RIM

Operating profits for the eight vendors I track increased at a compounded 25% over three years. As with revenues, the growth is concentrated. The following chart shows operating profit growth across three time frames: three year compounded, year/year and sequential. Loss-making vendors are excluded from this chart.

Looking at individual performance, the following chart shows how each vendor performed over time:

The mobile industry has historically been unforgiving. Companies that fall into unprofitability tend to stay there or exit/merge. This has claimed many: Ericsson, Siemens, Alcatel, BenQ, Palm, Sony, Toshiba, Handspring, NEC, Hitachi, Casio.

LG, MMI and Sony Ericsson are all in the same precarious situation. We'll have to watch carefully whether a recovery is possible for any of them and whether Nokia will reach the same rocky position.

Looking at operating profit shares, the picture is plain to see. While RIM, Samsung and HTC have maintained profit share, between 2007 and now, profit share has mostly shifted from Nokia to Apple.

But this does not tell the whole story. Here are the absolute amounts of operating profit from mobile phones. Exactly three years ago Nokia was earning 47% profit share or $2.35 billion. This past quarter Apple's 57% was equivalent to $5.23 billion, more than twice as much.

Finally, the league table shows how Nokia has now dropped from second to fourth in the last quarter. Not only Samsung, but RIM has overtaken Nokia as well.

It's become routine to see Apple at the top of the list of profit earners from mobile phones.

Revenues for the eight phone vendors I track increased overall during the last three years. The compounded annual growth was about 13%.  However the growth was not evenly distributed. The following chart shows revenue growth across three time frames: Three year compounded, year/year quarterly and sequential quarterly.

I separated the incumbent companies from the "entrant" smartphone vendors for contrast.

Looking at individual performance, the following chart shows how each vendor performed over time:

The share of revenues is shown in the following chart (I highlighted the smartphone cohort):

The ascent of the entrants is shown in the league table below:

The headline that Apple became the biggest phone vendor in the world by revenue has already flashed across the feeds of the world. It's another straw on the camel's back. But I'd like to take a moment to note that this is not just an Apple story.

If you look at the league table, RIM, HTC and Apple were at the bottom three years ago and now they are either in the top or the middle. RIM in particular deserves credit for reaching the fourth spot and staying there. HTC also has shown a late surge to fifth passing LG, Motorola and Sony Ericsson in the process.

Combined, these vendors went from taking in about one dollar in 20 (6%) in Q2 2007 to nearly half the money (46%) in Q1 2011. As the market also grew, the total amount went up an order of magnitude. From $1.8 billion to $21 billion in three years. Not bad for niche players.

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.

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.

IDC released a new forecast for the worldwide smartphone market which included a long range forecast--all the way to 2015.

Most people fixated on the share data in 2015. Not hard to do since whoever wrote the press release highlighted this flashy headline. Putting aside the three significant digits of accuracy on every data point and the hard to swallow declaration that a painfully underperforming (in more ways than one) Windows Phone will overtake iOS and BlackBerry to become the second largest platform by units/year in 2015, there is much more to the report.

Using only the public data from the press release we can put together a pretty good picture of the transition being forecast and determine some of the (unstated) assumptions being made. It's these assumptions about the underlying market dynamics which illuminate far more than the falsely precise share data.

The following chart shows both historic platform performance (which is detailed in the Asymco Interactive data sets on a quarterly basis) and the forecast based on the given compound growth rate published.[1]

I see three main assumptions being made:

1. Nokia (or more precisely Symbian) share will be swapped for Windows Phone. The transition period 2011 to 2015 shows approximately 150 million Symbian devices will be sold which is the stated goal for Nokia. IDC is making an assumption that the hardware vendors will roughly maintain their respective shares irrespective of platform dynamics and that Nokia will switch its share of users from one platform to another in a predictable way.
2. iOS and BlackBerry will maintain share. Presumably this is also driven by hardware channel dynamics and relationships with carriers.
3. Android will grow share slightly but the vast bulk of growth will come from market growth.
4. Market growth is strong but undramatic.

Overall this is not a controversial set of assumptions.

Except perhaps that it assumes that the basis of competition in the market is unchanging. Of course it's well understood that the basis has shifted during the tumultuous 2007 to 2010 and forecasts made before the iPhone was launched sound absurd today.

But IDC says that the unpleasantness won't happen again. From listening to the conversations going on today on this blog and elsewhere, their assumption that things will not change (again) is fairly deeply ingrained, indeed conventional wisdom. In that sense IDC is not taking any liberties with the future. The projections of current realities onto the future leads to this type of forecast and status quo defenders should be satisfied, if not rejoice.[2]

However, there are a few more consequences of even this uncontroversial forecast which should make keen observers sit up and notice.

If we look at more than the before and after snapshots and comfortable pie-splitting sound-bites there are some profound seismic things being implied.

