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Mobile Impossible

In yesterday’s post about the “biggest mobile loser” I covered the exodus of users from non-smart devices in the US and EU5. I also said that what happens in those regions tends to happen in other regions with a time shift. In some regions it happens quicker but in most it happens more slowly.

But can we be sure that there isn’t vast non-smartphone growth in other regions? Well, no, we can’t be sure. At least not without access to reliable data.

But what we can track is the overall non-smart phone market and compare it to the smartphone market. Here are the growth rates of the two sub-markets:

The difference is plain to see. We can also note that the non-smart market may be heading into a contraction–something noted by some analysts close to the market–but no real sign of that happening in smartphones.

Beside growth, we can also see actuals and the split of various vendors’ volumes in the market.

It’s also clear that the top line has not moved much in the last few years. Next, the shares of the vendors.

Finally, the before-and-after share pies.

We can see that the growth story, if there is one, is coming from low-end entrants. In late 2008 the main brands had 90% share. They now have about 60% (in a flat market.) The growth is all from “Other”.

What seems to be happening is that buyers in mature markets are swapping (or upgrading) from non-smart to smart and adopting new smartphone brands. At the same time, new users in emerging markets are increasingly adopting new non-smartphone brands.

So the question for the incumbent vendors is extremely important: Facing them are low-end and smartphone entrants engaged in a pincer movement, with obvious success; can the old brands survive?

The answer, as always, depends on whether the competition is symmetric or not. Low end competitors are usually structured around low cost structures. High-end competitors are exploiting new markets and new business models. For an incumbent to survive and fight on both fronts they’d have to adopt both of these models for themselves, simultaneously and quickly.

We can see that Sony-Ericsson and Motorola (Google) have thrown in the towel on the low end. The question of dual-front strategy is mainly relevant only for Nokia, Samsung and LG. LG is on the ropes and may actually be ready to exit the market so that really means Nokia and Samsung. Nokia has signaled continuing interest in the non-smart market (citing “the next billion users”). Samsung also seems to be hanging in there. Can they do it?

I cannot stress how difficult this is or how rarely it has been achieved. The two approaches are if not opposites then at least orthogonal. It’s like Mission Impossible. You can’t be a low cost global vendor while investing in R&D for differentiated platform-based devices. These are shaping up to be businesses requiring completely different skill sets. Few have the ability to host these skills inside one company. I can think only of one example.

  • http://twitter.com/nortools James Norton

    Who is your one example you mention in the final sentence?

    • http://www.asymco.com Horace Dediu
      • davel

        When I read this I thought of Apple, but then decided against it as they do not sell low end products. The lone exception is iPod where the low end product is a cheap stamp that plays music. However it is still significantly more expensive than the competition.

        My next thought was your former company Nokia as they are in both markets and until the Apple onslaught were considered very good high end phones.

  • Anonymous

    typo in next to last paragraph…LG is one the ropes.

  • Luis Alejandro Masanti

    Once in AllThingsD, Steve, asked for some unknown information, replied that “it was not good that the boat leaks by the top” (my words), meaning that he, the top, be the one to leak.

    In the same way, I think, Apple products “leak from the top.” Take the iPod. First came the top model, then the mini/nano, then the shuffle.

    In the same way, Apple –as Horace clarified above– is now able to enter the prepaid (not necessary not smart) phone market and then the truly dump phone market (maybe, by that time, the dumbest will be smarter than actual smartphones).

    On the other hand, it also can disrupt the phone market in a new way: with FaceTime, iMessage, etc. it could be building a data-only-phone-system, just over the telcos-as-pipes and twifi-hotspots.

    Telcos-as-pipes would be the end of the iPhone-started declime of the telcos-kingdom.

    • Anonymous

      Mobile telcos in most markets simply won’t stand for it, they’ll price data only so that it can’t compete with voice/data.

      Turkeys don’t vote for christmas.

      • Anonymous

        There only has to be one that finds a way to make data only subscriptions work. I’m not saying that the mobile telco market is a free market but I believe that a significant and growing demand will find it’s supply.

