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smartphone

  1. Getting to know the meaning of sisu

    Research · 13 comments

    Nokia announced 4.4 million Lumia smartphones were shipped in Q4. That's about 14 million since the Lumia line was launched a year earlier. It isn't however nearly enough to replace the lost sales from Symbian. One year earlier Nokia shipped 19 million Symbian phones in the fourth quarter and the year before 28.3 million. The history of smartphone sales from Nokia is shown below:

    Screen Shot 2013-01-10 at 1-10-6.23.00 PM

    I repeated the forecast I drew up in February 2011 when the platform switch was announced. That forecast was based on the company stating that 150 million Symbian phones would still be shipped. Symbian fell far more rapidly than I (and Nokia) expected and to date only 98 million have shipped. The last quarter's 2.2 million seems to be so low that it will be hard to imagine the platform lasting more than a few quarters.

    My forecast for Windows Phone was 15 million (through Q4/2012) and the 14 million actually shipped is not far off. However, note that the sequential growth into the fourth quarter was lower than the same period last year. For the holiday quarter Nokia received almost no boost. If there is reason to be optimistic it's that there wasn't a decline in overall smartphones into Q4.

    The overall result is that Nokia remains in an operating loss status and it's going to be very hard to recover. No phone vendor has successfully recovered to date. The company managed to book a €50 million one-time payment for IP rights (presumably from RIM) and is sustained by royalties and platform support payments from Microsoft. But even so it's barely breaking even.

    The prospects for Windows Phone may be improving however. Operators in the US continue to talk about it. We don't have a split for AT&T's push this past quarter and estimates suggest that 80% of smartphone from AT&T were still iPhones but Verizon will also push the platform and there are suggestions it's doing well in Germany. HTC has also launched some WP flagship phones and may have had a good December as a result.

    That translates into steady progress. But the growth of Android and iOS continue as well. Windows Phone needs to continue to persevere in adverse conditions for years to come. The Finns know a thing or two about that.

  2. When will smartphones reach saturation?

    Research · 27 comments

    50% penetration for smartphones in the US turned out to be fairly predictable. I tracked my predictions based on comScore data and the results are shown in the following graph.

    Screen Shot 2013-01-04 at 1-4-6.50.52 PM

    I began making predictions in May 2010 and updated the estimate every month since. As the chart shows, the prediction converged to early September 2012 by early 2011. The actual date was sometime in late August 2012.

    The reason this prediction was relatively easy was because the rate of penetration growth was mostly linear throughout the period of 2009 to 2012 or from 17% to 50%.

    In fact, the consistency continues even above 50%. The following chart shows the weekly new smartphone users add rate. No slowing seems to be evident for the few months since 50% penetration was achieved.

    Screen Shot 2013-01-04 at 1-4-6.51.02 PM

    So if we assume that this rate will be preserved or increase slightly, how soon can we expect smartphones will reach 80% penetration in the US?

    Screen Shot 2013-01-04 at 1-4-6.51.09 PM

    My guess is now August 2014.

  3. The last feature phone

    Research · 112 comments

    During the last 12 months 31 million American phone users abandoned the use of feature phones. During the last 24 months over 60 million switched. Over 550k users are switching every week and this rate of switching has not changed much since late 2009.

    Screen Shot 2013-01-03 at 1-3-3.26.17 PM
    Screen Shot 2013-01-03 at 1-3-3.26.24 PM

    Some of this switching has to do with demand for smartphone services but some of it is also due to a decreasing supply of non-smart phones. The shelf space being allocated to smartphones is nearing 100%. My single sampling of a Wal-Mart store shows the following data:

    Screen Shot 2013-01-03 at 1-3-4.11.18 PM

    Looking at individual carriers, AT&T ranged one feature phone and 7 smart SKUs. Verizon's ratio was 2:8 and T-Mobile's was 4:5.

    T-Mobile has been lagging in smartphone adoption and as they transition in 2013 it's possible that the AT&T ratio of 12% shelf space dedicated to feature phones will become the norm for the US. And as the US goes, the world will follow.

    With shrinking shelf space comes an accelerated decline in the product category. It may not come in 2013, and perhaps not by 2014 but it's quite possible that by 2015 the last feature phone will make its appearance in the US.

