The 'Cliff Theory' ie How Handset Makers Die, why in Mobile Phones do Companies Collapse so Rapidly (Siemens, Motorola, Palm, Nokia, Blackberry and Windows Mobile)

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.

CASES

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%

PATTERN

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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Comments

[tcb]

The Cliff effect does exist elsewhere, but in the most unlikely of places, restaurant and nightclub business, which points in a curious direction if we want to track the root cause of the effect. My money is on a community/peer driven emotional relation to the phone brand itself.

@vladkr, google was the disruption that killed of altavista/hotbot/lycos/excite

[tcb]

@don_afrim

Blackberry is pretty much doomed since its killer app, the messaging, is now matched by other services. The brand has also taken a hit, previously reserved to corporations, now its used by inner city kids/lower middle class worldwide wanting to save on SMS fees.

That has totally destroyed it image as a business/corporate oriented brand. Corporations have mostly turned to iPhone.

And why would Nokia EVER switch to Android, when its got its own great linux based platform, MeGoo? Why would it make itself completely dependent on Google and left to its mercy (Microsoft deal is as rotten), when it can perfect its in-house OS perfectly optimized for use in its products, much like Apple does with iOS.

[Henrik]

@tcb: And why would Nokia EVER switch to Android, when its got its own great linux based platform, MeGoo?

Two words. Android Market.

From a phone OS perspective WebOS and Symbian aren't bad platforms. What made iPhone a success was in large part the availability of apps, not the OS in itself. Google clued in on that and created the Market. I think that is what made it a volume product, not the actual OS.

[Tomi T Ahonen]

Hi Paul, morgan and At

Paul - good comment about Dominant Design by Utterback. But if I remember correctly Dominant Design, we would need to have a 'superior' phone that had appeared that caused this collapse for these 6 cases. That didn't happen in at least 4 of the 6 cases. Only one that would fit well Dominant Design is Palm's death in hands of iPhone, there is clear opposite market development in the same period; and the two were clear close rivals in the same national market. Windows Mobile doesn't fit as nicely but does fit partially. But Siemens, Motorola (and currently Nokia and RIM) did not die due to any Dominant Design.

morgan - first, I love the numbers you quote, would that study about subsidy vs cycle be somewhere in the public domain, or at least summaries of it? I would love to read it, and I am not aware of it. There is very little public domain data on those issues.

About the percentage of smartphones being subsidised, that number was correct but it is no longer true. The current level of global smartphones subsidised is around 40% so its almost totally reversed from the number you've seen.

As to the crash in subsidised vs non-subsidised markets, my gut feeling says there is no strong correlation either way. But I have not explicitly tried to find that info on these six cases, I would love for someone to do that if anyone has that kind of curiosity and please drop a mention here on this thread so I know and can link to the blog.

At - good point, yes there is typical kind of large organization 'rot' that happens. That is not the case here. I ask you to find one example of any global industry outside of mobile handsets, where a Top 5 globally largest competitor suddenly collapsed so totally, it lost its customers in 3 years and died. I have tried and have not found any such examples. I've also engaged with my Twitterati today and none gave examples there either. If you can think of one, please post here. But just a company becoming inefficient and eventually dying, is not The Cliff effect, because their collapse is not sudden and total and irreversable.

Tomi Ahonen :-)

[Tomi T Ahonen]

Hi Afewgoodmen, Henrik and Manish

Afewgoodmen - Yes it really seems that way. And since I wrote the blog, based on comments here, I am now thinking this is a remarkably perilous industry, like walking on thin ice. If you fail, you crash through the ice into the freezing water (and die..). There is no room for (major) error.

Henrik - brilliant, truly brilliant comment and will be major theme of part 2 of this thinking. Yes, that replacement cycle dived below the development cycle, it made the industry prone to single failure causing a total collapse. The subsidy usually does not allow easy switching, though. So that part didn't seem very clear to me. On the loyalty factors, I think yes, consistency can also be an influence (positive or negative haha). On full cost vs subsidised, pls see earlier comment, I explained there is no difference.

Also your last point, that the handset manufacturer has given away power to operators/carriers who now wield exceptional power to help or hurt given handset brands, is spot on.

Manish - thanks for the link. Horace is always good

Tomi Ahonen :-)

[anobserver]

An insightful post!

