[Samsung] said it has sold around 4 million Galaxy S smartphones in North America, 2.5 million in Europe, and around 2 million in South Korea in the past seven months.
Samsung's US Android sales are very similarly allocated to Apple's iPhone sales: 40%. But at 20%, South Korea represents a very large portion of their sales (2 million phones sold in 7 months into a country of 48 million). This is understandable given Samsung's distribution power in its home country. However it also implies that Samsung's [high end] Android sales in Asia excluding South Korea are tiny. Only 1.5 million were allocated to outside Europe, US and South Korea--a market that includes the whole of Asia, Africa, Middle East and Latin America.
If we believe that Android is activated at the rate of 300k units per day, then Samsung represents around 40k of that. (10 million over seven months, linear extrapolation.) So where are those remaining 260k units/day going? Gartner calculated that in Q3 Samsung was the leading Android brand (about one third of all units). The Samsung figures make these share numbers very obsolete because 40k/300k is only 13.3%.
It's hard to pin down the market because the share shifts are dramatic and the market's growth is not linear. Nevertheless, intuition and guesswork leads to me believe that Android activations are to a large degree (perhaps two thirds) in Asia. This in turn implies that Samsung is not a major participant in that market.
Since neither LG (who does not have a strong Android portfolio) nor Sony Ericsson or Motorola which have low volumes, (nor obviously Nokia, RIM or Apple) are supplying the Asian Android market, the question is who is? Only HTC remains a contender but it's not big enough to account for the difference and they too are focused on the established Western markets (except for a modest presence in China).
We are left again with circumstantial evidence that "Other" lower tier vendors are carrying the Android torch in Asia. Pdadb.net shows 277 Android models available. Brands like ZTE, Huawei, Acer, Notion Ink, Linx, TMN, FirsOne, Ziss, Kogan, Highscreen, Saygus, Haier and Forsa are selling Android devices (though not all in Asia).
Not that there's anything wrong with that
If there is a worry it is perhaps that Samsung might find it hard to maintain the top spot in supplying Android once the unbranded vendors make it through the distribution obstacle course (as HTC did when it reached 80% of the Windows Mobile share.)
If one is to argue that Android empowers the desperate incumbents, then one has to also agree that it also empowers the more nimble entrants--inevitably leading to even more desperation.
[Updated: thanks to reader @UVStaska who noticed on glaring error in the analysis. I had failed to see the "S" in the original quote and been assuming the 10 million figure represented all Samsung Android sales. The Galaxy brand is the Android brand but the "S" model is only one product within the line-up. Samsung Android sales are likely much higher than the 1.5 million I assumed.
Back to the drawing board with the question of Samsung's strength in Asia. One does still wonder how well they are doing relative to entrants.]
With a market share of 31.5 percent, Nokia is still the largest vendor of handsets in the Indian market, followed by Chinese brand G'Five with about 10 percent share, IDC said on Wednesday.
No, I haven't heard of G'Five either. The article goes on to say that there are 68 new vendors in the market accounting for 41% of total shipments. There were only five new vendors with a share of 1% in the first quarter of 2008.
It was not long ago that Nokia held over 70% of the Indian market. That market is now larger but the share for Nokia has dropped by half at least. The share was not lost to Samsung but to 63 new entrants. They managed to capture 40% of the market, roughly equal to what Nokia lost.
These new vendors will launch Android phones next year or the year after that. According to IDC, Android obtained 9.4% in the third quarter up from 2.9% y/y. The number of Android models went from 2 to 19 in the same time frame.
What does this mean for Your favorite mobile OS?
I'm sure many will use the Indian example as evidence of the inevitable ubiquity of Android. However, I would note that data networks are still very sparse in India and 3G has not reached a level of penetration that makes mobile broadband a common experience [citation needed].
