Understanding Smartphone Market Share? Battle not for phones, is for platform!

Why care about market share of 'smartphones'? This is the ultimate platform war!

I was stunned last week to see how many readers on this blog site were insisting to bring the profits and revenues discussion of Apple vs Nokia, into the 'market share' analysis. And I was puzzled why something that seemed 'obvious' to me, would bring so heated arguments. I have thought about it hard, and I believe we have a misunderstanding. Most who thought profits were a valid argument, were thinking of Apple or Nokia smartphone sales as a brand of phones, against other brands of phones. Similar to cars (Ford vs Toyota), or TV sets (Sony vs Samsung), or soft drinks (Pepsi vs Coke). Yes, if that was the 'race' that you considered, yes, profit is a very valid consideration. But that was not what I meant. I was talking of something else.

PROFIT AND MARKET SHARE INVERSE PROPORTION

So yes, if you think of a handset manufacturer brand, like Blackberry or iPhone or Nokia or HTC or Samsung or Motorola or whoever, and you consider 'only' the race against other similar brands of devices, then yes, profits and market share tend to have an inverse relationship.

What do I mean? I mean that 'ceteris paribus' ie 'all other things being the same' if you and only you lower your price in the market (rivals do not change their prices) then under normal economic laws, you gain sales. In other words, your market share grows. But also, ceteris paribus, if nothing else changes in your company and you just lowered your prices, then you have cut your profits. So yes, economic theory suggests that if nothing else changes, then lowering prices should increase market share but reduce profits; and conversely, if you raise your prices, you also raise your profits but it will hurt your market share. We saw both of these in this past quarter. LG gained market share in all mobile phones but went from generating profits to making losses. And Apple lost market share but grew profits. If we consider an individual mobile phone handset maker, then yes, increasing market share usually eats into profits and decreasing market share usually increases profits.

This is all fine and well and I agree with all those who wanted to make that argument. Yes, I agree with you. But that is not what I was talking about. I am not talking about individual handset maker market shares, in the "Smartphones Bloodbath" of 2010. Yes, I follow all major smartphone brands yes, but the race that I am interested is not between individual phone makers. There is a mega-race going on. It is about the platforms. I have been trying to say that time and again, and some of my less-frequent readers seem to be missing it. I am focusing on the platform battle. What makes it confusing, is that Apple is both a smartphone maker and a smartphone operating system maker. RIM is both as well. So is Nokia. So is now also Samsung. But not every smartphone maker has an operating system (like HTC, Motorola and LG for example) and now that Google and Microsoft have ended their short-lived smartphone projects, Google and Microsoft provide smartphone operating systems, while not being handset manufacturers anymore. So its easy for an occasional reader to be confused about what I mean, when Tomi is talking about Apple iPhone 'smartphone' market share vs Nokia 'smartphone' market share, and to think that Tomi is talking of phone market share. I am not, I am analysing the bigger pircture of the platform market share battle - and the phone makers play little part sin the big war.

PLATFORM RACES ARE RARE

In cars, for a hundred years we've seen major car manufacturers compete for market share against each other. There was no 'platform' war in cars. Rarely do we see a major battle of rival new technology platforms aiming to serve the same need. But every now and then we witness a 'megabattle' that determines winners and losers for that given technology platform for decades to come. We had a platform war in the Video Cassette Recorder (VCR) wars in the 1970s and 1980s. VHS won that and Betamax was defeated. We had a platform war on PC operating systems that Microsoft Won and Apple's Macintosh lost. We had a short-lived platform war in the BlueRay vs HD DVD standards that has gone and BlueRay won.

These are far more relevant as a technology race, as the platform decides a whole 'family of winners' and a 'family of losers'. If your tech brand supported a losing side, no matter how great your product (and how profitable your company), you end up disappointing your customers and abandoning the long term gains to your rivals. The worst humiliation comes when (or if) you are forced to join the rival standard - like when Sony started to sell VHS based VCRs (or, arguably, when Apple joined the Intel CPU based computers and made Macs 100% Windows Compatible).

