Pre-empting the PSP, how Apple again eats Sony's cake, now with iPhone

We just have seen numbers of the scale of mobile phone gaming that is owned by Apple. Flurry has counted the US domestic videogaming market that is generated by Apple iPhone (and iPod Touch) gaming applications to be worth 500 million dollars in 2009. That half billion dollar level gives Apple's iPhone game apps about 5% of the global videogaming revenues, in only two years. Note that Flurry's numbers are from the USA, the real global number is certainly bigger, perhaps 50% more. Tech Crunch has the story and shows how Apple's iPhone apps are now eating out of the portable gaming platforms market, and thus cannibalizing both Sony PSP PlayStation Portable and Nintendo handheld gaming markets.

NOKIA - PIONEERS WILL BE SHOT

Its dangerous to be first. You have to be really sharp at judging the market opportunity just right. Consider this. It was the biggest handset launch in mobile tech history. A handset, with a large color screen, and an unconventional keypad layout. A radical form factor unlike any other phone on the market. The launch of an app store, which would bypass the operators/carriers and sell the apps (games) directly to the consumer. The handset is a smartphone but where the market is oriented to enteprise/corporate use of smartphones, this is a smartphone aimed at consumers. It is an expensive phone yet at its launch the projections are that 10 million of these smartphones would soon be in the pockets of consumers. But yes, I am not describing the launch of the iPhone. This was the launch of Nokia N-Gage four years earlier, in 2003.

The original N-Gage was a flawed phone for many reasons. Even its follow-up second edition did not set the world on fire and total shipments of N-Gage were in the few millions before the line was discontinued in 2006. But the irony is, that Nokia had measured and correctly discovered a 'market space' for 'gaming phones' as a legitimate sizeable market segment of consumer smartphones, where games would be sold as apps sold/installed/downloaded bypassing the operator/carrier. It would be the iPhone that fulfilled that promise fo a gaming phone. Nokia was too soon, with what was no doubt a radical phone, but too early. I think its similar to how the Apple Newton was a radical innovative PDA but was way too early when the global market was not ready. The iPhone and iPod Touch today are that much better, because of the early steps taken by the Apple Newton.

SONY VS APPLE ROUND 1

So lets move on. What of Sony and Apple? Sony invented the portable personal music player market with the Walkman (introduced in Japan in 1979). The iconic c-cassette based 'player' would soon spawn a vast range of rivals from all major electronics brands. Walkman would shrink in size and add FM radio and eventually even the TV version. But by the 1990s the nice long lifespan of the Walkman was coming to an end as c-cassettes (and vinyl records) gave way to the digital music CD. There was a diminishing market for portable CD players and Sony tried to migrate the brand to 'minidisk' digital recording diskettes. A huge problem with that opportunity was, that there was no music content on minidisks. Meanwhile small MP3 player brands appeared with modest ability to store a couple of songs on the modest size memory chips of the early MP3 players. Sony felt there was no real market in the portable personal music player and pretty much ignored this market segment. They focused on the Playstation (PS2, and later PS3), the DVD player and then the home flat panel TV markets.

Along came a computer maker who felt they could re-invent the personal music market. Apple stuck a tiny hard drive onto its iPod, launched an iTunes. And the storage ability of the iPod was mind-bogglingly huge. You could carry your whole music library in your pocket. And the user-interface was radical, easy. The device itself was ultracool in apperance. Inspite of costing far more than rival MP3 players, the iPod took the world by storm from its launch in 2001. Today more iPods have been sold than all Walkman branded portable cassette players ever made. This in a market that was supposed to be past its prime, not worth Sony bothering with. A market Sony had once 'owned'. (We loved this market space creation strategy by Apple so much, we made it one of our case studies in our book Communities Dominate Brands)

SONY VS APPLE ROUND 2

So along came musicphones from South Korea in 2003, and soon we had musicphones from all major handset makers, including Nokia, Motorola (remember the Rokr?) and SonyEricsson which released the Walkman brand (as well as the Cybershot brand) to the phone maker partnership. SonyEricsson was doing a good recovery to its market share in particular with the Walkman brand, only to be bit by Apple again.

Because by 2006 the writing was on the wall, and Apple management saw that MP3 playing phones would steal the market from the iPod, and the mass market consumers would use musicphones, not stand-alone MP3 players (as we told you on this blog at the time, to enormous hostile response by Apple loyalists). And while we here insisted that we wanted an iPod phone to be released sooner rather than later and that it was inevitable in Apple's strategy, we were still vilified for somehow being anti-Apple.

Well, Apple are very smart people, so Apple management saw the numbers and made the decision to release their own smartphone. We saw it announced in January 2007 and released commercially in the summer of 2007. Obviously, the iPhone, as the 'son of the iPod' was immediately the world's best musicphone. And who was hurt most by this? Not RIM with its Blackberry. Not Nokia with its N-Series or E-Series. The brand most hurt by the iPhone was SonyEricsson's line of Walkman phones (as we predicted here).

Sony was there first, making portable personal music players. When they lost focus, Apple came in and stole their market. Sony came back with Ericsson, released their musicphone to re-enter the race. They were doing just fine, until... Apple came along and again demolished their market. How do you say 'ouch' in Japanese?

SONY VS APPLE ROUND 3

So, Sony was perhaps not devastated by the Walkman market, because they had enjoyed it for 20 years and by Sony's own analysis, the musicplayer market had peaked. So they didn't feel - at the time - that this was a key strategic market for them (anymore) by 2001 when Apple launched the iPod. But the Playstation. This is central to Sony's strategy. They've been battling Nintendo (Wii) and Microsoft (Xbox) for a long time. They have seen Nintendo in the Gameboy portable handset gaming market, and saw Nokia's play into the space from 2003. So in 2005 Sony released its PSP, which became an instant tech hit product.

