This blog article is not about Apple strategy, or the iOS strategy, which are both brilliant. This article is not about death grip, which obviously is not strategy, that was a rare execution stumble, unnecessarily made worse by a poor execution at an Apple PR event.
This blog article is one in a series of strategic viewpoints to the major players in the smartphone bloodbath, at the half-point of this pivotal year 2010, the bloodiest year of the battle for the control of the future of smartphones and mobile phones, and by extension the future of personal computers, the internet, media, advertising and even money. All of those are seen to be headed to a mobile phone near you - and many mobile industry analysts expect most, some say all - mobile phones will become smartphones before this decade comes to an end. What we are witnessing is the first year of the big race for all the spoils of digital convergence. All the big names of the tech space are already in it from HP to Apple to Lenovo to Dell to Intel to Microsoft to Google to Nokia to Sony to Ericsson to Motorola to Samsung and LG and many more. So this is 'part 1' of the big strategy blog articles, building on my blog from yesterday, where I gave the grades to the major players at this half-way point of 2010.
The top line for Apple today. The iPhone made the best-ever launch into smartphones in 2007. For the next two years, Apple grew at breathtaking speeds, capturing a huge slice of the enormous smartphone market - reaching a 17% market share in Q3 of 2009. Then the strategy imploded. Since Q3 the iPhone has lost market share and is now down to 13% according to Canalys (14% according to Strategy Analytics). By Canalys numbers, Apple has lost almost one quarter of its market share - in nine months! Worse yet, this year Apple is seeing a decline in unit sales - a decline which happens when the smartphone market is exploding. Since Apple's peak moment in Q3 of 2009, the smartphone market has grown 49% according to Canalys. Just in the past 3 months, the market grew 12%. All of Apple's big smartphone rivals grew unit sales and maintained or grew market share.
Apple not just lost market share, it actually saw unit sales decline. This even as Apple released the world's best, most-anticipated iPhone upgrade, the iPhone 4, that sold 1.7 million units in 3 days. This was before anyone was even buzzing about any Antennagate. Apple has the world's most desirable smartphone. It has the world's best customer loyalty of any smartphone. The smartphone market is exploding. There was no viable 'iPhone killer' on the market in Q1 or Q2 of this year and superphones like Google's Nexus One failed spectacularly and Apple's rivals like Palm folded and went bankrupt.
If Apple had the best phone, the most desirable phone and the most loyal customers, and it launched its best phone yet, why is Apple not able to turn that affection into market share growth? Why for nine quarters already has Apple been bleeding market share - growing more slowly than the rivals. Why is Apple actually seeing a decline in unit sales - the only one of the big 6 smartphone makers to see a decline in unit sales in any of the past four quarters? Something is wrong.
Its not that the iPhone is failing or the customers are deserting the iPhone (and this happened all before Antennagate). Something is wrong in Cupertino. This is the analysis of what happened and what has to happen to fix the problem. Its a matter of smartphone strategy.
This article is not a criticism of the iPhone itself. The iPhone is the world's most desirable mobile phone. The original iPhone in 2007 was the most successful new phone launch ever in this industry and each subsequent iPhone has been significantly better, achieving ever greater sales. Even with Antennagate, the iPhone 4 is a roaring launch success and iPhone retail outlets around the world cannot keep the iPhone in stock. The iPhone is selling literally better "than hot cakes".
This article is not a criticism of Apple the company. Apple is the world's most profitable mobile phone maker growing its profits in an industry where almost all rivals are struggling with declining profits like RIM and Nokia or making losses like LG or failing spectacularly out of the phone market like Palm, Google and Microsoft. This blog article is an analysis of the iPhone strategy today.
I am not saying Apple overall strategy is flawed. I admire Apple for the great products that it does very profitably, with enormous customer loyalty. But the strategy for the iPhone - that had been excellent in the first 3 years - is now wrong. The old iPhone strategy that was right for 2007 (and I said so many times back then) is now wrong in 2010. Its time for Apple to change its iPhone strategy. This blog is a long article of over 10,000 words - it will take you half an hour to read, but it is deep analysis of where Apple is today, how we got here, why it worked in the past, and why the current iPhone strategy is no longer working today. Go grab a cup of coffee as you digest this article. I think it will make many people think of the iPhone in a new light.
So who am I to say? My competence is in the mobile industry, specifically its strategy. Not just a random blogger, I am the world's most published author in mobile and my thoughts, as discussed in my nine bestselling books - including the first strategy book (M-Profits) for the mobile industry - so far have been referenced in over 90 books by other authors in the industry. I am held in considerable respect by my peers. And I am saying not that the iPhone has failed - far from it - but that the iPhone strategy is wrong. The iPhone strategy is severely 'sub optimized' and delivering a stunning victory in the wrong battle, while abandoning any chance of winning the main war it is in, where the big rewards would be. And therefore, the strategic guidance from Cupertino is faulty, steering the company to repeat the painful decades of the Macintosh prior to Apple's revival roughly timed with the the launch of the original iPod and iTunes. How many Apple loyalists can still remember all those years in the 1990s that Apple made losses while it had the Macintosh as the world's best PC and that slow death it was doing losing in the platform war to the Windows compatible army of PCs?
iPHONE THE TRANSFORMATIONAL PHONE
The original Apple iPhone (2G model) changed the whole industry as I predicted it would. No other phone before or since, not the Motorola Razr, not the RIM Blackberry, not the SonyEricsson Walkman or any other phone ever, had achieved that. And the iPhone went even beyond the mobile handset business which it revolutionized. It changed the larger mobile telecoms industry, and the adjacent IT/PC and internet industries. It changed the media industries and it woke up the mostly USA based giant advertising and banking giants to the potential of the mobile phone. There is a reason we consider the mobile industry in two eras, the time before the iPhone and the time after the iPhone (as I predicted we would).
This is similar to the Macintosh. In 1984 when the original Apple Mac launched, it did change the whole PC industry forever. We were introduced to the first user interface so simple, you didn't have to take a computer class to operate the computer. The screen had menus and icons that you could point to with a mouse. By one fell swoop a whole row of keys on the PC keyboard became obsolete (the 12 "Function" keys above the numbers on a typical PC keyboard). Today obviously all personal computers have a pointing interface in some form of mouse.
The Macintosh ushered in a new era in computing. In that process, personal computer sales exploded and the PC was embraced by all businesses and more importantly, the far bigger market of home consumers. Today grandparents can use a PC and even 5 and 6 year old kids who don't know how to read can already play videogames on their parents' PC. Note this is very similar to today, with the explosion of the smartphone as it moves from the business users to the consumers - in the past 12 months the smartphone market grew 69% - an unprecedented growth rate in human economic history for a gadget that was already selling over 100 million units annually at that time (the smartphones sold about 175 million units last year).