PHONE RACE IS THE ULTIMATE RACE

So lets understand this platform war. The smartphone race is not a race to win the current smartphone market. In 2009 the smartphone market was about 175 million handsets. What makes this battle an enormous one is far exceeding the current market size of 'smartphone sales' and their immediate projections of sales over the next few years, into the 250 million - 500 million range. The smartphone is not the start of the mobile phone industry. The mobile phone business is the most dynamic, most competitive race for the soul of the future of the most widely spread consumer technology ever. Televisions sell 300 million units per year. DVD players sell about 250 million units per year. Personal computers including laptops, netbooks, tablets like the iPad and desktops - sell about 300 million per year. Videogame consoles sell far less than 100 million per year. Mobile phones sell more than all of those - combined! Mobile phones sell 1.3 Billion units this year. To put it another way, more new mobile phones sell this year, than the total worldwide installed base of all personal computers in use worldwide.

There are 5 Billion mobile phone subscriptions in use on a planet of 6.8 Billion people. No other technology comes close to its penetration rate, not wristwatches, not FM radios, not cars, not TVs, not PCs, not even the 'plastic' we have in our wallets - even the total user base of all forms of plastic money, credit cards and all banking cards, is far smaller than the spread of mobile phones.

And even that is not the full story. Mobile phones are now the focal point of all forms of digital convergence. You remember reading 'the internet changed everyhing'? It didn't. The biggest internet giants like Google and Yahoo are now saying the future of the internet is on mobile phones. The PC industry giants like HP and Dell say the future of the computer is on mobile phones. The media giants from TV (BBC) to music (Warner) to videogaming (EA) etc are saying all future media content will be available on mobile phones. The future of the digital car is on phones. The future of digital money - is on mobile phones (Kenya became the first country where more than half of all bank accounts are now mobile, that happened earlier in 2010; meanwhile Sweden has started the debate of when should they get rid of cash money and use only mobile payments). And thats before we add all that is coming in mobile advertising and marketing too - yet another industry that is running to get into our pockets. Its time to smell the cellphone.

If you think digital convergence is a major trend in your business, whatever that business is, then mobile is at the center of that convergence. While smartphones today form only 19% of all phones sold, most major analysts of mobile believe that the majority of all mobile phones will become smartphones before the end of this decade. Many think that all mobile phones will be smartphones by then. And the relentless advance of Moore's Law certainly suggests its likely that most 'dumbphones' will turn into smartphones by the end of the decade.

FIRST BIG PLATFORM WAR

So lets take a few lessons from history's most famous platform war, the so-called Betamax vs VHS war in VCR's. Sony's Betamax was actually not the world's first home video cassette recording system. Two years before Betamax launched, in 1973, the world's then-biggest home electronics giant, Philips of the Netherlands had launched their VCR 1500 system. This early monster home gadget (it was the size of a small suitcase and weighed as if it was made of bricks) had a monster price - in Britain the cheapest new car cost the same as Philips's brand new N1500 home video recorder. The first video cassettes had recording lengths of either 30 minutes or 45 minutes. But home video recording had arrived, to Europeans.

In Japan Sony designed a far more advanced system, based on the professional U-Matic video recorders, and launched it as a consumer VCR system branded Betamax in 1975. Right from the start, Betamax tapes lasted the full hour. The devices were smaller and far more reliable than the clunky huge Philips units. And Sony was not alone making Betamax recorders. They had a 'family' of vendors who made Betamax recorders, led by Japanese electronics giant rival, Sanyo. Smaller Japanese electronics makers Toshiba and NEC were among the other Betamax manufacturers. Where Philips mainly sold only in Europe, Sony brought the Betamax to all continents.

But then in 1977, the Victor Company of Japan (we know it as JVC) launched an even more modern system, VHS, where the design was optimized for lower costs. The tape mechanism allowed longer tapes. VHS introduced 2 hours recording time. And JVC had signed up a whole army of home electronics makers including Matsushita (ie Panasonic), Sharp, Hitachi, RCA, Zenith, Magnavox etc etc etc. The VHS family of VCR makers was by far the biggest. The VHS system was also brought to all continents.

