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Asymmetric Intelligence

Motorola

  1. Apple captured two thirds of available mobile phone profits in Q2

    Research · 81 comments

    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.

  2. Does the phone market forgive failure?

    Research · 59 comments

    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.

  3. The end of phone vendor tiers

    Research · 25 comments

    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.

  4. A rising tide does not lift leaking ships

    Research · 28 comments

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

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

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

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

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

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

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

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

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

  5. If Cash is King, Apple's is an Emperor [Updated]

    Research · 84 comments

    Apple's cash for short-term and long-term marketable securities totaled $65.8 billion at the end of the March quarter. Cash increased by $6.1 billion.

    The increase in cash is net of approximately $900 million for prepayments and capital expenditures related to the strategic supply agreements that Apple announced last quarter.

    The following chart shows the historic cash, short-term and long-term liquid assets Apple holds.

    As in previous quarters, the securities Apple holds are:

    • Cash
    • Money market funds
    • U.S. Treasury securities
    • U.S. agency securities
    • Non-U.S. government securities
    • Certificates of deposit and time deposits
    • Commercial paper
    • Corporate securitiesMunicipal securities

    Although the asset classes are all liquid, those with longer maturity dates are classified as "long-term" securities (orange area in chart above) and are often not counted as "cash" in many financial databases.

    The enormity of the overall size of this cash can be put into several perspectives:

    • The funds are big enough to place Apple's CFO office in the top 100 largest fund managers in the world and larger than any hedge fund manager.
    • Cash growth in one quarter was higher than the market cap of many companies. For example, if pre-payments were added back, the cash increased by about the market cap of Motorola Mobility.
    • Current cash is worth more than Nokia, RIM and Motorola Mobility's market caps, put together.
    • Apple's cash is worth half of Google's enterprise value.
    • About two years ago, in January 2009 the stock traded at a price of $78 with at least one analyst placing a target of $70 on the stock. Today Apple's cash is worth $67 70/share.
    • If you owned $100,000 of Apple stock, $19,000 of that would be cash and only about $80,000 would be "at risk" capital.
    • If Apple had no revenues, the current cash would sustain operations (SG&A and R&D) for over 7 years or until the middle of 2018.

    When analysts cite limits to the rate of Apple's growth on the basis of the "law of large numbers" I wonder if there is an implied limit to how big this cash pile can grow. By looking at the chart its size seems to be growing faster all the time.

     

    [Updated] The cash per share figure was wrong. It is $70/share.

  6. Android vs. Windows Phone: Which vendors benefit?

    Research · 32 comments

    Who is Winning the U.S. Smartphone Battle? | Nielsen Wire.

    This is a great chart from Nielsen showing the split in manufacturer share by OS in US installed base. What I consider significant is how the modular software platforms Windows Mobile and Android worked out for the licensees.

    Whereas in the case of Windows Mobile HTC took a significant, nearly dominant share, the Android ecosystem was more balanced between HTC and Motorola. However, HP and Motorola left the Microsoft camps, Motorola going exclusively for Android and HP buying Palm. That leaves Microsoft with HTC, Samsung and Other (mainly LG I presume).

    The question of how Windows Phone will shape up vs. Windows Mobile and Android remains. Motorola has signaled they are not interested in WP7 for the time being and so it's likely that they will stick with Android. Samsung is always hedging its bets so it will probably balance its portfolio. One could conceive of Nokia stepping into the US with significant WP volumes, but there are many hurdles on the way.

    One can see the challenge individual modular vendors have to edge the overall volumes of the integrated vendors. As Nielsen points out:

    But an analysis by manufacturer shows RIM and Apple to be the winners compared to other device makers since they are the only ones creating and selling smartphones with their respective operating systems

    Not only are the volumes higher, but so are the margins and hence profit share.

  7. In memoriam: Microsoft's previous strategic mobile partners

    Research · 223 comments

    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.

  8. The remarkable stability of pricing

    Research · 27 comments

    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.

  9. Samsung was the fastest growing major smartphone vendor

    Research · 22 comments

    The smartphone market grew 73% in Q4. Here are the growth rates for vendors which regularly report smartphone sales:

    • HTC: 142%
    • Motorola: 96%
    • Apple: 86%
    • RIM: 40.5% (period ending November)
    • Nokia: 36%

    Samsung is not consistent in reporting smartphones and we don't have year-ago data but the following chart can be used to get a hint.