So all PCs in use can trace a clear lineage to the first Mac. So why are the world's biggest personal computer makers named HP and Dell and Acer and Lenovo...but not Apple? Because the Apple management failed to see many 'obvious' trends in the PC industry that abandoned massive market segments to its rivals, most obviously the whole laptop era. Again modern young tech analysts might not remember that Apple stubbornly refused to release a laptop version of the Mac until long after all its PC maker rivals had carved up that new high-priced and faster-growing (and more profitable) laptop market segment. Yes, today Apple offers Macbooks but they were very late to the party. Too late to help Mac back into the Top 5 (which they just now in Q2 finally managed, with the help of the iPad). Twenty six years in the wilderness, for the company that changed the industry. And why? Because of wrong strategy, as many long time Apple followers know fully well.
I do not hate the iPhone or Apple. I love the company and admire the product and have pleaded for Apple to join the mobile industry for many years before the iPhone was launched and I have cherished Apple's contributions since it did. But I am a mobile industry analyst, not a Wall Street analyst nor a PC industry analyst or a blindly loyal Apple fanatic. I try to be as honest and truthful as I can be. And it is clear to me that Apple's excellent launch of its iconic iPhone from 2007 has run its course, and the phenomenal market share growth by leaps and bounds through 2009 had screeched to a halt. The facts are in. Now its high time for Apple to make a major change in its strategy. That is what this blog is about.
THE APPLE LOYALISTS
From the iPod to the iPhone to the iPad, the modern Apple products are simple, elegant and have revitalized and re-invented their older industries (portable music players, mobile phones and tablet PCs). The Apple loyal user base has every reason to love the Apple products. They are by far the best-designed devices and technologies in the market. The Apple user base is familiar with this and willing to pay the extra for the premium of having an Apple product compared to any rivals.
This is the engine to the current profitability of Apple. American Express told us that a good experience is worth an extra 9% that consumers are willing to pay for. Apple has learned to live in that space, making their products (and the iTunes and App Store etc, even their consumer experience like in the Apple stores) better - for which Apple then is able to charge a premium. Then Apple has expanded from being just a computer maker.
Apple users are incredibly loyal, coming back to buy more Apple products. A survey of early iPad buyers by Piper Jaffray found that 92% owned an iPod, 74% owned a Mac and 66% owned an iPhone. The Apple army is loyal. In surveys from market after market, the current iPhone owner is incredibly likely to buy another iPhone, while even most other expensive rival smartphone owners like those with a Blackberry are more likely to buy 'any other brand' than another Blackberry, as we saw in Nielsen's survey of US consumers this week. A crushing advantage to Apple, as Nielsen found the propensity to be that 90% of current iPhone owners want their next mobile phone to be an iPhone. Meanwhile in the UK its gotten so bad for Nokia that even for those of current Nokia owners who are willing to make their next purchase also a Nokia, those Nokia owners are not willing to recommend Nokia to their friends! They are clearly ashamed of owning a Nokia.
This brings me to the true power of the Apple army of fanatics. Its not that they are loyal to a fault. The are much better than that. Apple loyalists are the most active brand ambassadors of any tech brand. Think about how many times you've been somewhere with your Windows compatible laptop and some Mac owner has said 'isn't it time you changed to the Mac?' And the same with the iPods and iPads. They are constantly peddling their gadgets at those who aren't part of the Apple army (yet).
So why the iPhone? It came at the perfect time, with the perfect paradigm change, in the perfect market, for the perfect audience. The magnificent screen. Yes, there had been 3 inch screens prior to the iPhone and even bigger screens. But the iPhone made the 3.5 inch size touch screen interface work. The first truly functional touch screen phone. Compared to its contemporaries - the Nokia N95 had a screen size of only 2.5 inches. As screen size is measured diagonally, in reality the iPhone had almost twice as big a screen as the similarly-priced Nokia N95. If you wanted to look at something, at that hand-held distance, the size difference is gigantic, in favor of the iPhone. Gigantic.
What do we show on the mobile phone? The first mobile phone service is the voice call. We don't 'show' our calls. Then came SMS text messages. Yes, we look at our messages on the screen on the phone - but we do not 'show' our messages. In fact most people are very possessive and secretive about their messages on the phones.
WE SHOW OUR PICTURES
So what is it that we do show? Its the pictures! The cameraphone was invented by Sharp and J-Phone (now Softbank) of Japan in 2000. The early cameraphones had very poor resolution cameras of very poor quality optics and limited storage. That evolved with Moore's Law and by 2005 we had megapixel cameraphones and by 2007 the first 5 megapixel cameras were appearing on the market. Today we see 12 megapixel cameras on mobile phones. No wonder the cameraphone completely shattered the stand-alone camera industry and today cameraphones outsell stand-alone cameras by about 9 to 1 and two of the 'big four' traditional camera makers - Konica and Minolta - have gone out of the camera business altogether.
The iPhone came at a perfect time, in that transition, when for the first time the mass market consumer was seriously transitioning camera use from stand-alone digital cameras to the cameraphone. And now where the phone might be 'lesser' as a 'camera' for casual snap-shot pictures, the iPhone style touch screen cameraphone 'trumped' the existing digital cameras - with its giant screen!
Think about it. What other digital pocket-sized cameras existed in 2007 that had a 3.5 inch screen? None. They also all had tiny 2.5 inch screens.. The iPhone 2G came at the optimal time to capitalize on this shift already happening globally. This was the perfect marriage of a modest camera but a superb screen. Most cameraphone pictures are not printed, they are shown on the phone. And for the average consumer, suddenly the cameraphone meant that everybody had a camera always in their pocket. And thus the new photo sharing opportunity - show it around the table.
And here Apple ruled the world. The screen was not just gigantic in size - but there was Apple's 'magical' technologies of the accelerometers - just turn the phone sideways for the next picture if one was in portrait form and the next was in landscape. Can you still remember how you felt the first time you saw that? Wow, this is magical. You just turn the phone, and the picture changes 'magically' as if reading our minds. Why aren't all phones like this?
And then the icing on the cake, the effortless multitouch capacitive screen, just swoosh the pictures along, from this picture to the next. This was utterly amazing. Apple seemed to be lightyears ahead of any other phones.
Note that the iPhone 2G was a severely compromised phone. It was technically not even classified a smartphone by the purists, it was categorized as a featurephone. Its camera was very modest. It didn't do 3G. It didn't have GPS. It didn't support major industry standards like MMS. Its camera didn't record video. It didn't do multitasking, it didn't allow for users to install apps, and on and on and on. Those who had a few years of experience with 'real' 3G smartphones from the major global rivals, in the more advanced markets like Asia and Europe - were not impressed by the specs of the iPhone.
