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January 12, 2011

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Lars

Hi Tomi..

Good stuff as always.. wonder how their target market subs will react once they start to realize the CDMA platform (still?) has duplex voice-data issues. Basically, or so it would seem, there will be no "FaceTime" video chat with iPhone4 on VZW.. @_@

Cheers!

Michael

Tomi:
Thorough analysis - expected coming from you. A couple of things I'm waiting to see happen...

1. What will AT&T's reaction be. If they spend their ad money slamming Verizon's network and promoting their (AT&T's) line of phones, I believe that AT&T will lose between 5 and 7 million customers in 2011. AT&T needs to address the very vocal segment of disgruntled iPhone owners that get poor reception.

2. T-Mobile has been running ads that seem like a love affair with Apple. They are modeled after the old iPhone ads and talk about how the iPhone is a great phone on a terrible network. Perhaps Apple will get the message and begin selling through TMobile as well.

Lars - As FaceTime is WiFi based video calling, the VZW iPhone should work fine. It only needs the voice circuit to establish the connection, then hand it off to the data circuit.

Don_afrim

I don't see why ATT is going to sell more iPhones than Verizon, if anything I would think Verizon is going to sell more than ATT since it's No.1 carrier and has a more wide spread and reliable network. I think since Apple doesn't have an exclusive deal with Verizon they will soon announce the iPhone on all networks in the USA and start selling unlocked iPhones at Apple Stores just like they do world wide at the latest once the iPhone 5 4G (hopefully penta band) rolls out in June/July.

I project that once the iPhone is available on all networks in the US they will capture 50% of the US market while world wide their market share will grow to 20-25%.

Phil W

The problem is for Apple just to maintain its market share it must increase the number of phones it sells each year because the smartphone market is growing rapidly.

This will be difficult to do as firstly the Iphone will start to look out of date against the newer competition from various manufacturers and secondly because the most explosive smartphone growth outside of the US will be at the mid to low price bracket end in which apple doesn't compete.

The Eco system that Apple is building with the ipad, itunes etc is a good way to bind in existing customers, but isn't relevant to when it comes to attracting new customers.

For that reason I think talk of 20-25% is wishful thinking.

Tomi Ahonen

Hi Lars, Michael, Don and Phil

Good comments, will respond to each individually as usual

Lars - haha yeah.. Actually Facetime is WiFi based, so I think it won't matter (but am not sure, we'll need to monitor the techie blogs)

Michael - thanks! Its a shame sometimes living here in Hong Kong that I can't get access to the domestic marketing activities especially of those countries that I otherwise know very well, having lived there for many years and where seeing the local advertising would be particularly useful haha, like UK, Finland and yes, the USA (lived there only for 12 years haha). So yes, thanks, very good to know about T-Mobile ads and also yes, agree AT&T needs to tread very carefully with any war of words about network capacity.

Don - First on 'why would AT&T sell more than Verizon' - its most of all because of return business, the renewal contracts. There is considerable 'lazyness' by all mobile phone subscribers globally, in bothering to switch networks. We had for example the Swedish Regulator calculate it and found about 70% of all customers will not bother to consider rival networks when it is time to renew a contract. Now, we need to remember that networks in the rest of the world are far better than those in the USA, so the Swedish customer would not feel that the network quality (dropped calls, congestion, lack of coverage) would be a significant issue haha, but still, there is a proven measured factor where most consumers in such contractual situations will continue renewing with the current provider. Same with insurance, home electricity, cable TV, etc etc etc. So that is the primary reason, why it is pretty safe to assume that of AT&T's existing iPhone customer base, the majority will renew with AT&T. The fight between Verizon and AT&T will be more for those who switch networks from any network (including those of Verizon, and those of AT&T) and in that 'net' calculation, AT&T will initially lose significantly more (to Verizon) than what it can gain from all rival networks. And Verizon will initially gain far more defectors than it would lose any left on VZ who wanted an iPhone but were still stuck on VZ. Make sense?

On your forecasts, I appreciate your viewpoint, I do think you are vastly over-optimistic in your projections. For AT&T to capture 50% of the US smartphone market, they would have to use one phone to kick the butts of Motorola, HTC, Samsung, Blackberry and many others. Each of the rivals offers at least one clear 'iPhone Clone' model of similar form factor (think slab touch screen) and each offers many rival form factors, like the iconic Blackberry style - and many of these have very loyal user bases. I think 35% or 40% is a reasonable target market share for US domestic smartphone market - but it may well be less - less - because the US market is like all of the world's smartphone markets now, moving to lower cost smartphones.

