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Is the smartphone a commodity?

People throw around the idea of things being or becoming “commodities” but there is little clarity about what “commodity” status implies.

If you look up the word, it has nothing to do with technology or innovation. In economics, a commodity is something that is substitutable (fungible) and roughly equal to competing versions of the same thing. A mineral good (oil) or agricultural product (pork bellies) is roughly of equal value regardless of where it comes from or who produces it. Commodities also have very liquid markets and are therefore easily priced according to demand.

Commodities have a “fixed” quality which cannot be and most likely never was improved. It’s a product that is essentially frozen in terms of innovation.

But in technology and especially in terms of complex, rapidly improving and evolving products with uneven distribution a commodity is not easy to identify and there can be a lot of arguing about what is and isn’t.

So here is another way to define it:

In terms of innovation, a product can be defined as a commodity if it reaches a point where improvements do not create additional value. As the product gets better, it reaches a point where customers can no longer absorb the improvements and therefore they become unwilling to pay for them. Thus the price of the product cannot be increased or maintained in the face of competition.

In other words, you can’t get a premium price for a better product.

If you can’t improve the product, one consequence is that you can no longer differentiate it. Becoming commoditized is a natural result of the improvement of a product beyond the customer’s ability to utilize that progress.

So we’re back to the debate about whether a product is good enough. You can argue that commodity status is that point where it over-shoots the market. Before that point is reached the product can obtain a price premium for technology innovation. After that point, the product becomes a “commodity”.

How does this relate to the mobile market today? Again, it’s important to ask what is the basis of competition. Is hardware not good enough? Is software? Or is the whole widget?

For those who say that smartphones are commodities, they have to also account for the inevitable consequence: that improvements will not be valued and hence will not be implemented. It also means that profits will evaporate from the current incumbents to new models of profit capture.

This is the essential argument for Android. But I’m still struggling with what the argument implies. That the product as it exists today is all that will ever exist.

  • ARJWright

    The smartphone as it is currently featured and marketed is indeed nearing that state. The software aspect of smartphones is where this definition falls down, as there is much that hasn't been explored. Hardware and services changes are easier to see, and much faster to propagate.

    • dchu220

      Is it possible to separate hardware and software in smart phones when everything is so interdependent?

  • Jesse Hollington

    I think the reality is that "dumphones" became commoditized years ago, as evidenced by the fact that many carriers are now practically giving them away. While there are certainly differentiating factors between models, for somebody who just "wants a phone to make phone calls" any cell phone will do. Most dumbphone users I know today purchase their devices based on aesthetics rather than features. The physical differences provide some differentiation, but the response of the average user is that they just want a "cell phone" and the specific model is rarely all that relevant in the decision.

    I don't believe the smartphone market is yet anywhere near commoditized, since it's not just a question of value-add, but also of differentiation. To suggest that the smartphone is a commodity is to suggest that one device is more or less just as good as any other (fungibility), yet the raging debates even between differing Android devices, much less the iPhone, Blackberry and WIndows Phone 7 seem to prove that most users aren't going out and "just buying a smartphone" — it remains a well-considered decision for most consumers, which makes smartphones a non-commodity at this point.

    • vijaykbhati

      I agree cellphone has to long way before it becomes
      Commodity.new features are being added all the time .software is being improved,applications are
      Added:

  • stsk

    While it may be tempting to throw economics at the question, the meta-question is: "Commodity in what sense?" It could be argued that there is such a thing as "a wine market", but only an idiot would argue that Ripple belongs in the same category as, say, a 1945 Chateau d'Yquem. Both are "wine" in the same sense that an iPhone 4 and a Nokia S60 are both "smartphones". The category is silly – there is no sense in which iOS and Symbian or Android are fungible. The iPhone is unique because the complete user experience is unique. The thing Apple haters miss is that the very thing they decry makes it logically impossible for them to lump iOS with Symbian or Android. iPhone is a whole, not iOS or iTunes or the App Store – it's a complete environment. There is no exact parallel in the Android or Symbian or WinPhone world.

