LG

Smartphones made up about 30% of global phone sales last quarter. That is a significant increase from 10% in Q4 of 2007.

From this perspective, iPhone obtained 5.6% share, Android 14.2%, Nokia Symbian 4.6%, RIM 3.6%, Bada 1.1% and Windows 0.4%.

The competition however still has 70.5%.

The chart to the right shows the challenge remaining and the progress being made.

The good news is that the non-smartphone market is not growing while the smartphone market is. In fact, the non-smart market has had a three year CAGR of 0% and a y/y growth of 1.0% and a sequential decline of 6%.

The non-smart portion of each branded vendor's business is pretty dismal:

• Nokia saw 17.57% decline y/y
• Samsung's non-smart business declined by 8.14%
• Sony Ericsson's dropped by a dramatic 80%
• LG's fell by 38.56%
• Motorola is the only one that grew y/y, by 17.86.

The reason all these brands fell is because the unbranded vendors took their place. "Other" non-smartphones grew by 43%. They have been sustaining growth at the rate of 57% compounded over three years.

The following chart shows the increasing share taken by the "other" vendors in non-smartphone units:

The non-smart business is so dismal for branded vendors that I've been assuming that they will cease to build such devices in the near future.

The trend is shown in the following chart which shows the percent of units for branded vendors which are smartphones.

Motorola, Sony Ericsson and Samsung are fleeing to smartphones as rapidly as they can. LG is following as quickly  as possible as well.

The only question remains with Nokia. While their smartphone business evaporates they've also made a commitment to the non-smartphone market and are thinking about "the next billion" users who, presumably, will not buy smartphones and will buy some variant of Nokia's Series 40.

Targeting the low end may be commendable, but the question they need to answer is why would those next billion buy anything other than a low cost smartphone? And if not, then what's so different about the next billion?

 

The major publicly traded phone vendors have all reported results for the second quarter. Based on the data available so far we can begin putting together a picture of the market.

The first picture I'll draw is usually the last: profitability. The following chart shows operating profit from the sale of mobile phones among the eight vendors I follow (Nokia, Samsung, LG, Sony-Ericsson, Motorola, HTC, Apple, RIM).

This quarter saw a slight sequential decline in overall profit for the sector, but four vendors did not manage a profit from selling phones. Nokia, Motorola, Sony-Ericsson and LG all saw losses. The other vendors split the slightly decreased pie with Apple getting two thirds of it (66.3%)

This share is up from 57% in Q1 and 50% in Q3 and Q4. Samsung's share went to 15%, though that's not a peak level historically. In Q1 2008 the company was at 21%. RIM was at 11%, a level in a range that has been unchanged for three years. Finally, HTC captured 7.4%, a new high and an increase from 6% since last quarter.  The profit share chart follows:

The ranking chart for profitability follows:

Finally, the "before-and-after" view of profit capture showing the change in profit share over a four year period.

 

The story remains largely unchanged from last quarter: Three companies which captured 11% of the profits before the modern smartphone era started (four years ago!) now capture 84% of the profits. Only one global brand phone vendor selling non-smart voice-oriented feature phones is still profitable however, as we shall see later, the only reason profits still exist for any vendor is due to the strength of their smartphone portfolio.

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.

Microsoft's new "strategic partnership" with Nokia is not its first. For a decade the software company has courted and consummated relationships with a variety of companies in mobile and telecom. Here are the ones I can remember:

• LG. In February 2009 Microsoft Corp. signed a multiyear agreement for Windows Mobile to be included on devices from LG Electronics Inc. LG would use Windows Mobile as its "primary platform" for smartphones and produce about 50 models running the software.

What happened? LG made a few Windows Mobile devices but with WinMo uncompetitive, they abandoned the platform and moved to Android losing years of market presence and all their profits.

• Motorola. In September 2003, Motorola  and Microsoft announced an alliance. "Starting with the introduction of the new Motorola MPx200 mobile phone with Microsoft Windows Mobile software, the companies will collaborate on a series of Smartphone and Pocket PC wireless devices designed to create a virtual "remote control" for the Web-centric, work-centric, always-on-the-go mobile professional." In addition, the alliance includes cooperation on joint marketing and wireless developer programs.

What happened? Motorola launched a series of Windows Mobile phones culminating in the Motorola Q "Blackberry killer". As Motorola hit the rocks in profitability new management reached for the Android liferaft. The company now relies exclusively on the Droid franchise.