The funny thing is that this lack of connectivity is not likely to be an obstacle to Android as it wasn't an obstacle to Symbian in the pre-3G era in Europe. More than half of Nokia's smartphones were selling without data plans in Europe well into 2009. Nearly all were selling without data in Africa, Middle East and India. Smartphones without data plans are just high end feature phones. They can be used for picture/video taking, listening to music/video, FM radio and, if they have a keyboard, for more productive text messaging. In emerging markets dual SIMs, FM radio and removable storage are killer features. Mobile browsing isn't.
A lack of broadband is however an obstacle to the iPhone. Here's why:
With the exception of those seeking "luxury" phones (a very small minority), the iPhone is too expensive in markets without subsidy. That's because the price Apple sets is very high (€630 or well over $800 at retail). This is not entirely because the product is inherently more expensive. Much of that extra cost is margin for Apple. What makes it popular is that much of that extra cost is paid by the operator who accounts for it as a subsidy. Don't pity the operator though. That subsidy is there for a reason: because the product entices users to data-oriented consumption at a higher monthly service fee.
The entire business model for the iPhone is to wrap a high-ARPU mobile broadband service plan with shiny metal and glass.
Put another way, an iPhone without a broadband connection is just a voice phone with an integrated iPod touch. You're better off getting a cheap phone and an iPod, or maybe an Android or Nokia phone.
When the iPhone 3G launched in India in 2008 with a price near $1000 it flopped. Many were quick to note that Apple did not understand the market. However few pointed out that the "3G" in the product's name was not just a marketing ploy. It was its Raison d'être.
To study the impact of iPhone in emerging markets you need to first plot out the penetration of mobile broadband.
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.
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.
My bet is that by the end of 2012, it will be hard to find any branded phones which won’t run a smartphone
I also showed how pricing has evolved over the last three years.
Two days later an article in Fortune's Google24/7 blog highlighted the possible price points of low-end smartphones:
I had a chance to speak with Jim Tran, VP/GM – Handset Line of Business for Broadcom, who was able to elaborate on the details of the new processor and what it meant for the industry. Here are some of Broadcom's bullet points:
The BCM2157 baseband, since it combines many functions on one chip, is able to run more efficiently, meaning less battery power will be needed than on current basic handsets
Low-cost, low-power, 65 nm digital CMOS process means the silicon will be cheap
The dual-core processors will run at 500-800mhz.
Supports portable Wifi hotspot and Android 2.2 and up
But the kicker is the price. Tran says that phones made from the BCM2157 chipset will retail for under $100 and may dip as low as $75. Those devices should debut in just 3-6 months (and we might hear about them next month at CES)....
To be clear, That sub $100 price is not the cost of materials, it is the suggested retail price after the manufacturers (and carriers) have taken their profits.
My own data shows that the average selling price for the top eight phone vendors for Q3 of 2010 was $156. Smartphone-only vendors were charging $450 on average and diversified vendors selling both smart and non-smart phones were charging $144 on average.
Nokia's ASP for its entire line-up was $88 (spread over about 84 million non-smart and 26.5 million smartphones).
What strikes me about the claim from Broadcom is that a $100 retail price for a smartphone implies an ASP of about $85 or so (assuming $15 or a very modest 18% channel mark-up).
That means that a smartphone could be built using this chip which would have nearly half the average price of all branded phones sold last quarter.
It would also be priced cheaper than the average price Nokia charged for all its phones (75% of which were non-smart phones.)
And this type of phone could be available not in three years in three months.
The chart above shows how prices could collapse.
Of course, low price is not the only condition for the widespread substitution of smart devices in vendor portfolios. But it does take away a significant objection. It no longer seems far-fetched to say that in another two years the price points for smartphones will be low enough to make them marketable in all markets. This may in fact be true next year.
I suspect that non-branded vendors will lead the way and make these devices widely available in emerging markets. The question will then be entirely up to the branded vendors whether they will follow or will they try to market dumb phones vs. smart phones at similar price points. Will buyers opt for a branded device with no ecosystem or unbranded device with the Android ecosystem?
It becomes harder to envision any reason why non-smart devices will earn positions in portfolios two years from now.