  4. The uncanny similarity between EU and US smartphone markets

    Research · 31 comments

    comScore released one of its rare updates to the EU5 (Spain, UK, France, Italy and Germany) smartphone market. Note that the data is claiming to show installed base and not sales in any particular period. What interests me is a comparison or contrast between the European market and the US market.

    First, total users.

    Screen Shot 2012-12-19 at 12-19-7.30.57 PM

    The EU has about 500 million inhabitants while Europe overall has 731 million. The EU 5 total about 314 million which is very nearly the same as the US (311.6 million). Therefore the EU5 is a good comparable to the US in terms of population. As the graph above shows it's also remarkably similar in its adoption of smartphones. Note that the scale reflects users and since the populations are very similar then the penetration should also be similar.

     

  5. The real threat that Samsung poses to Apple

    Podcast · 430 comments

    [The following is a post written by James Allworth.

    James is the co-author of How Will You Measure Your Life?. He has worked as a Fellow at the Forum for Growth and Innovation at Harvard Business School, at Apple, and Booz & Company. It follows and builds on a discussion we had on the 56th Critical Path podcast.

    You can connect directly with James on Twitter at @jamesallworth -ed]

    A lot of ink has been spilled in the wake of the recent Apple Samsung patent disputes, and the legal wars see no sign of abating any time soon. The rise of Samsung's phone business has been meteoric, and Apple is right to be concerned. But the real threat that Samsung poses to Apple has very little to do with the copying (or not) of Apple's designs. The lawsuits have simply been a convenient (if expensive and risky) way to attempt to quash a threat that is of Apple's own making. While there's no doubt that Google has played a key role in Samsung's success by handing out a free mobile operating system to pretty much anyone who wants to build one — it is actually Apple, more than any other company, that is responsible for Samsung's present success.

    How? By outsourcing as much work to Samsung as they have. And it's impossible not to wonder whether Tim Cook's announcement yesterday on bringing back Apple's manufacturing to the USA is the beginnings of an attempt to rectify the problem.

    But first, I want to establish why copying is actually less of a threat to Apple than you might think. Daring Fireball's John Gruber wrote last year on what he termed "The New Apple Advantage". Like most people who appreciate Apple and its products, the starting point for Gruber's appreciation of Apple is its design — he says as much in the article. But the realization that Gruber has in the article on Apple's true competitive advantage is what's really interesting:

    So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

    It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

    This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.
    (emphasis mine)

    The argument is beautifully made. The design part of Apple's equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it's this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes "good enough". The tech industry has always revolved around copying. Once folks work out how it's done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.

    It is the last part of the Gruber quote that really drives things home. "It cannot be copied without going through the same sort of decade-long process that Apple went through". He's right — it's very hard for a competitor to outright replicate what Apple has achieved without going through all the same steps. But it got me thinking of a concept — and a related story — that I learned from someone I was fortunate enough to have as a teacher: Clayton Christensen. Perhaps a competitor didn't have to copy Apple.

    What happens if Apple had already taught them?

    Christensen first wrote about the dangers of outsourcing in The Innovator's Solution, explaining how seeking to maximize efficiency by employing third party vendors to do the "low value-add" work for you can be a lethal strategy. In the Solution, Christensen and Michael Raynor gave the example of two fictional corporations—"Component Corporation" and "Texas Computer Corporation". I had the good fortune to work with Clay on his most recent book, How Will You Measure Your Life?, and we recount a similar story; only without any of the players being disguised. The story is that of Asus and Dell, and how by outsourcing its work—starting with just basic circuit boards—Dell equipped a competitor:

    Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”

    The Dell analysts realized that this, too, was a win- win...

    That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.

    Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.

    There are two sides to this story: the part that relates to Dell, and the part that relates to Asus. Dell, in its quest to maximize its financial efficiency, continued to outsource way beyond manufacturing components and assembly. They outsourced a long way up the value chain. But there's also the side of the story that relates to Asus — a small components manufacturer that was, in effect, nursed to success by Dell. The extent of the schooling delivered by Dell to Asus was pretty profound, given how far up the value chain Dell outsourced its operations.

    But here's a question: at what point did Dell seal its fate? When was it that Dell had outsourced enough that Asus, with a desire to simply get out of the low-value work, could have made it all the way to the point that it did? I'm beginning to wonder whether just component development and assembly was enough. In the case of Samsung, it seems that everything else they needed to learn, they did by entering the emerging market, which Apple has largely left alone.