• Palm. In September 2005 Palm and Microsoft announced a strategic alliance to "accelerate the Smartphone market segment with a new device for mobile professionals and businesses. Palm has licensed the Microsoft Windows Mobile operating system for an expanded line of Treo Smartphones, the first of which will be available on Verizon Wireless’ national wireless broadband network."

What happened? Palm shipped a few Windows Mobile, famously dismissing Apple's potential entry as something "PC guys" could never achieve. A new CEO, a private placement and an acquisition later the company is a division of HP making its own operating system.

• Nortel. When Steve Ballmer was famously laughing at the iPhone and saying that he likes the Windows Mobile strategy "a lot" he was sitting next to the then-CEO of Nortel (Mike Zafirovski formerly of Motorola) with whom the company had just closed a strategic deal.  "an alliance between Microsoft and Nortel announced in July 2006 ...  includes three new joint solutions to dramatically improve business communications by breaking down the barriers between voice, e-mail, instant messaging, multimedia conferencing and other forms of communication".

What happened? Nortel declared bankruptcy two years later.

• Verizon. In January 2009 "Verizon Wireless has selected Microsoft Corp. to provide portal, local and Internet search as well as mobile advertising services to customers on its devices. The five-year agreement will go into effect in the first half of 2009 when Microsoft Live Search is targeted to be available on new Verizon Wireless feature phones and smartphones." The deal would ensure Bing distribution to all of Verizon's smartphone customers.

What happened? Bing did ship on some devices but in October 2009 Droid came to Verizon.

• Ericsson. In September 2000, "Ericsson and Microsoft Corp. today launched Ericsson Microsoft Mobile Venture AB. This previously announced joint company will drive the mobile Internet by developing and marketing mobile e-mail solutions for operators. The first solutions are expected to be on the market by the end of the year. The company is part of a broader strategic alliance between Ericsson and Microsoft"

What happened? Ericsson divested itself of the mobile division forming a joint venture which would go on and make more strategic alliances with Microsoft over Windows Mobile culminating in a loss of profits and eventual flight to Android.

• Sendo. In February 2001, Microsoft announced a partnership, in which Microsoft bought $12m of Sendo shares and a seat on the board. Sendo was to be Microsoft's "go to market partner" for the Stinger smartphone platform that would become Smartphone 2002.

What happened? Sendo after litigating IP issues with Microsoft went bankrupt in 2005.

And finally,

• Nokia. No, not this OS deal, but in August 2009 "The worldwide leader in software and the world’s largest smartphone manufacturer have entered into an alliance that is set to deliver a groundbreaking, enterprise-grade solution for mobile productivity. Today, Microsoft Business Division President Stephen Elop and Nokia’s Executive Vice President for Devices Kai Öistämö announced the agreement, outlining a shared vision for the future of mobile productivity. This is the first time that either company has embarked on an alliance of this scope and nature."

The plan was to bring "Microsoft Office Mobile and Microsoft business communications, collaboration and device management software to Nokia’s Symbian devices."

What happened? One and a half years later the same Stephen Elop announced that Symbian will be deprecated.

Prices provide accurate, independent signals about where, when, and how to create and deploy value-creating innovations. The mechanism of free markets signals what should be rewarded and what shouldn't. When comparing competitors, prices are the best indicators of differentiable positioning.

However, prices are sometimes anomalous and subject to transient market conditions. It's therefore important to observe pricing over a long time frame.

This chart shows the average selling prices for all phones sold by the eight publicly traded phone vendors (covering approximately 70% of the market) since mid-2007.

There is remarkable stability in the pricing of the competitors. One could argue that only Motorola and LG saw significant swings in price. (Apple's instability in 2007 was due to the revenue sharing deal for the 2G iPhone on AT&T).

Motorola pared down its portfolio (and its market share) and as a result has seen a doubling in ASP. LG had a rapid rise and rapid fall as its feature phone business boomed and busted.

But otherwise, pricing trends are subtle: down from Nokia and Samsung. Slight decrease for RIM and HTC and stable for Apple. In a future post I'll dive into the relationship between pricing power and share.

One of the most popular themes running through the mobile phone industry this year has been the unprecedented growth in Android adoption. I've argued that the adoption was initiated on the supply side by vendors and operators, but demand has certainly manifested itself.