      • kevin

        The mobile telcos won’t like it, but Apple only needs to seduce one forward-looking or eager telco in a non-monopolized market to buy in, especially if consumers are also eager. Not sure we’ve reached that point yet, but a release of a 3G iPod touch (i.e., no cellular voice over 3G and data plans like the iPad) would help us to see what the market is willing to pay for.

      • Anonymous

        I think most nations unfortunately live with oligopolistic wireless companies. Oligopolies are the second-worst enemies of innovation and responsiveness to customer needs. So yes, they will fight to maintain their privilege and may succeed.

        However, sometimes a crack appears and something funny happens. Suppose the T-Mobile acquisition fails. T-Mo is stuck: it doesn’t have the scale to compete on the same terms but can’t sell itself. A marriage with Sprint looks doubly unattractive.

        *AN* answer might be for it to compete aggressively in bulk data. Suppose every iPhone could use T-Mo data, initially for user data billed back by Apple to users, then ads that users would pay zero, then software updates when the user hadn’t been near wifi in a while that would be performed in the wee hours when traffic was essentially free. A “dumb” pipe that would be selling excess capacity for additional revenue, without needing marketing or lowered prices that would further impair them.

        Leading to T-Mo being a FaceTime voice-only net charged at data rates, etc. All optional, incremental to Apple users without disrupting their existing carrier contracts.

        You don’t have to be stupid to run a wireless company. I think it’ll be interesting to see just WHAT T-Mo does if the clock runs out on their AT&T merger.

      • http://www.asymco.com Horace Dediu

        Exactly. Divide and conquer is the most (only) successful tactic against an oligopoly. It’s the way Apple entered the markets it did with iPhone. They would get rebuffed by the larger players (Verizon, DoCoMo, Vodafone, China Mobile) but would enrich the second or third tiers causing all kinds of consternation.

      • davel

        I do not think the scenario you list will be accomplished by TMobile. Their 2g network is fine. Their 3g network is a disaster. I expect 4g to follow 3g. The issue is frequencies. Their 3g frequencies are incompatible with the rest of the world and ATT. So phones have to be built for them only. Sprint 3g is the same as Verizon 3g. Rumors have it that Sprint will switch from WiMax to LTE.

        If so I expect Sprint to go the route you outline above. In fact they are the only ones with unlimited data.

        The recent DOJ case against ATT hopefully will kill the merger. But I expect the elections will change that as an incoming Republican admin will kill the lawsuit setting up a du-opoly here.

      • Anonymous

        I’d appreciate more insight into the networks. I had presumed the frequencies issue could be worked out relatively easily, and had read that Sprint’s network would look very spotty w/o piggy-backing onto Verizon’s. True?

      • davel

        I do not think the scenario you list will be accomplished by TMobile. Their 2g network is fine. Their 3g network is a disaster. I expect 4g to follow 3g. The issue is frequencies. Their 3g frequencies are incompatible with the rest of the world and ATT. So phones have to be built for them only. Sprint 3g is the same as Verizon 3g. Rumors have it that Sprint will switch from WiMax to LTE.

        If so I expect Sprint to go the route you outline above. In fact they are the only ones with unlimited data.

        The recent DOJ case against ATT hopefully will kill the merger. But I expect the elections will change that as an incoming Republican admin will kill the lawsuit setting up a du-opoly here.

  • Rob Scott

    Great work Horace. I think your mobile analysis has improved a great deal by looking at both – dumb and smartphones, and the changes that are happening in both as opposed to the obsession with smartphones.
    I have said it many times before that the Android OEMs are the net losers when you look at total units sold (sum of both dumb and smartphones), thus losers in unit share in general. They are as your work has shown losers in profit share and revenue share in the mobile industry.
    I feel that people gloss over these very real facts because they want to slant the message to the Android is winning meme.
    The point you haven’t addressed, that I would like you to think about is that the upgrading users or users who can afford to upgrade to smartphones are reducing in number. The true upgradeable market is more or less 70 – 80% of the total market, with the rest not upgrading in the next 5 – 10 year. The question then is: where are we as a percentage of the true addressable market? What does that mean for smartphone growth and incumbents’ prospects?
    Samsung will exit the dumb phone market in a year or two.
    The question I have been struggling with is – will Apple address this market with an iPod phone or not. The iPod has been in decline for some time and can be breathe new life with an addition of a 2G radio a $2 -3 affair. Why not do it?
    I expect Android to continue to lead in growth for the next year while its licensees continue to lose units share in the total mobile business. I expect Apple and Other to continue to gain share in the total mobile business.

