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Asymmetric Intelligence

HTC

  1. The Monopolist

    Research · 36 comments

    When the Apple Watch will begin sales, there will have been dozens of "smart watches" released. At CES this week at least 56 "wearables" were on display. One could be forgiven for thinking that Apple's Watch will compete with at least that many alternatives. Those alternatives don't even include the entire existing mechanical and electronic watch market, which, surely, is also filled with competitors.

    When analyzing competition, it's easy to get caught up in one-on-one competitive comparisons, each posited as a decisive life-or-death battle. Consider the list of competitors that Apple has been declared as being in a death-match with:

    • Real Networks. Yes, there was a time when Apple's survival depended on success vs. alternative media encoding technologies.
    • Adobe. Remember Flash? No Flash support meant that Apple's fledgling phone would fail.
    • "The Music Industry". Unhappy partners could surely shut down the iTunes music store, and their insistence on DRM would surely cripple the experience.
    • IBM. In nearly every aspect, their business/strategy/inclination and glimmer of intent was an existential threat the Apple.
    • Microsoft. In nearly every aspect, their business/strategy/inclination and glimmer of intent was an existential threat the Apple.
    • Google. In nearly every aspect, their business/strategy/inclination and glimmer of intent is an existential threat the Apple.
    • Samsung. Obviously. But not just phones or tablets. They have control over key components that Apple used in many of its products, before the iPhone even.
    • Palm/BlackBerry/Nokia/HTC/Huawei/Xiaomi et.al. Every phone maker (and every phone) was/is an existential threat to Apple.
    • Dell/HP/Asus/Lenovo et. al. Every PC maker was a threat to Apple. Some of them made MP3 players. Some of them make tablets.
    • Amazon. Obviously. Not only as an iTunes killer but as a device disruptor. They are working on drones, after all.
    • Sony. Remember them? No longer a PC maker but they moved in many circles Apple moved in. While we're at it, add all the consumer electronics companies in Japan.
    • Dropbox. "If Apple can't do iCloud right, they're doomed".

    This is a very short list (feel free to suggest more) and it becomes clear that the total count of competitors that Apple has to counter "or else" seems to number in the thousands. Practically every hardware, software and service company is positioned as an "Apple Killer". in fact, the more interesting question might be which companies are not competing with Apple.

    Another interesting question relates to why there is no transitive property of competition. I.e. if company A competes with Apple and Apple competes with company B then it does not follow that company A competes with company B.

    To wit, whereas HTC competes with Apple and so does Dropbox, it does not follow that HTC competes with Dropbox. So it's entirely possible that it's axiomatic that

    "Most companies compete with Apple but few of them compete with each other".

    Recognizing a pattern, one could build a model of the technology world where Apple is the focus of all competitive efforts. But this starts to sound absurd.

    Indeed, the flaw in the logic is that these competitive pairings are based on the overlap of features of products/services being offered. The features become the attributes of a product which supposedly defines their competitive power. But this is false for the same reason that the attributes of a buyer do not determine their buying behavior. Buyer attributes ((E.g. demographic, sociographic))  are easy to measure and they may correlate to purchasing behavior but they don't cause it.

    Similarly, product or company attributes are easy to measure and they may correlate to competitive behavior but they don't cause the substitution of a purchase.

    Therefore, appealing to Apple to change its strategy, operations or even its core beliefs in response to a competitor's behavior is deeply misguided. The cause of success and failure in the marketplace is based on being hired by the customer to get a job done. Once hired, the chances are that the trust is secured and the relationship continues even if alternatives are available. There is comfort in the knowledge of whom you're working with.

    This aspect of trusted relationship between the buyer and the product and the interweaving of 'brand' (aka intentions) of the hired is the root of loyalty. Of course, loyalties can be betrayed and trust can be lost. But that implies that the primary responsibility of the manager is the creation and preservation of trust. When seen in this light, an alternative axiom becomes clear:

    "Great companies don't have any competition."

    Great companies are "monopolists of customer trust" and are unaffected by alternatives. They are positioned on and nailing the job their products and services are hired for. The alternatives must not only duplicate the exact job (which they almost never do), but they must also overcome the switching costs.

    Remember this when analyzing the impact of yet another competitor and considering the "Apple must fix/do X or else" assertions.

