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When will the smartphone become a commodity?

I am taking a comment thread and promoting it to an article so as to expose it to a larger audience. There are two points of view:

Ariel writes:

I believe that next year and perhaps the year after that will see intense competition on the OS platform front, but eventually one will dominate the other(s) by a significant margin (and this also depends on the cloud and how it will be adopted across platforms). This happens as a result of a unified platform in which many can compete on lower margins instead of the development of the entire package and platform, which all goes hand in hand with commoditization.

However, to predict that smartphones will not be commoditized within the next three years is bold to say the least. The desktop was settled very quickly, and in this industry of exponential growth, it can be assumed it will not take longer for a similar scenario to settle.

I reply:

I’ve been observing (professionally) the smartphone market from its inception and was holding my breath for the commoditization of handsets that Microsoft promised all the way from 2004 through 2009. Several generations of Windows Mobile were predicated on the imminent stabilization of hardware and user experiences years before the iPhone came along. Not only Microsoft but Palm via PalmSource, Symbian as a consortium of all incumbents, Sun & IBM via Java, DoCoMo with iMode and not least of all, Qualcomm with BREW all made the same bets and ran with horizontal strategies toward a smartphone future built on the lessons of the PC industry. The only holdout for the integrated approach was the one company that everybody marked for dead: RIM. It’s also the only one who raked in all the profits.

All this happened before 2007.

To suggest that this time, in 2010, it’s different: that the definition of the smartphone as it exists today is the product at its zenith; that user experiences and expectations and hardware specifications and platform dynamics will be henceforth frozen with minor sustaining tweaks to look forward to is, in my opinion, a far riskier bet.

I don’t try to be a futurist or predictor of how the product will evolve, but I can see a dozen ways of how the very definition of a smartphone will change and how in 4 years we’ll have products that won’t be recognizable as such today.

So much depends on when the smartphone (or more broadly mobile computing) reaches this point of good enough. It’s at the root of all hypotheses of how the market will evolve.

  • Jim

    The domination of the PC OS landscape by Microsoft was an aberration. Sure, it can happen again, but the more common outcome is illustrated by the automobile or consumer electronics industries where there are systems that happily co-exist. Sure, there are lock-in pressures (software investments, contracts, etc), but people can switch between operating systems relatively easily. Their overall investment in a given eco-system and their loyalty to it cannot be taken for granted. Hence, there will always be room for alternatives. Add to this the simple differences in individual preferences and the desire for content providers for their to be no one dominant winner, and you get a relatively stable environment where no one OS represents more than 30-40% of the total. Moreover, there is more equitable room for multiple business models – both horizontal and vertical integration. RIM and Apple will exploit closer hardware/software tie-in, Google and Microsoft will enjoy greater hardware variety.

    • rd

      Automobile is correct analogy.
      Todays cars are identical because most
      of it is outsourced to OEMs.
      So manufactures are able to differentiate only in their ads.
      As long as Apple offer something unique like their
      retail store or some software, they will be ahead.

  • http://vlujunbaga.blogspot.com/ Ariel

    @asymco (re-posted)

    Fair enough. The smartphone (as much as it has evolved) has been on a rocky road. And I will most definitely agree with you that mobile technology is fast changing and 4 years from now will indeed look very different than today. I guess this really only leaves for us to look back in hindsight when this is all behind us.

    However, I would ask you, do you see any trend recently that points to something different in smartphones today irrespective of how they look/work at any specific point in time or who specifically makes them?

    I don’t expect user experiences and expectations and hardware specifications and platform dynamics to freeze. I don’t for a second believe the smartphone is at it’s zenith. But if anything is to gain traction, it’s to agree on a platform from which to jump to the next step. In this respect, the only difference I see between smartphones and PCs is that this time we have the cloud, which is it’s own platform.

    But the cloud has yet to gain it’s own traction as a platform, and until then, we have mobile operating systems to rely on for most our mobile computing. So why are 2010′s mobile operating systems different than those before? What’s this trend we’ve recently been seeing? Today smartphones are actually beginning to significantly enter the mainstream. As far as I can tell, that’s gotta account for something, if not everything, regarding this topic.

    • http://www.asymco.com asymco

      "do you see any trend recently that points to something different in smartphones today irrespective of how they look/work at any specific point in time or who specifically makes them?"

      For me the most interesting developments are what I observe being done with apps. Apps that encapsulate and deliver social media or other content within an embedded browser are showing how the device can change behavior. You don't browse, but use a social magazine (Flipboard). You don't access FB or Twitter through a browser but you browse through a Twitter iPad app.

      This Socialization of the user interface is awe-inspiring. Engineers talk about the cloud, but I see it from the user's point of view: the device is changing behavior away from functional to emotional engagement. This is a violently powerful cycle which leads to more innovation and more behavioral change.