    • http://twitter.com/Niilolainen @Niilolainen

      As long as people (or operators) at point of purchase, weigh up the pros and cos of an iPhone vs Android phone, they are in the same market. There is available consumer data on this along the lines of "Which phone would you like to buy next?", with the question asked of different kinds of smartphone owners. This shows there is churn going on between Android, iPhone, RIM etc.
      http://osxdaily.com/2010/07/24/iphone-vs-android-

      So the market is not commoditized, but iPhone does not exist in a bubble, it's just kicking ass!

      • stsk

        Well, not so fast. One of the reasons Verizon hasn't "deserved" the iPhone (their word) is because they tried to treat the iPhone as if it were a commodity and cripple the interface to run their own App-like store. Apple told them to go away. Virtually every other carrier has been begging for the iPhone. No real competition there. For consumers, the only way your point would make sense is if ALL, or at least a preponderance of consumers "shop" for a "smartphone". I don't know the figures exactly but I think only a very small minority of iPhone purchasers go into their local AT&T store and "shop" the phones on the shelf. (I suspect the same is true in world markets where there is a carrier monopoly…) The fact that a small subset of a market act as if there is a "comparison" does not a valid market make. The fact that I could go into a liquor store and "weigh up the pros and cos" of a $15,000 bottle of Sauternes vs. a $1 bottle of generic wine does not make them equivalent. As TomCF correctly points out below, software value is critical in understanding this. Carriers would LOVE for there to be a "commodity smartphone market" and have been waiting for that day. Hasn't worked out too well for them…

      • http://twitter.com/Niilolainen @Niilolainen

        the only way your point would make sense is if ALL, or at least a preponderance of consumers "shop" for a "smartphone"
        ——————————-
        I think a proportion of customers *do* think "I'm going to buy a smartphone". Although they might, given iPhone's grip on mindshare, think "I'm going to buy an iPhone or something like it". I think the data I linked to supports that point.

        Your wine comparison would make better sense if you didn't pick such extremes…

        iPhone = St. Emillion 1 Cru
        Droid = Decent Russian River Pinot
        Nokia = Australian Shiraz
        LG clamshell = 5 buck chuck

        (But I'm probably opening a can of worms, there!)

      • http://twitter.com/Niilolainen @Niilolainen

        If I didn't have my handset supplied by work the only handset I would spend my own money on is an iPhone BTW.

  • http://twitter.com/Niilolainen @Niilolainen

    Isn't a good definition of a true commodity (that does not contradict what you wrote) a good/service where the purchase decision is entirely based on price?

    If you accept that, then you might also say that it might also be possible to term a good/service where the purchase decision is largely driven by price is "largely commoditized".

    You had a great post showing market share/ASP trends where Apple has increased share while increasing price. ie Market clearly not commoditized at all, at least for smartphones.

    Whereas (I suspect) the dumbphone market is probably largely commoditized, showing a good correlation between low ASP and high share. This is an analysis I may just have to do…

  • dchu220

    Apple is a unique company in that it does many things well. They aren't perfect, but I'm hard pressed to think of another company that has executed at a high level in many different markets and products.

  • Ziad Fazel

    Cellular phones without smart features are commodities. Nokia leads most companies in working mainly on cost reduction and new markets for phones of a defined and static feature set. Cost and price are falling in order to grab market share and profits from the market being left behind by the smartphone makers.

    Smartphones are not commodities. There is continuous new feature development happening in both hardware and software, and ongoing efforts to find niches in the market between 2" and 5" screens, relative to 7" screens. As your charts have shown, there is heavy rotation in market leadership as new features are developed, especially the impact of the iPhone and now Android's arrival in the market. Disruptive technologies are still occurring. Even Windows Phone 7 could be considered disruptive with its simple interface, despite its weak 1.0 implementation, if it builds on it consistently and quickly.

  • berult

    They are not, nor should Apple allowed them to be before they're ready to jumpstart fate-altering technology. 

    Google's strategic imperative is to pull Apple down into zero marginal value territory. A commodity market is conducive to low marginal cost universal service distribution. The model is Government. How about private taxation without representation for a start, with the data gathering means to act preemptively upon the consumer's potential actions and reactions. Patent infringing practices smoothen technological edges to undifferentiated propositions, …and a Google-like intrusive commodity market.  