     

  2. Faster Followed

    Research · 76 comments

    Samsung's smartphone ascent was breathtaking. From having essentially zero market share in the category in late 2010 to becoming the largest vendor took less than two years. In doing so it grew to become the largest phone vendor, smart or not--a goal which eluded them during the previous decade of effort. Samsung went on to capture not only the lion's share of unit volumes, they also took almost all the profits in the Android mobile phone market.

    And in a market filled with competitors. Literally hundreds of vendors and thousands of products were available at every conceivable price point. Samsung did away with HTC, LG, and Motorola. HTC, the first Android vendor (and first to market with Windows Mobile), Motorola, Google's launch partner in the US and "Droid" brand partner (and future owner).  Google's own Nexus products. Samsung Galaxy ruled them all.

    Galaxy swamped the Chinese market and the Indian market, the largest in the world. They were so powerful that they were singled out both by Microsoft and Apple for IP royalties.

    All within two years or the average life-span of one smartphone.

    But something went wrong in 2014. Growth in shipments suddenly stopped. This was not a problem with the overall market, which kept growing. The slowdown did not affect other vendors, especially the up-and-coming Lenovo and Xiaomi and the second and third tier vendors whose names are  known only in the local markets they serve.

    The result of this slowdown is shown in the following graphs:

    <>

    Screen Shot 2014-10-30 at 10-30-4.11.19 PM

    Note how the wobble in units shipped was foretold by slowing revenues and an even more profound effect in profits. Peak revenues and profit occurred in Q3 2013 while volumes continued to grow until Q1 2014. Even in the last quarter, shipments are at near year-ago levels. Profits however have dropped to 2011 levels.

    At the same time, Apple shipments continue to grow as do those of Lenovo, Huawei and Xiaomi. Xiaomi in fact is growing in a trajectory eerily parallel to that of Samsung from 2010. It just hit the same level of volume that Samsung had in Q2 2011. And Samsung had been making phones for decades while Xiaomi is barely two years old.

    Having seen a boom/bust rise/fall pattern with other vendors (e.g. Nokia and Blackberry) it should behoove us to ask what are the causes of success and failure in this business. Samsung management suggests that they perceive speed of action, product mix/portfolio choices and hardware experimentation are the keys to their success.

    However, competitors which are rising rapidly (at the expense of Samsung) are not acting in the same way. Xiaomi is patterned as a Chinese Apple, offering design, brand, attention to detail and software as differentiation. Lenovo is building on its computing roots and expanding with acquisition. Huawei and ZTE leverage networking business and operator relationships.

    The crisper answer to causality may be that the market is bifurcating into an "upper" market where new jobs-to-be-done are being explored with integrated offerings (Apple and Xiaomi) and a "lower" market which is in the throes of low-end disruption. Both are competing with non-consumption though the upper market is service non-consumption and the lower market is feature non-consumption.

    Samsung is stuck right in the middle ((Just like Nokia was.)) It defines itself on the basis of what exists. It competes only within a defined market and positions itself agains existing products. They claim to be "better" than the competition and make the point loudly with their advertising. However, being better is never a solid foundation. At some point you'll be either good enough or someone more agile will be faster than you.

    At some point the fast follower exposes themselves to being faster followed. Better to find new lands to conquer.

  3. Twenty Questions from Catalin Stelian Andrei

    Research · 17 comments

    Catalin Stelian Andrei, Editor of The Day, INTERNET PROTV asked me twenty questions:

    1. What phone do you have in your pocket right now? Why that model?

    I carry the iPhone 5. The last iPhone I bought was an iPhone 5C which I gave to a family member.

    2. Apple is going to launch, form all we know, an iPhone with a bigger screen, long after their market rivals. Is Apple one step behind, being forced to take this road in the fight with Android and Windows Phone devices? Because many smartphone users were hoping that an big screen iPhone, a redesigned model, will be lauched long time ago, and that didn’t happen.

    Making bigger phones is easier than making smaller phones. First because miniaturization has always been the most difficult engineering challenge, and second, because a smaller phone has a smaller battery making efficiency much more important. The larger the phone, the simpler it is. The third reason smaller is more valuable is that it’s easier to carry and use. The largest phones cannot be put in pockets and cannot be used with one hand. In the history of consumer, electronics size reduction has been the most consistent measure of performance, and the most rewarding. Usually the most exceptional reductions in dimensions create the highest price and profit bands. There have been niches for larger portable devices but they are consistently a small part of the overall market. If Apple were to introduce a larger device I hope they will be able to solve usability problems and make the category attractive to a larger audience.