So if the iPhone 4 and similar rivals (Samsung Galaxy S etc) are selling for about 199 dollars with 2 year contract, there will also be similar smartphones from LG or HTC or Motorola, with 3 inch touch screens and 5 megapixel cameras, that will cost maybe 49 dollars or even zero dollars for 2 year contract. That is what I mean. And globally obviously in most markets where phones are sold without subsidy, the iPhone 4 sells for about 600 dollars while similar touch screen smartphones sell for as little as 150-200 dollars in unsubsidised form today.

As to world growth for Apple, if you mean the CDMA version alone can generate 20% more sales outside of the USA, that is utterly impossible, sorry, the math does not bear it out. That would mean 7 million extra sales of CDMA iPhones in the next 12 months, above and beyond those sold to Verizon. Please understand, this will not happen. There aren't enough CDMA operators/carriers with any potential to sell that amount of smartphones in the rest of the world, outside of North America and Western Europe. That would be 60% more sales of just CDMA phones, in the market where Apple has been selling GSM variant iPhones of only about 12 million units per year. It won't happen, please understand how impossible the math is. But if you mean 'all iPhones including GSM and CDMA' then yes, 25% growth in the rest of the world is quite feasible, in fact, I model Apple to do better than that.

Phil - Very good points and we agree, yes the big growth is now in the lower end of smartphones by price, and Apple is abandoning that market to its rivals. There is a dangerous long-term effect to Apple too, in that, in that it now allows rival phone makers to get the users 'familiar' with their way of working, signing up to the Android or Ovi or other app stores, etc, and then 2 years from now when they upgrade, they will prefer the existing brand of smartphone and it will be far more difficult to steal those customers then, if they are already familiar with, and comfortable, using the touch screen form factor smartphones from a rival. What is perhaps even worse, for Apple, is how Apple is resisting most industry standard initiatives, no micro SD card support, no removable batteries, etc which are standard items with most rivals - and these will become barriers to switch to Apple in the future, by experienced users of a rival phone brand.

Also agree about the eco system, its a great way to bind existing customers, not very relevant in capturing rivals.

Thank you all for writing

Tomi Ahonen :-)

Romain

Hi Tomi,

I was surprised too that Apple invested in porting their iPhone to a technology with such a small footprint (globally, not only in the US) and, more important, that doesn't really have a bright future (if at all) since all carriers, including in the US, have settled on 4G technologies (LTE/WiMax) that have nothing to do with CDMA.

But maybe there's more going on behind the scenes: for instance, maybe it is part of a broader deal with Verizon, like a exclusivity on the future LTE version of the iPhone (most probably the iPhone 6, seems unlikely for this year's iPhone 5, or whatever they call it) ?

BTW Tomi let's make some predictions: what's your take on a CDMA version of the iPad ? Some rumors have conjectured it could be the next step...
I don't really see this happen, with Verizon's mobile hot spot feature you don't really need an iPad with cellular connectivity (unless of course your "primary" phone isn't on verizon)

Oh and one last thing: isn't it time we revisit our definition of a smartphone ? I mean, does the Nokia C5 really compete with even the cheapest Android or BlackBerry phone ? What proportion of Nokia "smartphones" really connect to the Web, or have apps installed ? I bet much less than other platforms.
I'd be interested to know Nokia's market share on the mid/high smartphone segment (ie, basically, smartphones with a QWERTY keyboard and/or a touch screen). Do you have any data on that ?

Bob Shaw

Tomi - As always thanks for a great analysis. It appears that we are reaching a point especially in the top segment of the smart phone market where the smart phones are becoming very comparable in terms of features and functionality. Also performance wise the differences are shrinking between them. I feel there is small preference for Apple if customers value more ease of use, the same for Blackberry if customers value more security and the same for Nokia if customers value more the hardware especially the camera.

I think we are going to enter the next phase of smart phone competition especially in the highest segment where customization to sub segments will be the basis of competition.