    Samsung had a very good year with 25.2 million smartphones sold. This is compared to 2009 when they probably sold less than 5 million. Their growth has meant they overtook both Motorola and HTC and are likely to overtake RIM this year.

    Samsung owes its success mainly to adopting Android. As can be seen in the next chart, Samsung moved rapidly to shift its portfolio from non-smart to smart. This is quite a feat considering the starting point well below that of Nokia.

    From 2% of total phones to 15% smartphone volumes in 18 months is astonishing.

    Extrapolating for the missing data leads to an estimate of smartphone growth for Samsung of over 500%.

  10. Resetting Motorola

    Research · 31 comments

    Motorola—like HTC—is thus a bellwether for makers of Android phones, whose sales have now caught up with those of the iPhone—about 300,000 a day worldwide. Some industry analysts doubt that it will be able to create a big market for its devices and make enough profits before cheaper providers move in. If they are right, the smartphone market may eventually become like that for personal computers: a handful of huge competitors with tiny margins. The difference will be that these firms will hail from around the world rather than being mainly American.

    via Motorola: Breaking up | The Economist.

    When I argued that the meek shall inherit Android, the profitability data was the core evidence. That argument, made in August, was:

    So here we have the real challenge to Android:  partnership with defeated incumbents whose ability to build profitable and differentiated products is hamstrung by the licensing model and whose incentives to move up the steep trajectory of necessary improvements are limited.

    In other words, Android’s licensees won’t have the profits or the motivation to spend on R&D so as to make exceptionally competitive products at a time when being competitive is what matters most.

    The surge in emerging market Android entrants has been the latest setback for branded Android vendors. What should be the long term strategy for companies like Motorola and Samsung?

    Paradoxically, Motorola, being the weaker, has the best chance for successful recovery. The clue lies in both what Palm (now HP) and Microsoft did: starting with a clean sheet of paper and building their own platforms.

    This might seem futile given the network effects that current platforms are gaining, and there is a big execution risk, but the alternative is no alternative at all. The big incumbents cannot fight against the clone makers.

    Technically, building a new platform is not as daunting a challenge as it used to be. Palm, a small company, managed to do it in about 2 years. Microsoft, a large company, took 18 months. Google built theirs in about 2 years.

    They all took advantage of existing code bases (Linux or Windows CE). They also rely on web standards for their APIs (.NET or Java or HTML5).

    The challenge is bigger in attracting developers, though again, some core set of apps and developers can be obtained on the promise of brand power alone. Intel and Nokia is using this power for MeeGo.

    Motorola's advantage today is its new autonomy and singular focus on mobility. It has hit the reset button. There is no better time to be courageous and there are no sunk costs to confuse investment priorities. Android was a necessary stop-gap measure and the Droid timing was very good (before the clones and before iPhone distribution expanded). However, now would be a good time to start building a Motorola platform for the future.

  11. The parable of the the PDA: predicting the smartphone's future

    Research · 55 comments

    When reading the comments disputing the possible end of the voice-phone era I'm reminded of similar comments disputing the end of the PDA era.

    Although the Apple Newton pioneered the market in 1992 and John Sculley came up with the acronym, the Newton did not sell in significant volumes. It wasn't until 1997 with the Palm Pilot that the PDA market took off. Microsoft quickly followed with a licensed OS based on Windows CE. In 2001 Microsoft launched the Pocket PC brand to cement its attack on the PDA market. The first phones using a Microsoft OS were using something called Pocket PC Phone Edition. The first Nokia smartphones (Communicators) were built like mobile PDAs.

    The logic was quite compelling. The original PDA was built to mobilize contacts, calendars and notes. They replaced bulky paper organizers and seamlessly synced to PC productivity software like Outlook. It was a compelling product in the US where small business customers needed to keep track of hundreds of contacts. Users could even 'beam' contacts to each other via infrared. The idea of adding a phone function to the device made sense insofar as contacts could be immediately dialed from the contact app rather than typed into another device's phone keypad.

    By the early 2000's PDAs were forecast to sell by the hundreds of millions. There were millions of dedicated users who downloaded apps and thousands of developers being courted by platform builders. Palm even invented the word "ecosystem" as it refers to mobile platforms.

    However, I remember reading sites dedicated to this community and there were many people who rejected the concept of a PDA with an integrated mobile phone. They liked the fact that the PDA was not bundled with a phone plan. They upgraded PDAs in a different cycle from phones and besides, phones are for talking and PDAs were for something else.  It was even more difficult to justify the conflation of the two products when considering the corporate purchasing of PDAs. PDAs were procured by IT departments and phones came with contracts that were managed by a different department.