    3. What do you expect from the new iPhone 6?

    I expect it to run the latest version of iOS and, with the new apps developers will ship, that should make the most impact in people’s lives. I imagine health maintenance and home automation will become valuable new franchises. Of course iOS 8 will also run on older iPhones, but I suspect the newest iPhone will somehow run the new software better and have smoother integration with services.

    4. What’s the “not to do” lesson that Apple needs to learn for the now iPhone from it’s own past experience or their competitors?

    The biggest challenge is to move rapidly with scale. The company has managed to grow from zero phones a year to hundreds of millions. That’s great but it’s still frustrating to wait one year for major improvements. The “cycle time” of innovation for Apple remains one year. I wish it could be faster but perhaps this is also too fast for some. In some services like maps and iCloud and iWork, which are independent of hardware (mostly,) speed is of the essence.

    5. The iPhone is the most expensive smartphone on the market right now. In Romania, it certainly is. But where does Apple gains it’s most money from, selling products to users or selling services, like iTunes, App Store? And having that in mind, what will be their next step: better – breakthrough products or bigger, more complete services?

    The answer to where a company “gets its profits” is best answered by asking where a buyer “gets his value” from the product. For instance you might answer the question of where a car company gets its value by saying that it’s from making people be in more than one place in a day. So the “differentiation” of a car is in answering the question slightly differently. If it’s hard to see a difference to this answer between cars then it’s hard for any one company to make a profit. For a company like Apple, we need to ask what its users value about the experience and why they are willing to pay for that. My hypothesis is that the brand's value is in making life a little bit easier. That’s what Apple competes on. Of course, some people are not willing to pay to have an easier life and some even want to make their lives more complicated so Apple’s proposal to make life easier, for a price, is not accepted by everybody—which is ok by them. But for many, paying for comfort, productivity and ease of mind is worth quite a bit. The reason Apple is able to gain a premium over the competition is that this value proposal (of paying for simplification) is either weak or non-existent for competitors. Indeed, many competitors compete on the basis of making life more complicated.

    6. What does innovation means for Apple right now? What are their options for assuring a next decade of success? A new Steve Jobs person or a Steve Jobs tipe of group thinking. How hard is that to achieve?

    Innovation is meaningful invention—bringing useful creations to a large number of people who then make use of that creation. The interesting aspect of making money from innovation is that it’s a rare phenomenon, requiring many disciplines to work together. It’s like a big movie that somehow works and becomes widely popular but costs little to make. Many movies are made, few are successful and very few of those which are successful are built at low cost. What we know about technology innovation is that it’s a combination that comes together under strong leadership but that leadership alone is not sufficient. The myth of Steve Jobs is that he was both necessary and sufficient to success. The truth is that he was necessary but not sufficient. To make successful innovations requires strong leadership and teamwork and a process of incentives and passion that is hard to create a formula for. How this works at Apple is its biggest secret.

    7. Who are the key Apple employees right now? Do they need another Jobs or do they already have him?

    All Apple employees are key. I would say that’s the magic formula. There is no chief magical officer (and there never was.)

    8. What will be the next best thing for Apple? […]

    I don’t know. It’s probably not knowable.

    … Are they capable of another breakthrough in the market?

    Yes. This is almost certainly knowable.

    9. Is the smart-home project something that will really happen in the next, let’s say, two decades?

    If the project requires replacement of existing infrastructure, it will not happen. If the project allows adding new items to existing infrastructure, it will almost certainly happen.

    10. Growth comes from the middle and low-end smartphones, according to IDC. Would or would not be a good idea for Apple to release a handset cheaper than the 5c?

    If Apple were concerned with growth then they should. But we have to ask why they avoided doing this six years ago. Not only was it obvious to do so but a portfolio strategy was the modus operandi for every competitor and had been for decades. The question isn’t why Apple does not broaden its line-up but why do the others diffuse their efforts and have such poor focus.

    11. What feature or software you think would be the main battleground in the future, in the smartphone market? Apps? Battery? Camera?

    Integration of all the above. When new experiences and services emerge those who are able to make them usable succeed. Usability requires integration.