Four remarks:

1) You have a conjecture, not yet a theory -- you lack a model for the fundamental cliff mechanism and hence cannot try to make any prediction.

2) The odd man out seems to be Ericsson / SonyEricsson. It was a major player, and fell from grace -- but it seems to have been a long decline rather than an abrupt drop. Or was it?

3) For another industry with _very_ abrupt cliff phenomena: pharmaceuticals. The cause: expiration of patents. This is mortal for the profitability and market share of pharma firms, and leads to the demise of those that do not have a diversified, very well balanced portfolio of products _and_ a full pipeline of promising products at different stages of development. Which brings us back to one of the remarks regarding Nokia and its portfolio of mobile phones.

4) If subsidies have an influence on replacement rates, then it means that the financing model (pay now, or pay in rates over time) should see similar effects in other industries. Do countries where cars are leased rather than bought have shorter replacement durations, for instance?

[tcb]

@ Henrik

But you have a flaw there, Nokia has no need for the Andorid Store (now renamed Gogle Play in an ominous reminiscence of all that ineffective Windows Live branding Microsoft has been doing for years). In fact the Ovi store was doing great, full of high quality apps, until Elob torpedoed the Symbian platform and gave all the Symbian developers one big "up yours" instead on working with them on a platform migration to MeGoo (like Apple did when it moved from Power PC to Intel).

The current long term Elob strategy is obviously to kill off the Nokia store, and leave Nokia without any contact with the developers.

Now isn't that just great for the boys in Redmond.

[tcb]

As I was saying, Nokia does not need the Android Market/Google Play thing... Ovi could have made more money than Amazon, a relative late comer in Apps ecosystems.

http://www.pcmag.com/article2/0,2817,2402443,00.asp

Amazon's decision to pursue its own app store appears to be paying off, according to Friday data from analysis firm Flurry.
Flurry examined a "basket of top apps" that were released for Apple's iOS, the Android Market/Play Store, and Amazon's own Appstore. The firm found that for every dollar spent on the iOS version of the app, 89 cents were spent on the app within the Amazon Appstore, but just 23 cents was spent on the Google Play version of the app.

[Baron95]

One more time Tomi - stop making stuff up. Motorola never went bankrupt. And by the way they have not been sold to Google, yet. Though that will likely happen in 1H/2012.

What happened to Moto from 2006 to 2009 is that they were too reliant on feature phones and mostly a single model at that - the Razr. Once RIM, Apple etc came along with smartphones anad the RAZR fell out of the novelty factor sales predictably crashed.

Nokia, Siemens and Ericsson, were simply gifted a market advantage by the ITU/GSM cartel - it would never last. I'm shocked Nokia's run lasted as long as it did.

Phones now are computers. Not telecom "terminals". So Nokia, Siemens, Ericsson, Fujitsu, etc simply can no longer compete.

It is Silicon Valley's turn to rule.

[Baron95]

Now back to your main text, which is generally informative - thank you for posting.

If you re-read your "Cases" section, you notice what? That in virtually all cases (except Siemens) the decline started in 2007. Your examples show peak share for Moto, Palm, etc in 2006 then a steep decline to 2009.

Lets think back. What happened in 2007 in mobile....hummmm.....thinking.....oh yes, the second fruit-logoed phone was launched. Hint.

[Baron95]

As for your explanations of the cliff effect in mobile, I think you nailed several of the most important causes. Short replacement cycle, lots of choices, mostly sold side-by-side.

I think another industry that is somewhat like Mobile is the athletic shoe industry, where many brands fell off cliffs. Obviously Nike is akin to Apple, where they really made a shoe an aspirational brand with insane (up to that point) gross margins. The steep collapses of LA Gear and Reebok in the US were pretty epic as well.

[cycnus]

Tomi

You forgot 2 company that were also see the cliff, and you mention this a lot. Ratner (of ratner effect) and osborne (of osborne effect).

:)

[kevin]

Some thoughts:

1. As I've been saying, this cliff exposes the flaw of just focusing on units sold market share. Rising market share masks the rot that has already taken hold, so you can't see the disaster until it is too late. You have to also look at forward-looking indicators. Using other indicators, Nokia's and RIM's downfall could be clearly seen by an amateur (me) by summer 2010. Horace Dediu (asymco.com) has been tracking other indicators, and for a long time has been forecasting the outcomes we're seeing now.