    Smart phones are Apple's as long as they keep them smart, relative to what they were once upon a time, three quarters ago. "Smart" keeps the dumb phone market on its toes and ripe for value-adding easy picks. Apple's strategy henceforth gathers strength on luring Google into force-feeding on its creed.

    To further succeed, Apple has to keep Google's head above water, up the commodity threshold, into "AirPlay/Facetime", multi-dimensional, highly creative, free open space. And the two together, and hopefully with others, can dance to the tune of market perenity. Until paradigmatic death do us part…                  

  • WaltFrench

    Ummm, hearing about Near Field Comms and watching the Playbook-vs-iPad video, finally seeing another blogger ask for better home automation, I'd say there are still large gains in functionality.

    Phones are still not universal remotes, still not universal transactors, still not universal communicators. Despite Facebook's latest, we're still in the dark ages of communications choices/modalities. (And after all, communication is THE core phone function.)

    Still not optimal news source for those of us whose work calls for scanning dozens of news stories + analyst pieces per day, either.

    Think of every other item you interact with having a dock for your phone, so your car knows your phone preferences (and enough about your ID to let you control the locks), but can supplement the speakers, radio, interface screen, GPS, …

    And that little science fiction is without any additional paradigm shifts such as the phones have already created a couple of times over.

    This'll require lots of interface logic, lots of 3rd-party coding. The Walled Garden can prosper if it creates an easy-to-code-for device with lots of flexibility and dependability, whereas the Android platform will have 14 different ways of doing it (see: Netflix). And Android will win if their campaign to stress the financial uncertainty of developing for iOS continues to have traction in the mindspace of developers. Dunno why Apple hasn't recognized as much and gotten MUCH more aggressive about being developer-friendly, even given the bad hygiene of some of 'em.

    • asymco

      I have not read one comment so far arguing that smartphones are commodities.

      Yet there are many who will defend Android as a viable platform, even a potentially dominant one.

      As Android makes sense in a smartphone hardware commodity market, you could argue that because smartphones can be highly modular, then Android can still add value to the concept of a smartphone.

      But then again you run into another wall which is that modular phones cannot be built as competitively as integrated phones in an under-served, uncommoditized market.

      • berult

        The market is developing quickly and it's too early to call yet. At this early stage, there is ample room for chaotic and seemingly irrational decision making and still reap market-wide profit from it. That's what a precocious and fast expanding market does, make life miserable for pattern analysts and make riches out of short term expediencies.

        In the long run, the winning formula will most likely be patterned on the intimacy between human mind and body. Softwarehardware inseparable from one another with the odd transplanted part sometimes holding sway. The Apple model.

        Google is modular, hence inefficient, because they're in transition. But not for long, and they profit right now in riding the wave.

      • WaltFrench

        “…smartphones are commodities … This is the essential argument for Android.”

        There is a lot of BS surrounding Android's raison d'être, thanks to Google's marketing and the astroturf campaigns that it encourages. Take, “we developed Android to keep one man, one company from controlling the internet.” OK, could be true if, in 2005 when you bought Android, Inc. you illegally expropriated insider information that Apple was building a touch-screen smartphone, and projected that it was going to be a mega-hit. Or if you really meant, "Bill Gates.” Otherwise, just a don't-examine-too-closely marketing line, just like “Android is open,” bogus because as we see, Android is quite happy to be part of a totally locked-down ecosystem once the “openiness” gets it established. Take the Dells, for example: those sold thru carriers are still locked to 2.1 while the others are already upgraded to Froyo. Or the Droid2 that has a hardware feature on its CPU that pretty much guaranteeing that no rooted OS will ever run on it. Or the BS that it's possible to have a quality app store that doesn't refuse apps that bypass guidelines. Or…

        So I think the commodity argument for Android is (a) also BS to help Google seem less evil :-) , and (b) not necessary to account for the world we have today — a world where Android appears no less than “viable” in the feature-race, anti-commodity game. If Google never made Android, Verizon would've contracted a unix-based PhoneOS from somebody like the old Android, Inc., or Microsoft or Meego, heck, maybe even Oracle. (OK, unlikely.) Verizon, which made more money off wireless than anybody before Apple disrupted their cozy little deals where OEMs, actually used to do just that: contract for commodity hardware plus an adequate OS, “distinguished” by whether the gizmos were candybars or flipphones, and priced extra (in the currency of data charges) if VZ spec'd a camera or email. Supposedly this type of differentiation allows Motorola to make an actual profit? But of course, under the oligopsony model OEM profits come directly out of Verizon's margins, and so Verizon should have wanted to keep things as they were B.iP.