But that did not matter, because in bars and coffee shops and pubs all around the world, regular consumers were showing their pictures - on iPhones. And then when they compared to any pictures shown on any other technically 'better' cameraphone like a SonyEricsson Cybershot or some advanced Samsung or Nokia N-Series, that phone owner would always have to 'teach' the user - what button to press to zoom the picture, or how do you move to the next picture, or 'now it vanished, how do I get the picture back' etc. When we compared looking at pictures snapped now at the same childrens' birthday party, the parents would all be amazed at how 'intuitive' and simple that iPhone was. It was clearly the best cameraphone.. Not because of better optics or more megapixels - it was because the screen was so good.
Which brings me to the cherry on the top. The free media publicity. You want your technology on TV. The iPhone was by far the most TV-friendly mobile phone, ever. Its screen was magnificent in any close-up shots, the TV camera could zoom into the hand of the reporter, who could show the iPhone and what was on it. That became the ultimate phone to show on TV. The media darling.
We have the perfect storm. The iPhone 2G came at just the right time, when consumers were willing to accept cameraphones as replacements for the simple point-and-shoot digital cameras. The first of a new type of mobile phone experiences was being born, that was prone to sharing via the phone screen being passed around. The mobile phone user experience up to 2007 had been almost totally private. In 2007, we started to share the screen of our phone - and most of all it was those pictures on our phones.
The Apple loyalists were the perfect army to unleash to go convert the world. The iPhone was 'visibly' better than any other phone. This was manna to the Apple army. It was undeniable visual 'proof' that Apple made the world's best phone. For Apple loyalists, the evidence seemed obvious, that the iPhone was so much ahead of all others, and clearly, the other phone makers would have to 'learn from Apple to do this right'. Also it was an ego trip as clearly the Apple loyalist was 'clever' for having bought the expensive iPhone when it first appeared, and the friend should be smart too, to switch from the old-fashioned rival phone to the magnificent new iPhone... The evidence was before our eyes, and from 2007 to 2009, no other phone could touch the iPhone for sharing pictures as effortlessly by passing the iPhone around. (And after 2008 the App Store added games and apps and ebooks and other reasons to pass the iPhone around as well).
The visual evidence of the enormous growing popularity was further supplemented by the similar form factor of the iPod Touch - which to casual viewers in any bar, coffee shop or pub, would seem like 'yet another iPhone'. This added the perceived penetration rate of the iPhone by as much as 60% to 75%. And as the iPhone was so cool and sexy, many owners of expensive rival phones - that did not have big touch screens - were hiding their phones at Starbucks, not putting the Nokia N96 or SonyEricsson Walkman or Blackberry on the table, almost ashamed that it was not as cool as the new iPhones were. So while iPhones (and visually near-identical iPod Touch'es) were over-exposed and their users boldly showing the world how great the iPhone was, the rival phones were often hidden from view. And again, with WiFi both the iPhone and Touch were often used at considerable length at various Starbucks and other public places with WiFi coverage, so iPhones were very much 'out in the open' and visible. So the iPhone seemed to be everywhere.
It was the perfect storm and far more perception than reality, it was easy to believe that the iPhone was the world's most popular mobile phone as well as its most desirable one. In reality in 2008 only 1% of all phones were iPhones and in 2009 that was up to 2%. But anyone who lives in any city can attest that in the past two years, there have been far more iPhones about town, than one out of every 50 mobile phones. It often seems like iPhones are almost 1 out of every 2. That is the power of perception.
GAP IS CLOSING
The iPhone has not been sitting still since 2007. We have had the camera improved from 2 megapixels to 3 megapixels and now 5 megapixels. The iPhone camera now shoots also video and has added a LED flash for the iPhone 4. Meanwhile the wonderful 3.5 inch screen remains the same size but this summer Apple gave us 'retina display' resolution, of so high pixel density, that it rivals the ability for the human eye to discriminate sharpnesses that would be greater. That increase in sharpness is visible to the naked eye, when comparing any two phones side-by-side, to Apple's advantage.
But in January of 2007 when the iPhone was announced, the 3.5 inch screen was almost unprecedented to most consumers in most countries. The gap from the iPhone 2G to the rival phones by Nokia, Samsung, Motorola, SonyEricsson, LG, Blackberry etc - was enormous. If you took the most common phone sharing situation - the picture sharing as I mentioned in the above, the early iPhone models were very visibly "in a different class". All other phones seemed to be obsolete. The multitouch capacitive screen with the accelerometers was a huge leap forward in the summer of 2007 and its taken Apple rivals many failed attempts to finally do all of that.
But now in 2010 we have a slew of touch screen smartphones that do capacitive multitouch and have accelerometers. So that user interface gap is diminishing. I am not saying it is closing, Apple is still innovating but the rivals are diminishing the gap to a large degree.
This is exactly like the Mac vs the IBM compatible computers in the 1980s. The first user interfaces that tried to mimick Apple's Mac were very bad - Windows 1.0 was truly horrible. So in 1986 to 1989, there was almost no contest, where the Mac was far and away better than early Windows PCs. But Microsoft kept working at it, and by 1990 there was Windows 3.0 which took over the world and became the first mass market adopted user interface on a PC that outsold the Macs by a big margin. And important to remember, Windows 3.0 was not 'as good as' the Mac. But by 3.0, Windows was 'good enough'. For the purist, like a professional in the graphic design arts, there was only the Mac. But for the mass market, the Windows at 3.0 was 'good enough' where the average consumer no longer was willing to pay the premium Apple wanted. When the mass market came, it went to the Windows version and very rapidly all PCs and apps and services (and revenues and profits) followed. This, while Windows was never able to catch the Mac 'technically', in any subsequent editions either.
We are seeing that story now repeating with Google Android already outselling the iPhone - most normal consumers now think the latest edition of the Android OS is 'good enough' to be viable as a true rival to the Apple. Now the two bigger rivals to Apple, both Symbian and RIM have upgraded their OS to advanced touch screen systems that incorporate multitouch. I am not saying the rivals will catch or pass Apple in making the best smartphone OS for user interface. But the gap is diminishing to the point where today in 2010 a Samsung Galaxy or Nokia N8 can be a very viable multitouch rival to the iPhone.
Remember, Apple cannot win by being 'the best' in this race, after the rivals become 'good enough'. That was the lesson of the Mac (and incidentially, also the lesson of the Betamax vs VHS - Sony's Betamax was far superior technically with better video, audio etc but VHS won the race for market share with lower costs). Then all Apple can do, is hope to hold onto its current customer base, which in the big scheme of things in mobile, is tiny. Apple holds only 2% of the global phone market today, thats smaller than what the Macintosh has traditionally held in the PC market. Macs have been recently having about 4% of the global PC market. So understand, this is the wrong strategy for the iPhone, for Apple to 'be satisfied' with this tiny sliver of 2%, half that of what the Mac achieved.
THIS IS JUST LIKE AN iPHONE BUT BETTER
Then we have the 'other' advantages. Imagine the average non-technically informed mass market consumer, walking into an average phone shop somewhere on the planet. Lets say that consumer has already decided that the next phone has to be a touch screen about 3.5 inch smartphone and has seen a friend use an iPhone and wants to consider the iPhone.