Android is almost viral in the way it spreads. With no constraints on intellectual property, pricing, contracts, modification or terms of distribution, the incentives to push product out are phenomenal. It even works, mostly.

One hypothesis of the consequences of this viral adoption is that there will be a "commoditization" of smartphones with rapid price erosion to follow. This in turn might even lead to lower margins for Apple and RIM and most major vendors, including those selling Android itself.

In order to test this hypothesis, we need to look at what has been happening to prices. If prices have started tipping down at more than their usual rate then maybe commoditization is happening.

We can begin this test with the industry's canary in the coal mine: RIM. RIM has been struggling for growth in the very market where Android has been growing the fastest. Is RIM's pricing under pressure?

Interestingly, no. Their ASP (average selling price) decline, from an average of $350 to $310 in late 2009, came before the Android avalanche. During this year, the ASP has held steady, even rising in the last two quarters to $315 while Android activations reached 300k/day.

So I don't see a big problem with RIM, yet.

What about the industry as a whole? Can we see patterns that suggest imminent commoditization? Using the top 8 vendors (Nokia, Motorola, Samsung, Sony Ericsson, LG, RIM, Apple and HTC) and using volume-weighted ASP (total device sales divided by total units sold) we have the following chart:

Since the second half of 2007 the "industry ASP" (blue line) has actually increased. This is even though there was a huge recession in the middle of the time period.

This should be only slightly surprising. If you suspected that the iPhone may have a lot to do with that, you would be right. If you remove Apple from the mix, the second line (in orange) shows that the top vendors (ex-Apple) had some, but quite quite mild erosion (from an ASP of $133 to $129)[1].

This is far milder than what's been happening in the PC sector where prices are dropping catastrophically (According to NPD the average selling price of all Windows portable PCs has fallen from $659 in Oct. 2008 to $519 in Oct. 2009).

So Apple was a big contributor to the industry increasing its pricing power.[2] but even without Apple the industry has been holding on.

But is this just a lull?

Is Android going to stop the growth?

We can look at the pricing data one more way: If we separate the eight companies into two cohorts, the "diversified" vendors who sell both smartphones and regular phones vs. the "pure play" smartphone-only vendors, we get the following price history.

What is happening is that the diversified (Nokia, Samsung, LG, Sony Ericsson, Motorola) saw modest price declines (from $128 to $114) while the pure-players saw price appreciation (from $378 to $449). This is with the early impact of Android priced in. Unfortunately I don't have a chart showing non-smartphone prices in isolation, but I would be willing to bet it would be a significant negative slope.

In these two lines Android is not an independent variable. Android was adapted by some of the diversified vendors (all but Nokia), but in different ways. The thing is that Motorola and Sony Ericsson had great increases in ASP with Android. Among the pure-play vendors only HTC adopted Android and its performance is undistinguished vs. RIM which didn't.

So what, if anything, has Android done to pricing?

I argue that there is no evidence in the pricing data of a coming commoditization of smartphones. Android vendors were able to use the platform to move to higher pricing and the more they switched their portfolio to Android the more they got a better average price. At the same time those vendors who built smartphones without Android also saw strong price supports.

The only correlation with pricing power is whether you build smartphones or dumb phones. The more smartphones you build, the more price you can charge. This is regardless of platform.

The reason for this is that the smartphone market is growing so rapidly (90% y/y). There is limited direct competition between smartphones and a lot of competition between non-smartphones and smartphones--a battle smartphones are winning handily, irrespective of price. Smartphones seem to be what everyone wants.

So the real question that should be asked is:

Why do vendors bother making any dumb phones at all?

If you look at the third chart above you can see how attractive it must be for the diversified vendors to abandon the non-smart market to ZTE, Huawei et. al. Perhaps Nokia can still make a small profit there but to do so you need to run faster and faster toward extraordinarily low costs and prices. A point where phones cost less than everyday consumables. What keeps Samsung and LG in that game? Motorola and Sony Ericsson left once they hit profit warnings. Is that what it takes to drop what seems to be a loser business? I think not.

My bet is that by the end of 2012, it will be hard to find any branded phones which won't run a smartphone OS. Demand and supply of smartphones will race each other to overwhelm portfolio logic at the largest companies. The zero (visible) cost of Android will snowball this effect. What's even more provocative is that I believe the "others" will follow and abandon voice-oriented phones for smartphones almost immediately after the larger group.

So what have the Androids ever done for us?

