smartphone

It's time to re-evaluate the categorization of smartphones. The term has always been problematic. It loosely means a phone that runs an advanced operating system and has third party SDKs. There is no industry standard definition and some call it a converged device or a multimedia device. One analyst famously said that the iPhone did not count as a smartphone on launch because it was not open to developers.

I'd propose a different definition, not based on the attributes of the device, but the jobs that the device is hired to do. This is in a way, the same distinction between Facebook and MySpace. They are clearly hired to do different things by their users and as a result don't directly compete. When you do this job-based segmentation, you realize that iPhones, Android devices and Windows Mobile and Palm are fairly similarly used. Blackberry, however, does not match the profile. (Neither do most recent Symbian devices, though for different reasons.)

The most common jobs I can see in use with the first cohort of devices is (Comscore data exists to back this up)

• browsing
• social networking
• applications/games
• email
• media consumption
• navigation

The Blackberry has relatively poor utilization of any function except for email and perhaps social networking (though the latter is not likely in company-sourced devices). The focus on a large number of jobs to be done is what distinguishes smartphones from the more limited "feature phones". By this logic Blackberry is hired as a "feature phone".

It's also instructive to follow commentary among enthusiasts. It's fairly clear that this segmentation exists implicitly: Android, iPhone, Palm and WinMo are comparable while Blackberries are for a different demographic, different user, different usage.

Finally, there is the gut check. It's become clear to me that what users do with Blackberries is similar to what they do with voice phones: voice and messaging. Although additional functionality is available, it hardly gets used because it's hard to use.

But you may ask: so what? The reason this is significant is that smartphones are embryonic mobile computers with a clear trajectory for improvement. Feature phones are overshot voice phones which are likely to be disrupted by data-centric entrants.

On a different level, it also means that growth stats for the two product types are not comparable. Saying that the Blackberry is outgrowing the iPhone (or vice versa) is meaningless.

It also means that Blackberries, being an evolution of voice products, still have a huge growth potential with those customers which are looking for messaging as an improvement for their good enough voice products and for whom smartphones are over-serving.

Nokia regained top spot in operating profit. I'll leave net profit assumptions aside this time, but Apple is sure to have beat by having far lower R&D as percent of sales.

Nokia Smartphones had a good quarter due to new launches. I show also share and ASP comparisons for smartphones in both companies.

More than half of the 3.5 million smartphones shipping to France this year should be iPhone variant, while Apple should account for about 20 percent of the entire cellphone market's revenue. The company's popularity will have helped smartphones as a whole more than double their share of France from 7 percent in 2008 to 16 percent this year.

http://www.electronista.com/articles/09/12/29/as.many.as.2m.iphones.in.france.for.2009/

In other news:

• Nokia shutters flagship Regent Street store in face of Apple retail’s domination - December 08, 2009
• Nokia sees flat market share as Apple gains - December 02, 2009
• Nokia Chief Strategist: Apple will remain a niche player in smartphones, just like in computers - November 30, 2009
• Nokia to cut another 330 R&D jobs - November 20, 2009
• To understand market share vs. profits, look no further than Nokia vs. Apple - November 11, 2009
• How Apple passed Nokia to become the world’s most profitable handset vendor - November 11, 2009
• Strategy Analytics: Apple passes Nokia to become world’s most profitable handset vendor - November 10, 2009
• Nokia sues Apple claiming iPhone infringement of Nokia GSM, UMTS and WLAN patents - October 22, 2009
• Nokia posts loss of 559 million euros on weaker smartphone sales - October 15, 2009
• Nokia’s earnings plummet 66 percent - July 17, 2009
• Jim Cramer: The problem with Dell and Nokia is that no one wants their products; Buy Apple - July 17, 2009
• Nokia’s failures vs. Apple’s vibrant iPhone platform puts market share at risk - June 24, 2009
• Nokia Ovi Store launch a complete disaster - May 26, 2009
• Nokia ships 19% fewer phones in Q1, bleeds more share - April 16, 2009
• Nokia axes 1700 jobs worldwide - March 17, 2009
• Nokia halts sale of iPhone killer; 5800 handset plagued with major problems - March 02, 2009
• Nokia hops on bandwagon, unveils knockoffs of Apple’s iTunes Store, App Store - February 16, 2009
• Nokia profit collapses 69% in fourth quarter 2008 - January 22, 2009
• Nokia’s profits plummet 30 percent - October 16, 2008
• Nokia’s fatally flawed ‘Comes With Music’ service no Apple ‘iTunes Store killer’ - October 03, 2008
• Nokia fumbles iPhone lookalike-not-workalike launch in U.S. and Europe - October 02, 2008
• Nokia sputters that iPhone ‘not worthy of discussion’ - August 13, 2008
• Apple takes top spot from Nokia on AMR Research’s 2008 Supply Chain Top 25 list - May 30, 2008
• Nokia shares slammed in wake of miss; Nokia CEO calls Apple iPhone ‘niche product’ - April 17, 2008
• The knockoff parade continues: Nokia exec shows Apple iPhone lookalike ‘Tube’; dismisses Apple - April 08, 2008
• Nokia previews blatant Apple iPhone knock-off (with video) - August 29, 2007
• Nokia CEO challenges Apple over iPhone - February 13, 2007

http://www.macdailynews.com/index.php/weblog/comments/nokia_shutters_us_flagship_stores_as_floundering_cellphone_maker_fails/

An interesting note in the latest Canalys Smartphone quarterly summary (http://www.canalys.com/pr/2009/r2009112.htm):

"...in our October study of 600 European decision makers in medium and large enterprises, more than 20% said they expect the iPhone to be the dominant smart phone platform for running business applications in their organisation within the next 3 to 5 years. In France, the iPhone was ahead of Windows Mobile and RIM in this regard – a remarkable result.”