If that consumer truly wants the slimmest most minimalist smartphone today, the iPhone 4 is definitely it. Best screen resolution and meets all the basic expectations. But then its up to the sales guy to see what the consumer "really wants".
Now, what if that normal consumer likes the iPhone, but also wants something more? What if the consumer wants an even larger screen than the 3.5 inch screen? Then the salesguy will pull the Motorola Droid X with its 4.3 inch screen and let the customer compare to the iPhone. The iPhone 4 has a 'sharper' screen but the Droid X has the bigger screen. My gut says many will end up liking bigger more than sharper..
Or if the consumer is ok with any 3.5 inch screen, but is heavily addicted to mobile messaging (remember 78% of all mobile phone users worldwide are already active users of SMS text messaging, as I report in the TomiAhonen Almanac 2010, and 30% of all smartphone buyer will not consider a phone that does not have a dedicated separate QWERTY or T9 keyboard for their messaging needs, according to to Motorola). If the customer wants a full QWERTY keyboard - then for about the same price as the iPhone, but a bulkier smartphone, you can have your big touch screen with the slider QWERTY and get the Blackberry Torch. The salesguy will put these two phones into the hands of the customer. If QWERTY is what the customer would like, the customer will walk out of the store with the Torch, not the iPhone 4.
Or if the random customer wants the same experience as the iPhone, but rather than the 5 megapixel camera with LED flash, is more into photography and likes a 12 megapixel camera with 'real' Xenon flash. That customer will walk out of the store with the Nokia N8, not the iPhone 4.
Or if the customer want the same form factor of the iPhone but wants also to have a pico projector in their pocket, now there is a touch screen smartphone with the pico projector - still in the same price range as the iPhone - the Samsung Galaxy Beam.
These are not more expensive phones. All do the large screen multitouch 3G cameraphone internet enabled 3G smartphone concept very well (they are 'good enough' compared to the iPhone, for any non-iPhone user today). But like in cars we don't all buy the Ford Model T in black. Different consumers have different needs. Some like the fast sporty - but minimalist car like a Ferrari (no back seat, almost no space for luggage, very low ground clearance so speed bumps and potholes can be problems, etc) while others want a big tall roomy vehicle with tons of storage space and ground clearance like a Cadilllac Escallade or Range Rover SUV, while others want an eco-friendly hybrid car like the Toyota Prius, or yet someone else lives in the city and size and parking are a premium needs, so a small city car like the Mini or Smart Car is what they want, etc.
We are humans, we have differing needs. In 2007, one iPhone 2G was the only thing out there - quite literally the only choice - if you liked the large touch screen concept. Today for the same price you have many varieties of large touch screens in the high end of the price point. At this richness of choice, one model iPhone 4 can no longer hold the fort for holding market share. The rivals will run past it, as they already are like we see with Android. Google has just today announced it is activating 200,000 Android phones every day - that means Androids outsell the iPhone by 2.2 to 1 already. It was even just a few months ago.
Yes, the iPhone App Store has a quarter of a million apps and gets several billion downloads - but there are now many rival App Stores getting up to speed as well. The Nokia Ovi Store is already doing more than half a billion downloads and several dozen other app stores are out there supporting most platforms and phone brands. Android is getting more mobile web use, all of the 'but the use of the iPhone is different' arguments are proving false. If you give consumers a similar form factor phone, on a similar price plan, the Androids and Symbians and others will all generate similar usage as the iPhone. That is not a sustainable advantage for Apple either.
PROFIT VS MARKET
So we come to what is wrong with the iPhone strategy. I apologize for the long article, but I had to establish that this is not in any way being critical of the excellence of the iPhone itself, or of its loyal fans, or its true competitive advantages. And that I acknowledge the iPhone's launch and first years have been executed with excellence, far beyond what any other brand has ever achieved (compare the iPhone to say the failed launches of rival tech giants with the Google Nexus One or Microsoft Kin). But now its time for the second stage of the iPhone, and Apple is in danger of missing its opportunity. The current strategy - continuing the early awesome launch - is wrong for 2010. Wrong for this time. It was right in 2007 to 2009 but no longer. It is wrong for a market where the rivals are snapping at the heels of Apple.
In a stable mature industry like the PC industry for example or the music player industry, its great to be the biggest at making profits. But in a new industry that is experiencing rapid growth, where markets are still being made - that is where the management has to balance profit to market share growth. This is a difficult balance. If you have a good product and you price it too highly, you generate great profits - your investors will love you this quarter - but you abandon market share to a long-term investor revenge when their visions are crushed as the rivals take the market. But if you price too low, you risk buying market share now while making losses, which is an unsustainable market situation, suicidal to long term - and you go bankrupt with supremely happy customers, witness Palm.
In a time when an industry is in hypergrowth stage - like smartphones are today - the price is not the primary purchase criterion. In times of strong market growth, it is possible to have a desirable product, to gain market share, and grow profits - simultaneously. Once the market matures, and everybody offers similar products, the competition is far more driven by price. When price is the primary criterion, Apple is suffering and cannot easily grow market share. Apple is too dependent on its design edge, which means it will always be a premium price product. Now is the 'best' time ever, for Apple to achieve market share growth in smartphones. Apple can always rely on 'loyalty' ie return customers. That is not growth. But Apple has a rare chance, a once-in-a-decade chance, now. Once the big growth era is over, and price is far more important to buyers of smartphones, then Apple will have the hardest time to try to match the low cost providers from Asia.
What the tricky management conundrum is, is to gain market share while making profits. You cannot maximize one or the other. You have to balance the needs of the two. Please understand what I am saying. I am not saying Apple is wrong to make profits (that is great). I am saying, that if Apple has set strategic targets which generate excessive profits - at the cost of market share - that is a dumb strategy. If Apple can grow its market share while making some profits (as it did in 2007, 2008 and 2009) - that is the correct strategy.
But somewhere in late 2009 or early 2010, Apple strategy went off the rails. While still making profits, Apple's market share turned into decline (as first explained by me on this blog, but now retold regularly by the major mobile industry analysts, such as in this graph of global smartphone market shares by Strategy Analytics). There is no excuse for Apple to own the most desirable smartphone on the planet, and not be able to turn that into market share growth. That is simply incompetent management, clearly focusing on the wrong priorities. Apple should maximize its profits in the mature industries of Macs and iPods, but only optimize profit/market share mix in the smarphones space, to gain maximum obtainable market share for long term viability and profits measured in years and even decades, not a couple of quarters.