Note that I'm not suggesting that the market for high-end smartphones is threatened yet--there is still a lot of innovation that still needs to happen to shape that market into one of mobile computing (vs. mobile phoning).
Instead, what I am suggesting is that the bottom of the phone market is very vulnerable to becoming smart. This may sound like an odd sort of disruption, but it's a very sinister threat to companies who are in the business of selling brands and not platforms.
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.
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.
[ITG sent an explanation of their methodology and there is no indication that the data represents inside information.]
ITG Investment Research analyst Matthew Goodman is forecasting monthly sales record for all of Verizon's devices "based largely on our proprietary daily point-of-sale data from thousands of independent wireless retailers across the US."
Assuming the data is accurate, we are going to dive into it but I will state up-front that without confirmation, the conclusions below should be taken with a grain of salt. All statements should be read with a preceding "if the data is accurate..."
So, if the data is accurate, here is what I conclude [1]:
Verizon Has three strikes against them:
The iPhone has stolen their growth
They are facing the prospect of a single OS platform supplier
Android is not competitive vs. iOS
The iPhone has stolen Verizon's growth
The chart below shows the performance of all of Verizon's smartphones vs. the iPhone at AT&T. The area chart shows how Verizon's volumes grew from 2.7 million in Q1 to 3.3 million in Q3. Not a bad story in itself. However, the iPhone at AT&T went from 2.7 million to 5.3 million in the same time frame. Relative to just the iPhone, Verizon has been underperforming over the last quarter.
Those additional 2.4 million iPhone/AT&T activations in Q3 could be due to replacements but the same could be said for Verizon's volumes. The fact remains that iPhone alone is nearly twice the volume of all of Verizon's smartphone activations.
Just to be clear, this is a direct, apples-to-apples comparison. AT&T and Verizon smartphone performance figures are highly comparable. The two operators are highly representative of the US market. AT&T and Verizon Wireless raked in 75% of all mobile data revenue in Q2 of 2010 and account for 62% of the U.S. wireless customer base.
In addition, Verizon enjoys a larger customer base (has 92.1 million subs vs. AT&T's 90.1 million.) Over the time frame of the data the overall market did not increase dramatically therefore the conclusion that AT&T's win is Verizon's loss is plausible.
I used quarterly data so that iPhone at AT&T could be compared. But if we look at monthly data, the story gets worse:
These are absolute volume figures. You can see how RIM's fade was replaced to some degree by new vendors. However, growth hit a wall in August. Following widespread iPhone 4 availability, sales dropped. Coincidence? Perhaps, but the drop happened even with the addition of Samsung volumes.
That's strike one.
Verizon is facing diminished degrees of strategic freedom
The other notable is that even though Verizon doubled the number of vendors selling smartphones, it seems they are growing their smartphone base slower than the overall market.
Consider each vendor's share is shown below:
From three vendors to six. Shares are roughly evenly split (except for Palm) but none of these vendors are able to drive volume growth.
Consider that Motorola Droid is outselling RIM. This should be rightly noted as amazing. It plainly shows the power of Android. However that power is not something Verizon will benefit from. Quite the opposite.
Consider the share map by units and share of each OS:
Android (and WM, though that's likely to be a very tiny part of the green area) made up 75% of all smartphones sold in October. It's possible that the share could grow to 90% as RIM continues to fade.
For Verizon this would be a serious problem. Although Verizon used to have a disproportionate share of RIM's products, that OS was not enabling an ecosystem like Google's. It was a product narrowly defined around messaging. Verizon is facing the prospect of a single OS supplier who may or may not maintain alignment with Verizon's core profit algorithm. If they diverge, Verizon's bargaining power will be strictly limited.
Strike two against Verizon.
Android is barely enough to keep the battle with AT&T from becoming a rout.
In an apples-to-apples comparison, in Q3 the iPhone at AT&T outsold Android at Verizon (remember, same addressable market) by a factor of 2.5. This is with a variety of devices and vendors thrown in the market. We hardly ever get to see this finely grained a comparison when looking at platforms.
