apple story.

If you look at the league table, RIM, HTC and Apple were at the bottom three years ago and now they are either in the top or the middle. RIM in particular deserves credit for reaching the fourth spot and staying there. HTC also has shown a late surge to fifth passing LG, Motorola and Sony Ericsson in the process.

Combined, these vendors went from taking in about one dollar in 20 (6%) in Q2 2007 to nearly half the money (46%) in Q1 2011. As the market also grew, the total amount went up an order of magnitude. From $1.8 billion to $21 billion in three years. Not bad for niche players.

It's time to review the mobile phone market at the end of the first quarter of 2011. Before I begin, I'd like to remind that this analysis will span multiple posts and that many details will be published separately due to time and space constraints. Data about platforms, sales, profitability and pricing will be posted separately.

All data sets and chart data will be available for interaction and download through Asymco Interactive when complete. You can purchase a license to Asymco Interactive anytime and you will have access to any new data sets for next 90 days so don't hesitate to pre-order the report.

The overall phone market grew at a compound rate of 9% over three years. The pattern of entrants focused on smartphones and mobile computing growing faster than the incumbents continues. The compound three year unit growth for the tracked vendors in descending order is:

1. Apple 122%
2. HTC 55%
3. RIM 50%
4. Samsung 15%
5. Other 14%
6. LG 0%
7. Nokia -2%
8. Sony Ericsson -29%
9. Motorola -30%

To give an idea of the split between smart and non smart, Nokia's smart business grew at 18% compounded while its non-smart units contracted at -6% rate.

In terms of y/y growth the market grew at 26% and the vendor ranking is:

1. HTC 194%
2. Apple 113%
3. Other 103%
4. ZTE 75%
5. RIM 42%
6. Motorola 13%
7. Samsung 9%
8. Nokia 1% (smart: 13%, non-smart -2.3%)
9. LG -10%
10. Sony Ericsson -23%

Sequentially, the growth rankings are:

1. Other 28%
2. Apple 15%
3. HTC 7%
4. RIM 5%
5. ZTE -10%
6. Nokia -12%
7. Samsung -13%
8. Motorola -18%
9. LG -20%
10. Sony Ericsson -28%

In terms of market share, the field is becoming more crowded.

The ranking of units shows a continuing relegation of Sony Ericsson and the increase of HTC to 7th spot. Apple reclaimed its fourth spot from ZTE.

As the number of vendors increases and the share of incumbents decreases it becomes harder to identify who is a "top tier" vendor or, in fact, what the tiers are.

It's pretty clear that on a unit basis there are nine vendors selling significant volumes. The other important observation is that vendors like ZTE are graduating from "other" while "other" is still growing, now at 25% of the market.

Speaking of boats, there were recent claims that the iPhone is "dead in the water". As someone who has done some sailing I can say that being dead in the water is dangerous. Not only are you not going anywhere but you also don't have steering control. It's movement through the water that allows a rudder to work so being stationary means that you can't orient the boat when waves or wind might threaten stability.

This implied inability to gain directional control is what makes the accusation so powerful. How valid is it? That claim certainly was not made because the iPhone did not grow. iPhone grew at 113% year on year. It even grew sequentially in a post-holiday quarter and the growth is not slowing materially.

The claim was made that iPhone was not gaining share. But share of what? If we look at the iPhone share of all phones and share of smartphones, it's still growing. It reached 5% share of all phones sold in the quarter and fourth most popular vendor in the world. Beating RIM, HTC, Motorola, Sony Ericsson and ZTE.

So what makes the iPhone dead in the water?

The claim was made relative to the (a) share of (b) mobile platforms (c) installed base (d) in the US. In other words, if one adds all Android phones in use vs. the iPhones in use in the US (while ignoring iOS devices other than iPhone) while the market is growing at nearly triple digit rates, then the iPhone is not gaining (much) share.

That's the most obtuse way of suggesting a slowing product. If something is dead in the water, it isn't going anywhere or making any progress.

On a unit basis and one the basis of vendor comparison, iPhone is doing very well. On the basis of value capture and profitability it's doing even better. More about that later.

I've often said that the smartphone rising tide has lifted many boats. If you were selling smartphones during the last three years, your business was growing, no matter what phones you made.

In fact, measuring success and failure was a matter of deciding what growth rate was "not good enough". Growing at 30% was nearly enough to shame some vendors into re-evaluating their strategies.

But that sort of tidal growth can't last. At some point  ships with holes begin to sink no matter what the tide brings.

When we look at the data from the last quarter, we should be asking again whether some ships have developed some leaks.

The challenge is in eliminating seasonal effects. Q1 is usually a sequential drop for many markets. There is an unsettling drop in Nokia and Motorola and a weakening in Samsung and HTC. On a year/year basis the growth rates appear more robust for HTC and Samsung (194% and 530% respectively), but one should note the low bases they started from. Apple maintained triple digit growth (113%) while RIM sustained a respectable 42%. Motorola grew at 78% but looks weak sequentially. Sony Ericsson began to offer smartphone units and they are showing a run rate similar to Motorola but can't gauge their growth rate yet.

Apple and RIM seem largely unaffected by seasonality but Apple is growing twice as fast.

