September 2010
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Month September 2010

Nokia's UK managing director resigns

Nokia’s Uk managing director Mark Loughran reckons that the Nokia N97 will prove superior to the iPhone due to its significantly better camera sensor, lower tariffs and its radical change in styling and especially form factor from the company’s ex-flagship the Nokia N96.

Loughran said: “The new iPhone is an evolution rather than a revolution and for people trying to decide whether to get a Nokia N97 or an iPhone, it comes down to a decision on performance and value for money.”

Loughran added: “the new iPhone seems to have the same design and colour, upgrading froma sub-standard two-megapixel camera to a still low 3.2 megapixel camera, and is probably a disappointment.”

Nokia General Manager Believes N97 Will Beat The iPhone

Good times…

Can Android change the distribution of profit among phone vendors?

A quick update on the analysis of mobile phone profits. If the available profit[1] (i.e. excluding losses) were summed and each vendor’s profit were measured as a percent of this total, this chart would tell the story of the last three years:

Note that profit share has mostly shifted from Nokia to Apple, though Sony Ericsson and LG were also casualties and Motorola has not had anything to lose.

Some assume that the future belongs to the Koreans but we see that the relatively small amount of profit that Samsung has (less than RIM actually) has not changed much. HTC is also shown to be a steady performer but not having displaced much from competitors.

Will Android change this picture? As I’ve argued before, Android is most attractive to the unprofitable and the strategically constrained. Can having undifferentiated new products change this? As Nokia is unlikely to license Android, and RIM seems very unlikely and Apple is out of the picture, the only possible contenders are Samsung, LG, HTC, Motorola and Sony Ericsson.

Motorola and Sony Ericsson have both returned to profitability but with a very small volume Android strategy. However the incumbents fielding Android are really facing a far more sinister threat: the smaller local brands in China (e.g. ZTE) and emerging markets.

On profitability, the smaller challengers are unlikely to make a large impact, but they will constrain the profits of other licensees. The distribution of phones on a global scale is challenging without a brand, and brands are very expensive to build. It’s still possible over a longer timer frame that a small brand like HTC can emerge on a global stage. But in terms of profit capture, challengers will mostly “steal” from the already constrained big brands running with Android.

[1] Profit is not the only measure of success and can sometimes be a deceptive indicator. For this reason I look at a longer time frame so that anomalies, seasonality and business cycles are smoothed over. As flawed as it is as a measure, the most important reason to pay attention to profit is that it’s the only fuel for growth in the long term. Companies that are consistently unprofitable (e.g. Motorola) face diminishing degrees of strategic freedom further lubricating a downward slope toward financial distress.

Buying an iPhone in China? Better bone up on your math.

The operator instinct for consumer hostility knows no national boundaries.

Here is a table with no less than 100 numbers to ponder when deciding on an iPhone plan:

Contract plans for iPhone at China Unicom.

Star system vs. flea market: How Apple and Google target talent

The iTunes app store has gone over 310k apps approved and has 250k apps in its catalog. The Android Market, in spite of (or perhaps because of) an abundance of copyright infringements, is growing nearly as quickly. According to at least one source, there are over 130k apps.

The way to study these two catalogs is to look at the number of new applications being approved (or added) on a monthly basis.

Even better would be to index to the same starting date, as in the following chart.

The Android Market grew grew more slowly than the iTunes store for the first two years but has accelerated to nearly the same rate now. Meanwhile, the iTunes Store has shown seasonality around the holidays (though we’ll have to see if it repeats this year) and has held fairly steady at 20k/mo.

The policies are also shifting: On one hand, Apple has also signaled that they are not willing to accept “me-too” copies of simple apps. On the other hand they clarified policies and began to allow interpreted code apps. Google has not yet reacted to infringements on its store but it’s probable that they will have to respond with some policing as download volumes grow.

The fact that the Android store is not policed or curated reduces the barrier to listing for developers and, in theory, should encourage a more rapid add rate. But the Star system of the iTunes store encourages more attempts to find hit apps. So in many ways we see that the two have an orthogonal approach:

  • The iTunes store is a hit-driven star system with long tail paid app value model
  • The Android Market is a flea market model with an ad-supported value model

There are few conclusions we can draw at this time about long term sustainability–after all these are ongoing and fairly young experiments.  It does seem that both platforms are attractive enough today to create critical masses of apps, perhaps exactly because they don’t put forward the same value model.