    12. Who puts more pressure on Apple: Apple itself, Samsung, LG, HTC, Microsoft and Nokia? And how.

    I suspect competition is part of motivation but it’s not the entire story. Let’s not forget that Apple is considered to suffer from competitor pressure from software companies, services companies, media companies, hardware companies and everything in between. For instance, Apple is in competition with Microsoft, Amazon, Google and Samsung but the competition is not transitive. In other words Amazon is not perceived as being in competition with Samsung and neither is Google competing with Nokia. So somehow Apple should be sensitive to every perceived alternative to every aspect of its products. This quickly becomes an absurd idea. Apple is a system of things and systems can’t be compared with components.

    13. What is Apple’s sensitive spot today. What do you believe Apple fears the most?

    Losing people. The problem of retaining talented people is the most difficult challenge, especially when they become very wealthy due to the success of the firm.

    14. In 2012, you described the fall of Nokia in competition with Samsung at the Guardian Mobile Business Summit due to the disruption theory: the launch of the smartphone. Is Apple in danger of becoming a victim of the same story in the near future? What technology could replace the smartphone and when?

    Yes, every company is vulnerable to disruption. The defense is not to protect against it but to self-disrupt or enable self-destruction. Self-preservation is an instinct in humans so this is psychologically very difficult. The crisis comes not from a technology change but a business model change and that implies a cultural change. Companies embrace any and all technologies which sustain their business models and reject, resist and ignore any and all technologies which disrupt their business models. Changing business models is like a brain transplant; it happens so rarely that we can count it on one hand. By the way, because it’s so rare is why companies who attempt it are discounted by the market.

    15. You've been a Nokia executive. From this perspective, how do you see the deal with Microsoft and the future of Windows Phone and the Lumia brand?

    This is a long story. I can’t really do it justice now but I will say that it seems that Microsoft understands that they need to become an integrated systems company and not a component supplier. The same became evident to Nokia so they needed to merge.

    16. You've also worked with people from RIM. Do the have the capacity to innovate?

    Perhaps but scale also matters. RIM and HTC may not have the time to grow.

    17. Let’s imagine that no big company owns my personal information. If I wanted to sell that to someone, what would be the right price to ask? How valuable are individuals in the war for gaining personal information?

    The price of your personal information will be set by auction. It’s up to you to decide if you want to create a reserve price or to let the highest bidder win. As of today most people would trade all their personal information for almost zero price. This will not last and consumers will find out their value over time. I can’t predict how it will change but it will be a combination of offers being made and personal data catastrophes which will act as warnings.

    18. Do you believe in phoneblocks project from Motorola?

    Only people who want more complicated lives will want to build their own products. There are some such people (for example children) but they are not willing to spend a lot for that complication so the overall market for increasing complexity is small.

    19. The last question. What could trigger an Apple fall and when?

    The most common trigger for failure is success. To continue succeeding is very hard because motivation disappears. What can cause a crisis of motivation would be that there is a loss of belief that there are problems left to solve.

  4. Estimating HTC's post-traumatic life expectancy

    Research · 82 comments

    In May 2012 I wrote:

    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?

    via Post-traumatic life expectancy of phone vendors | asymco.

    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:

    Screen Shot 2013-10-04 at 10-4-11.01.11 AM

    [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.

    Sic transit gloria mundi.

  5. Unforgiven, Continued

    Research · 5 comments

    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:

    Screen Shot 2013-09-03 at 9-3-9.19.51 AM

    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.

    Screen Shot 2013-09-03 at 9-3-9.20.57 AM

    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.

     

  6. The real threat that Samsung poses to Apple

    Podcast · 430 comments

    [The following is a post written by James Allworth.

    James is the co-author of How Will You Measure Your Life?. He has worked as a Fellow at the Forum for Growth and Innovation at Harvard Business School, at Apple, and Booz & Company. It follows and builds on a discussion we had on the 56th Critical Path podcast.

    You can connect directly with James on Twitter at @jamesallworth -ed]

    A lot of ink has been spilled in the wake of the recent Apple Samsung patent disputes, and the legal wars see no sign of abating any time soon. The rise of Samsung's phone business has been meteoric, and Apple is right to be concerned. But the real threat that Samsung poses to Apple has very little to do with the copying (or not) of Apple's designs. The lawsuits have simply been a convenient (if expensive and risky) way to attempt to quash a threat that is of Apple's own making. While there's no doubt that Google has played a key role in Samsung's success by handing out a free mobile operating system to pretty much anyone who wants to build one — it is actually Apple, more than any other company, that is responsible for Samsung's present success.