While all makers would release upgraded devices that used the same cassettes to record longer times in 'LP' Long Play versions (with a clear loss in picture quality), Philips's VCR 1500 system was soon outclassed and they discontinued that system. But Philips was not done, they came back with European partner Grundig to launch the V2000 system that offered 8 hours of recording time. The V2000 system was launched in 1979 but by then the Japanese had built such a strong presence worldwide, that the V2000 system only sold modestly in Europe and Latin America and was eventually withdrawn. Both Philips and Grundig would then join the VHS family making VCRs on that standard.

After the two Philips led systems were eliminated, the final battle, or the title bout for world dominance, ended up being between VHS and Betamax. And without any doubt, Sony made the better devices. For every generation, the Sony led Betamax family had better quality video, better quality audio, better quality still image, better quality editing etc. The Sony machines were simply better. They were also more expensive. The Betamax recorders were more expensive, the Betamax tapes were more expensive. Movie rentals were more expensive on Betamax tapes (and had less variety). And eventually even Betamax repairs and spare parts were more expensive.

Meanwhile due to mostly its lower prices and longer tapes, VHS rapidly took the market lead. By 1981 in the world's biggest VCR market, the USA, VHS had taken 75% and the battle was clearly being won by VHS. The video rental stores offered more movie titles on VHS than Betamax, soon rental stores stopped carrying Betamax titles altogether, and then rare Betamax rental stores were left. In 1988 even Sony admitted the loss, by starting to make Sony branded VCRs using the VHS system.

The race was not won by the best technology. Both Philips V2000 and Sony Betamax were far better technologies than JVS's system, VHS. The race was not won by the most profitable maker of VCRs. Due to its high quality products and superior features, Sony had the highest prices and could command the highest mark-ups and made the best profits. But while it won the profitability battle, Sony lost the platform war. Then JVC as the license owner collected billions of dollars of royalties in the next two decades of VHS video recorder devices made, VHS tapes sold, VHS camcorders produced, and various follow ups of special variants to VHS like VHS-C and Super VHS.

What do we learn from this?

1 - That it is only scale which will win a platform war.

2 - Having the best technology is not in any way relevant to winning. You have to be good enough, you don't have to be best.

3 -  Price is a major key to scale so your technology has to reach low price points to win the platform war. Being the most expensive is a guarantee you cannot win the platform race. And..

4 - You need partners on your platform to get scale. And with those partners, again their scale is the relevant point. One Panasonic or RCA as a partner to JVC in VHS was worth much more than several Toshibas or NECs for Sony (or Grundigs for Philips).

SMARTPHONE TECH WARS

And in mobile phones we now have the smartphone OS tech war, that has been running for a decade and in the past few years has seen more new OS platforms emerge, not less. Today we have ten global contenders and pretenders in the smartphone OS battles of 2010. They are ('Nokia's') Symbian (actually Symbian Foundation nowadays), Google Android, RIM/Blackberry, Apple iPhone iOS, Microsoft with its older Windows Mobile and its newer but incompatible Phone 7, Samsung Bada, HP's newly acquired Palm WebOs, and Linux Mobile. There is a new OS coming from Nokia and Intel called MeeGo (and it supercedes Nokia's short-lived Maemo). Thats it, Ten Little Operating Systems.

Currently their markets shares (Q2) are as follows:
Symbian ................43%

Android .................19%

RIM .......................19%

Apple .....................14%

Windows Mobile .....2%
Linux Mobile ...........1%

Bada .........................0%

Palm .........................0%

Phone 7 ..................(not launched yet, expected Q4 2010)

MeeGo ...................(not launched yet, expected Q1 2011)

IS RACE TO CAPTURE DUMBPHONE MARKET

And then this tech platform war is significantly different from the VCR battles in one crucial way. We have a huge existing market of dumbphones, which is in the process of migrating to smartphones. So the winner of the smartphone bloodbath won't just capture a 250 million annual sales unit market of smartphones, towards the end of this decade, the winner of the smartphone wars will capture the dumbphones market of 1.3 Billion handsets sold annually. THAT is what we are fighting for. This is the biggest technology prize of any consumer electronics, ever. The grand race for the grand prize.