Is a Facebook phone destined to be a Vanity smartphone?

What do Palm, Kin, Nexus One, and the Simon have in common?

Beside being market failures, it’s the fact that they were efforts by large companies that had no business in smartphones. What’s more important is that the motivation for participation was not well thought out.

HP, Microsoft, Google and IBM tried (or are still trying) to capture a piece of the hardware revenues from smartphones, but their results were dismally poor. It turns out that with the exception of RIM, HTC and Apple, there have been no smartphone entrants which have succeeded against the incumbent voice phone makers.[1] Furthermore, Apple is the only large technology company to succeed. Studying the efforts that the successful entrants undertook shows that (1) it takes a very dedicated effort, led from the top, and (2) it takes a lot of capital or a lot of time. Those who tried and failed were not dedicated to the concept at a high enough level and were not patient enough for growth.

I think the real motivation to enter the market is rooted in vanity: appealing to the need management to feel a part of something new and important. If you are an ambitious internal champion skilled in political maneuvering, it’s fairly easy to appeal to this vanity in order to secure funding for these efforts.

This string of vanity-induced failures is not likely to end anytime soon. No doubt Dell will keep trying with the Aero, and we might see the PC companies rush in again as they did with PDAs.

We also hear today of the evolution of INQ’s product (INQ Social Mobile) into some sort of Facebook phone. However, is the Facebook phone project a vanity phone? Maybe, but the counterpoint is that this is not likely to be a smartphone. It’s more likely to be a feature phone and, as such, it’s not attempting to be something so grand or vain.

The real comparison might be to the Kindle. A specific, purpose-product built by the most motivated and best-positioned service provider. The Kindle has had some (unspecified) amount of success because it was developed to light specs and with a well-established distribution channel (amazon.com).

So although the motivation might be more sound, the challenge for Facebook will be the same as for Google: distribution. At the end of the day, without operator support the product will still remain a niche.

[1] I note here that Android and Windows Mobile are not phones but platforms and this article deals specifically with hardware.

US Population by Phone Operating System

Since wireless subscriptions in the US are running at about 100% penetration, it’s possible to classify the wireless subscribers as representative of the entire population. So it’s safe to categorize the population of the US by the phone OS they carry.

The left part of the chart shows data from Nielsen that breaks up the population by the OS to date. The right part of the chart shows my estimate for how the platform shares will evolve by this time next year. The non-OS share will still be above 50% but it looks like it might shrink even more rapidly after reaching a tipping point of half the market. (Note these charts do not show quarterly sales but installed base of each OS).

My hypothesis remains that smartphone user bases will be balanced (or fragmented, depending on your point of view) by operator portfolio decisions and chronic constraints on distribution.

If RIM did not exist today and someone were to suggest it, could it ever get funded?

Consider what RIM had to overcome to even be: It was an outsider entering the mobile phone business at a time when incumbent market power was far more concentrated. It evolved from data-only pagers awkwardly adapted to carry voice without pandering to the fashion consciousness of its contemporaries obsessed as they were with the RAZR. Its foothold market was the most difficult market to enter, the US; and within it, in most difficult sector–business users.

RIM’s solution has no architectural elegance and their non-standard approach to email using their own servers and protocols defied all IT policies regarding security and the entrenched use of Exchange. Even after Microsoft offered a cleaner solution (Exchange push) that avoided the RIM back end, businesses otherwise committed to Microsoft stuck with RIM for mobile email. In spite of various government opposition, RIM continues to grow internationally.

Even its acceptance may be an accident of history.

The absence of interoperable SMS in the US early last decade meant that there was no reliable way to send text from one mobile to another across CDMA and GSM networks. The Blackberry was hired to to the same job that SMS was hired to do anywhere else, but by the time SMS was working in the US, the use of Blackberry increased irrespectively.

It should be no wonder then that the company can be considered both disruptive and a dead end. Analysts have been split about it from day one. Gartner advised against adoption by any self-respecting IT shop.

Equities analysts are still split into bulls and bears more evenly than any other company in this space. See: RIMM: Street Split Sharply On The Stock; Avian Cuts Rating (Updated) – Tech Trader Daily – Barrons.com

The arguments are pretty straight forward:

  • Competitive pressure from ‘better’ architectures, uninspiring products, lower growth

vs.

