I think its time to coin a new term for the smatphones and in fact all mobile phone 'handsets' industry about the biggest danger in this industry? The Cliff. The sudden comprehensive collapse of the business. Why does this happen in mobile and at rates - I mean the speed in terms of timing of the collapse - never seen in any other industry.
Lets take a few case studies. What am I talking about. First, lets go to all phones, and ten years back. For the end of 2001, Siemens had 7% market share in mobile phone handsets. They had held a reasonably steady top 5 position for many years. Its a bit like LG has been recently. And what happend? They suddenly fell off a cliff. By 2003 their market share was half, and two years later, half again, and they quit the business (the Siemens handset business was sold to BenQ of China).
Then Motorola. Moto had held a steady 2nd place market share in handsets for 8 years since Nokia took their number 1 position, and Motorola's market share had been very steady, modest fluctuation only, between 15% and 20% over that 8 year period. Then in 2007 they fell off a cliff. So for the year 2006 Motorola's market share of all phones sold was 20% (similar to Samsung today). Then in just 18 months, it had fallen in half, and in another 18 months, by half again. By 2009 Motorola's global handset market share was down to 4%. They went bankrupt, were split up as a company and the handset business was sold to Google.
What about smartphones? Palm had held a strong second place market share behind Nokia, rather steady, at modest fluctuation only, at about 8% to 11% over many years, and had 9% market share globally of smartphones for 2006. (This would be like say HTC has been recently in smartphones). Then Palm fell off a cliff. In one year their market share fell in half to 4% and just a year later, they had lost another half by 2008 and then limped along bleeding customers and making huge losses, until they were sold to Hewlett-Packard.
And lets take Windows Mobile. Microsoft's smartphone OS has been around for a decade and it had steady growth until 2007 when it reached 12% market share of smartphones and held that till 2008. Microsoft's OS had briefly taken over the second place ranking behind Nokia's Symbian, after Palm's second place and before Blackberry replaced it as second biggest OS. Then from 2008, Windows Mobile fell off a cliff. In 18 months their market share fell by half to 6% and in another 18 months, fell by another half. Obviously Microsoft itself killed Windows Mobile which in 2011 managed only a 1% market share, so Microsoft now tries to replace it with Windows Phone which had amassed a magnificently unimpressive 1% market share for itself globally for the first full year it was sold, when we remove the other Microsoft Windows Mobile smartphones, in 2011. The combined Microsoft smartphone operating systems market shares, together, for last year, was under 2%
I like to find patterns and I think we have one here. The historical performance of a given mobile phone handset or operating system seems to have exceptionally poor predictive power to this phenomenon I now have christened 'The Cliff'. Powerful, global Top 5 size powers in handsets, often for very long in tech, more than a decade often, have held steady shares (Siemens, Motorola, Palm) - or even they might see steady growth for year after year, as in the case of Microsoft Windows Mobile - and can easily be even the second biggest player of this industry at the tme (Motorola, Palm, Windows Mobile) - but if they hit 'The Cliff' they can die in unprecedented speed. Let me show you this graph to give a graphical view of what it looks like. This is a kind of amalgam of the cases we've had, to illustrate the theory, but it is not the mathematical average haha..
(The above image may be freely distributed)
Understand this doesn't happen in other industries, certainly not this fast. In cars, home electronics, even personal computers, the growth is steady and long-term, and the decay and decline for some past glorious brands, is also relatively long-term. The bestselling car makers worldwide 50 years ago included Ford, GM, Volkswagen, Toyota, etc. Yes, manufacturers die, like American Motors, but globally, even less-desirable brands manage to hang around for a very long time. How many of the 10 bestselling cars of the 1970s has vanished. I don't mean that a car brand has quit some single car market like say French carmakers Peugeot and Renault left the US market (many US readers might be surprised to find out that Renault and Peugeot (with Citroen) are both still giant car manufacturers globally. I am not talking about mergers here (Daimler and Chrysler, Chrysler and Fiat), those are 'normal' in business. I mean market collapse like the four cases in handsets that I listed.
Even the bestselling PC makers a decade ago had very familiar names - HP, Dell, IBM, Compaq, Toshiba, Apple. None of them collapsed. IBM was sold to Lenovo but IBM did not collapse and sold as a corpse, Lenovo bought IBM's PC business while it was still a powerhouse, and it continues under the Lenovo brand as one of the biggest PC makers of today. Compaq is no longer a brand, but HP bought Compaq also while it was one of the top 5 PC makers.
