Fujitsu

It’s not unusual to see articles consisting of lists of reasons why Apple is facing an existential crisis. Agonizing and hand-wringing about Apple been a meme for decades, so much so that it had its own web site, The Apple Death Knell counter and the "Pray" for Apple imagery was a thing since the 90s. The original article from June 1997 offered 101 tips on saving the company starting with outsourcing hardware or scrapping it entirely.

Image (media.wired.com)

Although the imminence of death has always been persistent, what’s changed over the years were the causes. There are far too many to recall or enumerate but I have through personal recollection and pattern recognition grouped them roughly into three categories:

1. Irrelevance due to low market share, i.e. insufficient network effects for its platforms which will eventually drive users away. This is fundamentally a size problem.
2. Insufficiency in capital/resources/talent/management. This includes the death of Steve Jobs, the departure of various other managers and historically the low spending on R&D. This is more qualitative but still fundamentally a problem of being too weak.
3. Externalities including but not limited to: law suits, regulations, taxes, technology standards. This includes everything from the absence of the Beatles in the iTunes store to confiscation of assets or extortion by governments. Extreme versions are antitrust cases alleging monopoly status. This is a problem of being too big or too strong. (Contrast with the first two categories)

For instance, during the last Apple Investor Event, I highlighted a typical article citing a list of problems for Apple. It was Titled “5 problems facing Apple it won’t talk about at is April event”. Published in August 2024 it cited the following:

1. Maintaining profitability. Citing a drop in operating margins in 2020(!) the problem was stated as a need to maintain momentum.
2. Antitrust regulation. Citing EU and US investigations against Apple and other Big Tech companies. Money quote: “reports have surfaced that several tech companies in China are actively testing ways to circumvent Apple’s new privacy update”).
3. Lawsuits in general, Epic trial in particular.
4. A lack of diversity in the management team. Essentially, insufficient DEI.
5. Competition. Google, Blackberry, Dell, Fujitsu, Microsoft and Samsung are cited.

When I read this I thought it must have been AI generated (hallucinated more likely). The dates did not make sense (August publication predicting an April event) and the competition cited was obsolete (Blackberry? Fujitsu?). It was a random list of Apple news framed as problems. Rather than try to refute them, I realized that it did not matter. The objective of the author was not to illuminate but to discharge something, anything, as long as it was negative.

Since last August a lot has happened. A new US administration, a new set of problems. Judging by the share price and news flow, Apple bashing is once again in vogue. (Incidentally, the stock price reached an all-time-high in December 2024 at nearly $260/share, a substantial increase from $170 or so six months earlier.) Today everyone and their editor is jumping into the scrum writing lists of Apple problems.

The pattern however seems a bit different this time. Almost all the catastrophes Apple has are externalities. Let’s try to enumerate them (inspired by Bloomberg.)

1. Tariffs. Consequences include presumably negative impact to company’s operations, product development and device prices.
2. Antitrust. A US Department of Justice lawsuit for allegedly anticompetitive practices. Similar actions by the European Union, South Korea, Japan, India, etc.
3. Lawsuits. Apple must stop taking a commission on in-app purchases and subscriptions paid via the web. Epic again.
4. Distribution deals (Google antitrust). The threat of losing a $20 billion-a-year deal with Google for default search placement.
5. AI delays: the risk of falling even further behind its tech peers
6. Competition in China.

What these examples seem to share is that, except for the AI execution, they are externalities and thus of the third category. They are therefore problems related to being too successful.

Tariffs are a problem because Apple relies on massive scale and thus requires integrated production which creates concentration in production centers which are difficult to redeploy. Antitrust is a problem because Apple is too big and thus dominates developer distribution. Lawsuits center on having too much control—related to antitrust. Google antitrust remedy forces a decline in distribution revenue for browser search—a predicament coming about Apple’s enormous leverage vis-a-vis Google. Being so big means there is only one way to go: down, hence Chinese competitors gaining share. Lastly, AI execution problem is more Category 2 problem but would not be an issue if Apple did not insist on Privacy for its customers, something which caused much of its success with customers that it got too big.

Incidentally, profitability is now higher than ever, top line growth is consistent, bottom-line growth is even faster, the company is guiding growth in-line with current trajectory, the number of customers is at a new record, churn into the platforms continues, Apple is winning against non-consumption, capital is pouring into shareholder pockets and R&D spending is soaring. Cue the charts.

What the casual observer might note missing from the Doomed listicles is any mention of customer satisfaction, loyalty, acquisition and retention. The things the company actually talks about on earnings conference calls.

Do these externalities of tariffs, antitrust remedies, distribution dissatisfaction and non-iOS competition make any impact on how customers perceive the company?

We'll discuss this in the next few posts, as the lead up to presentations at ACTIVE: The Apple Investor Conference on Tuesday June 10th, the day after the WWDC25 keynote.

One of the details of Nokia's warning which did not get a lot of attention was the mention that profitability for the current quarter could not be guaranteed. That is to say that Nokia may make a loss, perhaps for the first time in more than a decade.

This may not be that newsworthy except for the strange fact that as far as I've been able to observe, any company in the mobile phone market that ended up losing money has never recovered its standing in terms of share or profit (i.e. AMP index value has never recovered).

Here is a list companies that have "hit the rocks" in terms of mobile phone profitability and their fates (in no particular order).