Consider the Top 10 handset makers and their market shares, and what platforms they support:

Nokia................ 33% ........(Symbian, MeeGo)

Samsung .......... 19% ........(Symbian, Android, Windows Mobile, Bada, Phone 7)

LG ...................... 9% ........(Android, Windows Mobile, Phone 7)

ZTE .................... 4% ........(Android)

RIM .................... 3% ........(RIM)

SonyEricsson ..... 3% .........(Symbian, Android, Windows Mobile)

Apple .................. 2% .........(Apple)

Motorola ............. 2% .........(Android, Windows Mobile)

Huawei ............... 2% ..........(Android)

Sharp .................. 2% ..........(Symbian, Linux Mobile)

That is why it is so important to compare current smartphone performance to the dumbphone market. That is why the smartphone market share is not enough, we have to also consider that brand's presence in the dumbphone side of the business. And I have done some preliminary projections of how that future market share might look like, if all dumbphone makers manage to migrate all their customers to smartphones (not in any way a certainty, Nokia has been doing it well, Motorola very poorly)

And for those who think the cheap 'Africa phones' market is not worth pursuing, or has so cheap basic phones, it cannot be converted to dumbphones, please consider this. Moore's Law tells us that the integrated circuits will double in capacity in every 18 months, or to put it another way, we get the same performance for half the price every 18 months. So take the awesome iPhone 4 of today. It has a real 'street price' without subsidy of 2 year contract, of about 600 dollars. That is what AT&T acually pays Apple for every iPhone they 'sell for 199 dollars (plus 2 year contract)' haha. So its price is pretty much the same as a Samsung Galaxy or Nokia N8 or other 'superphones' at the high end of the smartphone price points.

Now take Moore's Law for this decade. By 2019, that exact same iPhone 4, its exact specs and parts, retina display, 5 megapixel camera, 3G and GPS etc - in end-user 'street price' would have fallen to... 10 dollars. Note I am not saying selling a used 2010 phone in 2019. I mean to manufacture and sell that iPhone 4 nine years from now, means its price has fallen from 600 dollars to 10 dollars.  But that is Moore's Law. So today if they sell 25 dollar basic phones in Africa, then yes, by the end of the decade, igh performance touch screen 3G 'superphones' that match the iPhone 4 today, can be sold for 10 dollars. Yes there will be a cheap computer even for every child in Africa, but it won't be a Negroponte 100 dollar laptop. It will be a cheap smartphone.

We are now fighting for the control of that market, where all digital convergence is headed. Where the internet is headed, where media is headed, where computers are headed, where digital money is headed, etc. The mobile phone of the future will be a smartphone, and then, towards the end of the decade, there will not be 10 operating systems. It may not be down to 1 or 2, but it will be only a handful at best. And that fight is the megawar. The 'smartphones wars' of our times.

WHEN EVERY APP STORE SEEMS THE SAME

Today the Apple iPhone App Store is clearly the best of the several dozen app stores that have launched. Apple has most apps, it has most downloads, it generates the most revenues. It has a good system for discovering apps for consumers and a good system for paying the partners who deploy the apps. By almost any measure, the App Store is the best store out there for smartphones.

But nothing that Apple does with the App Store is unique to Apple. Meanwhile the other app stores keep getting better. They are adding apps. And in the digital world its easy to copy what works on one rival and bring it to the other. Its like almost anything in the digital space. Yes, Amazon is the leading bookseller online, but if you go to another major bookseller, it seems very similar to Amazon and carries most of the same titles too, at about the same prices, and the shopping experience is similar, to the point of reader reviews, ratings etc.

In a few years all app stores will be cookie-cutter copies of each other with 90% overlap of content and apps. Just like almost any supermarket today will sell you both Pepsi and Coca Cola.