        And that after a short ramp-up period, Android allowed them to do, again. Android allows Verizon to pretty much commoditize the hardware, reserving the proprietary aspect — a competitive smartphone on a premium-priced network — for themselves. (Likewise, the spectrum in the US is a true commodity that the carriers have managed to dis-commoditize thru the auction process.) Verizon has taken the chance with Google that it didn't realize it should have taken with Apple, because they only belatedly realized that they needed to get back in the game. If Google gets too uppity, they'll find somebody else. BlackBerry would seem to be a nice fit, and Nokia sure needs a patron.

        So Android phones are fast becoming commodities, even if Android per se is not. This is bad news for the high-cost or low-volume producers. I can't see how Moto and SE will survive, despite RAZR and t68i being my favorite phones Before iPhone. In a commodity market, a producer with an extra $1 expense per unit gets driven out of business.

        Only in that sense is Android a commodity, methinks. The phone, not the Google software or business model or Verizon network that is pushing it. But Apple de-commoditized the smartphone market in 2007.

  • dave

    I think the word commodity as being described here is incorrect.

    Horace, my understanding of this post is you have two or more widgets or products or whatever vs. services.

    The choice is whether to buy product A or product B. Both are of similar value. If the cost of one or the other become prohibitive you will gladly switch to the other with no real loss in benefit.

    That is the case with high end android phones and apple's iphone. they both do similar things in similar ways. if you are sticky with regard to carrier – verizon – you will happily buy an android phone rather than either wait for it to show up on your network or switch to att.

    if the perceived benefit of one phone over another is great enough then perhaps you switch carriers and pay the price because the utility is great enough for you to choose to do so.

    • asymco

      The definition I'm using is describing the category of products as a whole. Any single purchase decision is complex and depends on things like distribution and network effects. But strategically, the way a business manager needs to think about the category and the way one architects the business will depend on whether the market can absorb improvements. If it can then you spend on R&D and integration (e.g. HP buying Palm), if it can't then you spend on the modules that are likely to make money in new ways (e.g. Microsoft building Windows Phone OS).

      So my argument is addressed to decision makers in the industry and investors in their companies.

      • dave

        If you look up the word, it has nothing to do with technology or innovation. In economics, a commodity is something that is substitutable (fungible) and roughly equal to competing versions of the same thing. A mineral good (oil) or agricultural product (pork bellies) is roughly of equal value regardless of where it comes from or who produces it. Commodities also have very liquid markets and are therefore easily priced according to demand.

        I took this to mean you were redefining the continuing thread on modular vs. integrated strategies to one of how classical economic theory views a simple marketplace.

        In the end I still believe my statement that at a very general level all these smartphones are replaceable. Apple came in and disrupted the market with a new take on the high end phone. Its competition has since caught up. You can debate the relative merits of one product or another, but in reality they all do pretty much the same thing with varying degrees of success.

        I know people who are waiting for the contracts to be up and product A to show up at another carrier. I know others who have convinced friends to switch by showing similar or better functionality on the other product.

        I view Apple as the leader and it tries to create stickiness leveraging iTunes and emotional ties of coolness and newness. But in reality there is not much difference between an iPhone and HTC/Motorola Android phones in terms of functionality.

        I do not think it is a case of modular vs. integrated design. It is one of execution. Apple is able to execute at a reasonable price – see the iPad. HTC et al is also able to execute copying the hardware features of the iPhone. Both iOS and Android have their roots in Unix so they both inherit a flexible architecture.

        For now there is room for more than one winner. Apple will eventually have to broaden their lineup ala the iPod in order to compete. But there is not much that Apple does that Microsoft or Google cannot copy.