    How? By outsourcing as much work to Samsung as they have. And it's impossible not to wonder whether Tim Cook's announcement yesterday on bringing back Apple's manufacturing to the USA is the beginnings of an attempt to rectify the problem.

    But first, I want to establish why copying is actually less of a threat to Apple than you might think. Daring Fireball's John Gruber wrote last year on what he termed "The New Apple Advantage". Like most people who appreciate Apple and its products, the starting point for Gruber's appreciation of Apple is its design — he says as much in the article. But the realization that Gruber has in the article on Apple's true competitive advantage is what's really interesting:

    So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

    It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

    This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.
    (emphasis mine)

    The argument is beautifully made. The design part of Apple's equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it's this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes "good enough". The tech industry has always revolved around copying. Once folks work out how it's done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.

    It is the last part of the Gruber quote that really drives things home. "It cannot be copied without going through the same sort of decade-long process that Apple went through". He's right — it's very hard for a competitor to outright replicate what Apple has achieved without going through all the same steps. But it got me thinking of a concept — and a related story — that I learned from someone I was fortunate enough to have as a teacher: Clayton Christensen. Perhaps a competitor didn't have to copy Apple.

    What happens if Apple had already taught them?

    Christensen first wrote about the dangers of outsourcing in The Innovator's Solution, explaining how seeking to maximize efficiency by employing third party vendors to do the "low value-add" work for you can be a lethal strategy. In the Solution, Christensen and Michael Raynor gave the example of two fictional corporations—"Component Corporation" and "Texas Computer Corporation". I had the good fortune to work with Clay on his most recent book, How Will You Measure Your Life?, and we recount a similar story; only without any of the players being disguised. The story is that of Asus and Dell, and how by outsourcing its work—starting with just basic circuit boards—Dell equipped a competitor:

    Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”

    The Dell analysts realized that this, too, was a win- win...

    That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.

    Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.

    There are two sides to this story: the part that relates to Dell, and the part that relates to Asus. Dell, in its quest to maximize its financial efficiency, continued to outsource way beyond manufacturing components and assembly. They outsourced a long way up the value chain. But there's also the side of the story that relates to Asus — a small components manufacturer that was, in effect, nursed to success by Dell. The extent of the schooling delivered by Dell to Asus was pretty profound, given how far up the value chain Dell outsourced its operations.

    But here's a question: at what point did Dell seal its fate? When was it that Dell had outsourced enough that Asus, with a desire to simply get out of the low-value work, could have made it all the way to the point that it did? I'm beginning to wonder whether just component development and assembly was enough. In the case of Samsung, it seems that everything else they needed to learn, they did by entering the emerging market, which Apple has largely left alone.

    Now, it's obvious that there are some very clear differences between the decisions that Apple have made in terms of outsourcing, and the decisions Dell have made. Dell outsourced its business all the way up to the design of its products. In many respects, Apple is doing the opposite — going so far as to even bring chip design in house. Horace has done some fantastic work detailing the extensive amount of investment Apple has made in its supply chain and it's clear that they've spent a lot of money investing in equipment used in production.

    But there's also no denying that Apple has begun to rely extensively on a network of suppliers across Asia.

    It's when you start putting the two arguments together that you realize that Apple may have a more serious problem on its hands. I want to again recount the final two lines of Gruber's argument:

    It’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

    He's right — generating that scale requires a long gestation period — one that Apple went through. And it can't be copied without significant time and effort on the part of a competitor. But there's one big implicit assumption here — that suppliers won't turn around and start developing their own offering. Because when Apple went through this transformative process, where the design whittled down the broad range of offerings to just a few, and they generated the scale on the business side that accompanied that — they weren't actually the only one to go through that process. Apple's partners — their suppliers — went through it with them. And they've got very big, and very good at what they do. Samsung, obviously, is among those partners.

    Now, the response I often hear to this line of reasoning is: Apple hasn't outsourced anywhere near as much as Dell has. How are the situations analogous? But I think it's actually the wrong question. Instead, the question is: has Apple already outsourced too much?