One thing that did not happen much with PC and will happen more with smart phones is going to be customization. The main reason is that PC does not have the power and memory constraints that characterizes a smart phone. So a vendor can load all the features/functionalities on a PC and a customer can pick and choose what to use out of it. So customization was not that important in PC. In smart phones no matter what segment, trade offs will have to be made in terms of what to include and what to exclude because of power, memory and other limitations. Secondly smart phone is more personal than a PC and anything that is more personal has more opportunity for customization.

Going forward the one size fits all mindset for smart phones will not work and the vendors ability to understand the needs of different sub segments and offer customize products for each sub segment will lead to competitive advantage.

Vendors like Nokia who have shown ability to customize will be at a competitive advantage. Already we are seeing Nokia do that with N8 targeted more at entertainment/general user market and the upcoming E7 targeted more at enterprise/business users.

Also going forward all vendors will have to adapt but Apple will have to adapt lot more than other vendors. Further any advantage that a vendor will generate will last for very short time and thus new advantages will have to be continuously generated at a faster and faster rate.

Lastly a separate point, as pre paid becomes more dominant among customers than post paid and competition amongst carriers become more intense, the carriers ability to hide the real cost of the smart phones from the customers is going to diminish. I think the halo effect of iPhone worked when customers had little or no choice in terms of alternative similar smart phones and the real cost of iPhone was hidden from them due to post paid plans. Once the cost of smart phones becomes transparent, I don't know how much premium, if any, will customers pay for iPhone compared to other similar smart phones.

Baron95

I think your analysis of the 2011 sales split between AT&T and VZ got the numbers about right, but for slightly different reasons.

Some here asked "What will AT&T do"? Wrong question. It is what they HAVE DONE already.

AT&T has:

1 - Become the exclusive provider in the US of the iPhone 3GS at a price of $49 - $150 cheaper than ANY VZ iPhone.

2 - Allowed many customers to upgrade to iPhone 4 up to 6 months ahead of their contract end date - re-locking them for another 2 years.

3 - Become the exclusive provider or arguably the best phone to date on the market - Moto Atrix.

---------------

Other items, you failed to consider. Most iPhone customers on AT&T are on family and friends plans and work plans (my case). I can not pick up and leave AT&T for VZ that easily.

Likewise, *A LOT* of VZ smartphone customers are on work plans (mostly on RIM, some on Windows and Android) or, again, family and friends plans. Many, many who wanted an iPhone could not pick up and leave VZ. So the pent up demand is HUGE. That is why is reserving a full weak exclusively for their existing customers to pre-order, than they open it to new users.

Another very, very large group of people, watched in horror, how abysmal Cingular/AT&T's network was. Particularly in the media centers of New York and San Francisco it is truly awful. Many iPhone potential buyers simply refused to go to AT&T.

----------------

Lastly, iPhone demand....

Arguably, the iPhone 4 was the only iPhone that was truly "complete" and highly desirable. You saw the huge spike in demand when it launched. I myself (not really an Apple fan) upgraded from 3GS (company paid) to 4G (out of pocket - first time ever buying a phone with my money).

So what can we expect in 2011? iPhone 3GS selling for $49 on AT&T and iPhone 4 selling for $199/$299 on both AT&T and Verizon. Similar story worldwide.

Then comes July. Most likely iPhone drops to $99 with the new models coming in, and then, assuming new iPhones are good, sales really go up to a new level.

Also, don't discount the iPad phenomenon. Smartphone buyers want their favorite apps (purchased or free) to work seamlessly on both the phone and the tablet.

That will be true for Apple and Android

It will not be true for Nokia. It will likely not be true in 2011 for WP7 and Rim.

So Apple and Android will take off in 2011 and will pull away from the pack even more.

Baron95

Bob Shaw said...."Once the cost of smart phones becomes transparent, I don't know how much premium, if any, will customers pay for iPhone compared to other similar smart phones."

What makes you think that the iPhone would EVER be more costly to make than other similar smart phones?

Apple develops one model/year with *HUGE* economies of scale. Apple is selling at a rate about 50M iphone 4s, 25M iPads and 80M iPodTouchs per year - these are all basically the same device (same OS, processor, connector, etc, etc). They NEVER EVER customize their devices to operators or countries - It is virtually the same.