2. iPhone is responsible, directly or indirectly, for the collapse of 5 of the 6 examples, and all the examples that occurred after 2007.
- iPhone set a new standard for a mainstream phone in 2007. The whole paradigm shifted and left Moto way behind.
- iPhone took the high end of every market it was sold in (and it has taken years before iPhone was sold by more than half of the carriers in most markets). In doing so, it forced previous high-end leaders to move down-market (i.e. lower ASP), where they soon had to compete against Android (which imitated the iPhone standard in concept), or compete against others within the Android sphere.
--- RIM's Verizon-backed BB failure against iPhone in late 2007 and 2008 led Verizon to spend over $100m to promote Android in late 2009. RIM was forced down-market by the US carriers, and to turn to international markets, where Apple and Android did not yet have as much mindshare, or as much of an ecosystem. Now that low-cost Android has arrived in those international markets, RIM has nowhere left to go (ASP has already dropped to around $250 from $368 in Feb 2009; $267m in BB7 phone inventory written off last quarter).
--- Palm tried to take iPhone head-on, with trash-talking and faking-out-iTunes, and releasing its new Pre a mere two weeks before a new iPhone. It got crushed.
--- Windows Mobile's failure to compete successfully against iPhone in late 2007 through 2009, and slow-mo development of WP7, pushed handset makers (like HTC and LG) to turn to Android.
- Using Android drastically reduces the ways a vendor can differentiate its products, and increases the impact of pricing. When low-cost vendors can also use the free Android, it makes supply chain mgmt and production costs even more critical. Due to this, Sony, HTC, Motorola, and LG cannot successfully recover from any mistakes in competing against Samsung, Huawei, and ZTE. It's already simple to forecast LG and HTC heading downward. I think Sony still has a slim opportunity to make something of Playstation. Moto will have Google financial backing so it may be able to take losses until Google gives it a ground-breaking innovation.

3. I agree that the short replacement cycle (which is often shorter than the development cycle) is a partial explanation.

4. The dealership and carrier relationship are also partial explanations. Apple transcended both. Apple went directly to the consumer, with its stores and marketing, thus bypassing the carriers. Then the carriers eventually needed iPhone as much as Apple needed the carriers.

5. The iPhone paradigm shift necessitated moving from a phone OS to a computer OS, and from being phone-hardware-centric to platform/ecosystem-software-centric. Google responded quickly, possibly because its CEO Schmidt was on Apple's board. RIM, Nokia, and Microsoft took way too long to recognize the shift; disparaging iPhone and then delaying development of a replacement OS or ecosystem. Palm also disparaged iPhone but soon responded, but it had other major handicaps.

6. Finally, this cliff effect in market share also happens in other industries, as others have noted. But it has been much more dramatic in mobile because the mobile market has much much greater revenue.

[anobserver]

@kevin

Good points about what happened from 2007 onwards, and the reasons for the demise of several players. However, I think you short-change Tomi.

"iPhone is responsible, directly or indirectly, for the collapse of 5 of the 6 examples, and all the examples that occurred after 2007."

Ericsson is something to check -- and it took place long before iPhone. Tomi might have the figures to determine whether it fits the cliff pattern or not. Another case is Benefon -- a very successful player in 1G NMT networks, but which crashed some years after 2G networks had become successful (yes, Benefon had several interesting 2G products and innovated with GPS functions).

"It's already simple to forecast LG and HTC heading downward."

All the more so since 2011 was definitely not a good year for HTC and LG. They have been heading down at least since 3Q-4Q2011.

"The iPhone paradigm shift necessitated moving from a phone OS to a computer OS"

Yes, this is the major evolution. We are dealing with a computing environment, and all pieces (phone, PC, cloud, software) are essential. Many of the players did not have them.

"But it has been much more dramatic in mobile"

It is more dramatic also because mobile phones are ubiquitous mass-market products.

Another industry where cliffs appear is banking. The phenomenon is called a bank run -- and interestingly, an impedance mismatch between customer switching times (short-term deposits that can be closed overnight) and product cycles (long-term loans such as mortgages) is the reason these bank runs are deadly. See Northern Rock in the UK. It takes literally just a few days to kill a large player.

Between mobile, pharmaceuticals and banking, everything points at that impedance mismatch between product development cycles and customer switching time to another product.