And this is not somehow symptomatic of the telecoms industry either. Look at the other hardware side of telecoms. The five biggest telecoms networking infrastructure makers at the start of the past decade were Ericsson, Nokia, Lucent, Siemens and Alcatel, in that order. Yes, there has been some mergers in the industry, so today Alcatel owns Lucent and Nokia and Siemens have joined venture on their infrastructure. But if you take the market shares of the combined entities, then the three players were ranked Ericsson biggest even alone in 2000, NokiaSiemens second biggest and Alcatel-Lucent third. How is that today? Ericsson is biggest of these three, NSN is second and Alcatel-Lucent still third biggest. Except that NSN is in reality third, and Alcatel-Lucent is 4th in the world, because Chinese Huawei has climbed to 2nd place. But this is 'typical' competition in the world. The global rankings do not fluctuate wildly even on decade-length time horizons.
Same is true of television sets, Some new brands emerge but the old brands fight on and if some depart the scene, they do so over lengthy periods of time. A decade ago the world sold tons of Sony TV sets and Sony is still in there today. Samsung was not as big, but they were around a decade ago, and so forth. But in mobile, if your handset maker hits 'The Cliff' the fall is rapid and essentially seems nobody survives the Cliff. The damage is 'terminal' and the company will be bankrupt in what, like 3 years.
Note, size is no protection here. Motorola had one fifth of the world market to itself in 2006 (making huge profits too). Thats about what Samsung does today in total handsets, and is actually more than what Apple currently has for the iPhone in smartphones. And hugely popular 'must have' devices are no guarantee you won't fall off 'The Cliff' - witness the Motorola Razr. That didn't keep Moto from going over the MotoCliff. Again, warning about the uber-desirable iPhone here too. I am not about to suggest Apple is about to fall - far from it, I strongly believe the next iPhone is going to be a huge hit as well - but please beware, nobody, not me, nobody predicted at the Razr peak, that MotoMoto would become the DodoDodo of the handset industry before that decade was done.
WHY IS THERE THE CLIFF
Obviously one case does not prove any kind of pattern. We needed several such collapses to even be able to observe a pattern. But now with proven cases of Siemens, Motorola, Palm and Windows Mobile; combined with the current collapse of Nokia's smartphone business and possibly Blackberry as well, we have evidence of a peculiar pattern in a consumer electronics industry sector. Why is this possible to happen in mobile phones and why haven't we seen anything like it in other industries.
I think there are three factors that help create The Cliff. First, there is the replacement cycle. The average replacement cycle for mobile phones in year 2000 was 21 months. By year 2006 it was down to 18 months. Today it is 16 months (all handsets). For smartphones it is even faster, at 11.5 months. A car is replaced something like every 3 or 4 years on average. A TV set once every 7 years. A personal computer every 3 and a half years. But mobile phones are replaced every year and a half, smartphones replaced every year (on average).
So if you have a bad model car, and your sales suffers because of it, you will not lose all your loyal customers in a year or two, because many of your customers have last year's model and are happy with it, and will not even come to your car dealership until two years from now to consider the replacement model, by which time you have had plenty of time to fix the problems with your current car model.
In mobile phones we do not have that luxury. The pace is so fast. And note that the rate of the collapse due to The Cliff is actually accelerating. This also suggests the replacement cycle and The Cliff are related.
A second point is the dealerships. Some technology is kind of 'protected' from rapid market fluctiations, because it is sold by the manufacturer's own stores (like Sony flagship stores for example) or through branded dealerships (like in new car sales) or by registered partners (like many personal computers, sold through 'VARs' Value Add Resellers, who are authorized with given PC brands). In mobile phones, there used to be no branded shops (Apple changed that of course) and Nokia briefly tried its own Nokia branded flagship stores - most of them have been discontinued. So if you have branded dealers, that helps dampen the fluctuation, even if you have a bad model year of your products, the damaging effect is not as severe. Mobile phones are sold whether in operator/carrier stores, or independent handset retailers, with essentially all handset brands and many of their models on display side-by-side in the store. Note, that of current handset makers, only Apple is a little bit immunized but not completely so, as it also operates its own Apple stores.