So how long did they have until their rival Apple came along? Apple launched the original 2G iPhone in 2007, but by 2008 Apple had launched the iPhone App Store - and as we all know, the vast majority of the titles and the downloads are games. So while it was initially marketed as the 'iPod phone' and early pundits including us - were counting it as most of all a top line 'musicphone' - the music side of the iPhone has almost immediately been modest. The iPhone achieved several specialist niches. Its by far the best phone for viewing pictures and videos (because of its multitouch and swiping user interface). While never having a good camera per se, its easily better for viewing cameraphone pictures, due to its large 3.5 inch screen that contemporary 2007 cameraphones with far better optics, resolutions and in-built flash, but screens only half that size at 2.5 inch, like say the Nokia N-95.

The iPhone was almost immediately the world's best phone for surfing 'the real internet' due to its large screen, multitouch screen and that most iPhones were sold with the unlimited data plan (rare on most other smartphones of that time). And from 2008 when the App Store was launched, the iPhone fulfilled the long forgotten promise of the Newton - that we will want a PDA type of device, that we can customize (with apps) more like a pocket computer, than a pocket phone with some connectivity and utility functions. I would argue that as US legacy smartphones - Palm and Microsoft Windows Mobile - were strongly descendants of the PDA form factor, when Apple released its 'next generation Newton' in the iPhone, it also demolished those two instantly obsolete smartphone platforms. For those who thought of the smartphone/PDA as a tiny palmtop computer - for those the iPhone - with its new app store - was instantly the optimal new device. Again, if the user had a different need, like was addicted to messaging, then say the Blackberry was not at all affected by iPhone sales (as we predicted).

So, the iPhone came and set a new standard for excellence in 'musicphones' and 'internet surfing phones' and 'picture/video viewing phones' and 'pocket computing'. Great job. What I did not see coming, was that the iPhone would pre-empt the PSP and capture the 'gaming phone' market. 

So for many years, many analysts (including us on this blog) have begged and pleaded with Sony to release its Playstation to the SonyEricsson phone line and give us a PSP phone. We argued here, that after the launch of the iPhone in 2007, the next tech brand that could possibly match that level of hysteria was Sony if and when it would do its PSP phone. Even as we saw the hype around Google entering the phone space last year with Nexus One, we said here that PSP would be a bigger hit if and when it was offered. Now we are hearing rumblings and rumors that perhaps the PSP phone will be released this year by SonyEricsson. Its about time.

But is it too late? Every month that goes by, Apple expands its installed base of iPhone and iPod Touch (and soon also iPad) user base. PSP total global installed base is at about 60 million, but the iPhone and iPod Touch have already an installed base of 75 million and selling more every quarter. This puts the PSP at a perilous position. They will need to enter this market quickly or find it has all been gobbled up by Apple.

COULD BE BEST PHONE OF 2010

What could a SonyEricsson PSP be like? Imagine all that you wished for in an iPhone but what Apple refuses to give you. A replacable battery? A memory card slot? a serious camera like at least 8 megapixels. And yes, a modern cameraphone has to have a flash, come on. And as gamers tend to be Generation C (Community Generation) for whom texting is critical, then at least a real keypad (QWERTY perhaps on a top end PSP phone). For gamers, the 'Playstation' buttons for 'real' gaming. Then obviously it won't be done on the Apple OS/X smartphone operating system but most likely would be on Android - which would give users multi-tasking (another aspect that iPhone users keep begging for).

These are not radical matters. They are serious 'faults' that Apple just refuses to give us. Like the original 2G iPhone did not have 3G, did not have MMS, did not allow users to install apps, etc. Apple is still learning how to match its own vision of what a phone should be, and what is the mass market. Still today, the iPhone 3GS has so many faults, it would be relatively easy to do a 'superphone' to match most and exceed several areas. And the cool factor, Motorola or LG or Nokia or Blackbery or Google can't match the cool that Sony PSP could bring to the table (for its target segment, gamers...)

If SonyEricsson wanted to, they could create a superphone out of their PSP phone. And from Apple's view point, this could be the most dangerous rival smartphone for the year, far more so than Motorola Droid or Google Nexus One or any Nokia N-Series or Blackberry or HTC or Samsung etc. The issue is, that Apple is capturing ever more of that total market today, and Sony is losing in this war by every week that goes by and they don't announce their superphone

WHAT OF NINTENDO?

And then what of Nintendo? They invented the portable videogaming market way way back when, in 1980, when they released their first 'Game and Watch' portable gaming gadget in Japan. They have really been aroudn the block for honestly 30 years and should know the gaming world inside out. For a long while they had the bestselling third generation gaming platform in Wii, and their current lineup of Gameboys are popular. But don't they see that Apple is eating their pie?

If computer makers like Dell, Lenovo, Acer and Apple can get into smartphones. If Internet giant Google, software giant Microsoft and watchmaker Tag Heuer can make smartphones. If fashion brands from Dolce & Gabbana to Armani to Prada can offer phones. Then why can't Nintendo? In Japan we have 7 phone makers including just about the who's who of Japanese electronics - Panasonic, Sharp, NEC, Toshiba, Fujitsu etc. Why not Nintendo? Could we perhaps see a Nintendo branded phone (and perhaps, like Google's Nexus One, be actually manufactured by someone else like say HTC out of Taiwan?).

I do think a PSP phone has to appear. Then it becomes interesting to see if Nintendo (and Microsoft perhaps too) might want to get into the 'gaming phone' game. And what of poor old Nokia. I am sure those who believed so strongly in the N-Gage opportunity and built the internal business cases and justifications for what was back then the biggest tech launch on mobile phone handsets history - I am sure they are crying their eyes out, thinking 'if only we had been given one more chance..'

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