    • davel

      You bring up a good point. Why is there the drumbeat of stories about Android winning where as our host continually points out their profits makes a long term business debatable?

      • http://twitter.com/ProfessorTom Tomas Gallucci

        Because people are either emotionally or financially invested in Google being a big winner ignoring the privacy and profit concerns. It’s the ignorance (that is to say, people who lack knowledge) of living for the moment instead of securing the future.

  • poke

    Surely the trick would be to make smartphones a need rather than a want, the same way dumb phones are now. Then there won’t be a dumb phone market. It seems like that’s just a matter of time. Although perhaps a relatively cheap, popular pure-data entrant could make developing world carriers reevaluate what it is they should be supplying.

    • http://www.asymco.com Horace Dediu

      I tweeted a question where I asked if you were stranded on a deserted island and had the choice of either (a) unlimited wireless data plan or (b) unlimited voice plan, which would you choose. I received a huge number of replies and they were all unanimously (a).

      Now I would ask if this makes a smartphone more of a need than a voice phone. I would also add that cellular phones were much more a want than a need not too long ago.

    • http://www.asymco.com Horace Dediu

      I tweeted a question where I asked if you were stranded on a deserted island and had the choice of either (a) unlimited wireless data plan or (b) unlimited voice plan, which would you choose. I received a huge number of replies and they were all unanimously (a).

      Now I would ask if this makes a smartphone more of a need than a voice phone. I would also add that cellular phones were much more a want than a need not too long ago.

      • Sacto Joe

        I posted somewhere in the last few days in response to the hackneyed statement that Apple only sold luxury products that this was backwards to the truth, that what Apple really did was redefine what was a necessity.

      • davel

        With VOIP you do not need voice. In fact I do not believe voice is analogue at all so it is an artificial distinction. The only difference is the distinction created by the telcos.

        At some point voip becomes the standard and telcos only sell a data plan.

  • http://www.intomobile.com/ Stefan Constantinescu

    Should Nokia and Samsung then separate their mobile phone business into two divisions (read: companies), one that makes devices for the masses, the other that focuses purely on smartphone and innovative services? Car makers already do this, though they do change the branding. Honda sells a ton of vehicles, but for the folks who want a premium product there’s Acura. Toyota has Lexus. Nissan has Infiniti. Volkswagon has Audi. See where I’m going with this?

    • http://www.asymco.com Horace Dediu

      New brands make some sense. Nokia tried with Vertu for the ultra-high end. It makes sense typically as you move up-market. You want to have an aspirational brand to give meaning to your new luxury offering since your entry as a low-end disruptor does not translate.

      However, moving from a mid- or high-end branding to a low-end is rarer. Typically management does not want to decrease margins and invest in brands that lower them. It’s not that it does not make sense, but that it seems counter-intuitive. Consumer goods companies are more likely to do it as they expand into emerging markets. I’d look into P&G as a leader in this.

  • Jerry

    I carry both a several-year-old old clamshell-design LG “dumb phone” and a Nexus S. The LG is just a better *phone* than any smartphone I’ve used: Easier and quicker to use, smaller, sounds better, better signal. (It has an actual stub antenna sticking out of it, which can only help.)

    Combined devices inevitably make some kind of tradeoff. The question for each individual consumer – and for large groups of consumers, hence for producers – is whether what is lost is outweighed by what is gained. By the standards of the old “stereo” industry – not to mention the true high-end stuff for “golden ears” – the sound quality of an iPod is horrible. But the convenience completely trumps the sound quality, which is good enough for the purpose.

    There continues to be a market for better-sounding audio equipment, and there probably will be indefinitely. Will there continue to be a market for cell phones that are better as cell phones? It’s unlikely to be the same as a market defined by *cheap* phones. Personally, I hope so … but I’m not sanguine.
    — Jerry