Today there is a heated argument on the tech review sites about which app store is best and who has the most of what. Soon that is irrelevant. Soon the app store is not the deciding factor, but the overall reach of the platform is. And the reach of the platform will also ever more guide the development decisions in the future. Think about the PC vs Mac environment. Few PC software app developers 'start' with the Mac version - unless its for an industry where Macs are the predominant PC, like in advertising or multimedia. Most app developers on the PC will of course make their new app first for the Windows PCs, because of the reach of the platform.

DATA PLANS SOON FOR EVERYONE

And we have the amazing adoption of data services by iPhone users. Then there is the 'surprising finding' now, that Android users actually produce very similar usage numbers (Motorola Android phone users generate more data traffic on Verizon and HTC Android phones more data traffic on Sprint, than iPhone users on AT&T, by latest Q2 numbers of 2010).

Why is that? Because the iPhone in most markets on most mobile operators/carriers was sold with an 'all you can eat' data plan. These are typical for very high cost smartphones (like iPhones and early Android smartphones). Then there is the migration of those data plans to cheaper phones. In Japan where the all-you-can-eat data plan was invented, today more than half of all mobile phone users are on such plans which includes a lot of 'feature phone' users too on all-you-can-eat data plans. Soon that is true of Europeans and Americans too. The concept that an iPhone user is somehow exceptionally heavy user of the mobile internet (or apps) will soon be forgottten. Its not the phone that is the key, it is far more the data plan.

THE ONLY THING THAT MATTERS IS SCALE

In the tech platforms you have to be biggest. As long as you are viable you can hang on. The longer a losing platform fights it, the more it creates resentment among its users to the brand, and long term bleeds support. The biggest platform always wins.

In mobile it is far too early to decide who ends up winning, because smartphones are still such a small part of all phones. But this year we'll sell about 250 million smartphones. Thats nearing the level of total global PC sales including the new netbooks and tablet PCs like the iPad. By next year smartphones will sell more than all PCs made and about a quarter of all phones sold will be smarpthones. Even as the 'end-game' for smartphones cannot even be seen, early strong contenders are emerging.

THE iOS FAMILY WITH iPAD AND iPOD TOUCH

Then many Apple loyalists are sure to remind us that with the iPhone we also have the full family of iOS devices. For every 3 iPhones sold, there are a further 2 iPod Touch devices. And now there is the new hot must-have tech gadget, the iPad.

Here we have a 'different' story. I am not dismissing the iOS platform. It is very important to Apple, and is driving its profits now. It is a very clever strategy of synergy. And yes, it expands the total reach of developers from just considering iPhones to typically launch their apps also for the Touch and iPad (and perhaps in the future, even more iOS devices). But a Playstation Portable, with a WiFi connection - is not a mobile phone. Neither is an iPod Touch. Even if you use Skype on WiFi, it is not a mobile phone.

Similarly a Kindle is not a mobile phone, and neither is the iPad. There are many synergies that Apple and its developers can find from expanding their iOS family - but a Touch or iPad is not a smartphone - just like Honda makes cars and motorcycles (as does BMW). But when we count the global market for cars, we only count those Honda motor vehicles that are 'automobiles' and we do not count Honda motorcycles.

The iPod Touch is part of the portable stand-alone media player market, like other iPods (and the Playstation Portable and Creative Labs and other media players) which has a total global market size of 195 million units sold annually. So if you want to debate how relevant the iPod is to that portable media player market (where Apple's iPods have a combined 28% market share globally) - feel free. But don't do that related to this blog article. The most used service on mobile phones is the voice call. The second most used service on mobile phones is SMS text messaging. Together these account for 90% of all services consumed and all revenues generated by the mobile industry in 2010. Your stand-alone Touch or iPad won't accept traditional voice calls and SMS text messages ('everywhere' ie beyond a WiFi hotspot). So they are not viable substitutes. Just because they can do Skype or instant messaging or email - means that they are capable of cannibalizing fixed telecoms services - not mobile services.