    Now, it's obvious that there are some very clear differences between the decisions that Apple have made in terms of outsourcing, and the decisions Dell have made. Dell outsourced its business all the way up to the design of its products. In many respects, Apple is doing the opposite — going so far as to even bring chip design in house. Horace has done some fantastic work detailing the extensive amount of investment Apple has made in its supply chain and it's clear that they've spent a lot of money investing in equipment used in production.

    But there's also no denying that Apple has begun to rely extensively on a network of suppliers across Asia.

    It's when you start putting the two arguments together that you realize that Apple may have a more serious problem on its hands. I want to again recount the final two lines of Gruber's argument:

    It’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

    He's right — generating that scale requires a long gestation period — one that Apple went through. And it can't be copied without significant time and effort on the part of a competitor. But there's one big implicit assumption here — that suppliers won't turn around and start developing their own offering. Because when Apple went through this transformative process, where the design whittled down the broad range of offerings to just a few, and they generated the scale on the business side that accompanied that — they weren't actually the only one to go through that process. Apple's partners — their suppliers — went through it with them. And they've got very big, and very good at what they do. Samsung, obviously, is among those partners.

    Now, the response I often hear to this line of reasoning is: Apple hasn't outsourced anywhere near as much as Dell has. How are the situations analogous? But I think it's actually the wrong question. Instead, the question is: has Apple already outsourced too much?

    For all intents and purposes, we're at a level of maturity in the smartphone market where I believe design — particularly on the hardware side — has largely become commoditised. Performance is now "good enough". Whereas it was not so long ago that consumers sat on the edge of their seats to find out what the new iPhone had to offer ("please, fix the battery life", or "please, make it faster") the recent release of the iPhone 5 seemed not to generate the same intense reaction. Now, I'm not saying it won't sell well — in fact, it will probably become the best selling phone of all time — but people aren't making these decisions based on huge design differences between the devices. The basis of competition has shifted. HTC recently learned this the hard way when it introduced the One X — a phone that, to the critics, at least, was considered the best Android phone available — "a masterpiece",  "one of the best mobile devices I've ever used". Yet it has been absolutely crushed in the marketplace by Samsung.  How? Well, Samsung used its business scale to, as Horace put it on Twitter, "invite operators to a better party with an eye-watering marketing budget". This has nothing to do with Samsung making a better phone (they probably didn't), or Samsung copying Apple (indeed, HTC may have just done a better job of copying Apple). Instead, it has everything to do with the fact that Samsung has had its business sucked along in Apple's slipstream.

    There's another way of seeing just how deep the problem lies. Jobs promised "thermonuclear war" on the copied devices, and so far, the biggest target of Apple's many legal warheads has undoubtedly been Samsung. Getting a $1 billion judgement certainly proves Apple was serious about it. But doesn't it seem strange to you that the target of such a devastating strategy on the legal side, just so happens to be… one of the most important suppliers for Apple's new phone?

    The problem that Apple is facing right now has nothing to do with their designs being copied. There is a long history of copying in the tech industry; patents being deployed in lawsuits by giants often signify desperation more than anything else. Rather, the problem that Apple faces is that it now is going up against at least one competitor that has been a beneficiary of the scale that Apple has achieved on the business side. Samsung has clearly demonstrated that, like Asus, it was not satisfied being a low-margin ODM — of doing all the menial work while somebody else made the big bucks. Suing Samsung over Android patents isn't going to change that — if Google's operating system gets too expensive to use, there'll be a switch made to Microsoft. Or to another operating system altogether. It doesn't really matter, because design in the smartphone space has been commoditized. It's good enough. Manufacturers are now creating performance that most consumers aren't able to absorb. Instead, as we've moved into a world where performance is now "good enough", the world has flipped into one where it's the business side — operational scale — that matters most.

    Apple have taken steps to minimize the ability of competitors to duplicate their business advantage. There's a great post here on Quora describing how Apple has used its supply chain as a competitive advantage and how competitors end up subsidizing Apple's use of the technology. But the approach of "locking in" key new technology so nobody else can get them works best in a world where consumers need more performance from their devices — a world is rapidly slipping away.