      Taking apps in yet another direction, I see the potential for user generated apps. Even, or especially, a child would be able compose an app like they can now compose a YouTube video or a page on FB. Think how long ago it took an expert with skill and special tools to do video editing or web site development. The polishing of these new app authoring tools will require a particularly keen understanding of user experiences. The nearest analogy is iLife vs. Office. "iApp" will be the composition tool for your app lifestyle.

      These are just two trajectories where smartphones could go. The hardware device will fade in importance and the universe it enables will grow. The HW will not stand still but it will not be the measure of improvement. Users will clamor for more HW specs so that they can engage more deeply in their app universe. So a platform that enables this new app universe will not be your dad's API and SDK. This will be very different.

      Google and even Microsoft might field consumer app authoring tools, but, like in iLife, we'll see that Apple will do it better and people will fall in love, all over again.

  • ScottJ

    One company has managed to maintain meaningful differentiation and thereby avoid the commoditization of the PC market.

    Why should the mobile market be any different?

  • kevin

    Today, we can look at featurephones (or "dumbphones") and say they have become commoditized. But that's because a new category called smartphones has been created. In that sense, I can agree with Ariel, namely, that some evolution of the smartphone will cross a line when we are no longer calling it a smartphone but something else. At that point, the smartphone could begin to be a commodity, and growth and margins will move to the evolved device.

    Will that happen in 5 years? I don't know, but my guess is that it will take a new user interface paradigm (like multi-touch was), or a new physical form (i.e., wearable) to cause that shift to happen.

  • http://lantinian.blogspot.com Nikolay Andreev

    "Commoditysation" only occurs if there is lack of innovation. And by innovation I don't mean introducing a faster or smaller processor that that does the same thing but entirely new set of technologies that destroy the current market balance.

    The Netbook was a product of extreme commoditisation. Nothing new, just the old stuff produced at extremely low cost and smaller size. A smaller and cheaper computer, not a better computer.

    Now consider the iPad. While its component cost is similar to that of a netbook, the mix is entirely different as are the technologies used. The result, a dramatic new level of functionality rendering the netbook obsolete in many respects.

    Most companies on the market today benefit from commoditisation. The reason is that they do not produce a complete product but rather compete for the parts of somebody else's product. Those that offer complete solutions however benefit from innovation more. The reason here is that profits are greater when your product offer something new, rather than counting on your suppliers to provide you with the same but cheaper components.

    The question comes down to which force on the market will dominate? Well, evolution did not result in humans by making the DNA a commodity. It constantly experimented with a new variations and it constantly introduced new strains and mutations.

    Between 1985 and 2005 there was a force in the technology market that choked innovation by constantly searching for it and destroying it using its market power. That was Microsoft. For 20 years the only thing that changed in the computer market was the speed of the components. The PC remained the same. Thing only looked prettier. Only only need to remember that they even tried to make the phones work and look like a PC!

    However, even Microsoft could not be everywhere. One of the things they missed to swash in time was very small but very important "organism". It was called the iPod. It eventually grew to dominate the market not by destroying it but by out-inovating it, trough a new "DNA mix" every year. Sometimes one of the new iPod species did not have a successful "DNA mix" (iPod with 4 buttons, iPod Video, iPod Shuffle 3rd gen). However, its creator Apple kept trying harder and harder even when there was no other competition in the entire "food chain" left. The iPod now only competes with itself, but it has not stopped to try a new "DNA mix" every fall.

    Unless the technology reaches a fundamental "bottleneck" or a higher power demands the stop of this constant innovation arguing that ever increasing GDP is unsustainable, the world will not plunge into another era of technological commodisaton.

    Until that day, the creator that is Apple is likely to mirror the "evolution" success of its "species" in every market niche, as long as everybody refuses to build a complete solutions and rely on commoditisation.

  • famousringo

    I view commoditization as the antithesis of design. The reason why it happened so quickly in desktop PCs is because people place very little value on good design in desktop PC hardware. They're quite content to put a beige crate full of circuits under their desk, another crate with a display on top of their desk, and get to work.

    But the farther you try to take the PC away from the desk, the more you need good design to get a usable device, and design is intellectual property which tends to be hard to commoditize. That's why Apple has traditionally seen more success selling laptop computers than desktop computers. Apple gets more and more successful as the computers get smaller, more mobile, and farther from the desk than ever.

  • famousringo

    I guess to refine my thoughts in my last post, I would say that a good mobile device requires good design in both the hardware and the software, while a good desktop PC only requires good software design.

  • Iphoned

    Just thinking out loud…

    I suppose one can theorize that Microsoft's early lock on DOS/Windows and their tight control of the OS, licensing terms, actually froze the evolution of a PC. I.e. certainly it became economically/competitively impossible to innovate in the OS itself (except by Apple which lived in a slumber between '88 and late 90's), but also h/w innovation was tightly restricted either by MS contractually, and/or by the need to stay compatible. We've also seen the same dynamic that froze innovation with a browser. I mean, there is still innovation, just not of a dramatic kind.