For example the entire market will be nearly 1 billion smartphones a year (in four years!). Even more startling, considering the "race to a billion" discussion we've been having, some of the platforms seem to be reaching that threshold rather quickly. The following chart shows the cumulative unit sales for the candidate platforms on a log scale:

 

Android is considered likely to break one billion units in five years post-launch. Windows Phone will sell nearly half a billion units and Blackberry will be well over that number.

I tallied the cumulative platform unit totals below:

No less than four platforms will have sold half-billion units by 2015. The suggestion that Android will "win" by having the most units sold seems as hollow as the suggestion that Symbian "won" by having the most users in 2008. Not so much because it will go on to lose them, but because there were plenty of viable alternatives for users to buy and developers to build for. Half a billion users cannot be easily ignored.

So even "safe" assumptions can lead to astonishing results in this market. Namely, IDC is saying that the smartphone market will not have any platform losers.

There is one more thing the report implies. If you look at the ranking of leading platforms (by units/year) in 2008,  2015 and, with a little extrapolation, 2016/2017 you get:

Rank in 2008		Rank in 2015	Rank in 2016/2017
Symbian		Android	Android
Other		iOS	Windows Mobile
RIM		RIM	iOS
Windows Mobile		Windows Mobile	RIM
iOS		Symbian	Other
Android		Other	Symbian

 

In other words, there is a complete reversal being projected. An almost perfect flip: those on top end up at the bottom and those on the bottom end up on top. That's about as controversial as it gets. Pretty impressive for a set of safe assumptions.

--

Notes:

1. You should ignore the shape of the curve between 2011 and 2015 as it assumes the CAGR is applied to every year. Although the press release shows a CAGR, the actual report may include various fluctuation in yearly growth. The starting point of 2011 and the end result in 2015 however should be the same.
2. If, on the other hand, you believe that exponential growth, rapid gains in communications speed, new breakthroughs in interaction with devices, and entrants winning with new business models are causes for a disruption, then perhaps extrapolation may not be the way to forecast this market.

Yesterday RIM reported their quarterly earnings. The results were mixed to slightly negative and the shares were down 10% in after-hours trading.

I'll work through the smartphone market data at a later time but for now what I want to focus on is RIM's strategy which really means understanding RIM's intentions or their approach to the market. For that we have to go straight to the source: what management actually says. Trouble is, management often speaks in a jargon that is unfamiliar to people (sometimes unfamiliar to anyone outside the company).

Strategy analysis involves translation. So here follows the interpretation of Jim Balsillie's remarks during the conference call (transcript sourced from Businessinsider.com).

What Balsillie Said	My interpretation
First of all, what we announced is Gingerbread. This is not Honeycomb. I don't know what the number of Honeycomb apps is, but it's not very many. Whereas Gingerbread they've got lots of them.	RIM will support Android apps in the PlayBook tablet. As there is not one Android, I need to clarify that RIM will not support Android tablet (Honeycomb) apps but Android phone (Gingerbread) apps. So RIM's tablet will support Android phone apps even though our tablet does not actually have a phone in it, but requires tethering to a BlackBerry for cellular data.
You've got the volume of the handset apps, so if you're looking for the tonnage of apps, or some kind of long tail stuff, you've got it.	This support means there will be many apps including apps that are not very popular. We don't like supporting unpopular apps. We like a few good quality apps but this approach allows us to offer all kinds of apps.
At the end of the day, people are going to want performance.	However, many apps will not run smoothly.
You're just not going to get things like gaming and multimedia, you're not going to get the speed going through a VM interface. If you want content, or Flash type stuff, or you're looking at AIR-type, evolving web-type assets, that's what you're going to do.	Games and graphics will not run well through emulation. For processor intensive experiences we will have native execution options or browser apps.
There's no compromise here. You've got the tonnage of apps. And you've got the performance. Do I think the tonnage is overplayed? Yes.	By supporting emulation of Android apps we can offer a large catalog of so-so apps while having a small portfolio of high quality native apps.
But if you think it's about having a couple hundred thousand apps, there you go	For people who value large selections, they can go to one store.
Do we believe it's about super high performance? Yes	But for those people who value quality, they can come to our store.
I'll just offer that observation that today broadly in the world without any specific comment on us or our competitors, there are multiple ecosystem patterns that need to be considered	Beside emulation and native we also think there are many other ways to deliver applications.
Do we believe it's about full web fidelity? Yes.	For example, Flash.
These are concepts that were really relegated as not technically possible, which we're doing here. This is a no compromise environment.	Because of Moore's law, Flash is becoming viable on a mobile device.
If you want to work on Android, great. Do we think people will want to migrate web assets? Yes	Then there are browser apps.
Do we think they're going to want super high performance native assets with the SDK? Absolutely	We will have our own native SDK.
You think they're going to want to use their Flash based stuff for an offline Flash/AIR type environment? Yes	And support Flash.
I'm just not interested in these sort of religious application tonnage issues.  I really think we put that issue to bed.	We have a new platform but catalog sizes can no longer be used against us.
And if you think the whole world's going to want to develop for Gingerbread, fine. Do I think that's going to happen? Then why is there a different environment for a tablet? And you know about the performance issues and you know about the app volume issues, cause it's tough. And that's why QNX matters	Google's ecosystem is fragmented, Android apps are not able to rely on competitive hardware and there is too much competition. That's why developers should target QNX (which is unfragmented, built on fast hardware and there are few apps on it).
Is this stuff going to go more in the browser and HTML 5 and more native? These are going to be strong trends. But if you want these app players for different VMs -- and don't forget we have 25,000 BlackBerry 6 apps	Browser apps will increase in value and we also have legacy BlackBerry apps.
So, at the end of the day, we believe this is going to be about performance. It's going to be about enterprise greatness.	But we believe in a future with native applications running on QNX.
Things like multi-threaded capability, symmetric multiprocessing. We believe it's about an uncompromised web. We believe it's about enterprise security. True multitasking, not with suspension -- and that matters because you're going to want to run these things in the background.	Because QNX is a robust operating system with PC-like performance. It also supports a good browser.
But I'm out of the religious war on tonnage, which I'm delighted.	However, before QNX takes off, we will provide access to catalogs of apps which are built for other platforms.