    So, what's Apple got to do? In so much as it is able to trust its suppliers of key components not to become competitors, it can continue to use them. But where it can't, or where those suppliers have already become competitors, it has only one sensible choice — replace them. It has two choices here: the first (and obvious one) is with another supplier. But that risks the same thing happening all over again — Apple nursing another supplier into a competitor. The second choice: for components and services that are critical to maintaining competitive advantage in the markets which Apple plays, Apple needs to build the components themselves.

    Most companies wouldn't be in a position do that. But Apple is almost already there. I also hear that there might be a country out there with relatively high unemployment rate, looking for some jobs to be brought back home. Funnily enough, it seems that's just what Tim Cook is doing right now. This approach might just be a good way of on-shoring some of those untaxed offshore profits (I imagine the tax benefits for building a few factories in the US would be quite high), all the while taking away business from competitors — both current and future.

    But there's one question that still remains. In the instance of the threat that Samsung poses to Apple: is it already too late?

    –

    Looking for more information on the renaissance of production and its effect on the technology industries? Then come to Asymconf and take part in the debate.

     

  6. Apple's new factories

    Research · 87 comments

    Two years ago, almost to the day, I wrote a post titled It’s time for Apple to look at owning factories again.

    What I argued then was that of the problems that Apple had the means to fix, production was what most needed fixing.

    Since then we've seen evidence of significant investment in manufacturing tooling, where Apple is effectively purchasing the means of production rather than just renting or contracting it out. This capital equipment investment is the equivalent of owning one of the three asset classes that make up a manufacturing operation:

    1. Tooling or capital equipment. The "Capital" at the root of the concept of "Capitalism".
    2. Skills, talent and knowledge. This is the softer kind of asset that turns out to be harder to replace or buy.
    3. Labor pool. Although considered a commodity even unskilled labor is difficult to obtain if flexible employment is needed in a regulated environment.

    It did not stop there. It has also used capital to ensure capacity through pre-orders thereby allowing the skills and labor to be more predictably applied by its suppliers (and preventing competitors from having sufficient supplies). Apple has also taken control of chip design for the vast majority of its CPUs thus building a more bespoke supplier chain.

    However these are not enough steps to make production "good enough" to meet the demands of a billion customers buying a new product every other year.

    An insidious problem emerges when outsourcing:  suppliers tend to become competitors. It happened in the PC industry with Acer vs. Dell. But it's also happening to Apple. Consider how Samsung's foreknowledge of Apple's orders allowed them to anticipate the demand for large screen smartphones. Receiving orders years in advance for memory, screens and CPUs in the hundreds of millions would be a clear indication of demand. Receiving funds with which to build capacity is an enormous help when turning on production for your own versions of the product.

    With that knowledge and the capacity built to serve Apple, Samsung was able to go from near zero market share in smartphones to being the largest vendor in two years a feat that Apple itself could not accomplish.

    The supplier-turned-competitor is one of the risks of outsourcing production and is at the root of disruption from value chain evolution.

    Hence it's gratifying to see that Apple has committed to "in-sourcing" assembly of at least one product. Tim Cook in an interview with Rock Center:

    And next year we are going to bring some production to the U.S. on the Mac. We’ve been working on this for a long time, and we were getting closer to it. It will happen in 2013. We’re really proud of it. We could have quickly maybe done just assembly, but it’s broader because we wanted to do something more substantial. So we’ll literally invest over $100 million. This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.

    For the first time since the 90s, Apple is taking steps to control the last pieces of the value chain it participates in.

    It's a baby step and perhaps it's going to remain symbolic, but one can imagine a trajectory for this effort which will pay off as well as retail has paid off ten years after the first Apple store opened.

    –

    Looking for more information on the renaissance of production and its effect on the technology industries? Then come to Asymconf and take part in the debate.

  7. Google vs. Samsung

    Research · 283 comments

    Samsung's recent success in mobile phones has been spectacular. It overtook Nokia for the top spot in overall unit sales. 

    It went from having almost no smartphone sales to selling over 50 million units per quarter in a matter of two years.

    It now accounts for nearly 40% of all industry profits.

    A key decision which made this success possible was to shift its portfolio to smartphones and to offer a large variety of such phones.