DRUG DEALER STRATEGY
We know that Apple's loyalty is beyond any rivals. 90% of existing iPhone owners want another iPhone. And we know that Apple is able to expand that loyalty across the other Apple products. Get the consumer to buy an iPhone today, it will consider the iPod, the Mac and the iPad in the near future. And most of all - still today in 2010, what has been true the past 3 years, the current owners of iPhones will try to convert their friends to try the iPhone, most of all by sharing pictures. No other phone brand in mobile has this power. So no other phone brand has this strategic option. Apple should take the 'drug dealer' strategy, to get Apple iPhones into the hands of the widest possible reach of consumers - and rely on Apple love, loyalty, bordering on addiction - to build its future base. Because still today in 2010, there is that very rare 'spreading factor', where not only does that user return to buy another iPhone but that iPhone user will try to convert friends to become new iPhone users.
This is rare in any technology. But it means there is a magnificent opportunity for Apple (today). What Apple should be doing right now, is to get every conceivable customer on the planet to 'try' an iPhone - to get addicted now, and to teach all friends and colleagues to try Apple now, before every smartphone is a total iPhone clone. And most wonderfully for Apple's long term achievement - their brand loyalty is so strong, they can do this profitably, without 'giving away iPhones for free' haha. No, they can maintain the same profitability of the iPhone line as today, while dramatically expanding their market share.
PRICE PYRAMID OF PHONES
Morgan Stanley told us last year that you can divide the global mobile phone handset market into three price tiers. There are superphones costing about 600 dollars (like the iPhone, or Motorola Droid or Samsung Galaxy or Blackberry Bold or Nokia N8 etc). Their total market according to Morgan Stanley last year, was 2% of the global handset market in 2009. There is a cheaper smartphone (and premium feature phone) market of about 350 dollar phones that comprises of 11% of the global phone market. And then there is the remaining 87% of the global market where the basic phones exist with an average price of 100 dollars. Please note these prices are 'street prices' ie without contract, so yes, the real price of the iPhone 4 is not the 199 dollars you pay at AT&T, its real price hidden in the 2 year contract is 600 dollars.
Where do we stand today? Apple has a global market share of all phones sold worldwide (in Q2)... of 2%. It has taken most of that super premium phone market that is available according to Morgan Stanley. In reality, because of those confusing handset subsidies, the iPhone is also competing in the mid-price phones segment in many markets of handset subsidies like the USA, UK and Japan - where the price is not as clear to the end user. But still, its obvious that the current iPhone 4 is a super luxury phone at the top of the price pyramid. That also is reflected in statistics on iPhone users. The average household income of iPhone owners was the highest of any smartphones, at 100,000 dollars according to Yankee Group. The iPhone is disproportionately a rich person's tech toy. It is an expensive luxury good.
CURRENT SALES PATTERN
The current iPhone 4 is selling so well that it is on waiting lists in most stores. But that demand is an illusion that only applies in the beginning of the sales cycle. The iPhone cannot sustain its initial appeal for two reasons. The launch cycle of only 1 new iPhone model per year creates an anticipation factor to the iPhone, so in the Spring, owners of existing iPhones will delay their upgrade/replacement purchase decision while they await the newer greater iPhone due in June.
Note that this is a bad trend for Apple, as it prolongs the natural rate of replacement cycle. The replacement cycle for phones globally is only 18 months according to the Semiconductor Industry Association (vs 3.5 years for personal computers by the way). So if someone bought a nice shiny new iPhone 3G in October of 2008, then by February 2010 that same customer is edgy to get a new phone. If Apple had a new iPhone for that consumer in Q1 of 2010, Apple would make a sale in February and then be ready to sell another new iPhone for Christmas 2011. But as that Apple fan knows the new iPhones come in June, the purchase is unnecessarily delayed. And because the 'newer' iPhone is bought only in the summer, the 'next' iPhone is also delayed by a further 6 months, so the delay effect is cumulative.
The math is devastating. For every customer that would have upgraded at one and a half years (the world average rate), but prolongs to two years - Apple annual sales of replacement phones are depressed by a third. Apple is voluntarily abandoning a huge slice of the 'natural' market it 'owns' due to unnecessary delay in the upgrade cycle. Apple didn't understand this, coming from the PC industry where replacement cycles are more than twice as long.
The second effect is the rivals releasing new phones. This industry moves very fast. Most major rival giant mobile phone makers release new smartphones monthly (Nokia, Samsung, LG, SonyEricsson etc) and even the smaller 'pure' smartphone makers like RIM and HTC release more than a single new smartphone model ever quarter. Only Apple does only one new model per year. This means that in the Spring of any year, the rivals can pick prospective iPhone new users with alluring new phones. Apple is unnecessarily abandoning this market to rivals.
ITS TIME FOR THE iPHONE NANO
So this is what I think is inevitable. Apple has to expand its product range. Why? First, because it is too crowded in the top of the pyramid. All rival makers are offering new phones to go against the iPhone. The battle is getting brutal in the superphone category - only more bloody towards the end of this year with the newer models coming. Apple has to come down in price to where a bigger market exists. This is what Apple already does with the iPod and the Macintosh. Apple has no problem designing and managing a portfolio of premium luxury products with iPods and Macs, of exceptional design, that users love. Apple have no problem maintaining the competitive design aspects and Apple's brand loyalty as it has split those product ranges into multiple products. Why would Apple have any problem in doing so with the iPhone?
MY IDEA OF WHAT THE NANO iPHONE SHOULD BE
My suggestion is at roughly half the current price of the iPhone 4. Do a new iPhone Nano at a street price of about 300 dollars without contract, or about 99 dollars for the US market on AT&T with 2 year contract. That kind of price. And not to repeat the iPhone 3GS. Make this genuinely "a new iPhone". Give it a couple of 'new' abilities that the 3GS did not have. This is easy to take from the iPhone 4. Add LED flash to the 3 megapixel camera of the 3GS. Add the iOS version 4 that has multitasking etc. Add a faster CPU and memory than 3GS, so the iOS version 4 will run well. And give it the 'revised look' of the new iPhone 4 (obviously also fix the Death Grip haha). The rest of the guts would be essentially the 3GS.
Then VERY importantly, make this a nano model, ie make it physically smaller. Most of all, give it a modestly smaller screen than the iPhone 4, ie 3.2 inches. This gives Apple the chance to make the Nano 'noticeably' smaller physically than the traditional iPhone Classic size phones - something like 10% physically smaller in length and width (while retaining about the same thickness). There is the 'intuitive' reason why the Nano is cheaper and the full price iPhone 4 more expensive, because the Nano itself is smaller with the 3.2 inch screen, and the iPhone 4 bigger with its 3.5 inch screen. Like in cars, compare the BMW 3 series vs 5 Series etc. The Nano needs to be carefully designed to not significantly cannibalize iPhone 4 sales.
By using the same screen resolution as the current 3GS, there is no significant market fragmentation with a new screen resolution to manage. And by using Moore's Law, if Apple was able to make the 3GS profitably in June of 2009 with a street price of 600 dollars, it can do a Nano iPhone with almost the same specs but smaller screen, at half the cost it was for the 3GS in 2009. So the Nano in late 2010 will have the identically excellent profit margin.