    For all intents and purposes, we're at a level of maturity in the smartphone market where I believe design — particularly on the hardware side — has largely become commoditised. Performance is now "good enough". Whereas it was not so long ago that consumers sat on the edge of their seats to find out what the new iPhone had to offer ("please, fix the battery life", or "please, make it faster") the recent release of the iPhone 5 seemed not to generate the same intense reaction. Now, I'm not saying it won't sell well — in fact, it will probably become the best selling phone of all time — but people aren't making these decisions based on huge design differences between the devices. The basis of competition has shifted. HTC recently learned this the hard way when it introduced the One X — a phone that, to the critics, at least, was considered the best Android phone available — "a masterpiece",  "one of the best mobile devices I've ever used". Yet it has been absolutely crushed in the marketplace by Samsung.  How? Well, Samsung used its business scale to, as Horace put it on Twitter, "invite operators to a better party with an eye-watering marketing budget". This has nothing to do with Samsung making a better phone (they probably didn't), or Samsung copying Apple (indeed, HTC may have just done a better job of copying Apple). Instead, it has everything to do with the fact that Samsung has had its business sucked along in Apple's slipstream.

    There's another way of seeing just how deep the problem lies. Jobs promised "thermonuclear war" on the copied devices, and so far, the biggest target of Apple's many legal warheads has undoubtedly been Samsung. Getting a $1 billion judgement certainly proves Apple was serious about it. But doesn't it seem strange to you that the target of such a devastating strategy on the legal side, just so happens to be… one of the most important suppliers for Apple's new phone?

    The problem that Apple is facing right now has nothing to do with their designs being copied. There is a long history of copying in the tech industry; patents being deployed in lawsuits by giants often signify desperation more than anything else. Rather, the problem that Apple faces is that it now is going up against at least one competitor that has been a beneficiary of the scale that Apple has achieved on the business side. Samsung has clearly demonstrated that, like Asus, it was not satisfied being a low-margin ODM — of doing all the menial work while somebody else made the big bucks. Suing Samsung over Android patents isn't going to change that — if Google's operating system gets too expensive to use, there'll be a switch made to Microsoft. Or to another operating system altogether. It doesn't really matter, because design in the smartphone space has been commoditized. It's good enough. Manufacturers are now creating performance that most consumers aren't able to absorb. Instead, as we've moved into a world where performance is now "good enough", the world has flipped into one where it's the business side — operational scale — that matters most.

    Apple have taken steps to minimize the ability of competitors to duplicate their business advantage. There's a great post here on Quora describing how Apple has used its supply chain as a competitive advantage and how competitors end up subsidizing Apple's use of the technology. But the approach of "locking in" key new technology so nobody else can get them works best in a world where consumers need more performance from their devices — a world is rapidly slipping away.

    So, what's Apple got to do? In so much as it is able to trust its suppliers of key components not to become competitors, it can continue to use them. But where it can't, or where those suppliers have already become competitors, it has only one sensible choice — replace them. It has two choices here: the first (and obvious one) is with another supplier. But that risks the same thing happening all over again — Apple nursing another supplier into a competitor. The second choice: for components and services that are critical to maintaining competitive advantage in the markets which Apple plays, Apple needs to build the components themselves.

    Most companies wouldn't be in a position do that. But Apple is almost already there. I also hear that there might be a country out there with relatively high unemployment rate, looking for some jobs to be brought back home. Funnily enough, it seems that's just what Tim Cook is doing right now. This approach might just be a good way of on-shoring some of those untaxed offshore profits (I imagine the tax benefits for building a few factories in the US would be quite high), all the while taking away business from competitors — both current and future.

    But there's one question that still remains. In the instance of the threat that Samsung poses to Apple: is it already too late?

    –

    Looking for more information on the renaissance of production and its effect on the technology industries? Then come to Asymconf and take part in the debate.

     

  7. The phone market in 2012: a tale of two disruptions

    Research · 96 comments

    During the first quarter this year HTC, RIM and Nokia all surprised investors with bad news. The effect is evident in the share price of these companies which, in the case of RIM and Nokia is around book value, and in the case of HTC, neared 12 month lows and a 70% drop from peak.

    These "misses" in earnings and expectations are on top of the already woeful news from Sony Ericsson and Motorola, which have not had profits for years and LG, which has been borderline since late 2009.

    In combination, this seems to imply a dearth of profits in an industry that is, by all measures, booming. Units are up 7% with smartphones up 47%. Revenues are up 20% and overall profits are up 52%. This are exceptionally strong numbers. Few industries can measure growth in double digits.

    So if the industry is booming but the majority of participants in the industry are loss making (and surprisingly so) then what is going on? There are two answers: new market disruption and low end disruption.

    The new market disruption is the migration of a large number of demanding customers away from phones-as-voice-products to phones-as-computing-products. The low-end disruption is the migration of a large number of less demanding customers from branded phones to unbranded, commodity phones.