But the biggest surprise is the drop in Nokia's volumes. There was a similar drop in Q1 2008 but the phone market was plunging into recession then and the company's smartphones moved in sync to the overall market (one with limited competition). This quarter's drop happened when the overall market is growing. The alarming thing is that Nokia's smartphone performance in Europe seems to be a big part of the problem.

Data from IDC shows that Nokia's volumes plunged by 15% y/y in Europe while the smartphone market there grew by 76%. Apple ended up with the largest share in a region that had been Nokia's with 70%+ share. That share is now under 20%. Nokia's overall growth was a mere 13% y/y while the market grew 73%. The result is the following picture of Smartphone shares:

But perhaps the drop should not be a big surprise. Was it due to the public execution of Symbian? Did Europeans stay away from Nokia in droves due to an aging portfolio or because they felt betrayed. Perhaps we'll never know but there is another indicator to mull over. Nokia's brand fell to 81st spot in a recent survey. It used to rank in the top 10.

comScore's latest survey data is in and the news is good.

In March an additional 3 million Americans became smartphone users. That translates to 700,000 every week or 100,000 every day switching from a non-smart or feature phone to a smartphone.

The smartphone is now in use by 31% of the phone users in the US. A year ago 80% of Americans did not use a smartphone. Today non-consumption is down to 69%.

It also means that only 19% more penetration remains before half of the population is using smartphones and that penetration is increasing at an average of 1.3% per month.

I reset my Phone Tipping Point countdown clock to reflect the new data.

I call it the Phone Tipping Point because it's the moment when I expect we'll stop using the word "smartphone".

It's nearly one year away.

The Mac grew at 28% while the overall PC market contracted at 3%. The Mac has outperformed the PC market overall for 20 consecutive quarters.

Prices increased sequentially and year-to-year.

I've mentioned the increasing shift of Mac mix to portables as a possible reason for the growth of the business. The Mac was one of the first to move to a portable form factor and has been pushing portability over performance for many years.

The following chart shows the relationship between growth and portable mix:

The trouble is that mix is not enough to explain the increasing gap with the rest of the PC industry. Windows PCs have also embraced portability and have even run down the path of over-serving portability with the netbook.

Clearly something else must also be at work. This was even noted by Apple's COO Tim Cook in the last conference call in response to question on the effect of iPhone growth on the Mac:

[iPhone] clearly seems to be creating a halo effect for the Mac. And I think that's one reason we see the growth that we are seeing on the Mac. It's amazing when you see the 28% year-over-year versus the worldwide market in PCs contracting by 3 points. It's an astonishing delta.

The delta has been there for a while but it's widening and it's persistent.

I've never been comfortable with the halo effect. Not because it's not happening but because we don't have a way to measure it. I've never seen reliable data that establishes a causal link. Lots of anecdote but little proof.

The other problem with halo is that it implies illusion and hence impermanence. The halo effect is a cognitive bias which can mislead. An example would be judging a good-looking person as more intelligent.

This effect is often exploited in marketing. It's quite common in the automotive industry where halo vehicles (e.g. Ford GT 40 or Dodge Viper) are created which promote sales for the entire brand even though they may lose money. These efforts often fail or have temporary benefits at best.

When it's deliberate and an attempt to prop up something unworthy it seems deceptive, dangerous and temporary (buyers may be disappointed when they buy a Ford or Dodge and realize that they are not supercars and a reverse halo effect can emerge.)

A halo effect should be used to boost a product that is under-rated not badly rated. This is when the effect creates benefit over a long period of time like the five years over which the Mac has over-performed.

There is precious little data on Android units sold. There are estimates but no actual summary. Google themselves don't seem to know as they don't report sales, preferring to report "activations."

Assuming that activations means "unique activations of new devices" then we can draw some equivalency between Google's reports and the reported units of iOS sold. There is some uncertainty with respect to iPod touch units, but that is not very big (estimates are drawn from Apple's reporting of overall iOS units at several points in time.)

To estimate Android, I took the download rates currently available and placed them in the month when they were published. I then interpolated the data monthly and quarterly.

To make the comparison more valuable, I chose to index the starting point at the launch of each respective platform and plot quarterly units (or activations). This way we can observe how the platforms ramped in growth and where they were at similar points in their lifetimes.

The following graph results.

There is likely to be more seasonality in Android data than is shown, but the impressive thing is that Android is running at three times the equivalent adoption rate for iOS at similar points in time. In fact Android is being "sold" as rapidly as iOS today even though iOS has been in the market about 15 months longer.

Overall, cumulative units sold for iOS are still about twice as many but if Android will continue to grow as rapidly as it does now, it will likely overtake iOS in installed base in less than a year.

One should be careful about drawing conclusions that this implies effective competition. Both platforms are growing very quickly. iOS is growing at at least 100%/yr and Android's second year was 65x bigger than its first. iOS growth is limited by the ramp rates of a limited portfolio of products. Android growth is limited by how quickly vendors can bring out products. Neither platform is demand constrained and hence they are competing for share of growth not for share of a fixed pie.

Extrapolation is a dangerous game, but the chart above shows some predictability in Apple's curve whereas Android has a "step function" or discontinuous feel to it and that's a curious thing.

Not so much for its lack of predictability but because it's so asymmetric to iOS.

A dictum of classical physics states that in nature everything is continuous. However, in quantum physics everything is discontinuous. Both models of the physical universe have their uses.

It should be noted that both business models represented above can also co-exist, at least for the foreseeable future.