This strategy does not harm Apple's profitability at all. Do not give the Nano the retina display. So this is clearly the 'entry level' model. Design the Nano to be 'not good enough' for current iPhone 2G or iPhone 3G users to consider in an upgrade/replacement - they don't want a smaller screen and they will love the Retina Display and 5 megapixels of the iPhone 4 - Apple has to make sure existing iPhone owners will all want the iPhone 4, and if the users were able to pay for the iPhone 3G (or 2G) then they can afford the iPhone 4 today. So in synch with the launch of the Nano, make a modest upgrade to the internal parts of the iPhone 4, to give it a bit of a 'supercharge' so upgrade the memory for example, to further illustrate the concrete value of the iPhone 4 being significantly more than the Nano, to secure the loyalty of existing iPhone owners.
DRUG DEALER WANTS NEW ADDICTS
The Nano strategy is to capture NEW customers to Apple's iPhone. Why? One, we know that worldwide, the big growth is at the lower end of the smartphone market. Two, we know the iPhone has the best desirability today, so there is a huge pool of love of iPhones that are deterred by the current high price. Three, we know that all new Apple product owners fall in love with Apple. This will mean that probably 90% of iPhone Nano first owners will continue as iPhone owners. Fourth, the iPhone Nano would be an entry level Apple product to get new buyers to Apple other products like the iPad or Mac or iPod (and future iOS devices). And fifth, because all iPhone users become fanatical brand ambassadors - who will show their friends how cool the iPhone is and try to get them to buy iPhones too. And sixth, this Nano offers increased unit sales, increased revenues at the same excellent profit margin as the 3GS did last year.
With the lower cost of the Nano, the iPhone will probably increase total global iPhone shipments by at least 50%, maybe even double it. Because its seen as a new iPhone with some honestly new features, there is no stigma that the 3GS currently has, of being 'the obsolete iPhone'. There will be very little of any cannibalization of the full price iPhone 4, because the 4 is the 'replacement version' for existing iPhone owners with clearly superior tech specs, specifically the Retina Screen and the 5 MP camera. The Nano is the new first-time iPhone 'entry' model for new buyers. The Apple loyalists are very knowledgable and peculiar about their devices, so it will be clear to all existing iPhone owners, that they really do want the iPhone 4, not to replace an iPhone 2G with the Nano today. And Nano buyers of today will eventually be then migrated to premium iPhones over time.
Coming for Christmas, the iPhone Nano would be the perfect Christmas gift for every dad to buy whose wife has been using "the family iPhone" before. The Nano would be the perfect gift for grandparents - here is the perfect smartphone for the elderly (the elderly are loving the iPhones). It is also a far more practical gift, pricing wise, for teenagers than the real iPhone 4 (teenagers break and lose phones far more than adults do). And obviously the iPhone 5 of June 2011 would then be another 'superphone' with the big leap forward for the flagship iPhone.
IS READY TO GO
I am nowhere near the first to suggest now that Apple should introduce a cheaper Nano iPhone. Those rumors have been on Apple forums and blogs since the iPhone 2G was launched in 2007. So Apple HQ has heard this story many times. I am sure there has been a feasibility study and there has been a 'rolling plan' of a Nano version, updated every few quarters as the tech specs change. I am sure Foxconn has had proposals for Apple on expanding Foxconn's business with Apple to do the larger market, larger volume iPhone Nano, totally in Foxconn's interests. And some poor Apple internal manager has been trying desperately to convince Steve Jobs to approve the Nano project but been ruled against, time and again. Early in 2007 and 2008 I said that it was not the time for the Nano. But since 2009 it became plausible. Now it is needed. This is the time for the Nano variant to the iPhone.
FULLY SUPPORTS APPLE PRODUCTS
There is no compromise in this strategy. I am not asking for a QWERTY version (which I have argued separately, would double the iPhone's market share, but thats another story. I a not convinced Apple will ever see this, and may be stubborn about it like it was for a decade with refusing to give us Macbook laptops, or even today, refusing to issue a 2 button mouse for the Mac). And it would not eat into the sales of the iPhone 4. In fact, there would be some, who would start to carry two iPhones. So for some existing iPhone users with one iPhone, now there is a reason to get a second. The main phone as the iPhone 4, and the second 'partying' iPhone for the evenings, as the Nano.
Note also the iOS family of products. Many of the developers have been fooled into thinking that Apple's iPhone (and/or iOS) reach is somehow the biggest smartphone platform on the planet. Apple has not particularly pushed this view, but have not bothered to correct it either. It has most of all been fuelled by faulty analysis of mostly US based analysts and reporters.
Meanwhile the tech bubble that started to form around iPhone apps somehow 'being the new gold rush', has subsided as many analysts are now pointing out that the iPhone App Store (and all other app stores too for smartphones) economy is not a digital eldorado. So the App Store myth is now breaking, and the truth is coming out about the iPhone not being somehow the world's most used internet surfing phone either. These facts have been knows to the real experts of the global industry and I've been among the many trying to inject some reason to the discussion over the years.
So there is still a strongly held myth, that somehow the iPhone is 'taking over the world' and the emerging truth that the iPhone only accounts for 2% of all mobile phones and even its peak market share in smartphones was a year ago in Q3 of 2009, when Apple had 17% of smartphones, and that market share has been in perilous decline ever since, now down to 13% or 14% - while the smartphone market itself is experiencing the biggest boom ever. The iOS developers will start to ask for answers and demand solutions.
What Apple needs is now a big boost to the iOS market and again, an iPhone Nano would instantly sell more than the iPad, and could well sell more than the iPhone 4 itself. The faulty but widely held view of most US based analysts and Apple loyalists is that the iPhone is the world's most used, or perhaps second most used smartphone. So most who 'believe in Apple' including many investors, think that the iPhone has achieved number 1 or number 2 status.
The truth is also out there. It is now being spread, that number one by a wide margin is Nokia on Symbian. The new number 2 is Android. RIM is number 3 and all three of these grew unit sales and kept or grew market share in 2010. The only big smartphone maker and platform that lost unit sales and is seeing big declines in market share is the iPhone, now at number 4. As this reality sinks in, many will be stunned and worried. What Apple really needs now is a good 'second act' to the iPhone story. The Nano iPhone is the story all Apple fans and followers (and investors) want to hear, now.
INEVITABLE, BUT WHEN?
Can Apple do this? I am certain that Foxconn can do this smaller 'updated' version of the 3GS very easily by Christmas. This is not the cutting edge technology like the iPhone 4 was with retina display. Some day Apple will do this. It is inevitable. They will split the iPhone into a range and my gut says the Nano will come before any premium super duper iPhones. By next year some analysts expect half of new phones sold in the USA to be smartphones and in Europe in some countries to be more than six out of every ten new phones. China is now rapidly falling in love with smartphones, after the 3G networks went live last year and China has become the second biggest country for smartphone sales where 1 in 8 smartphones are currently sold worldwide. In China, Apple's rivals like Lenovo sell iPhone clones. Will Apple release the Nano now soon, or will it come years too late, like so many other Apple changes (eg Macbooks)?