The juxtaposition of HP's strategy of increased independence and Nokia's new strategy of increased dependence can't be more striking.

HP is probably Microsoft's biggest customer. As the largest licensee of Windows it probably generated more revenue for Microsoft than any other company. The fact that HP invested in a new operating system for its mobile efforts shows a level of discomfort with the lack of strategic leverage.

Nokia, on the other hand, has been resolutely independent in its software strategy. For over a decade it held out against licensing any OS, especially one from Microsoft. The pantomime theatrics that took place over that decade will make a great case study some day.

But now we have a complete reversal of roles: The abandonment of platform independence by a mobile giant at precisely the same time as the acquisition of platform resolve by an IT giant.

It seems almost poetic. And that should be a clue. Whenever you see poetry, you need not look far for some truth.

These chess moves are taking place in the context of a greater game: the collision and disruption of IT and Telecom. It's not surprising that massive market forces are causing incumbents to react. HP, Microsoft and Nokia are in the throes of fundamental disruption. Even if these moves may not be all in the same direction, they each react in ways that make sense to them.

It's also very likely that all the moves are for naught. Incumbents rarely win with reactions. Let's not forget that the entrants came with different business models. Apple and Google are not making money in the ways of Nokia and HP (who are channel dependent) or Microsoft (who is license dependent). The reaction must itself be asymmetric. So far it's not clear where the asymmetry lies.

Read more:

HP/Palm’s Rubinstein believes in integration

WebOS: HP, and HP Only. QNX: RIM and RIM Only

HP’s PC group spends 0.7% of sales on R&D

The reason Robbie Bach was fired

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%.

The following chart uses comScore data to show the relative consumption of Android vs. iOS by the subscribers of the four major US operators. I modified an original chart published by Silicon Alley Insider.

A few observations:

• As of November, the ratio of iOS to Android users was more than 15 to 1 at AT&T.
• iOS at AT&T has twice the users as Android at Verizon
• Although T-Mobile had the Android franchise to itself for all of 2009, it was overtaken by Verizon within four months
• T-Mobile Android consumption has also been nearly matched by Sprint within a year

The rapid eclipse of T-Mobile smartphone penetration makes one wonder how effective Android is as a differentiator for carrier and device vendor alike. It also explains their new pricing model.

The data also gives clues to how iOS at Verizon will grow.

Since Verizon and AT&T have nearly the same number of subscribers, excluding RIM ,which is common to both, AT&T has a far larger penetration of smartphones (16.5 million vs. 7 million.) Is the cause iOS itself or the delay with the timing of Android launch at Verizon?

Other data from comScore shows that much of the gains for Android at Verizon have been at the cost of RIM, so Android has not been entirely additive. Will there be a similar platform switching going on or will iOS be additive to the Android base?

On one hand, the potential exists for a similar number of touch smartphone users at Verizon as at AT&T (15 million as of November). On the other, Verizon is "half-penetrated" with Android. How many will switch (as they did with RIM) and how many will be new users?

I'm not going to make any predictions yet but I would not be surprised if Android at Verizon will flatline if not drop while iOS at Verizon will jump quickly to make the sum of both equal to AT&T iOS in about twelve months. That would imply about 10 million new Verizon iOS users by 2012.

If Verizon users start to switch from Android to iOS, iOS could add as much as 15 million users. It seems that 10 to 13 is a reasonable estimate.

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.

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.

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[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.