    In Q1 2010 only 3% of the phones Samsung sold were smartphones. In the latest quarter the ratio was 54%. 

    As a result the average selling price more than doubled, from $115 to $234.

    Profit margins also soared in proportion: from 12% to 21%.

    All this plus an overall growth in volumes from 64 million to over 100 million per quarter has meant that the company is raking in enormous profits. Not only did it overtake Nokia, the market share leader for 14 years, but is making more profits than Nokia ever did.

    So much profit in fact that it has overtaken Google's decisively.

    The reason I point this out is that Samsung's success is dependent on having ridden on the back of Android. Samsung's ascent can be precisely timed to their adoption of Android. The groundbreaking Samsung Galaxy launch was the Galaxy S which shipped in June 2010.

    Meanwhile, indications are that "mobile" is causing a contraction in Google's margins.

    If nothing else, Android has created a very interesting industry. There are many questions of course: Is Samsung's trajectory sustainable? Why aren't there other vendors successful with Android? Why isn't Google successful with Android? Why isn't Google's Motorola successful with Android? What would happen if Samsung soaks up so much profit from mobile that it's in a position to acquire Google and control the trajectory of their enabling platform?

  8. The late smartphone adopter paradox

    Research · 70 comments

    comScore reports that US smartphone penetration has decisively crossed over 50% in August. This should not come as a surprise as the penetration rate has been very linear.

    Now that we've crossed this milestone, the thing to watch is the conversion rate from smartphone non-consumption to smartphone consumption.

    The reason is that we don't know what "saturation" means in smartphones. We can assume it's at least 80% as about 80% of new phones being purchased are smartphones. What we don't know is how much above 80% it can be. It could  be 100% if feature phones simply stop being made but we can't be sure if there will be latent demand and how long this will last (similar to the market for black-and-white TVs after Color became commonplace).

    To help keep an eye on this measure, the following graph shows the rate at which non-smart to smart conversion is happening.

    It measures the addition of new (to smart) subs each week in a particular measurement period (three months ending the month shown on the x-axis). There is also a 3 period moving average shown as a line. Keep in mind that this shows net new users and therefore excludes smartphone switchers. It's a good measure of how rapidly non-consumers are being converted to consumers.

    The data shows that there are as many first time smartphone adoptions in late 2012 as there were in late 2010. Or, the new-to-smart users are joining ecosystems just as quickly when penetration is 50% as when it was 20%. An encouraging situation when considering the opportunity space above 50%. The "S-curve" has not reached an inflection point.

    If you're thinking about growth, so far so good. There is however one surprise in the data.

    All the growth in the last 24 months (between 2010 and present) was due to Android and iOS. Android added 50 million and iOS added 26 million in the last 24 months. The net smartphone user additions were about 60 million (RIM lost about 12 million, Windows lost 1.5 million and others lost 2.6 million). Android therefore has gained twice as many users as iOS has in this two-year period. Put another way, Android captured 70% of the growth and iOS captured 30% of the growth.

    However, if we look at the last 12 months, the split is 23.5 million for Android and 17.0 million for iOS. Android gained 58% of the growth and Apple captured 42%--a change in "spread" from 40 points to 16 in favor of Android.

    The evidence also shows itself in the trajectory of platform market shares of installed base.

    In the last six months, Android share growth is slowing while iOS is still gaining.

    If this trend continues then the next 50% may not behave as one might expect (namely that late adopters would take the low-cost commodity offering accelerating Android adoption.) Late adopters may, in fact, be choosier than early adopters. And it's not at the cost of overall growth. Late adopters are still converting at the same rate of the early adopters.

    Therefore, paradoxically, the late market shows that the prospect for iOS growth seems strong. Furthermore, as we do reach saturation, perhaps in another three years, the secular growth may end in the US but the loyalty of iOS usage may give iOS another advantage in a market where growth is determined by "platform churn"

    The US is the crucible of the phone market in many ways so what happens in the US may be a harbinger for what happens world-wide.

  9. Nokia's price for exclusivity

    Research · 47 comments

    Days after Nokia announced the end of life for the Symbian platform I wrote a post titled Who will buy the next 150 million Symbian smartphones? The reference was to claim by management that before there would be a complete transition to Windows Phone, 150 million legacy Symbian phones would be sold, keeping the company financially stable before the new ecosystem took root.