The iPhone 4 is a great smartphone. But it is expensive. The Nano would be the perfect China iPhone too. Apple can profitably do a far cheaper Nano model of the iPhone and reverse its decline in market share. The time to do that is now, when the smartphone market is still in hypergrowth stage and market shares are relatively easy to capture profitably, than a few years from now when the smartphone market has become more mature and price is the main way to compete. And because of Apple's big investment in design, Apple can never win the price war. The time to capture market share is now while the market is still growign strongly and price is not the main issue.
GREAT QUARTER NOW IN Q3
Do not be fooled by the numbers of Q3 in 2010. The iPhone is the world's most desirable smartphone. All major markets have now been opened to the iPhone as China and South Korea were added to the iPhone family last year. The Antennagate Death Grip did not have time to suppress Q2 sales because only 3 days of iPhone 4 sales were registered in the previous quarter. But Apple was fast enough to issue its apology and the 'band aid' solution of the free cases, that today the demand for new iPhone 4 smartphones is still far bigger than the supply.
The iPhone will have its best-ever quarter in unit sales and revenues and profits in Q3 of 2010, which together with strong demain for the iPad will no doubt produce a magnificent quarterly revenue and profit statement for Apple to report for the Calendar Q3 with Apple results out in October. The iPhone is definite to break its own unit sales record and I am confident they will far exceed 10 million iPhones sold in this quarter.
That all is good and well, but they are winning the wrong war. Apple could sell 50% more - even maybe twice the number of iPhones, if it had a Nano model in its lineup. And that Nano model as I defined in the above, would be exactly as profitable as the 3GS was. Today Apple is the most profitable mobile phone maker on the planet. It makes the most desirable phone and has the best loyalty of any phone maker in the market. It has been so for the past year.
WHY iPHONE FAILING THE MARKET?
Why is it that Apple saw a peak of market share in Q3 of 2009, and even as it releases the best iPhone ever, the iPhone 4, Apple's total unit sales went down from the previous quarter? Why has Apple's market share crumbled from a peak of 17% of all smartphones in Q3 of 2009, to 13% today. It is not because customers don't love the iPhone. Its because Apple has the wrong strategy now. They are abandoning the long term sustainable profits of major market share gains now, for the short term maximising of profit at the cost of market share, now.
Does this mean that Apple management is brilliant, or is perhaps a senior executive like Steve Jobs planning for retirement and maximising market evaluation now (to dump shares perhaps at a peak price?) at the expense of long term shareholder value? I am certain Apple has a ready strategy to launch an iPhone Nano type of cheaper iPhone and could do so within half a year. Why is it not doing so now? Apple has the wrong strategy for its iPhone.
Finally - This is the first in a series of analysis articles about the major rivals in the smartphone bloodbath wars and what I think of their current strategies. For those who want to see the 'grades' I gave at the half-year point of 2010, my first half review of all major brands is here. And if you want to get the stats and numbers for the mobile industry, please take a look at the TomiAhonen Almanac 2010 (available as immediate download as an ebook/mbook for your smartphone or PC or Kindle or iPad)
PS - TOMI DOESN'T KNOW WHAT HE TALKS ABOUT
"Tomi doesn't know what he talks about" Oh, do I not? When the US tech press was all gaga over the unveiling of the original iPhone 2G, in the Spring of 2007, before the iPhone had launched, this is what your humble mobile 3G consultant wrote on this blog:
On January 10 just days after the first prototype was shown by Steve Jobs on stage,I wrote my first major analysis of the iPhone - that the iPhone will reach its 10 million target for first year (not unusual forecast but clearly I was not one who said it will fail - as many did - nor did I fall all over the iPhone suggesting it will sell 20 million as others did). But I was the first analyst anywhere to give a mix of US vs World sales of the iPhone, and called that US/World split of sales for the first full year almost exactly, five months before the iPhone had even launched.
I said the iPhone 2G would fail advanced Asian markets until a 3G version was released (who else said this by January 10 of 2007?). I also said Apple's particular strengths were its marketing and PR spin machine, its loyal fans, and its exceptional skills in UI design. Which of the mobilists raised these issues when oogling over the first pictures of the large screen slim sexy iPhone. And I called it that there will be a touch screen iPhone clone by one of the major 5 before the summer - as LG did launch the Chocolate in Europe that spring. Not bad, two days after anyone saw the iPhone.
Then a month before the iPhone launched, on May 18, 2007, I wrote my definitive prediction about the relevance of the iPhone, in 'Entering the iPhone Era' - the blog that also is credited with inventing the term 'jesusphone' (something I never said, but was later mistakenly assigned to me and that blog). I said that from that point, the yardstick to measure any premium phones would be the iPhone (good call). I called it that there will be a migration from laptop use to pure iPhone use (correct). I said the use of the mobile internet will be (mistakenly) attributed to the iPhone (good call, even better that this was done mistakenly, but that the myth would prevail that the iPhone brought the internet to mobile). I called it that the media industries based in North America will wake up to mobile (correct call again and nobody made this call in May of 2007). I said that USA based advertising execs of Madison Avenue would also wake up to the cellphone, thanks to the iPhone (correct again). I said the iPhone would be a regular on latenight TV comedians and on 24 hour news (right). And I said that silicon valley, the PC and internet industries would discover mobile after the iPhone. When we look at Dell, HP, etc - that was clearly also the right call.
In that blog I predicted that in its first year the Nokia N-Series would outsell the iPhone (correct). This again, more than a month before the first ever iPhone 2G had launched, and nobody was yet testing the iPhone or reporting on it. Most analysts were still mesmerized by the outwardly slickness and sexiness. I was very deep into analyzing how the iPhone would change our industry and other industries.
And a few days before the iPhone 2G finally launched, on June 24 of 2007 I wrote my last analysis of the potential of the iPhone and pointed out that while excellent as a first attempt by Apple, the iPhone 2G was flawed with some of its biggest faults being no 3G, a puny 2MP camera, no ability to record video and no flash for the camera - all factors that Apple has since fixed in updates to the iPhone line. And on 24 June I wrote that what will end up being the biggest change in mobile - where Apple changes the whole game - is the user interface. This was again written before any press or tech reviewers had a chance to play with Apple's amazing multitouch iPhone.
And what of the 'seasonal' sales cycle for the iPhone that we now know exists, where it sells better in the second half of the year up to Christmas, than the first half of the new year, while waiting for the newer model? Who told you first there will be this seasonal pattern? I called it on June 24, before the first iPhone was sold! I do know my 'sh*t'.. And while many were suggesting an iPhone Nano within the first year, I said that was not possible because the next iPhone would need so many costly upgrades, it would end up costing more than the original - again 100% accurate as we see from the iPhone 3G vs 2G.