Apple's cost advantages are *HUGE*. Contrast that with Nokia - 3 OSes, dozens of devices/year, each with different carrier crapware.

In addition, each device Apple sells, is another registered iTunes account with a credit card to buy Music, video, apps, etc - with Apple getting a nice 30% cut of ads or sales.

If Apple EVER needs to be in a price war, they will win. But guess what, they won't need to be. When you can only buy Beatles songs from iTunes. When Apple hs the best Phone/Tablet/PC synergy in the industry. When Apple has a well choreographed launch machine - tablet in the spring, phone in the summer, iPod in the fall, Mac in the winter.

Well, dream on - taking Apple on price - good luck with that.

Want to take on Apple? Do what Samsung did with Galaxy S or Moto is doing with Atrix and Xoom tablet. Get on a popular OS and leapfrog on features.

That is the ONLY way.

Nokia will never crack the US market with a device like the N8. Ever.

Baron95

Romain said..."was surprised too that Apple invested in porting their iPhone to a technology with such a small footprint (globally, not only in the US)"

That is because you don't understand Apple or Brand value development.

Apple would easily spend $1B, $2B, $3B to maintain/grow brand equity.

For the reasons I stated above (AT&T network quality and inability of some users to leave VZ), a large number of Apple customers, potential customers plus the press, etc were dissatisfied with the iPhone being only on AT&T.

The investment is minimal - replace the radio subsystem and change the length of the antenna cuts.

Even if Apple sold just 1M CDMA phones in VZ, they will gain so much good will and enhance their brand so much, it is a no brainer.

You are thinking in terms of costs or price - so is Nokia.

Apple is thinking in terms of value.

You will never get it.

Phil W

So Baron95,

"Apple develops one model/year with *HUGE* economies of scale".

So the fact that, according to IDC, in Q3 Nokia sold 110 miliion phones (of which 26.4 million were Smartphones) and Samsung 71.4 million phones compared with Apple's 14.1 million doesn't matter?

I'm afraid I struggle to believe that Apple can better Nokia or Samsung on component or production costs.

The N8 will sell bucket loads, but you are right there, not many will be in the US. I don't think Nokia really expects it to. Nokia is looking to the Meego devices to start the long haul back into the US market. It won't be easy and it won't be quick, nobody is expecting it to be.

kevin

Phil W,
If we're talking about large touchscreen display smartphones with 8GB or more of flash RAM, Apple is in the same class. If we're talking about anything else, then Apple is not in the discussion.

Nokia sold 26.4m smartphones, Apple 14.1m. But mentioned here because it is really relevant, Apple also sold about 8m iPod touch and over 4m iPad, so the volumes are similar.

The most expensive hardware components in a touchscreen smartphone are the flash RAM and the large 3.5-4.3" display, not the phone components. So the large number of non-smartphones sold does nothing for RAM and large displays, as even most of Nokia's smartphones don't come with 8GB of RAM nor do they have a 3.5"+ displays. So clearly, Apple does greater volume on both of those and gets discounts. Also, in exchange for Apple's assistance with capital investments, Apple received favorable long-term pricing. (I expect but don't know what discounts Samsung's chip or display units give to their mobile unit.)

In software, iOS is leveraged across the same Apple products and AppleTV, plus the far more expensive Mac line, as OS X is the base software and most of the Core was developed first for the Mac. MeeGo will not have that same base, though the Qt layer has a larger base.

kevin

Tomi,
- As usual, thanks for a comprehensive overview. Most important, if you could do something about the cost of international roaming, that would make GSM more valuable and make me very happy. ;)

Here are my thoughts on your piece:

1. The casing is changed because buttons on the side of the iPhone were moved, partly due to using a CDMA antenna and components. The gap on top of the iPhone have been moved to the left and right sides, near the top. The antenna gaps on the sides near the bottom, which were the focus of antennagate, remain exactly where they were on the GSM iPhone.

2. COO Cook explicitly pointed out that the Verizon iPhone is not exclusive. So I wouldn’t be surprised if there is a deal with T-Mobile – but not until later this year. From what we have seen so far, Verizon got no concessions from Apple – no logo, no pre-installed apps, no distributor limits, Apple warranty and service, iTunes Store, App Store – so I think Verizon probably did get a period of sales exclusivity. By the way, Sprint and T-Mobile combined have fewer subscribers than either Verizon or AT&T.