This short quote brought back to mind the recently formed partnership between Nokia and Microsoft to deal with RIM. One fruit of this relationship is a recent job posting atcareers.microsoft.com which seeks Symbian developers to work for Microsoft:

Job Category: Software Engineering: Development Location: India, Hyderabad Job ID: 702365 Division: Microsoft Business Division

The Office team is looking for a self-motivated and highly passionate Developers to contribute in building a new team and drive discipline excellence in the delivery of Office Mobile and Communication experiences for Nokia’s Symbian smartphones.

Microsoft and Nokia have formed a global alliance to design, develop and market mobile productivity, communications and collaboration solutions.

Under the terms of the agreement, the two companies will begin collaborating immediately on the design, development and marketing of productivity solutions for the mobile professional, bringing Microsoft Office Mobile and Microsoft business communications, collaboration and device management software to Nokia’s Symbian devices. These solutions will be available for a broad range of Nokia smartphones starting with the company’s business optimized range, Nokia Eseries. The two companies will also market these solutions to businesses, carriers and individuals.

This project builds on the existing relationship with Nokia who is optimizing access to email and other personal information with Exchange Activesync. Next year, Nokia intends to start shipping Microsoft Office Communicator Mobile on their smartphones, followed by other Office applications and related software and services in the future.

(related job description)

While the iPhone wins hearts and minds in IT through sheer brilliance Nokia tries to become a supplier to IT departments through a strategy deeply rooted in the 1980s: the manipulation and exertion of control over file formats. As IT has diminished in importance (to the point of ceasing to matter to some) it's hard to understand this misplaced alliance with Microsoft over something so inconsequential.

So Dell is making Android mobile phones while Nokia is making Windows PCs. A curious confluence of poor management decisions.

Why is all this dilution of core competence happening? Average punditry would suggest it's all about "convergence" and the overlapping of mobile and until-recently-fixed computing.

Er, not quite.

The economics of plastic bits shipped in cardboard boxes has not changed. It's as lousy a business as it has always been, whether the plastic bits are small or large. Some would argue that the gross margins of mobile devices are higher than those of computers, but that's not true on average. The gross margin on average mobile phones is just as low (<10%) as it is on PCs. There are about the same number of competitors and rivalry and global marketplace.

If indeed, margins were the only story, why would Nokia choose to chase the low margin PC business while holding (albeit very tentatively) 50% global share in "smartphones"? Similarly, why would RIMM choose to chase the low end consumer business (link: Blackberry Pearl et. al.) while having the fat margins of thinly penetrated business devices to wallow in? Finally, why would there be hundreds (literally link: www.pdadb.net) Windows Mobile smartphone licensees, the vast majority of which don't manage to sell more than the 50k minimum volume licenses they are obliged to order?

The fact of the matter is that the money being chased by device vendors is not being paid for devices, but for the service plans those devices enable. More precisely, these businesses are concerned with capturing a share of ARPU uplift from mobile data services. As such, they are mostly offering hardware as enticements for the *change* in ARPU that mobile broadband creates. Success depends on the power of that hardware to compel users to switch to higher data service fees.

The first proponent in his "hardware as ARPU booster" was actually Microsoft back in 2003 when they entered the mobile OS market. One of their value propositions was that Windows Mobile would boost data ARPU. The reality was not so compelling however as WinMo turned out to be too awkward to use for most users and the power of the platform lay fallow. In reality, the first successful hardware ARPU booster was RIM. In the middle of this decade, RIM showed that a Blackberry user could be worth between $5000 and $8000 in NPV ARPU to an operator. For that juicy pie, RIM was handsomely rewarded with a small "cut" that boosted their margins to above 50% making them the most profitable device vendor on the planet.

The realization only began to set in about 2007 as every other vendor began applying resources to deliver ARPU boosters. Apple took note early and executed beautifully with the iPhone, mastering the "get paid for ARPU" game, and in the process capturing 50%+ gross margins and (depending on the quarter) up to 30% of all profits in the device industry.

To forecast how this game will be played and how sustainable this boosterism is, we need to segment or categorize the market according to ARPU. The way to visualize this is what I call the "wedding cake" model. Each cake layer represents the population of users in that ARPU segment and the thickness of that layer represents the delta of ARPU to the layer below.

• The base layer is huge (billions of customers) and represents the prepaid voice market. The average "thickness" of this layer is about $10/mo.
• The next layer is smaller and represents the postpaid voice market. The thickness is about $30, representing the "boost" over prepaid.
• The next layer is smaller still and represents the postpaid voice+data market where the data is a-la-carte. This is typical of plans where the buyer pays separately for certain data services (e.g. email, navigation, etc.) and pays on a per-megabyte basis for browsing. The ARPU differential is about $20.
• Finally the top layer is the unlimited data plan packaged with bucket voice and SMS. Here the ARPU differential is another $30.

At its highest, the cake is about $100/mo., though the width of the top layer and hence the population of paying customers at that price point is quite small relative to the other layers.

Now each layer is covered with a "frosting" which is the device hardware revenue. Obviously the frosting gets a bit thicker the higher the layer, but it's a relatively thin layer compared to the "cake" thickness. In the higher layers the trend is in fact to make the frosting as thin as possible (<$99 NPV or <$4/mo. for a 24 mo. contract.) The devices which enable the top layers are clearly more complex and expensive to make, but the end-user pricing is trending down. The trick is therefore to convince the operators to pay a piece of the "cake" to the device vendor in exchange for migrating users to these higher layers.