Many consider June 2007 to have been a pivotal moment in the history of mobile phones. Apple's entry with the iPhone has re-defined the market in many ways. However, there was a smartphone market before then. About 28 million smartphones shipped the quarter when Apple launched out of an overall phone market of 265 million. Apple's entry with 270k phones was a drop in the bucket.
I thought it would be instructive to chart what happened between that quarter, exactly three years ago and today. I collected the data from IDC, Gartner and Canalys and company reports to paint a few pictures.
First, the market shares (by units) of the top mobile vendors, Q207 vs. Q210. I highlighted the smartphone vendors by separating their wedges from the pie. Note that I also separated Nokia's smartphones from Nokia's regular phones as two separated wedges--Nokia ex-SP for no smartphones and Nokia SP as their "converged" units. I did the same with "other".
The first thing to note (beside the large increase in smartphone share) is that "other" non-smartphones are a huge part of the pie. At 20%, the share of "other" is now equal to the share of Samsung. Other consists of a group of mostly low cost Chinese vendors. The growth of the low end "other" went from 35 million units in Q207 to 65 million in the last quarter. It's this competition that is driving profit out of the core businesses of Nokia, Samsung and LG and forcing a flight to smartphones (more about this later).
The second thing to notice is that Motorola and Sony-Ericsson are highly visible victims of the last three years. Sony Ericsson shipped 25 million devices in Q207 and only 11 million three years later going from 9% share to 3%, on par with RIM and Apple. Motorola did even worse, shipping 35.5 million in Q207 and a mere 8.3 million last quarter, losing 10 out its 13 points of share.
Viewing the overall units market, one can see the gouge in units that the recession took out. The following graph shows three years of volumes by the top vendors with the smartphones separated at the top (Nokia SP, RIM, Apple, HTC and Other SP--everything above the grey band are smartphones).
However, separating out the smartphones, one can see their volume increased with barely a ripple during the recession. Although Nokia retains the top share spot, the entrants have jointly grown much faster. I have annotated a few of the competitors' volumes with the actual values.
One thing to note is that "other smartphones" has traditionally consisted of Windows Mobile licensees but that is quickly shifting now to Android. I also had only fragments of data for Samsung and Motorola, so their bands are incomplete. However, one could note how minimal their participation has been in the market. LG has been practically absent from this market. For these latecomers to smartphones, it's clear what Android offers: a chance to stay in the game.
After piecing together the global smartphone shares, it's time to take a look at global mobile phone shares. That's all phones from all vendors that matter.
Unfortunately, just like there are only fragments available from Canalys about smartphones, there are only partial lists from IDC (IDC - Press Release - prUS22441510). Missing are numbers from Apple, Motorola and HTC. But fear not, those can be obtained from company earnings reports.
So here is the full picture for 2Q10 vs. 2Q09
The year-on-year growth for the vendors above is:
The source data is:
Observations:
The pure play smartphone vendors (HTC, Apple and RIM) are growing rapidly and capturing most of the profits.
LG and Samsung are taking share from Nokia but losing margins.
"others" are doing well at the low end.
Sony Ericsson and Motorola are transitioning from mass market vendors of commodity voice products to niche vendors of Android commodity data products.
However, it has lost its position as the largest U.S. maker of phones to Apple Inc. Motorola sold a total of 8.5 million phones in the quarter, while Apple sold 8.8 million iPhones. Four years ago, when the Razr was still popular, Motorola sold 46.1 million phones in the first quarter.
A year ago, Motorola sold 14.7 million phones in the fourth quarter (a y/y drop in unit volume of 42%). The drop in phone revenue in the same period was 9 percent.