    I reproduce the original forecast I made below with the addition of what actually happened.

    [Note that the Actual stack area chart is independent of the forecast area chart as indicated by shading.]

    My forecast in early 2011 was based on the 150 million Symbian phones being sold over a two year transition period. The implication with the forecast for Windows Phone was that this would still lead to a difficult contraction of volumes.

    As it turns out, only 96 million Symbian devices have been sold in the 7 quarters since the platform was deprecated. It's unlikely that there will be ever by 150 million units sold as last quarter only 3.4 million shipped. In any case, management has already retracted that claim.

    What about the Windows Phone forecast? It turns out that by this point in time (Q3 2012) I had expected Lumia shipments to total 9 million. Actual shipments reached about 9.5 million, so not bad. However, the market grew faster than I had expected and overall Nokia smartphone market share turned out to be slightly lower (6.3% in Q2 vs. 10% estimated.)

    The just ended quarter shares are not yet available but it's quite possible that overall Nokia smartphones could be well below 5%, and may slip to 3% during the transition period.

    My warning in February 2012 was that 150 million Symbian units would not ship since I expected there would be a stigma associated with the products among distributors, even if consumers were fine with them (which they weren't).

    The public execution of Symbian (and any other alternative being developed inside Nokia) will probably be a classic case study in disruption management. To wit: even if a platform needs to be led out to pasture, there are ways of managing decline other than suicide. Nokia's failure is not so much having chosen the wrong alternative to Symbian, but having chosen exclusively.

    However, there's a twist. The company did not accept exclusivity of one supplier without a concession: In exchange for exclusivity, Nokia negotiated $250 million every quarter in the form of "platform support payments" from Microsoft. Nokia has to date received over $1 billion in such payments. (For the last quarter that amounts to $86 for each Lumia phone shipped.)

    The tragedy comes from this $1 billion/yr not being enough. The foregone revenues from Symbian (assuming they had been able to maintain the decline to the level of 150 million units that they had originally forecast) would be about $9 billion. This means that had Nokia not knifed Symbian and had sold the shortfall units at an average price of $200 they would have received an additional $9 billion in sales. Furthermore, assuming a margin of 33% for those units, Nokia received from Microsoft one third from of what she gave up for exclusivity.

    In other words, the net cost of the Microsoft exclusive relationship is at least $2 billion in operating profit.

    This turns out to be the difference between being profitable and being distressed.

    We will never know if this scenario would have ever happened, but the forecast management made 21 months ago suggests that at least they thought this was what they were going to get out of the bargain.

    This reminds me of another article posted around the same time.

  10. Nokia's Lumia brand strategy for the US

    Research · 29 comments

    Last July I asked the question "How many Lumia phones were shipped in the US?"

    My answer was 630k through the first half of this year.

    I revisit this question following Nokia's latest quarterly report.

    As a quick review, Nokia reported the following performance for its mobile phones operations:

     

    The most worrying thing of all however is that Nokia's smartphone performance has collapsed. With only 6.3 million units shipped, the company may be the worst performer among eight competitors I track. They were below RIM's shipment total.

    The value of 6.3 represents only 7.6% of their overall phone shipments.

    As the graph above shows, Nokia is going in the wrong direction with respect to moving to a smartphone portfolio.[1]

    Of the total 6.3 million smartphones (aka smart devices, as per Nokia's reporting nomenclature) 2.9 million were Lumia Windows Phone units.

    Using information about average selling prices and total volumes into North America, I was able to estimate that there were about 180,000 units sold into North America during the last quarter.

    Since launch, my estimate is that Lumia has sold 810k units in the North American market.

    This cannot be seen as a good performance. There are mitigating factors such as the lack of upgradeability to Windows Phone 8 which probably deflated demand[2]. However, it's a poignant observation that during the last quarter the US reached 50% smartphone penetration by users. As traction is still absent from both Nokia and Microsoft in the US market, we are back to the question of how to compete.

    As the market in the US transitions from competition against non-consumption to competition among rival platforms, the Lumia brand is being forced into targeting smartphone "switchers" rather than smartphone "adopters". The switching option is expensive, requiring aggressive advertising (see Samsung Electronics' $11 billion ad budget).

    There's only one source of cash for that sort of strategy.