  • Fierce loyalty of users, continuing international expansion, continuing growth

The market has largely voted with the bears as the price shows absurdly low valuation (4.3x EV/EBITDA) but the company continues to show growth quarter after quarter.

My own point of view has been for some time that RIM’s disruptive days are over because the engineer in me says that their code base is a dead end. But the disruptive analyst in me leads me to be hesitant in proclaiming their imminent demise. The fact remains that their product is good enough for a subset of the users who want nothing more than a messaging phone. I will add however that this subsets unlikely to grow especially relative to the number of users who will opt for more highly functional devices.

So the riddle of RIM remains: rumors of its death has been exaggerated but it’s not an unforeseeable growth story anymore. As a result the company is in limbo.

RIM Quarterly update: just the numbers

Noteworthy data (with my notes in parentheses.)

  • 12.1 million phones shipped, 11 million sold through (estimated iPhones for this Q range from 11 to 13 million)
  • Net subscriber account additions were 4.5 million which was lower than anticipated (41% of units sold through were to new subscribers which implies nearly 60% were to existing users)
  • Revenue grew 31% over the same quarter last year and GAAP earnings grew 76%.
  • The BlackBerry subscriber account base grew 56% year-over-year to over 50 million
  • RIM has shipped approximately 115 million handhelds to date. (note: 120 million iOS to date)
  • BlackBerries are available through over 565 carrier and distribution partners in approximately 175 countries and international markets (vs. 150 carriers and 88 countries for the iPhone)
  • Approximately 52% of revenue in the quarter was generated outside the United States and over 45% of BlackBerry subscriber account base is outside of North America. (70% of iPhones were sold outside the US through the first half of this year)
  • Torch was launched with one carrier but will expand to 75 next quarter
  • To date over 35 million BlackBerry Smartphones have downloaded App World at an average of over 1.5 million Apps are being downloaded every day which is up 40% sequentially (iOS apps are running at 17 million downloads per day)
  • Average selling price for RIM devices was $304 (vs. $600 for the iPhone)
  • Gross margin was 44.5% (upward of 50% for the iPhone)

Research In Motion CEO Discusses F2Q2011 Results – Earnings Call Transcript — Seeking Alpha

Another CEO head rolls while the smartphone market booms

Management changes are usually made at the end of the year but the change, which takes effect from October 1, reflected an urgency to overhaul the struggling mobile unit.

“We made the decision to give an incoming chief executive enough time to prepare for next year,” LG Group said in a statement.

LG Elec names new CEO as mobile business struggles | Reuters.com

LG follows Sony Ericsson, Motorola, Palm and Nokia in replacing CEOs because of trouble with their smartphone efforts. Microsoft also let go Robbie Bach, head of the Mobile division.

It’s an interesting pattern at a time when the industry is facing unprecedented growth.

European Operators contemplate own OS. Why not just fork Android?

France Telecom-Orange CEO Stephane Richard has invited the heads of Vodafone, Telefonica and Deutsche Telekom (T-Mobile) to Paris on 8 October to discuss the development of a common operating system for mobile devices. He told Le Figaro that mobile operating systems were the Trojan horse used by Google and Apple to establish relationships with mobile customers. The four operators have nearly 1 billion customers combined and the capacity to influce industry. The initiative could take several forms including a joint venture or a common apps development unit. He added that the operators aim to retake the reigns of innovation, rather than be followers.

In the interview Richard also stated that carriers have decided not to advertise the iPhone any more.

Phone carriers want to team up against Apple and Google. – HardMac Forum

This attempt at operator cooperation in software has been tried before, but it predictably failed (does anyone remember Savaje?) Symbian itself was an attempt at mobile phone vendor cooperation on systems software. There are various consortiums for “open mobile OS” based on Linux (e.g. LiMO which started as a Japanese effort). Even the Open Software Alliance is a rubber stamp body rather than an attempt at development.

Although one can safely dismiss the potential of this effort on the basis of a lack of competence, the arrogance reminds one of the rigidity in response to the disruption under way. The fact that high-speed data networks allow operator disintermediation cannot be changed by “innovation” on systems software.

But the odd thing is why even bother. The solution to taking control over the user experience and services platform is straight-forward: each operator could fork a version of Android as their own and hire a team to integrate white label services. It’s much more straight-forward than coordinating a joint effort. China Mobile have already done their own non-Google Android.