    What's a device vendor to do? The most avid customers of PDAs did not like the idea of burdening the product with a phone. RIM was doing its thing with moving pagers to include voice, but that was a different job to be done. The story is picked up here by this comment:

    I was hired by RIM in 1999 just before they began work on their first phone .... Coming from a two-way pager background, RIM decided that phones should have two-way push synchronization of pretty much everything that Exchange provided along with a limited WML browser. The general thought was that phones would never have sufficient power density or radios sufficient bandwidth to allow anything more. That was incredibly predictably wrong, but it's how things went down.

    Along with RIM was Ericsson, Palm, Motorola, and Qualcomm. Motorola came from a similar background as RIM and went on to build very similar devices. Both Nokia and Ericsson had come from phones and had decided feature phones should have far more sophisticated PDA functions. Palm started with PDAs then moved to the phones, but adamantly dismissed ideas like wireless synchronization for years making their first attempts at smart phone far more like early Nokia Communicators than early Blackberrys...

    So the point is that all these companies were fighting over what amounts to overgrown PDAs with phones and wireless stacks strapped on. Everyone assumed power density was no where even close to what was needed for general computing, that a full featured browser and heavy duty Internet services were impossible due to bandwidth and latency. Take a look at how our Java expert groups named standards, how people at the time talked about what features smart phones should have, and its clear that no one thought an iPhone was possible. Even Danger, which eventually went on to work on to create Windows Phone 7 and Android, was just working on a better Blackberry.

    via: shacknews

    But what does this have to do with the future of voice-phones?

    The problem is that the vendors that lost this game failed because they listened to their customers. Like with PDAs or with the original mobile phones or first generation of PCs, early adopters are not the audience that should be consulted on how to improve the product.

    Early Windows Mobile users were ecstatic about the platform and rejected new UI metaphors because they wanted a "mobile Windows". Palm fans stuck with the PalmOS even though it was well past its shelf date in the Treo because they treasured the original PDA metaphors.

    Every company paying attention to the market in 2005 would have been eagerly pursuing corporate buyers of PDAs and aiming complex products at enthusiastic PDA users.

    And yet, non-consumers should also not be trusted with their opinions. Most early surveys would show that the vast majority of consumers found that mobile phones were not good value for the money. Later the same audience would declare that smartphones were not worth buying.

    There are many voice-only users in the world who are happy with their products and not interested in any new options.

    So what's a marketer to do?

    If you can't ask early adopters and you can't ask non-consumers for hints then where can clues be found?

    What history shows is that consumers have been happy to trade up to technology that offers more option value.

    • Television went from cheap/free over-the-air broadcast with limited channel options to expensive cable with large option value in channels. Even if most of those options went unused, they are still valued.
    • Telephony went from low cost reliable landlines to high cost, less reliable but with much more option valuable mobility. Having the option to call a person vs. calling a place (where a person might be) changed the calculation of whether you make the call. Calling became much more popular.
    • Data as well went from metered dialup to unmetered high option valued broadband. From a luxury, to the least likely service an unemployed user might give up.
    • Emerging market users hungered for mobile phones even though they cost more than several months' wages because they gave access to information and increased the option value of their labor.

    Each of these huge technology transitions came associated with increased costs for the consumer, but that cost went toward the purchase of a far larger option value.

    The problem is that users cannot calculate option value in their minds when faced with a market research questionnaire. How can they envision all the ways they would use a new product they've never used before? How can they "get it" without observing it in use or spending time thinking of "how they would use it" or asking someone who tried it? In a nutshell, users are willing to pay for option value but can't envision or quantify this value without observing a finished, polished product in use.

    This is the problem faced today by branded phone vendors. Asking or observing current users of smartphones does not provide any incentive to sell low end versions. Asking or observing non-consumers seems to indicate no interest in newfangled complex or costly products.

    But the calculus that must be made is one of option value. Does the new product offer significant option value? Will this option value be easily realized? This is not easy to determine, but it's a method that is far more promising than asking users their opinion.

    The PDA was not a product that was introduced by the incumbent computer vendors because their customers did not ask for it. Once established, the PDA was not replaced by a product that PDA users asked for either.

    Smartphones are following this well trodden path. The high end devices are evolving into computer replacements nobody asked for (but everybody will use). The low end products are adding data option value to voice-oriented users who never asked for anything more.