1. Alcatel of France. Sold its brand and operations to TCL Communications of China in 2004.
2. Siemens of Germany. Exited in 2005 through acquisition by BenQ of Taiwan.
3. BenQ of Taiwan. Mobile devices division declared bankruptcy in 2006.
4. Ericsson of Sweden. Exited by merging with Sony in 2001 even though third in volume share the prior year.
5. Sony of Japan.  Joined with Ericsson to form Sony Ericsson in 2001. Held less than 1% share prior to merger.
6. Motorola of the United States. Even though once the largest vendors, after a period of severe distress, Motorola spun off Motorola Mobility. Market value shows long-term viability still a concern.
7. Casio of Japan. Merged with NEC and Hitachi in 2010.
8. NEC of Japan. Merged phone units with Casio and Hitachi in 2010.
9. Hitachi of Japan. Merged phone units with NEC and Casio in 2010.
10. Fujitsu of Japan. Merged with Toshiba in 2010. Held 15 percent of Japanese market prior to merger.
11. Toshiba of Japan. Merged with Fujitsu in 2010. Held 4% share in Japan.
12. Palm of the United States. Sold to HP in 2010.
13. Handspring of the United States. Sold to Palm in 2003.

That makes 13 large phone brands that, in less than a decade, have either exited or lost independence after suffering crises of profitability.

As the following chart shows, at this time Motorola, Sony Ericsson and LG are still operating but have been dipping into the red.

The three suffered severe volume contractions in feature phones and have no differentiation in software or platform products which makes their position precarious.

This cursory survey shows that it's difficult to be optimistic once a company reaches a point of crisis. It's a curious outcome given that the market is so vast and growth is so robust.

But the fact is that because of the technology cycle time, rapid business model evolution and fairly low barriers to entry, there is great rivalry between competitors. Profitability is the canary in the coal mine. It causes a brand to be tarnished in the eyes of distributors who, because of sales cycle times, are extremely sensitive to obsolete inventory. A loss maker is seen as a maker of damaged goods.

It then turns off the tap of incentives, promotions and hence visibility in the eyes of consumers. It's a vicious cycle from which few (if any) can recover. Past greatness offers no succor.

And so, with Nokia about to join the list of loss-makers it's only natural to question its fate as an independent company.

The smartphone market has grown threefold in the span of three years. However, as noted previously, the share of units running a licensed OS has not grown dramatically. The following chart shows the vendors' shares with the same brown/green dichotomy between licensed and unlicensed OS's.

In order to gain some insight into this licensed OS area (and who the "others" are) we need some visibility into which OSs are being licensed and what their shares are.

The following chart shows the share of the various licensed platforms[1]. (I blanked out the Integrated vendors.)

Before we dive in to understand the effect of Android, we have to understand the licensing of OSs in 2007.

The chart shows Windows Mobile and "Other" splitting the market. Windows Mobile is rather easy to understand. It was still growing as a platform and Ballmer was famously quoted in 2007 as saying he liked their strategy "a lot".

But "Other" is something of a mystery. What "Other" actually mostly meant was Symbian[2]. But not only the Symbian that Nokia was shipping and licensing to some vendors. At the time, Symbian also had a version called MOAP "Mobile Oriented Applications Platform" which was in use in Japan (somewhat analogous to the variants of Android now in use in China).

Fujitsu, Mitsubishi, Sony Ericsson and Sharp developed phones for NTT DoCoMo, using an interface developed specifically for DoCoMo's FOMA "Freedom of Mobile Access" network brand. This UI platform was based on the UI from earlier Fujitsu FOMA models[3]. The user could not install new C++ applications and therefore these were not platform devices, however the industry still included these units as "smartphones" .

So what we've witnessed in the last two to three years is the replacement of MOAP and Windows Mobile share with Android TAPAS and OMS.[4]

But, more significantly, when looking at the rise of Samsung and Motorola and HTC we were also witnessing the demise of Palm, Fujitsu, Mitsubishi and Sharp (plus a myriad of Windows Mobile licensees even larger than the Android army).

The significance here is that "other" in smartphones is still mostly about branded vendors. This is in stark contrast to the low-end of the phone market where “others” are quickly replacing branded vendors.

So we can conclude that the smartphone market is so far showing a distinct preference for branded vendors. The value of the brand is still evident. But ZTE and Huawei are quickly developing Android competencies. How long will it be before the branded vendors feel the pressure from the upstarts?

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Notes:

1. The Other category includes WebOS which was not licensed during this time frame but is not material enough in terms of share.
2. A few million units running flavors of Linux were also on the market in 2007/2008.
3. FOMA was also implemented with a Linux OS and the same UI.
4. It should be noted that except for Windows Mobile, all the licensed mobile OSs including LiMO and Symbian are now open source. Android's success is not therefore due to being the only OS that is "open".

In Japan’s second cell-phone merger this month, Fujitsu and Toshiba said Thursday they will merge their handset operations ... NEC, Casio Computer and Hitachi merged their phone units earlier this month.

via Fujitsu and Toshiba to Merge Cellphone Units - DealBook Blog - NYTimes.com.

Mergers usually happen in a mature industry when there is excess capacity and decreasing growth.  In the mobile phone market we've seen several companies disappear or merge over the past decade:

• Ericsson
• Sony
• Alcatel
• Siemens
• Casio
• NEC
• Hitachi
• Fujitsu
• Toshiba
• Palm
• Handspring
• Motorola tried but failed to get itself acquired.

But we've just seen forecasts where the smartphone market is growing and is expected to continue growing at 40%. Why is there consolidation in a growing market?

The obvious answer is that none of the companies listed above had any significant smartphone businesses.  But that begs another question: why? Is the smartphone market so different than the mobile phone market?

If the answer is yes, then there is an implied asymmetry.  Asymmetry is symptomatic of disruption. Disruption then leads one to ask how the other incumbents will cope?