I wrote this up as a lack of competitiveness. It may seem provocative, but I define competitiveness narrowly: the competition is for a purchase decision on equal terms. These purchase decisions are fiendishly complex to predict, but the data speaks: whether it's due to brand, visibility or performance and in spite of "antennagate" the iPhone is cleaning up.
That's strike three.
The devil they know
By 2009, Verizon was probably optimistic that they could head off AT&T (and Apple) at the pass. With the vast array of vendor Android roadmaps laid out in front of them they saw a way to stem the flood of defections. I think that optimism dissipated sometime this year and was replaced by a more dreadful prospect than what iPhone presented in 2007.
It is perhaps coincidental that the rumors of a Verizon deal with Apple seem to have started in earnest right after August. It's thin, circumstantial evidence, but the only evidence we have to corroborate the data above is that Verizon has been signaling more desperation.
Reading further into the data, I would say Verizon faced these problems and decided that they had to throw in the towel. Apple may be the devil, but so could be Google. Apple was predictably evil. But Google? The devil you know is perhaps better than the one you can't predict.
What's more, the devil Apple seems to be helping your worst enemy way too much and the unpredictable one does not seem to help all that much.
Final question: how many iPhones will Verizon sell
I think this data shows that Verizon has another reason to sell the iPhone. The underperformance of their smartphone franchise is not the only determinant, but it is perhaps another straw on the camel's back.
What would happen if (or more likely when) Verizon sells the iPhone? I believe they will sell them at the same rate as AT&T does.
The data shows that Verizon sold, on average, about 3 million smartphones per quarter during the first nine months. That's about 1 million a month. That was based on three platforms, six vendors and widespread promotion.
The iPhone sold almost 4 million a quarter over the same time period.
Verizon users bought smartphones at a lower rate than AT&T users bought iPhones. This is even though the two carriers have approximately the same subs base which churns very slowly. Since a mass-market product will appeal equally to statistically equivalent populations the product should be taken-up with similar vigor.
So the question is not whether Verizon can sell iPhones at the rate of 4 million a quarter. The question is only whether these 4 million will be in addition to the 3 million that are currently buying non-iPhones.
My guess is that the 3 million run rate for non-iPhones will drop, but not to zero.
The impact on the other vendors supplying Verizon may be strongly negative depending on the level of promotion Verizon puts on the product. That promotion budget is usually fixed as a percent of sales. What Verizon applies to iPhone will be taken out of what is spends on Droid. I have always said that operators will be motivated to balance their supplier power. The promotion budget is the primary instrument to meet that end.
On the other hand, the overall market will grow so 2010's 3 million/Q will be 2011's 6 million/Q. There is plenty of room for multiple platforms.
So my conclusion remains that iPhone will find at least 8 million new users with Verizon. The analysis above give me confidence to increase the upper bound to possibly 12 million.
Verizon striking out means they need to change the way they play. The iPhone is a new ball game.
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[1] To assemble this discussion I used only the data provided in the article linked above and the officially published iPhone activation numbers from AT&T. Obtaining specific smartphone vendor volumes is a matter of reverse engineering the share chart and cross-referencing it to the table of vendor sales.
When comparing smartphone platforms it's tempting to consider the global market as unified and commonly addressable. However, when you look at individual countries some strange patterns of behavior emerge:
Indonesia, the fourth most populous country in the world (230 million people) loves Nokia's Communicator. It's the ultimate mobile status symbol.
Japan had one of the largest installed bases of Symbian phones. The version running in Japan is not compatible with versions elsewhere. Famous for its Galapagos mobile culture, the iPhone is changing what the Japanese consider the basis of phone performance.
The iPhone just became Korea's favorite smartphone even though hegemonic Samsung and LG are doing a roaring trade selling Android phones elsewhere.