    ---

    Notes:

    1. The caveat is that they market some of the Series 40 phones are "smartphones" on the basis of having "smartphone-equivalent" performance. However, smartphone equivalency is and has been purely subjective. On that basis there were many times in the last decade and a half that we could have counted Java-based or BREW-based or i-Mode-based phones "smartphone-like". Smartphone has been defined on the basis of running an operating system with native APIs for developers.
    2. I imagine that the upgrade path could have been known to Nokia, AT&T and Microsoft nine months ago when the Lumia was unveiled for the US by the three CEOs and therefore expectations could have been modulated accordingly.
  11. The Crucible of the Phone Market

    Research · 36 comments

    [The following was originally published on LinkedIn.]

    The US is in the forefront of smartphone usage. This has not always been the case. Five years ago only 3 percent of US phone users were using a smartphone, lower than the global average. At the time Palm and BlackBerry were the prominent devices in the US while in Europe Nokia's push with Symbian and Microsoft's licensing of Windows Mobile led to a smartphone adoption rate of about 7%.

    All that changed with the iPhone. After 2007 the US began to rapidly catch up and eventually overtook all other regions in terms of smartphone adoption. The latest data from comScore Mobilens shows that the US is now effectively 50% penetrated. The following chart shows just how quickly this happened.

    Image (media01.linkedin.com)

    In December 2009 only 17% of Americans used a smartphone as their primary phone. As of August the total reached 49.8%. By today the US is effectively a majority smartphone usage country and it looks like there is no slowing. We might very well see the US reach saturation with 80% smartphone usage in another two years.

    Of course, the US is not the first country to reach this threshold. Some northern European countries were there earlier, but North America is the first major region to get there. That means over 115 million smartphone users in one market. As a result, the US has become the crucible of the whole smartphone market. It's where platforms are most concentrated in use and therefore the most sensitive to the effects of that usage. That leads to more innovation, more discovery of new use cases and more ecosystem growth. Quite simply, it's where competition is most heated.

    This prominent position implies that the US could now be seen as a leading indicator of global trends. It might allow a keen observer to predict what will happen from US data. So what does the mobile platform rivalry look like in the US?  We are fortunate because the data is finely grained in the US. We have montly updates from comScore and we get specific platform penetration data. The following graph shows the shares of the major platforms since late 2009.

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    It becomes immediately evident that BlackBerry has lost a huge part of its user base to Android and iOS. In 2.5 years share when from about 42% to 8%. In raw numbers that's 11 million users that switched to another smartphone.

    Looking closer you can also see a consistent growth in share for the iPhone since mid 2010 with a slightly higher rate of increase of share than Android in the last few months. The problem is that this pattern of rapid decline in RIM and moderating growth in Android is not necessarily mirrored globally.

    RIM just reported an increase in total users during the last quarter (from 78 to 80 million subscribers.) Google also recently reported 500 million Android activations globally with no apparently letup in growth.

    So there seems to once again be a disparity between the US and global platforms. Do we take the US market to be anomalous or is it a pre-cursor to global trends?

    Certainly the US market is in many ways unique with a very low rate of pre-paid usage and a relatively high ARPU and average device pricing due to subsidies. However, the global trend has been to increasingly mirror the US not vice-versa. The iPhone has radiated out of the US in terms of usage and so has Android. Attempts by other platforms to make inroads in the US have been unsuccessful. Symbian failed to gain a foothold and it seems Windows Phone is stumbling as well. Both of these platforms have had more success outside the US. The US operator subsidy model has also been "exported" more than pre-paid has been "imported". By 2007 Europe was moving away from subsidies as prices of feature phones were coming down and 3G was still in its infancy. That was reversed as the large screen smartphones became the device of choice. In addition to device and operator trends, most apps originate in the US and the major social media platforms are all American-based. In other words, the modes of usage are being conceived in the US.

    On the other hand, the US is still a tiny percent of total consumption. It represents only about 6% of all phone users. Chances are that prices for devices in the US (especially the iPhone) can't be sustained for 5 billion consumers. Then there are "cultural" considerations where regions cling to their own usage habits and perceptions of value.

    So it's still an open question of whether the US is the leading indicator for how platforms might change globally but I would watch this data very carefully. When it comes to mobile platforms, it might be that if it plays in the US it will play globally.