But yes, each major platform is likely to support some other devices, not just phones. Android has for example already been installed on some premium TV sets. So while the iOS is interesting to Apple as a company and its partners, only iPhone devices from Apple are relevant in this smartphones bloodbath, not the other iOS devices, just as I will not be counting Android TV sets either. But to be really clear - even if we added the total installed base of iOS, then Apple's global market share of 'mobile phones' would go from 2% to 3%. It is not in any way enough to 'win' the platform race. Yes, it extends very powerfully the reach of iPhone developers, but in the big picture, going from 2% to 3% when the market leaders have 19% or 43%, that is simply not enough.

IS WORTH $10B DOLLARS ANNUALLY BY DECADE-END

This is not a race to earn millions. This is the big war for the billions. Google yestereday valued its potential out of the Android platform to be worth a cool $10 Billion dollars annually towards the end of the decade when they hope to have 1 Billion users of Android devices (not just on phones, but also on other devices like TV sets etc). Ten Billion dollars annually, if you have a platform that has a Billion users. Note that even Microsoft has not achieved that level yet in the installed base of Windows operating system on personal computers (but are slowly approaching the level). And Microsoft has been able to turn its global platform lead in PCs into Microsoft being the most profitable tech company for more than two decades now.

Google's Android is taking its first tiny steps today, having less than 20 million active users of Android devices. Nokia does have a little over a Billion active users of various Nokia phones worldwide, but most of those are basic dumbphones. The whole Symbian family has a little over 300 million active users today.

But the billion smartphone user vision is not that crazy. Take the 'worst case' for the Nokia vision and the Symbian family. If Nokia loses all its Symbian partners, and only converts its own Nokia branded dumbphones to smartphones during this decade, and again, under worst case scenario, if we take the lower number, that of Nokia's total phone market share, not its better smartphone market share - even in this case, Nokia will sell roughly 450 million smartphones per year and have an installed base of about 1.2 Billion smartphone users worldwide, by the end of the decade. Bear in mind that so far, Nokia is doing far better - it is gaining market share as it migrates users from dumbphones to smartphones.

Or if things go well for Nokia, and they maintain the current level of Symbian partnership adoption in the migration to smartphones - and assuming they manage to migrate Symbian users to MeeGo, then Symbian/Meego would sell more than 600 million smartphones annually and have an installed base of over 1.5 Billion users worldwide.

And Google tells us a Billion smartphone users will be worth a bonus 10 Billion dollars of premium and related services that they will deploy during this decade. Whatever Google does on Android, Nokia can rather easily copy onto Symbian/MeeGo.

I hope you now understand what we are talking about in the smartphones bloodbath. This is the race 'for all the marbles'. The ultimate contest for the biggest prize.

IS NOT SAME AS IN PC WAR

Its easy to look at past platform battles and think this will be the same. The smartphone OS battle has similarities to the PC wars, but there are a few dramatic differences. First of all, in the PC world, the OS market grew from zero as the PC market grew grew from zero. In the mobile phone market, its not a question of smartphones growing from zero to 250 million today, but rather of the existing 'dumbphones' migrating to smartphones. And only 19% of those dumbphones have migrated to smartphones so far.

What is also important to understand, is that while 'pure' smartphone makers like RIM, Apple and HTC are indeed relevant in this early stage of the smartphone market, of all smartphones sold in Q2 of 2010, they have been pushed to the periphery. Already 65% of all smartphones sold worldwide, are sold by the big traditional 'dumbphone' makers like Nokia, Samsung, LG, Motorola and SonyEricsson. That is rapidly shifting - as their market share is rapidly growing - and will soon be more than 80% of all smartphones sold.

HAVING THE BEST PHONE DOES NOT MATTER

The second very important factor to bear in mind, is that in the PC market and the VCR market, and most other consumer goods, more or less 'normal' rules of free market economics applied. If you made a good product, on a good brand, sold at a good price, available on a wide distribution network, you could expect a 'fair' performance in the market. That applies in most technology space once they are mass market goods, like in cars, television sets, videogaming consoles etc. Most markets are 'fair' in that the best product/price value proposition will win in the market.

But that is not how the mobile phone market works. In mobile phones, the market is severely distorted by 'carrier relations' - what a mobile operator/carrier like AT&T or Vodafone or T-Mobile or Telefonica or China Mobile will decide for its market, that is what happens to phones. So for example, Google's Nexus One was rated by many analysts as a viable contender to the iPhone and should have sold well. But the early US carriers decided not to carry the Google branded smartphone - and within a few weeks of that announcement, Google had to discontinue its product.