The US has four incompatible 3G network technologies in widespread use. No widely distributed smartphone phone works with any two. Blackberry ruled supreme until AT&T started promoting the iPhone and Verizon started promoting Android.
Latin America loves BlackBerry. BBM is wildly popular as an SMS alternative.
Saudi Arabia loves BlackBerry. When face-to-face conversations are taboo, the BlackBerry is a social lubricant.
Australia loves the iPhone. Android is almost non-existent.
Italy has more smartphones per capita than the US. The majority are made by Nokia.
China uses two incompatible 3G technologies. The most popular (TDSCDMA) is not available anywhere else. WiFi was illegal in phones until this year.
Germany has a disproportionally large installed base of Windows Mobile
There are no Blackberries in Finland.
Although some of these idiosyncrasies may be cultural (like the Indonesian penchant for large devices) most of them are due to operator decisions. In some cases operators choose incompatible network technologies to protect from competition. In others they promote local vendors or price certain products out of reach.
Sometimes big bangs take place and demand explodes for "banned" technologies or vendors. However, it's just as easy to see how the pendulum can swing against free market choice.
Ultimately users and device vendors are at the mercy of operator decisions. In the long term operator control over platforms might diminish but it will take many years.
The difficulty in analyzing the smartphone market lies in its extremely rapid growth. With the market growing at 90% (and 400% in some areas like China) the forces of demand and supply are disconnected. It's impossible to discern whether a purchase decision is made from a choice of comparable alternatives or if it's made from a choice between buying nothing and some alternative.
Furthermore, another problem lies in distribution inefficiencies. The global phone market is nominally serving 4.6 billion consumers but they are not all participating in the same market. Devices and the services they are bundled with are not fungible globally. You cannot buy a phone is one country and easily couple it with service in another. You can't even transfer one bundle from one owner to another within the same country. Products are available only in some countries or some operators and not in others.
Commentators focusing on mobile OS platform shares assume a zero sum game and a liquid, efficient market. Both assumptions are false. They also assume that the platform is a basis for the choices made (rather than the device, the pricing illusion attached to the device, the service plan, availability, point of purchase and network switching costs, etc.)
There is data where competition for a single purchase decision by two comparable products with comparable specs and price plans can maybe show a preference. However that data is not public. Only an operator like AT&T who sells both Android and iPhone through the same channel has that data and they're not sharing.
The closest I came to analyzing this was in a blog post last May. However, that data is obsolete. Since then Android growth has accelerated rapidly as vendors who were not making smartphones (Samsung, Asian second tier, Motorola and Sony Ericsson in that order) began making smartphones in volume. Their only choice in entering the market was Android. This supply-side view of the market is much more relevant than demand-side assumptions because the market is supply constrained.
Another way to see it is this: If there is a shortage of bananas, you can't make a case for Costa Rican bananas being preferred over Honduran bananas. People will buy whatever bananas they can get (even if one may be preferred over the other). If Honduras can produce twice as many as Costa Rica then they will sell them all and it says nothing about their quality or end user preference or whether that volume advantage will be sustainable once the shortage abates.
60.7 million people in the U.S. owned smartphones during the three months ending in October, up 14 percent from the preceding three month period, representing 1 out of every 4 mobile subscribers.[...] Despite losing share to Android, most smartphone platforms continue to gain subscribers as the smartphone market overall continues to grow.
29.7 percent of U.S. mobile subscribers now own smartphones that run full operating systems.
The most popular smartphones are the Apple iPhone and RIM Blackberry, which are caught in a statistical dead heat with 27 percent of smartphone market share in the U.S. Twenty-two percent of smartphone owners have devices with the Android operating system.
I've been tracking the Nielsen data and using it as a basis for forecasting the penetration of smartphones. While most coverage of this data focuses on splits between current OS platforms, I will look at competition with non-consumption and the impact on operator services.