Notice that others have pointed out that once embedded in the Apple environment (with tablets, iPods, sync, iTunes, iCloud), it is fastidious and takes time to switch to another "ecosystem" (you have to replace several devices at once and software and reacquire content and reconfigure everything). So Tomi is indeed onto something.

[em]

anobserver: Banking is an excellent example. "The bank run" in mobile is probably a situation where your purchasing contracts and manufacturing capacity can not be scaled down with the falling demand.

The unit production numbers in mobile are very high, hundreds of millions for major players. It is just very hard or impossible to build and close factories for the components and devices within the handset replacement cycle.

Also, I think Samsung has been making losses in some quarters since 2000. Yet it has been able to adapt (a'la Darvin) and survive. Now Nokia is trying to do the same.

[Darwinphish]

Tomi:
Very interesting post. You hit on a number of key causes, but I believe you missed one. All the collapses you document occurred during the early stages of the market when it was experiencing phenomenal growth. The reason why you do not see similar collapses in other industries is that you did not go back far enough in their histories to similar periods in their markets' development. For example, if you go back 30 or so years and look at the PC market, you see lots of companies which fell off a cliff: Tandy/Radio Shack, Atari, Commodore, Osborne, et. al.

For a market to grow, it must keep bringing in new customers. Companies which experience early success do so because their products appeal to early adopters. However, early adopters often have much different needs and preferences than consumers who enter the market later. To attract new customers, sellers must offer something new. In a fast growing market, listening to your current customers and focusing on their needs will likely blind you to the needs of potential first time buyers, a group which is much, much larger than existing customers.

That is, market's experience growth BECAUSE new products are introduced. The smartphone market would be much smaller and would be growing much slower if the product options were still the same as the options 5 years ago. Motorola would still be selling a lot of flip phones, and would probably have great market share if messaging-centric devices did not expand the market so much. Similarly, media-centric devices brought a whole lot of buyers into the market who were never enticed by messaging-centric devices.

[kevin]

@anobserver: Tomi is great at delivering the numerical facts. I've learned an amazing amount from his sharing his knowledge on this blog over the past 5-6 years, and I use it to find quick comparisons of the mobile industry to other industries.

But I think he has two long-standing blind spots: 1. Nokia and 2. the real but often overlooked industry changes brought about by iPhone because Apple has had different objectives/strategies from the incumbents. For example, Tomi continues to tout SMS as a sales driver. SMS is certainly used by just about everyone, but it is not a differentiator between featurephones and smartphones, nor between different brands of smartphones (excepting the physical keyboard). Apps may not make many developers rich, and entertainment media may not be used by everyone on their phones, but both are very real differentiators used by consumers in choosing a smartphone.

My comment earlier about "all examples" only referred to the ones Tomi mentioned above.

[S]

I would agree to Paul Cosway about the design, just would add a few points: in mobile you can't wait to see what others do and copy them. That adds 18 months lag and just too much to survive. You have to guess, and if you ain't anywhere close to the right answer you die.

Then I wouldn't just name it "design". Its about features the phone has. Say if you create a phone today that would have perfect voice capabilities but won't have any sms support - you are just doomed. And btw, producing a phone that can't do filesharing or play mp3 or whatever else is just the right way to the cliff (note Windows Phone devices).

My guess is that it happened in each newborn industry and faded away as the rules became solid.

[Riccardo Campaci]

I think there is at least another industry where the "Cliff Theory" is valid too: fashion industry. For instance, this year everybody's going for "green" tones; next year: green will be out. For no apparent reason beside pure fashion market logic.

Mobile phones market have always included a strong fashion element; a bestseller mobile phone have always needed to be not only good but also cool, sexy or sleek. RAZR, StarTAC, iPhone, Galaxy S II, N95. That's because people likes to show their phones in public.

Fashion, style and design is a big part of mobile phones market, sometimes bigger than the features_part and this part is influencing customers perception too. There was a time when owning a Nokia phones was a cool thing; now is no more so.

[tcb]

@ Riccardo Campaci, your speaking of fashion design trends, but fashion brands are not as volatile, so its not a good example really. Major brands like Boss, Chanel, Gucci... have been around even before WWII, so its more like the car market, although new brands/designers can pop out, the old stay relevant, its a very structured industry.