      • berult

        Apple defines the smart phone market on a foundation of yearly quantum improvements. It is the metrics of all platforms comparisons. Others have adopted a strategy of continuous incremental improvements. They slow down the clock.  

        Run away market growth is fueled in large part by run away Apple mind share of the "smart" part of the smart phone. It's unprecedented and it becomes compulsive throughout the industry. Do smart and do it smart. Adding smart to any commodity gives it a life of its own and some sort of individuality.

        The smart phone would vehemently oppose being branded as a commodity. The smarter the wiser so if you want to do it, better do it now!

        Anything that purports to be smart is by definition a work-in-progress. It therefore cannot be commoditized for it doesn't stand still and is seldom at rest. Unless of course the concept "smart" becomes itself a commodity. It already has in Politics.

        So, for all of you investors and decision makers, never bet against someone or something which, at a tormentor's request, may grow the will to make you regret…!

  • asymco

    But they are or aren't. The problem with treating them as if they are while they're not is that you can't benefit from them, or more precisely, you can't build competitive products which capture the upside in the market.

    • TomCF

      Yes, I agree, and I wonder if that's why sometimes open source software doesn't compete so well.

  • GreggThurman

    It's impossible to characterize an Apple product as a commodity, simply because purchase of the product gives the consumer access to an ecosystem that competitors have failed to replicate. The 'value' of the Apple product is the totality of the user experience within the ecosystem. Ergo, device PLUS ecosystem is the product, and while it can be argued that Apple's hardware is superior (or not), the ecosystem is the value added differentiator.

    Will competitors ever be able to compete as an ecosystem alternative? No.

    Apple established the ecosystem many years ago with the iPod and iTunes. Since then they have simply improved it. Additionally, Apple established its ecosystem with price points that leave no room for price comparison, while still enabling competitor profitability. So Apple gets its value added revenue enhancement from its hardware, denying the competition the ability to develop its own competing ecosystem. Competitors are simply locked out because they don't control the whole widget, leading to commoditization of key components of their hardware, and denying them the individual share that would make creation of an ecosystem possible. Nokia and RIMM have the potential to operate as complete solutions, but they don't get "it". They remain focused on the hardware, while paying little more than lip service to the ecosystem.

    In the end, the dominant ecosystem will garner dominant market share, and only one firm is positioned to do that: Apple.

    • Pol

      Very well put, Greg, but I disagree with your conclusion. With a superior ecosystem (by providing a superior overall experience, I would say), the Mac didn't win the market share battle. However, it won what counts most: the profit share battle (http://www.businessinsider.com/chart-of-the-day-revenue-vs-operating-profit-share-of-top-pc-vendors-2010-3).
      In MP3 players, no worthy competitor emerged, such that Apple won both the unit and profit share battles.
      This is not the case in smartphones, where Android has already captured greater market share. As with the Mac, however, Apple will keep generating the highest profits (http://www.asymco.com/2010/10/30/last-quarter-apple-gained-4-unit-share-22-sales-value-share-and-48-of-profit-share/).

      • stsk

        Again, which Android has captured greater market share than what? Android is a cluster of similar operating systems for phones. It is not a single platform. (again, Netflix?) It is silly and obfuscatory to treat Android(s) as if they were a single platform. Is it appropriate to compare the Androids to the iOS platforms? Maybe, maybe not. iOS runs on iPads, iPod Touches, iPhone(s) of several generations. Android might, someday soon, work on "tablet" devices, but will it be the same OS as the one on the Droid? Or HTC's tied to Verizon? Or AT&T? Which Android has bigger market share than which iOS? iOS 4.2 is (or will be any day now) the same OS and runs on a variety of devices. Android is a bunch of similar, but not the same, OS's which run on a bunch of phones in different guises as played by different carriers. It's ridiculous to treat the Androids as singular in figuring market share. Do all extant versions of Android have the ability to run on all current "Android" platforms?

      • GreggThurman

        Because "Android" cannot be installed on devices from several manufacturers (or even different type devices) I don't think you can rate it a single platform. It is certainly a commodity because differentiation of the OS is limited, as is any ecosystem that may surround the competing products.