The third point is the carrier relationship. The operator/carrier has exceptional influence in the mobile phone handset business. If the carrier/operator decides to push a given phone, it can help it succeed, yes, but that is not dramatic gains. But if the the carrier/operator community decides to punish a given brand, it rapidly dies. We heard just now from Finland (of all places) that a survey of major handset stores in the biggest cities of Finland by the commerical TV broadcaster MTV3 - found that in most handset stores (both operator stores and independent stores) - even if the consumer asked for the Nokia Lumia by name - most sales representatives would not show the Nokia Lumia to the customer, and showed Samsung Android handsets instead. This even as the stores had Lumia in stock and the biggest in-store displays were featuring Lumia.
In television sales, the television broadcasters (BBC, CBS, RTL etc) do not have any influence on what brand of television you buy. The internet brands like Google, Yahoo, Ebay, YouTube, Facebook have no real influence on what brand PC or tablet you buy to access the internet. But in mobile, the carrier/operator has a profound effect on which handset brand is welcome to that market, and which is not.
And as the carrier community is tiny - the 10 largest carrier groups control the subscriptions of 2.7 Billion people - and thus strongly influence 46% of the global handsets - that could theoretically be down to yes, 10 CEO's (or a little bit more in reality, their handset bosses and their management teams). So like just now today, those 10 CEOs could decide (or might have decided) that Blackberry survives or Blackberry dies. But yes, imagine if an operating system manufacturer (just hypothetically, lets say Microsoft manages to piss off the carrier community) or say a handset manufacturer (again, hypothetically a giant like Nokia suddenly annoys the carriers) were to become the object of - perhaps boycott is too strong a word here at this level - but lets say 'undesirability' - their fate would be doomed. Witness the birth and death of the Kin youth phones by Microsoft. They went from launch to death in 6 weeks. WEEKS. But obviously the Kin phones cannot be used as example of falling off a Cliff, as they never climbed up to the hill in the first place haha.. I am just saying it here as evidence of the incredible power of the carriers in deciding who wins and who loses in the handset business.
WHAT IS NOT THE CAUSE
Some will jump in here and say Tomi, the obvious disruptor was Apple's iPhone. And I agree, the iPhone has been the most important handset model ever, and we now measure time in the era before the iPhone and the era after the iPhone (as I correctly predicted before the iPhone was first sold in 2007). But this pattern existed before the iPhone (Siemens, Motorola), it coincided with the iPhone (Palm, Windows Mobile), and it happened after the iPhone stopped grabbing tons of market share (Nokia, Blackberry).
Yes, for those who didn't pay attention back in 2007 and 2008 and 2009. The biggest growth in the iPhone market share, from zero to 17% - happened from the summer of 2007 to the summer of 2009. Since then Apple's iPhone market share has been essentially flat picking up only a few market share points to 19% for 2011. In the big iPhone growth years, Nokia mostly held flat and Blackberry actually grew market share in smartphones. So it is absolutely factually untrue to claim that Apple stole customers from Blackberry. And to a lesser degree same is true of the iPhone and early Nokia smartphones in 2007 and 2008. (Few remember that after the original iPhone 2G was launched in 2007, Nokia's contemporary smartphone, the N95 handily outsold all iPhones globally.)
After the iPhone big growth period ended and the iPhone was flat, only then Blackberry suddenly collapsed and so did Nokia. So the losses to RIM and Nokia did not go to gains to Apple's iPhone. Their losses were to the gain of the Android family, so while you can argue that the iPhone killed Palm and Windows Mobile, the evidence does not support the theory that the iPhone killed Nokia or Blackberry, on the contrary, those were relatively immune to the iPhone, it was Android which killed Nokia smartphones and Blackberries. I recognize that the widely-held myth keeps repeating the BS that the iPhone killed Nokia or Blackberry. We deal with the facts here, not myths.
So, to anyone who wants to comment on this thread - this pattern can be observed BEFORE the iPhone existed, so it cannot be (solely) caused by the iPhone. Yes, the iPhone may have boosted the damage haha, but then I would argue, its simply 'any' new and highly desirable phone can help boost the effect. The Razr for example caused Nokia's 2006 market share to fall. So just be warned, anyone who posts comments here and says 'the iPhone caused the Cliff' - those comments will be deleted immediately, because this effect has existed before the iPhone. Yes, I myself have said the iPhone is the most important phone of all time and it changed everything, but it did not cause The Cliff haha..