I've long argued that the phone market should be studied as a whole because the competition is not between platforms but between smart and non-smart. Pricing is a leading indicator of what drives decision making inside vendors and it leads margin, and thence portfolio discussion. Android is expanding the market without crushing pricing. The margin expansion is what attracts more vendors and creates more demand. It's a virtuous cycle.

In a way, this is all good news--even for Apple. A world full of smartphone users is a better addressable market for iPhones than one filled with voice products. iPhone's traction was always in markets which had been seeded by some smartphones: the US with RIM and Europe with Symbian. Such a smartphone-soaked world will have better mobile broadband infrastructure, users with more demanding tastes and awareness of the value that a smart device can bring.

---

[1] The effect of "other" vendors not among the 8 listed is a big unknown. It's been estimated that they now make up as much as 30% of total volumes and that they are beginning to ship significant volumes with Android. Without visibility into that part of the market, we should be cautious. However, the eight vendors sampled here are still a significant cohort and the conclusions still appear reliable.

[2] This industry had, until 2007 suffered from chronic price erosion. Each sustaining innovation drove a mild burst of pricing power but it never seemed to last. From color screens to bluetooth, to 2.5G to 3G to MMS, to cameras to music playback, each hardware advance was not enough to keep the erosion away. The tipping point seems to be the iPhone and the shift to software as the component that drives price power.

Gartner released sell-through data for the handset market. In the release appears an estimate of total Android 3Q Smartphone sales (20.5 million). Combining this with what some of the vendors have reported in terms of units sold, we can estimate the share of Android by vendors.

Note that this is a rough estimate. We don't have data on Sony Ericsson's smartphone units sold and we don't know the mix of HTC's Windows Mobile vs. Android.  I'm also assuming LG as part of Others. The data from Gartner is claimed to be sell-through whereas vendors report sell-in so there is more roughness about each vendor.

Regardless of these potential sources of error, it's a very safe bet that Samsung and HTC are the largest Android vendors by a fairly large margin.

It's perhaps noteworthy that both are also committed Windows Phone vendors. According to pdadb.net here is the count of Windows Phone SKUs by vendor:

• HTC 12
• LG 5
• Samsung 2
• Dell 2
• Toshiba 1

Motorola is keeping its Windows Phone options open, leaving "Others" as the only likely exclusive Android vendors.

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

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

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

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

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

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

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

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

So, here are two charts:

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

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

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

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

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

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

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

----

Notes:

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

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

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

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

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

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

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

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

I'll throw out my predictions to start:

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

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

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

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

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

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

------

Notes:

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

A quick update on the analysis of mobile phone profits. If the available profit[1] (i.e. excluding losses) were summed and each vendor's profit were measured as a percent of this total, this chart would tell the story of the last three years:

Note that profit share has mostly shifted from Nokia to Apple, though Sony Ericsson and LG were also casualties and Motorola has not had anything to lose.

Some assume that the future belongs to the Koreans but we see that the relatively small amount of profit that Samsung has (less than RIM actually) has not changed much. HTC is also shown to be a steady performer but not having displaced much from competitors.

Will Android change this picture? As I've argued before, Android is most attractive to the unprofitable and the strategically constrained. Can having undifferentiated new products change this? As Nokia is unlikely to license Android, and RIM seems very unlikely and Apple is out of the picture, the only possible contenders are Samsung, LG, HTC, Motorola and Sony Ericsson.

Motorola and Sony Ericsson have both returned to profitability but with a very small volume Android strategy. However the incumbents fielding Android are really facing a far more sinister threat: the smaller local brands in China (e.g. ZTE) and emerging markets.

On profitability, the smaller challengers are unlikely to make a large impact, but they will constrain the profits of other licensees. The distribution of phones on a global scale is challenging without a brand, and brands are very expensive to build. It's still possible over a longer timer frame that a small brand like HTC can emerge on a global stage. But in terms of profit capture, challengers will mostly "steal" from the already constrained big brands running with Android.

--

[1] Profit is not the only measure of success and can sometimes be a deceptive indicator. For this reason I look at a longer time frame so that anomalies, seasonality and business cycles are smoothed over. As flawed as it is as a measure, the most important reason to pay attention to profit is that it's the only fuel for growth in the long term. Companies that are consistently unprofitable (e.g. Motorola) face diminishing degrees of strategic freedom further lubricating a downward slope toward financial distress.