      • Pol

        The different Androids are similar enough to be considered one category in a market share analysis. Call it a meta-platform (http://daringfireball.net/linked/2010/11/13/netflix-android-wp7), if you wish. Most consumers in the market for a smartphone don’t consider the small tailored differences in the Android software from one phone, or one carrier, to the next: they consider hardware and price. Most aren’t even aware of the Android meta-platform’s fragmentation and its inherent problems, much less care for them. The carriers don’t focus their sales efforts on their customized version of Android: they tout their products' advantages over the iPhone, price and network quality. Android is often mentioned only as an afterthought. Who cares if the iPhone is outselling one particular HTC phone running Android 2.1 on Verizon? Not only is it not ridiculous to treat the Androids as singular in figuring MARKET share, as you state, it’s the only pertinent way to carry out the analysis because the MARKET perceives the Androids as singular. Your argument will only become valid should a customized version of Android become significantly distinct and superior to make it a deciding factor in purchasing decisions over other versions of Android.

      • GreggThurman

        Pol, you can't compare the history of the Mac to that of the iPhone. The evolution of the Mac stopped under the leadership of John Scully (who favored a myriad of product names vs product innovation). Innovation of the Mac did not restart until Jobs returned.

        The iPod didn't become the must have product until Apple released a Windows version of iTunes (ecosystem component), and started selling music (ecosystem component) through it.

        Now Apple is extending that ecosystem to include the Mac, which has never had an ecosystem surrounding the hardware. You could argue that the graphics industry provided the Mac with an ecosystem, but it was dependent on 3rd parties and crumbled when Abode offered Windows versions of its creative products.

      • Pol

        Yes, innovation largely stopped under Scully. However, even at its market share apogee in 1984, Apple only held 22% of the PC market (http://jeremyreimer.com/postman/node/329). Had Jobs not been forced out that year, would Apple have been able to overtake Windows? I doubt it because even though Apple had the superior product, PC clones offered sufficient functionality at a better price to attract the most consumers.

        The classic iPod is essentially a single-purpose device that no other company was able to match because of its superior ecosystem, as you rightfully state. Smartphones are more complex, however. They are handheld computers. Apple's ecosystem may be superior but the Android clones offer sufficient functionality and ease of use to offer stiff competition at a lower price; witness the recent introduction of the Huawei Ascend available without a contract for $150 (http://reviews.cnet.com/smartphones/huawei-ascend-cricket-wireless/4505-6452_7-34192033.html?tag=contentMain;contentBody;1r#reviewPage1). It's not an iPhone but it has a touchscreen and a camera, it offers web access and a quality library of applications, overall a decent enough ecosystem for most users. Some will choose the superior iPhone, but most will be swayed by a good enough Android clone because of its better price, just like most consumers buy a PC over a Mac. Look at the consumers' enthusiasm over the Ascend, in spite of its terrible call quality. The challenge for Apple is to keep its grasp on the high end. It will probably henceforth never sell as many smartphones as the different flavours of Android.

      • GreggThurman

        Pol, intelligent response. Thank you.

      • Pol

        Thank you for sharing your insight, Greg!

      • asymco

        In 2006 Windows Mobile devices were launching at the rate of 50 every month. The vendors were touting a huge number of form factors and price points. The product offered a good enough browser, integrated email and an app library. There were keyboard devices, keypad devices and touch screen devices. They were available on every carrier on the planet. Palm threw its lot in with Microsoft as did every vendor, even those who were members of the Symbian consortium

        So what happened?

        Something better came along.

        If you say that Apple has a challenge, it's not that it has to grasp the high end. It's that it has to re-invent the market. Fortunately for them that's all they do.

      • Pol

        Yes, we might be talking about WinMo vs. Blackberry instead of Android vs. iPhone had the iPhone not come along. The iPhone was a reinvention, as you correctly state, a tectonic shift, a revolution. Apple's challenge is indeed to keep reinventing the market with small incremental steps within the current paradigm (evolution) and by bringing about the next quantum leap (revolution).

        Its success in meeting that challenge will continue to be measured by its ability to keep selling the most profitable phones. We're both right: you articulated the means (reinvention of the market) to the end (holding on to the high end = selling the most profitable phones) I mentioned. (R)evolution is the game; a fat bottom line is the end.