LONG LEAD TIMES
And one very important point I forgot to mention in early version of this article. The third person in the comments, Dipankar Mitra mentioned the connection with two time frames - one is the time we start to hate a given new phone, and the other is the fixing time. I forgot this dimension, thank you Dipankar! Yes, the typical development cycle for a completely new mobile phone is about 18 months from a clean table to in the stores. In the case of a newcomer company it can be longer - with Apple it was reportedly 30 months, because Steve Jobs looked at the intended 'iPod Phone' of late 2006 - and gossip says it looked like a Nokia candybar phone with regular buttons and a medium size screen - and Jobs said no, that is not good enough, and forced a total redesign, which then gave us the radical look of the iPhone with the massive screen and one button. And today's Nokia Lumia 'shortened' development time is totally an illusion, as the outwardly look and feel was taken from an existing Nokia product, the N9, and the guts of the phone came from Compal, not Nokia's own process. Even then it took 9 months to take existing parts and reorient them into 'Lumia' - but the first Nokia-designed and Nokia-manufactured original new Lumia phones that are not a blatant rebadging, will start with the Lumia 900 which launched 15 months after Elop announced his Microsoft strategy..
With that, yes, very very important point. If you have disappointing smartphone, to redesign a totally new one would take your company about 18 months, but by that time 3 out of every 4 customers you had, will have bought a new smartphone and if they really rejected your current phone, this is essentially a problem you cannot recover from. Thank you Dipankar!
NEEDS MORE STUDY
I am not here to publish a massive peer-reviewed scientific survey haha. I am here to argue, for the first time in the public domain, that there is this phenomenon 'The Cliff' and it is peculiar to the handsets industry. It has already claimed several victims and it may well collect several more. The main point is that the rate of decline, if any handset maker goes over The Cliff, is catastrophic - essentially today, it means you lose half your customer base in less than 18 months, and another half again - or even faster. With Nokia when they went over The Cliff in 2011, they lost half of their market share in 9 months!.
And then if any handset maker goes over 'The Cliff' - the total company is in utter chaos and panic. The normally sensible management moves will not work and can be severely counterproductive, such as mass layoffs. If your sales fall by half in a year or 18 months, no matter how profitable you had been, you will be plunged into loss-making (witness Siemens, Motorola, Palm, Nokia and RIM). And if you combine that with massive layoffs, you then can't market, can't sell, and can't develop newer models fast enough to help save you (witness Siemens, Motorola, Palm, Nokia and RIM).
So I just wanted to post this blog out there, to spread the story, and to ask for comments and to have fellow thought-leaders in mobile consider 'The Cliff theory' and see if they see the pattern too. Are there other handset related brands that saw the same. I only looked at the global numbers, are there regional patterns too. And I haven't seen this speed of decline in other industries, can you think of some? Is this phenomenon unique to mobile? And can we perhaps find a way for any company to be saved if it falls off 'The Cliff' - is there perhaps a strategy that worked for some player that saved it.
Please those of my regular readers who have mobile related blogs, feel free to spread this story and give it your spin and opinion. If you do, please do refer to this as The Cliff theory by me, and please include a link to this blog if you do. You don't have to agree with me haha.. Let me know what you think on your blog, and I'll post updates on this and include surveys of other thought-leaders on what they said about The Cliff.
I'd really like to hear if this makes sense, but it may be very valuable for us in the industry to consider now for example with Nokia and RIM so much in trouble, and as we consider the 'invincibility' of an Apple or Samsung for example (or Android). Do you see 'The Cliff' and do you agree it is an effect that stalks the players in this handset industry only?
POSTSCRIPT - about 7 hours after I posted this, and after 22 comments in the comments thread, I have been convinced to refine the name. I think the follow-up blog will be called 'Walking Blind By The Cliff' theory which describes even more accurately how brittle any lead in this industry can be. So imagine being blind, and walking on a hill with a deadly cliff. And not being able to detect when stepping into The Cliff. But anyone has stepped into it, the fall is irreversable. I will return with more blogs about this, and include thoughts from the discussion thread. Oh, and Bruce Sterling at Wired and its Beyond the Beyond has covered this story already (thanks Bruce!).
UPDATE APRIL 11
Note Nokia's Q1 results show the single biggest one-quarter crash of smartphone market share yet reported. Read my view of the Nokia Profit Warning and why things are even worse.
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