On the eve of iPad sales start, and the soon-to-be classic quotes from iPad experts, it's time to play back some of the classic iPhone expert predictions from yesteryear:
"[iPhone] just doesn't matter anymore. There are now alternatives to the iPhone, which has been introduced everywhere else in the world. It's no longer a novelty." - Eamon Hoey, Hoey and Associates, April 30, 2008
"We are not at all worried. We think we've got the one mobile platform you'll use for the rest of your life. [Apple] are not going to catch up." - Scott Rockfeld, Microsoft Mobile Communications Group Product Manager, April 01, 2008
"Microsoft, with Windows Mobile/ActiveSync, Nokia with Intellisync, and Motorola with Good Technology have all fared poorly in the enterprise. We have no reason to expect otherwise from Apple." - Peter Misek, Canaccord Adams analyst, March 07, 2008
"[Apple should sell 7.9 million iPhones in 2008]... Apple's goal of selling 10 million iPhones this year is optimistic." - Toni Sacconaghi, Bernstein Research analyst, February 22, 2008
"What does the iPhone offer that other cell phones do not already offer, or will offer soon? The answer is not very much... Apple's stated goal of selling 10 million iPhones by the end of 2008 seems ambitious." - Laura Goldman, LSG Capital, May 21, 2007
Motorola's then-Chairman and then-CEO Ed Zander said his company was ready for competition from Apple's iPhone, due out the following month. "How do you deal with that?" Zander was asked at the Software 2007 conference. Zander quickly retorted, "How do they deal with us?" - Ed Zander, May 10, 2007
"The iPhone is going to be nothing more than a temporary novelty that will eventually wear off." - Gundeep Hora, CoolTechZone Editor-in-Chief, April 02, 2007
"Apple should pull the plug on the iPhone... What Apple risks here is its reputation as a hot company that can do no wrong. If it's smart it will call the iPhone a 'reference design' and pass it to some suckers to build with someone else's marketing budget. Then it can wash its hands of any marketplace failures... Otherwise I'd advise people to cover their eyes. You are not going to like what you'll see." - John C. Dvorak, March 28, 2007
Even if [the iPhone] is opened up to third parties, it is difficult to see how the installed base of iPhones can reach the level where it becomes a truly attractive service platform for operator and developer investment." - Tony Cripps, Ovum Service Manager for Mobile User Experience, March 14, 2007
"I'm more convinced than ever that, after an initial frenzy of publicity and sales to early adopters, iPhone sales will be unspectacular... iPhone may well become Apple's next Newton." - David Haskin, Computerworld, February 26, 2007
"Consumers are not used to paying another couple hundred bucks more just because Apple makes a cool product. Some fans will buy [iPhone], but for the rest of us it's a hard pill to swallow just to have the coolest thing." - Neil Strother, NPD Group analyst, January 22, 2007
"The iPhone's willful disregard of the global handset market will come back to haunt Apple." - Tero Kuittinen, RealMoney.com, January 18, 2007
"[Apple's iPhone] is the most expensive phone in the world and it doesn't appeal to business customers because it doesn't have a keyboard which makes it not a very good email machine... So, I, I kinda look at that and I say, well, I like our strategy. I like it a lot." - Steve Ballmer, Microsoft CEO, January 17, 2007
"The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant... Apple is unlikely to make much of an impact on this market... Apple will sell a few to its fans, but the iPhone won't make a long-term mark on the industry." - Matthew Lynn, Bloomberg, January 15, 2007
"iPhone which doesn't look, I mean to me, I'm looking at this thing and I think it's kind of trending against, you know, what's really going, what people are really liking on, in these phones nowadays, which are those little keypads. I mean, the Blackjack from Samsung, the Blackberry, obviously, you know kind of pushes this thing, the Palm, all these... And I guess some of these stocks went down on the Apple announcement, thinking that Apple could do no wrong, but I think Apple can do wrong and I think this is it." - John C. Dvorak, January 13, 2007
"I am pretty skeptical. I don't think [iPhone] will meet the fantastic predictions I have been reading. For starters, while Apple basically established the market for portable music players, the phone market is already established, with a number of major brands. Can Apple remake the phone market in its image? Success is far from guaranteed." - Jack Gold, founder and principal analyst at J. Gold Associates, January 11, 2007