The chart on the left shows the historic penetration of smartphones since mid-2009 based on Nielsen's reports. The chart on the right is my forecast. This is an update from the last quarter's chart here. My forecast was fairly accurate with respect to platform shares in the last quarter so I've had to make only small adjustments and extended the forecast one quarter further out. [1]
If my forecast is correct, smartphones will make up 50% of all phones in use by the end of 2011. That's up from nearly 30% today and 18% a year ago.
One in three of all phones in use will be either iOS or Android. That adds up to about 80 million users; up from 35 million today. Overall, 120 million Americans will be using smartphones.
Now consider the consequences for how services are delivered by operators. The most popular product operators will be selling will be unlimited data plans. One year hence, by 2012, unlimited data plans may become the largest service revenue generator for mobile operators in the US. Pricing and competition will inevitably be in a state of extreme flux. I leave the consequences to the imagination of the reader.
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[1] Note that the charts show share of phones in use, not phones sold in a particular point in time. In other words, this is measuring platform consumption, not units sold.
According to Morgan Keegan analyst Tavis McCourt Chinese consumers purchased 8 to 10 million smartphones last quarter--implying 400% growth from the 2 to 3 million last year.
How quickly things change. According to McCourt, Android now represents nearly 50 percent of smartphone volume in the country, up from zero last year. And Apple’s iOS, while a niche player with less than 500,000 iPhones sold last quarter, is ramping up quickly, thanks to the successful launch of the iPhone 4 in the country last month.
The growth of Android is far beyond what a single company can engineer. It represents the effect of uncoordinated and uncontrolled distribution. Google does not have to market, license or write contracts for Android. It also does not necessarily benefit from this work. It enables excess device manufacturing and distribution capacity to embrace browser-enabled devices.
Android is clearly accelerating smartphone adoption and is competing very effectively with non-consumption. Without Android I doubt many of the Chinese manufacturers who are building more smartphones today would be doing it.
One question that remains with is whether Google will do anything to police the platform or leave it to run and splinter.
Another question is what will current Android users aspire to purchase for their next phone.
The release of the iPhone is rightly acclaimed as a watershed event in the history of telecom. It was a sensation. But it was also a product that was widely underestimated and dismissed. Even today expert opinion is divided. The critics of the product transitioned directly from labeling it a superfluous bauble to an obvious and copyable sustaining innovation. Advocates of the product describe it as revolutionary and dazzling with the potential for capturing significant profit share due to premium pricing and positioning.
So which is it?
I'll argue that it's none of the above. The iPhone is not superfluous, not easily copied, not revolutionary and not a premium product. What it is is disruptive.
First, we have to quickly define disruptive potential.
A product is disruptive if it competes with an existing, incumbent set of products on a new basis. It competes along a new measure of performance. That means it's either "low end" and hence cheaper, simpler, more modular and conformable, or it creates a "new market" where completely new measures of performance or quality are relevant.
In both "low end" and "new market" disruptions the product is usually wrapped in a business model that insulates it from incumbent response due to inherent asymmetries. Incumbents will find the economics of the entrant product unattractive and will be motivated to ignore it or actively avoid copying it.
The consequences of disruptive product entires are often catastrophic for the incumbents because, over time, the disruptor product vacuums up all the profits in the industry, robbing the incumbents of the fuel to respond by the time they become motivated to do so. In essence, the transfer of value to the new basis of competition happens so slowly that the threat is imperceptible until it's too late.
If we look at this definition, it's startling that the iPhone does not seem to fit.
As a phone, it's not cheaper, nor modular and hence not "low end". It did not create a new market. As a phone, although it did recruit more regular phone users into becoming smartphone users, it was not the first or last phone to do so. Its phone business model was not a radical departure. It was not ignored by the mobile phone incumbents who reacted with various degrees of urgency and vigor. It was actively copied in every way from the UI to the ecosystem to the pricing model and distribution.
The only thing that seems to have happened according to the disruptive formula was the transfer of profits from incumbents to Apple, at least temporarily.