    The New Market Disruption

    The new market disruption is evidenced by the shift of fortunes to Apple and Samsung and away from every other device maker. Here is the profit picture:

    Of the vendors tracked (public companies who report mobile phone divisional performance), Apple obtained 73% of operating profits, Samsung 26% and HTC 1% [1][2].

    The "share of profit" picture is potentially misleading because it could imply that the profits available are a constant. They're not. The absolute profits picture below shows how the industry actually expanded available profits by quite a lot. Two years ago the vendors generated profits of $5.3 billion in the first quarter  and last quarter they generated $14.4 billion.

    Seen this way, the story isn't so much that Apple "took the profits from the incumbents". Rather, it's that Apple created a vast new pool of profits. And one need not look far to find out where they came from: operators. These profits were mostly carrier premiums for the iPhone 4S.

    Before shedding tears for operators, consider that although this does amount to a current transfer of profits from carriers, the decision is a popular one. Hundreds of operators have made it. It's unlikely that they all colluded to be robbed. Indeed, they willingly hand over these premiums because the iPhone ensures a competitive advantage or preserves their customer base from churning. The calculations that go into a decision to range the iPhone are compelling enough that 250 operators made the decision (though, crucially, there are still 250 who have not).

    Following this value proposition to its logical conclusion would suggest that the industry is rewarding those who can supply computers-as-phones which preserve the cash flows of what is essentially a trillion dollar data services business. Vendors which cannot offer this solution saw their businesses implode. At least on the high end.

    The low end disruption

    Simultaneous with this shift of the high end to smartphones-as-app-and-service-platforms came an explosion of growth in unbranded phones. As Apple led and most brands followed the new market, the old market of voice-oriented phones was abandoned to new entrants offering cheap "good enough" phones. Nokia tried to preserve its volumes and margins there but it's becoming increasingly difficult.

    The following chart shows how the "Other" vendors have come to make up about 44% of the market.

    Note that although this "feature phone" segment is not growing, it is still a large market (250 million units a quarter). The entrants in this market are numerous (perhaps in the thousands) and they are offering white label and unlicensed knock-off products. They are also offering unregulated (i.e. without IMEI numbers) products which are technically illegal and sold mainly in underdeveloped countries which have no incentives to enforce regulations.

    This is a consequence of feature phones reaching the point of being "good enough". The feature set and quality are adequate for voice, text, games and even media playback and are priced at $30 or less.

    This commoditization of the low end is pressuring what would normally be the fallback cushion under an underperforming smartphone business. The crisis for the incumbents comes from not only being unable to shift to the new market as fast as needed but also from not having cash flows from a low end that was thought to be sustaining.

    This combination of two disruptions is why we see an explosively large and growing market failing to reward all but two of the participants.[3]

    ---

    Notes:

    1. You can download, view and interact with a motion chart for the industry data here. All data is sourced from company filings except for some estimates where data is missing.
    2. Operating profits are sales minus cost of sales minus operational expenses attributed to the business. When not available, opex is estimated as a percent of total in proportion to sales. Note that operational income excludes taxes, depreciation and other capitalized costs.
    3. We cannot say that the thousands of low end entrants are unprofitable. They are probably enough profits to sustain them and even to attract more entrants, but we have to also recognize that there are likely to be very low margins.
  8. 400 million phones per quarter and everything's topsy turvy

    Research · 40 comments

    Sony Ericsson is no more. The company remains but the brand is gone. Now the phones it makes will be sold under the Sony name. Unfortunately, that means we no longer get reports from the company on its volumes, profitability and sales. The units will be part of "Other" from now on.

    That vendor's data disappears as did HTC's and Samsung's earlier reporting. Bit by bit, vendors are withdrawing information. RIM stopped reporting its average selling prices some time ago, Motorola may disappear completely and they already stopped reporting tablet sales.

    This makes the picture of the market fuzzier each quarter. We have to rely more and more on analysts who publish estimates. I try to pick from the available data the best assumptions but the errors are undoubtedly increasing. Here are the charts showing unit volumes in terms of absolute, share and ranking.

    As I wrote previously, Samsung has overtaken Nokia which lost the top spot in unit shipment ranking, a spot it held for 14 years.