And do I understand the market that the iPhone was invading. I made an emphatic point that the iPhone would not impact the Blackberry (and that pundits would think it would) - both proven to be true. Of all smartphone brands, the Blackberry has been most isolated from any iPhone impacts, and grown by a healthy rate ever since. I did call it that the two brands most hurt by the iPhone would be Motorola and SonyEricsson (wow, that was a good call - both profit-making growing premium phone makers went into a tail spin, lost customers to Apple and lost market share and started to make losses). I called it in June 2007 that LG would gain more from the iPhone launch, selling its Chocolate touch screen phones (LG sold more Chocolates for two years after the iPhone's launch). And I called it that Nokia's N-series, in particular N-95 would gain from the launch of the iPhone - as it did also outselling the iPhone. And I called it that an Asian beneficiary for all those networks who won't carry the iPhone will be HTC.
I also called the problem of launching with multiple carriers in Europe and Asia, the need of 3G to make any meaningful sales in Europe and Asia and the need of multiple carriers in the same market(s). And I predicted that most European carriers would reject the revenue-sharing deals that Apple got out of AT&T. Of the Asian market I also pointed out that much of Asia is very price sensitive (witness iPhone's poor performance in China). And I called the clones to appear in Asia. And finally, that while the US market would love the iPhone 2G, the rest of the world would be underwhelmed by that near-obsolete device but that when Apple did its first full upgrade, with 3G, in the summer of 2008 - that would be the first true Apple world-winner smartphone (all turned out to be true). All this was written still before the iPhone had sold one unit in June of 2007.
Obviously I am not infallible, I have made many bad calls in the industry too, like anyone who is professionally involved in forecasts. So with the iPhone, I did get the Q1 quarter of 2010 (Jan-Mar calendar quarter) very wrong. I had forecasted a decline in the unit sales compared to the Christmas Q4 quarter as had been the seasonality pattern in previous years. The reality was that the iPhone actually grew unit sales from Q4 of 2009 to Q1 of 2010.
Yes, I was clearly wrong - but that time, forecasts for iPhone unit sales prior to Q1 Apple quarterly results - every single published analyst (over 30 of them) had all forecasted a decline in sales, and my error in my forecast was one of the smallest of the forecasters. Even when I am wrong, I tend to have less error than most of the other analysts. In this forecast the average error in the forecasts was about twice the size of my error. And not one forecaster correctly predicted that iPhone would grow sales from the Christmas Quarter to Q1 of 2010, every one thought the sales would decline. And in Apple's biggest country market, the USA, that pattern did hold. AT&T sales declined by 13% from the Christmas period. How did most of the analysts react to Apple's surprising numbers? I did not see many of them acknowldeging that just days or weeks before, the analysts had been wrong.
I was on Twitter within minutes of the number being released, telling my followers that my forecast was seriously off, and I came onto this blog within hours with a blog article explaining that my forecast had been significantly off. I didn't see that by the other forecasters. And then, I did what I always do if I find my forecast did not meet with reality - I take it upon myself to research what went wrong and why my forecast did not happen (as I have done with such famous forecasts of mine in the past as the video calls, MMS picture messaging, 3G adoption rate etc). I think that is the professional responsibility of anyone who makes a living with forecasting.
I went digging for the facts and details, to discover where that unanticipated error was. I discovered it too, I believe I was the first analyst to point out that China had delivered a surprising one million extra sales for Apple for Q1, which accounted for the surprising up-swing in the unit sales compared to the expected decline. The China quarterly sales of iPhones in the Christmas period were about 300,000 units (according to China Unicom), the level that seems the standard for China, as that is the level of iPhone sales that Apple also had for this past Q2 of 2010 (under 280,000 units actually, according to Canalys). Then in Q1 of 2010 the China iPhone sales surged to about 1.3 million. A sudden, never-before-seen major surge in sales, four times bigger than normal level of iPhone sales. I found the missing number that caused all the forecasts to be wrong, but this was still not the reason why China happened in the first quarter of 2010.
I dug further and found that this was due to the Chinese holiday of the Lunar New Year (Chinese New Year) which falls in late January or early February of any year depending on the lunar cycle. The Chinese exchange gifts on Lunar New Year, which is the big gift-giving season similar to how people in the West give gifts on Christmas. Most Chinese gifts are 'red envelopes' of cash, but increasingly affluent middle class and wealthy younger Chinese also gift major gifts of 'goods' ie products, to close relatives including smartphones. This was why there was a huge surge in Q1 in China and I was definitely the first analyst to explain this. Since I did so, many other analysts and even other phone makers like Nokia have attributed Q1 strong smartphone sales to the Lunar New Year gift-giving in China. The reason we analysts missed this pattern, is that China only in 2009 started 3G operations and smartphone sales have only become significant in China since then. Today China is the world's second largest country for smartphone sales accounting for 12% of the total sales of smartphones worldwide (according to Canalys).
So I am only human, all of us forecasters make errors. But find me another mobile analyst who comes to his blog immediately when one of his forecasts is found to be in error - and who then also takes the effort to discover why it was wrong - and reports that finding too. That is Tomi Ahonen. I have gone through every major forecast error I have ever made in my career, and accounted for myself, in public, in my books and this blog, explaining where I had gone wrong. Most of the time, luckily, I have been quite accurate. And on iPhone related forecasts and predictions, I have been exceptionally accurate over the past three and a half years since the first prototype was shown by Steve Jobs in January of 2007.
Of the most important mobile phone of all time, and the most successful new phone maker launch of all time, I have been making correct calls most of the time, by far more correct calls than any other Apple follower or tech analyst or mobile specialist. I do understand the iPhone impact to the mobile industry and how the mobile industry is reacting to the iPhone.
And I am telling you the reader now, that Apple had a great launch strategy for the iPhone, but its follow-up strategy is now flawed. Apple has to split its product range and introduce a cheaper iPhone model alongside the main iPhone model soon. The longer they wait, the worse it will be for Apple in mobile in the long run. What do you think? Is it not time for the iPhone Nano?
ABOUT COMMENTS TO THIS ARTICLE
We find often with Apple related commentary, that some flood our blog to post pointless comments by visitors who clearly had not read the full article. If anyone leaves comments that clearly had not read the article, I will be eliminating those comments without mercy. I am happy to take any critical comments including those accusing me of being an idiot, as long as the person leaving the comment has clearly read the article.
This is the first in a series of analysis articles about the major rivals in the smartphone bloodbath wars and what I think of their current strategies. For those who want to see the 'grades' I gave at the half-year point of 2010, my first half review of all major brands is here. And if you want to get the stats and numbers for the mobile industry, please take a look at the TomiAhonen Almanac 2010 (available as immediate download as an ebook/mbook for your smartphone or PC or Kindle or iPad)