So the iPhone seems to be correctly classified as a sustaining innovation. Something that moves the phone market forward and which, except for a temporary misallocation of profits, will entrench the incumbents after they manage to copy it effectively.
However, here is where we have to dig a little deeper.
Market analysis easily becomes myopic when looking only at a market defined by a product. I've argued in the past that strategic insight comes from looking at products that cross over their market boundaries. Especially products that are hired to do different jobs than the same products in their categories. The iPod may seem like an MP3 player but it caused catastrophic profit collapse in multiple industries. It knocked out the CD business, it crippled the component audio system "Hi-Fi" industry, it razed the music retail business and affected the entire music value chain. It's still pounding at the gates of video and TV production. And, almost as a side-show, it crushed the Walkman.
Even though it was a music player, the MP3 device market was the smallest target for the iPod. It turned out to be far more dangerous to ancillary industries. The reason is subtle: it competed as an integrated ecosystem. You hired the iPod to serve you music everywhere, not just in your living room. And it did the job in an integrated way from source to earbuds taking what was a hodgepodge of modular components built around analog music and smoothly integrated them to deliver music in new, non-consuming contexts.
The lesson is therefore that when looking at the iPhone one has to look at ancillary industries not just at phones.
Phones have always been a component in a wider inter-related telecom value network. Even today they are often called "terminals" in the industry meaning that they are the end points of a network. Similar to the PC, the iPhone enables a migration of intelligence away from the center toward the edge of the network resulting in a de-valuation of the network itself.
I argue that the real disruption of mobile computing (i.e. iPhone) is made possible not by the smartphone technologies but by mobile broadband. Once broadband became mobile with 3G the smartphone could shift its focus (jobs it's hired to do) from voice to data. That shift is disruptive to incumbents because they built their businesses around operator distribution and operator service economics. With apps, mobile computing brings with it services which allow all communications to be independent of operators. Selling ringtones, maps, email and video-on-demand are all dead business plans today. But operators clung on to these hopes for many years and forced vendors to comply to this strategy.
The incumbents relied so much on the telecom value chain, where the value flows from the monthly service charge, that they would not deploy technologies or business models that were asymmetric to operator business models. This is the root cause for Nokia and Samsung and Motorola and LG "missing the boat" on smartphones. All the vendors had the pieces of technology on their shelves. But when they took these technologies to their customers, the customers rejected the package.
This is why entrants like RIM and Apple could easily gain a foothold and grow. They had modest volumes, sold new concepts like business email and new UIs with iconic designs, but did not go after the core business model. This is similar to how iPod/iTunes got a toehold with the record labels. By the time the disruption took hold, operators were addicted to the new high-ARPU being generated even though they were all pure bitpipe plans. A bird in the hand is worth two in the bush, so the new device brands stuck.
Do the incumbents still have time to respond effectively? It's less and less likely. They cannot build the new computing ecosystem without the distribution power of operators. Note that iPhone 'clones' in Android are still sold via operators and that nobody is interested in making either iPod touch clones or iPad clones sold independent of the operator channel/subsidy model. This is not because of technical or economic reasons but because of a lack of distribution (and lack of integrated content).
When you step back and look at the phone in the context of the network business model as well as the shifts in consumer jobs to be done you realize the potential is far greater than taking share from incumbents. The iPhone is not divided into a portfolio of different phones, but it's a part of a portfolio of new mobile computing products. It just happens to be the only one which still depends on the cellular operator distribution network.
Seen as part of a new mobile computing paradigm and following the trajectory of the mainframe, mini-computer, PC and laptop, the iPhone is an essential, non-superfluous device for a vast population of new users.
Seen as an integrated app ecosystem with strong network effects, it's not easily copied. Responses that only account for it as a glass and metal object of desire will fall way short of being competitive. As the hardware was always available to competitors, it's not a revolution in hardware or even in user experience.
Most importantly, seen as a computing alternative merged with a communication appliance, it and its siblings are not premium products. The pricing and service structure around it make it seem a low cost alternative for solving the jobs it's hired to do.