3. If AT&T alone could've gotten a 33% to 45% growth in iPhone for Apple, then with Verizon, Apple will certainly do more than 50% growth with iPhone. Not 90% but more like 65-70%, which is a difference of about 3m iPhones. Several reasons as follows:
-- Verizon’s churn rate increased from 3Q07 thru 4Q09. Then it started going back down. My interpretation is that Verizon customers who were willing to switch to AT&T for iPhone did by the end of 2009, and there aren’t very many left. Yet a Changewave survey in Nov 2010 found that 34% of non-AT&T customers would’ve bought an iPhone if it was on their carrier. As Leebase wrote above, AT&T is disliked by many non-customers, who would never switch to AT&T.
-- Verizon’s website went down several times on 1/11. Most observers think it was caused by iPhone visitors.
-- I believe Verizon agreed to Apple’s terms because they see that iPhone has been able to get people to switch carriers and sign up for data plans. It has been the main source of AT&T's growth. Now they get that boost and dent AT&T at the same time. Verizon's plan for a huge iPhone marketing campaign, replacing their Android spend, shows that they see iPhone as their big weapon for the next few months (until LTE phones arrive).
-- The cost of the data plans is still the key factor in smartphone uptake. The $15 plans which started in 2H 2010 will increase the number of smartphone subscribers as contracts turn over. On AT&T, iPhone garnered more than 80% of its smartphone sales, and on Verizon, which still has a low smartphone uptake, I would expect it to get at least 40% of its smartphone sales in the coming year.

Finally, for Apple, this phone is just a stepping stone to a Verizon LTE phone. Verizon will take 3 years to have LTE cover the US, so a Verizon phone must have CDMA as the fallback. Apple is ensuring that when the iPhone LTE arrives, it won’t have any trouble with the CDMA piece. As I've said before, Apple is not in a rush, because with LTE and faster processors, a smartphone will even more so a smaller personal computer.

Phil W

Hi Kevin,

I was very careful in my wording as Baron95 was implying that Apple was much better than everyone else. I can accept that Apple may be comparable and I think that is what you are telling me.

I haven't checked the RAM issue, but I will take your word for it. The display issue has some merit in that Nokia's smartphones have different sizes, but the quantities of each Nokia model will still be pretty significant and I would be surprised if Apple gets much more leverage than Nokia.

I also may be underestimating the impact of the OS costs, but I was focusing mainly on the BOM costs and the OS costs are essentially spread across millions of units aren't they. (Ok maybe not for Meego initially.)

The one thing I would have thought was in Nokia's favour is that it has its own manufacturing facilities. It does outsource as well, but I understand that all of Apple's manufacturing is outsourced.

Phil W

Again @ Kevin,

Just checked and the N8 has 16GB internal memory and the C7 8GB internal memory. The E7 will have 16GB of internal memory as well. The C6-01 only has 340MB.

Now if the rumours of 4Million N8s being sold this quarter are anywhere near true and then factor in the C7 and potential E7 sales (not on sale yet I know). That suggests that Nokia's purchase of RAM will be pretty significant.

As I don't know any real numbers and the E7 is vapourware until it actually goes on sale, I won't make direct comparisons with Apple's buy, but I would suggest the advantage is not as much as some people think.

KDT

Phil,

When it comes to flash memory, Apple has been the number one consumer since the iPod Nanos became popular (around 2005). For 2010, (guessing on the 4th calendar quarter), Apple will sell:

About 45M flash based iPods - 2GB - 64GB
About 48M iPhones -- 8GB - 32GB
About 14M iPads -- 16GB - 64GB
About 1.2M AppleTV's - 8GB

And a wild guess, about 4M SSD equipped MacBooks -- 64GB - 256GB

Bob Shaw

In terms of cost of components advantage, Samsung I think would be ahead of Apple and Nokia. Samsung has a large base of smart phones and dumb phones but more important Samsung makes component for other vendors like Apple, Nokia etc. My understanding is that Samsung is the biggest manufacturer of Displays.

Phil W

Thanks KDT, I wasn't adequately considering Apple's other products. So apple wins hands down for RAM buy.

Bob, I knew Samsung would be up there with the others for that very reason.