        BTW, terrific blog, Horace!

  • Narayanan

    If people buy smart phones and use it only for making voice calls and texts, then commoditization has happened. Eg; android activations have shot through the roof, but Android web usage is still relatively low, implying most people are using their "smart" phone in a dumb way. In this use case, commoditization has occurred.

    To stay ahead of the commodity envelop, Apple needs to continually introduce new use cases such as Facetime, that are actually used by the masses.

    • GreggThurman

      Narayan, I believe your reference to Facetime is a comment on Apple re-inforcing the iPod touch, iPhone, iPad ecosystem. On this you and I agree.

      To respond to Horace's comment, "I have not read one comment so far arguing that smartphones are commodities.", let me say this, the iPhone is NOT a commodity because it has a unique value proposition (ecosystem) that cannot be easily duplicated. That said, all other smart phones ARE commodities because features come on a chip and are easily duplicated, except where those features require an ecosystem to be complete. The closest thing to a competing ecosystem is RIMM's email security/delivery feature. But that is where RIMM stopped innovating, and now the world is passing RIMM's differentiation by.

  • WaltFrench

    Yup. When Rubenstein said, “We could not compete in a fashion that would allow us to be one of the premier companies in the marketplace. And HP needed … to control their own furture and not rely on the kindness of strangers,” I don't think he was talking about entering as yet another commodity seller.

    And yet, I think HP/Palm has a better chance, at least in the short term, in a commodity world. WebOS is pretty far behind the curve in so many aspects of the market that Apple defined and Android has successfully jumped in on: app library and store, music/video store, optimized graphics (incl Flash), CPU bragging rights, …

  • unhinged

    Horace, I think your reasoning in the final paragraph is flawed. Commodity status does not mean that a single product such as Android will stagnate, it means that it simply will not improve beyond the rate achieved by the entire set of products in that marketplace. Improvements will continue, but as you say they will not exceed the absorption capacity of the consumer – yet the latter is not necessarily a fixed point. Look at the iPhone's disruptive effect; Apple nurtured the consumer mindset to the point where it would accept such a massive change, after having learned the lesson of the Newton – don't ship a product that the market isn't ready for.

  • Iphoned

    We can get wrapped in definitions, or just look at reality. Google provides free OS and is able to match (more like ripoff) IOS feature for feature. Many hw vendors use it to supply close-enough hw at sometimes suicidal margins. We've seen it play out in the PC business. We have news now of a $150 Hwawei Android phone sold without contract. I just have a hard time seeing how Apple can sustain current margins in this game unless they want a Mac-like market share, and thus lose the platform war. And if they cut prices to stay in the platform game, with iPhone around 65% of profits, this will destroy earnings and the stock. So far they've been able to avoid this choice, becase iPhone is still superior, but with everyone else drafting, the superioritynis fast diminishing. So I thing Apple is facing some painful choices ahead.

    • asymco

      If they cut margin but increase volume earnings could increase.

    • unhinged

      I think the difference this time around is that Apple have provided an ecosystem for developers. The Apple II was very successful for the same reason, when that got "Steved" the DOS PCs became even more popular in business and because businesses were spending tons of money thanks to Reagonomics that's where the developer focus shifted.

      With the iPhone, we're talking lower absolute prices and Apple is not going to discontinue the product in its prime because they come up with the next Macintosh. So the market is not as sensitive to the higher margin, developers have a vested interest in maintaining the platform because there are profits being made, and despite your assertion Android is not at feature parity yet (Exchange support? Good luck with that).

      Apple may have to lower prices in the future, but while they are committed to aggressive pricing they will ensure a decent margin – and if price competitiveness suffers, so be it. If they don't get the ROI they want from a project, they find another one.

  • Norton

    I agree there will still be innovation even if smartphones are commoditised if only to maintain a base level, just not charge a high(er) premium. Like fancy buttons and programs on my washing machine that simple dials (remember those?) used to work. But the irony is, I find the “phone” part of my smartphone the least used, so I’m paying for a better camcorder, GPS navigator, alarm, game console, social communicator…..

    Must be familiar counting so called Android market share like Windows market share – there are so many versions of it yet all lumped conveniently under one name.