    Of all the participants, only three brands enjoyed growth this last quarter: Apple, Samsung and ZTE. ZTE, like Apple, is noteworthy for its late entry. The others are in a mess: Motorola -4%, Nokia -24%, RIM -26%, HTC -29%, LG -44% in terms of unit growth y/y. This, while the market managed a modest gain.

    It still find it fascinating that such a large market, selling 400 million units every quarter can exhibit such rapid change in participant ranking.

  9. First: Apple's rank in mobile phone profitability and revenues

    Research · 82 comments

    Apple retained its top rank in profitability and regained the top spot in mobile phone revenues.

    The relative shares of revenues and profits are shown below:

    Individually, Apple's share of units, revenues and profits is chronicled below:

    Apple reached 75% of profit share, nearly 40% of revenue share and 9% of units share.

    Apple and Samsung combined for about 91% of profits with RIM third at 3.7%, HTC fourth at 3.0% and Nokia last at 1.8% of a $15 billion total for the quarter.

    In terms of revenues, Apple had 39% to Samsung's 25%. Third was Nokia with 12.6% and fourth RIM at 8%. HTC only managed 5.5%, Motorola 4%, LG 3.3% and Sony Ericsson 2.7%.

     

  10. Third

    Research · 33 comments

    Apple reached the third place rank in total units shipped during last quarter. The following chart shows the ascent in rank.

    Apple achieved this with a total market share of about 9%. Second place Samsung has 22.6% so there is significantly more room to go before Apple gets to be second. Nevertheless, the climb to third was achieved in less than five years. At the time when Apple entered the market third place was held by Motorola with shipments of 35.5 million units (Q2 2007). Motorola only managed 10.5 million in the last quarter.

    To see growth I prepared the following chart showing the fourth quarter's growth by vendor according to four years' compounded, sequential and y/y growth.[1]

    On a four year compounded basis, the pattern is that of Apple, HTC and RIM showing significant growth with Samsung showing moderate growth. The other vendors all had negative real volume growth. The list does not include "Others" which had 13% compounded growth.

    Projecting Apple's 60% rate of growth and a market growth of 10% leads to Apple obtaining 27% share by the end of 2014. My guess would be that is when we'll be able to write a post about Apple being second.

    ---

    Notes:

    1. I don't have HTC data for Q4 2007 so the compounded rate is measured for three years.
    2. Additional volume data
  11. The effect of smartphone growth on share prices

    Research · 17 comments

    Data on Q4 performance is starting to trickle in. Last week Motorola, as part of a profit warning, revealed their Q4 smartphone shipments were 5.3 million. RIM had reported 14.1 million units (quarter ending November). HTC has also warned that their shipments of smartphones (and tablets) totaled 10 million. Samsung provided guidance on overall sales but since they don't report data on smartphone (or phone) sales, the estimates are ranging between 32 and 35 million.

    Many have forecast Apple's performance but there are many other companies which are not easily estimated (Sony Ericsson, LG, Nokia, ZTE, Others.) But rather than dwelling on the specific quarter, we can make some long-range estimates of performance based on the historic data.

    One method I use is to look at patterns of growth. Growth is the first derivative of market performance and it sometimes shows patterns which the performance itself does not. Consider the following chart showing the growth pattern for RIM.

    The blue line shows the absolute year-on-year quarterly growth based on reported numbers of smartphones shipped. I've also shown the growth "relative to market" which is unit growth with market growth subtracted. This orange line represents how much faster (or slower) the company is growing relative to the market. If the orange line is above zero, the company gained share. If it's below zero, it lost share.

    I also overlaid the performance of the share price (right scale).

    Now compare that with another long-term incumbent in the smartphone market, Nokia. 

    Bearing in mind that the scales are identical, Nokia's relative performance has been negative since early 2008. Persistent negative smartphone performance relative to market growth causes persistent loss in share price.

    What about other, more recent competitors?

    HTC is not a recent entrant in smartphones, and has gone through a phase of growth with Windows Mobile in the 2000's. This is its pattern of growth (and its share price).

    Keeping the scale for growth consistent with the other companies leads to a bit of clipping but the pattern of rise and fall also seems correlated to share price performance.

    Finally, the following is the same analysis applied Apple.

    Again, keeping the growth scale consistent leads to some clipping, but the pattern remains observable.

    What seems to be rewarded to various degrees is consistency in growth of smartphones for companies which are primarily engaged in the market. However, failure to grow is punished with severe share price declines.

    Being able to forecast smartphone growth seems to be useful, at least in the time frame of one or two years.