I just wasn't happy with the blanket assertion by Baron65 that in cost terms noone could compete with Apple. Knowing that Nokia has long been held up as a model of inventory and supply line management and given the sheer volumes of the components it buys, it has to be up there as well.

The discussion here has set me straight me that Apple has a strong position as well.

It would seem that all three companies have their own particular strengths.

Thanks Kevin, KDT and Bob for the debate.

kevin

Phil,
The models you mentioned were a negliglible part of the 26.4m sold in Q3 and will be a small part the 30+ million smartphones Nokia will sell in the Q4.

What about all the rest of the S60 smartphones - C5, other E-series, other N-series, 67xx, 6210, 58xx, 5730, 5630, 5530, 5250, 5235, 5230, 5228, 3250, etc?

In any case, people more knowledgeable than me have said Apple is the largest purchaser of flash RAM in the world. RAM experts claim Apple's actions move the price.

kevin

Phil,
One other thing: Outsourced production in China often is cheaper than using your own manufacturing facilities, depending on where they're located.

Apple does a huge amount of business with about 3 or 4 contract mfrs in China. Apple's cost of goods sold in 2010 will be about $45 billion, so just getting 2% is almost $1B in revenue.

kevin

@Bob,
Samsung makes huge quantities of components; they make Apple's A4 processor. That's not the question.

Samsung operates each of their units separately - with revenues and profits associated. So how much does Samsung semiconductors, or Samsung display charge Samsung mobile for the chips and displays? If the semi unit gives mobile a better price than they give Apple or Nokia, semi takes the hit, not mobile, and risks that Apple takes their huge buys and A4 to Toshiba or someone else, to get as good a price.

Anyone know how Samsung operates?

Phil W

@ Kevin,

Yes I wondered about the logic of my comment almost as soon as I had written it. I was thinking the outsourcing company would be adding a cut onto the costs to make its profit. But that is flawed thinking as the point is that these outsourcing companies are huge and focused on one thing which means they can do things cheaper. If it wasn't cheaper then why is Nokia playing with outsourcing at all?

A bit silly on my part, thanks for the comment.

Bob Shaw

A company with small market share can grow profits disproportionately compared to its rivals up to some point by creating interrelated products as Apple is doing. However the products can be made interrelated in terms of use only up to a certain extent. Beyond that the overlapping features/functionality tend to start cannibalizing each other. I would not be surprised if iPhone is cannibalizing some potential sales of iPod and iPod touch and the low cost iPad is cannibalizing some potential sales of high cost Mac books. Apple's ability to grow profits disproportionately compared to its rivals without increasing market share has been remarkable. However there is only so far this strategy can take a company. Eventually a company has to think about increasing market share if it wants to grow profits beyond the rate of industry profit growth.

Bob Shaw

The main point is that Apple has about 4% of the mobile phone market and compared to that a much larger share of the profits of the mobile phone industry. In other words it has disproportionate share of the profits of the industry compared to its market share of the industry.

Now one can sustain this if the company's product value proposition is very valuable as well as very unique such that it cannot be matched by any other competitors. Now this may have been the case about 6 months to a year ago. However that is not the case at present. At present I believe that smart phones from other players like Nokia, RIM, Windows and Android based players are quite comparable to iPhone and are available at a relatively lower price point compared to iPhone. Therefore in absence of a very valuable and very unique product value proposition, it would be very difficult for Apple to sustain this disproportionately high share of industry profits compared to its low market share. I believe that going forward the profits in the mobile phone industry will be redistributed amongst the major players and will more or less reflect their respective market share.

Bob Shaw

Lee - I am talking about scenario going forward whereas you are stuck in the past. You missed the point I made that products with comparable value proposition to iPhone has started appearing in markets only in the last 6 months or a year. I believe it is more last 6 months. Compare this to the fact that iPhone had 3.5 years to develop traction. Also some of the new android based smart phones have even raced ahead in innovation with 4G and dual core processors where as iPhone is still 3G with single core processor. The race has just begun in the segment in which Apple's iphone is competing. I believe Apple will be able to keep up in the race but will not be ahead in terms of innovation. Also iPhone will have to be priced comparable to similar offerings from other players or they will have to accept a loss of market share. Finally, in any industry or segment, the profits of players with comparable products are more or less in line with their respective market share. So any anomaly will get corrected shortly.

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