"Apple will launch a mobile phone in January, and it will become available during 2007. It will be a lovely bit of kit, a pleasure to behold, and its limited functionality will be easy to access and use. The Apple phone will be exclusive to one of the major networks in each territory and some customers will switch networks just to get it, but not as many as had been hoped. As customers start to realise that the competition offers better functionality at a lower price, by negotiating a better subsidy, sales will stagnate. After a year a new version will be launched, but it will lack the innovation of the first and quickly vanish. The only question remaining isif, when the iPod phone fails, it will take the iPod with it." - Bill Ray, The Register, December 26, 2006
"The economics of something like [an Apple iPhone] aren't that compelling." - Rod Bare, Morningstar analyst, December 08, 2006
"Apple is slated to come out with a new phone... And it will largely fail.... Sales for the phone will skyrocket initially. However, things will calm down, and the Apple phone will take its place on the shelves with the random video cameras, cell phones, wireless routers and other would-be hits... When the iPod emerged in late 2001, it solved some major problems with MP3 players. Unfortunately for Apple, problems like that don't exist in the handset business. Cell phones aren't clunky, inadequate devices. Instead, they are pretty good. Really good." - Michael Kanellos, CNET, December 07, 2006
"We've learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They're not going to just walk in." - Ed Colligan, Palm CEO, November 16, 2006
I calibrate my growth rates on the assumption that Apple will overtake the combined share of the two money-losing handset vendors.
Sony Ericsson and Motorola are the weakest competitors in terms of portfolio and competence with software. Their sales, units and profits shares for 2008/2009 are shown in the graph above (source: Morgan Stanley).
Therefore, my thesis is that Apple could beat these two weakest competitors in 3 more years.
Here is the basic top-down view:
In 2009 174 million smartphones were sold out of a total of 1.13 billion phones (IDC, Strategy Analytics). Using a 10% CAGR on this figure gives 1.65 billion phones in 2013
Apple obtained 2.1% share in 2009 and about 1.5% share in 2008. My forecast share for Apple:
2010: 3%
2011: 4.1%
2012: 5.5%
2013: 7.5%
During the last quarter, Sony Ericsson held 4.5% share and Motorola 3.7% therefore my 2013 target for Apple is a little less than the sum of what these two hold today.
This results in unit sales for Apple of 125 million units for 2013 and a compound annual growth rate of 50% a year.
Nokia's latest quarterly results and forecast caused a 15% drop in the share price on a day when the S&P rose by about 1%. The drop was the largest single day change in the company's valuation since 2004. The cause for the drop was not macroeconomics or performance in the previous quarter, but the guidance provided.
The shock was in an unchanged low margin and a flat market share. Both of these measures of performance were expected to improve as the overall market improved. What Nokia is saying, in effect, is that it will perform no better than the market average. Naturally, its value should therefore be no higher than the market average.
The trouble is that the "market" for mobile phones is abysmally free of value and hence of profits. Taking the sum of profits for all the major incumbents (Nokia, Samsung, LG, Sony Ericsson and Motorola) we find that net profits for the entire industry are, at best, flimsy, at worst, negligible. But this begs another question: why is value missing in mobile devices--a market that seems to be growing faster than almost any other technology market?
First a few facts:
Focusing only on Devices & Services, Nokia did make a net profit of EUR763 million on sales of 103.2 million phones. That's EUR 7.39 average operating profit per phone. In Q1 Nokia Devices made about EUR 6 per phone, so a slight improvement, but down from about EUR 20 a year ago.
Sony Ericsson entered its fourth quarter of losses.
Motorola entered its 9th consecutive quarter of losses.
Samsung and LG are at about break-even.
So if one were to look at the incumbents, the ~1 billion phones they sell a year seem to be generating barely EUR2 per phone, most of it in the hands of Nokia.
The exceptions are, of course, the entrants RIM and Apple with EUR 60 and EUR 120 profits respectively per phone, orders of magnitude above average.
Nokia seems to be the best of a bad lot. Can Nokia expect to join the entrant cohort or sink with the incumbents? Answering this question forces us to go through a deep examination of what correlates with value in the new device market.