[Colin Crawford]

The difference with the iPhone is it spawned a massive developer community and an eco-system where developers could make money. The consumers are loyal to the apps as much as the hardware. The rapid replacement cycle seem previously was because of weak bonds of loyalty - sure there was some brand loyalty but most of the time the lure of a better / cooler phone outweighed it. In the case of the modern smartphone market which was defined by Apple - apps are a central component. No longer is loyalty to a platform just because of hardware features - it's because of thousands of developers producing amazing games, services, information apps and so on. Of course Apple will have to continue to innovate the hardware and iOS - NFC, maybe 3D and support for AR, networked phones, more geo aware features etc. It's extremely hard to keep out in front with hardware alone - which is why the cliff effect has been seen before - Apple's been very smart giving developer the tools they need to develop awesome apps - that way the customer bonds are much tighter. So far no competitor has figured out how to compete with the Apple "platform" that covers hardware, software, the supply chain, developers and a extremely large number of very loyal consumers. Even if Apple does not have a majority market share of the handsets - it has overwhelming share of profits.

[Louis]

This is a really good discussion.

@tomi: Thanks for the post.

Somebody already linked to Michael Mace's blog post on the dynamics of how platforms die, but I want to endorse it as well. (Basically, a company gets really big and efficient at cranking out the same thing, and doesn't notice the basis of competition changed until after it can't afford the necessary capital investments to transition.)

@kevin: I agree with all of this. The iPhone changed the basis of what is the standard package, and everybody who didn't switch to the fast-following Android blew up.

One thing I want to throw out here is a slightly different take on the role of the operators. RIM always made much of its efficient use of data, but operators who had made hide 3G investments really needed to drive sales of expensive data plans. The iPhone arrived at just the right moment for this, which is probably why AT&T was happy to agree to Apple's terms: nobody really cared about their data plans before.

In other words, the operators were more prepared for a secular shift to data than the incumbent handset makers.

[RG]

I have one word for this thread:

apps

Repeated around 300,000 times, it invalidates most of the reasoning presented.

[Brian Daly]

I think of all the factors mentioned the most relevant is because mobile is a very young industry so there has been a string of disruptive hit phones. Because of the relatively long development times companies get left out in the cold. The iPhone experience is just superior. It's amazing what google pulled off with android. The companies with established brands and there own ecosystem faced the classic innovators dilemma, and couldn't respond quick enough.

The comment on early PC industry is illustrative (disappearance of Tandy, Atari, Osbourne). 

A bank run is not similar, it's an old old business, and the cliff effect is so extreme govt has to back it. It's driven by the fact that in a bank run, the earliest people to jump ship get the money, late actors lose everything. The mobile market is not like this.

One other comment: the two market leaders in mobile phones, Google and Apple moved in from other industries and brought huge resources to bear that are extremely hard, if not impossible, to replicate. This would point to Windows Phone as the most likely contender. Is it not incredible that Microsoft has floundered so badly?

[Kai Lukoff]

Brilliant piece, Tomi. I also re-read your 2007 piece on BI-AI iPhone, which reads as very far-sighted five years later!

I'd like to ask, could it be that fewer handset makers will fall off the cliff in the next 10 years? My commentary also echoes some of what @don_afrim says about the need to switch to Android, one of the two mobile OSs that consumers consider worth their money.

1) The iPhone era (AI) ushered in a new age in which the phone OS (software) has become more important than the hardware. In 2004, would I choose to buy a Nokia handset if it ran the RAZR's Symbian OS? Hell no, I want the RAZR's sharp-looking hardware, not its shitty OS. Today, would I buy a Nokia phone running iOS or Android? Yes, I just want the OS--the hardware is nice, but secondary. Players who missed this game change and got stuck on the wrong OS were/are sure to fall off the cliff.

2) As this OS era now stabilizes around iOS and Android (with Windows as a possible third player), I'd hypothesize that fewer handset makers will fall off the cliff. The 100,000s of hours app developers are spending to develop for iOS and Android give these OSs strong barriers to entry that previous ones never held. This greatly reduces a huge source of unpredictability for handset manufacturers: OS change.

That's an obvious point of stability for Apple. But also for manufacturers of Android handsets, they can now focus all of their energies on making great hardware, not guessing which OS to bet on or, even worse, building their own OS. There will still be some who choose Android and still lose (see: Motorola), but fewer will be eliminated because their OS can't hack it (see: Palm, and now maybe Blackberry and Nokia).