    Now, in In the mobile market (phones, tablets), there is no such "single" controller, so one can argue it will be much faster changing, for a longer time and will not commoditize any time soon, as what happened in PCs.

  • John

    I don't see smartphones becoming a commodity for quite a while. A smartphone is bounded by what is possible, not by conventions. We have just scratched the surface if what is possible. A huge are of potential is the ecosystem. By that I mean all the content outside the phone. Much remains to work out licensing and copyright issues and mobile payment methods and privacy issues.

    You can think of hardware specs as fences. We've been fenced in by small hard drives, slow CPUs, etc. In the next ten years we'll see these fences recede to the horizon. The capabilities of these devices will be limited by our imaginations.

  • Iphoned

    If all future innovation in in software, them smart phones themselves will get comoditiezed fast.

    Faster CPUs, longer-lasting batteries will come, of course, but that's not a differentiated innovation. And it is not like the current form factor can change. So this would argue for fast commoditization of hardware.

    Can anyone think of examples to the contrary?

    • David Chu

      SOC (System-on-a-Chip) CPUs will be a major point of hardware differentiation. Designing a chip a that is specialized for handling specific tasks efficiently versus off the shelf chips.

      Actually, I think there is a lot of room for hardware innovation. Every component will need to be faster, smaller and more energy efficient. Only a handful of companies will be able to develop these innovations on their own, thus differentiating their hardware. Apple and Samsung come to mind. Maybe Nokia or HTC?

  • Iphoned

    @asymco

    "…but I can see a dozen ways of how the very definition of a smartphone will change and how in 4 years we’ll have products that won’t be recognizable as such today."

    For example, what are some of these "dozen" ways, and are any of them hardware related?

    • http://appleincanalysis.blogspot.com/ Lee Penick

      Why mess around with a phone in your hand when you could be seeing a heads up display on your Apple glasses. Voice activated.

      Or the Cyborg phone that is embedded under the skin with only the display on the surface.

      The watch that acts as the display, blue toothing to the phone in your pocket.

      Steve hasn't told us yet what we need 5 years from now.

  • MattF

    Thing is, it's not just about phones, so it's hard to say exactly what functionality is being commoditized. More broadly, I think the wild card in this market is the ability of smartphones to emulate and take the place of a dozen other specialized gadgets– mobile phone, GPS navigator, barcode reader, netbook, game console, camera, e-reader, music player, remote control, etc… Each gizmo replacement is small, but the combination of all the substitutions adds up to a new way of doing things.

  • yet another steve

    It just seems unlikely we'll see the switching costs/lock in that were involved in the pre-internet PC.

    That said, it would seem that the iOS platform is stickier than any other: iTunes integration, apps, form factors. But sticky is a long way from locked in.

    And when devices and platforms are seriously constrained by production capability…. we are a long way from knowing how this all plays out.

    And the PC standardization phase came from the enterprise down. The smartphone revolution is going from the consumer up. I don't know what this means but it sure is a difference. (And remember the #1 Enterprise standard is BB!)

    A huge unknown is MS. Were MS able to competently leverage their resources and market position, they could be a real force. Not that they've shown any sign of being competent enough to do this…

    And enterprise adoption of the iPad may be a lot more significant than the number of consumer Android phones shipped.

    • David Chu

      'And the PC standardization phase came from the enterprise down. The smartphone revolution is going from the consumer up. I don’t know what this means but it sure is a difference. (And remember the #1 Enterprise standard is BB!)'

      The big difference is that people's first experience and expectation of what a smartphone is will not be determined by their company buys. For most people, their first computer was the one on their desk, so when they finally got their first computer for their home, it was naturally windows.

  • David Chu

    I don't think Apple worries about smartphone commoditization because they do not think of themselves as a smartphone maker. They are first and foremost a mobile computing company whose most profitable product happens to be a phone.

    Why is this important? Because it will allow them to ask the right questions that will generate new ideas and new solutions to stay ahead of the pack.

    Compare iOS with android which was first designed to be a blackberry clone, then modified to be an iPhone clone and now scaled up as an iPad clone. All the design errors get compounded as you move further from it's original intent.

    • http://www.asymco.com asymco

      I would say Danger which shared DNA with Android via Andy Rubin, was a kind of Blackberry re-positioned for teens, but when Google bought Android it probably got some kind of Windows Mobile disruptor. But your point is well taken.

  • Narayanan

    As always, commoditization will occur when there is no perceived differentiator. That is precisely what Google's market flooding strategy is attempting to achieve. It has achieved some level of success towards that, by playing to the vast and vocal anti-apple crowd.
    Apple will have to continue to differentiate by innovation- Facetime and AirPlay being the next level in this game.
    In the long term, the game itself will change and Apple will again lead the charge due to it's unique blend of hardware/os/design/userfocus.