So in selling any kind of phones, but even more so the most expensive kind, the smartphones - it is absolutely vital to have the full support of the carriers/mobile operators. This is an expensive lesson that Lenovo, Dell and Acer are going through right now. And the pricing decision of the carriers, in countries where there are handset subsidies like in the USA for example - will pretty well make or break a given phone model. When Microsoft's Kin phones were not priced competitively under their contracts in the USA, the whole Kin smartphone strategy was destroyed.

Good evidence of the carrier relationships come from Apple, who only offers the iPhone through AT&T, and whenever a rumor emerges that Apple might end the exclusive deal with AT&T and offer a Verizon version of the iPhone - Apple's evaluation on Wall Street jumps. In Asia, Blackberry is the most popular smartphone of Indonesia and a big hit in Thailand and India and many other markets, but it is not successful in China. Why? Because the Chinese carriers hadn't supported the Blackberry there (until now). And Nokia, the world's most successful smartphone is an utter failure in the US market. Not because Nokia has bad phones (and it has recently had some bad phones yes) but because the US carriers haven't offered Nokia phones with the kind of subsidised prices that they sell the iPhone, Blackberry, Motorola Droid, etc.

The world has about 600 mobile operators/carriers and roughly speaking about 70 mobile operators of the world have about 10 million subscribers or more and these 70 will pretty well decide which phones are going to be a success or not. The majority of the 600 carriers/mobile operators tend to fit into families of carrier groups, where the top 20 carrier groups account for about 75% of all mobile phone subscribers on the planet. The smallest of the top 20 carrier groups has 75 million subscribers. When we consider AT&T (the 16th biggest carrier group and largest based in the USA), the US exclusive carrier of the iPhone having 85 million mobile subscribers at the end of last year, and it accounted for a third of all iPhone sales worldwide, we can start to understand why these carrier relationships are so vital. China Unicom had 140 million subscribers but its rival China Mobile had 510 million subscribers. When the iPhone is only offered on China Unicom's network, and mean while Nokia branded smartphones are sold on both networks - its clear to see why Nokia outsells the iPhone in China, by a big margin too.

There are three finer elements of the smartphone market as it relates to the carrier relationships. I have written a long blog explaining it in detail so I will not repeat it heer. The main point for readers of this article is to get it in their heads, that you will not win only by having the best phone. It is pretty much meaningless (the Palm Pre was highly praised as the first true 'iPhone killer' with very competitive design and with competitive pricing, but it didn't have the carrier relationships to get the sales). The global race goes to the phone maker with the best carrier relationships - not to the phone maker with the best phones or the biggest app stores or the best customer loyalty - which is why Nokia and Samsung are doing so much better than LG, Motorola, SonyEricsson (or RIM or Apple or HTC). If you want to read how you win globally in smartphones, here is my long article with all the facts.

Remember this is not a fair fight. It is not a question of who has the best phone or the best OS or the best app store or the best usage. Apple iPhone is by far the best smartphone today. It is the most desirable phone and has by far the best customer loyalty. It is seen as very advanced and gets press accolades daily (excepting now the temporary bad press about the Death Grip).

Yet the world's favorite smartphone by far, the iPhone lost unit sales while the smartphone market was exploding. Apple's world-beating smartphone has been losing market share from its peak in Q3 - thats now four quarters and counting. Apple lost market share while it was undisputedly the world's best smartphone. Having the best phone is good for profits in the short run, but having the best and most expensive phone will not win you the platform war. Sony had the best VCR in its Betamax in every single generation. Apple's Mac has been the best PC in every single generation. Being best will not get you the market. Being best if you do it well, may make you the most profitable company yes, but then you limit yourself to a niche, just like the Mac has been a niche PC for its whole life.

There is nothing wrong with having a niche market, if you are very profitable at it. BMW has done that successfully for decades in the car market. Nothing wrong with it. But this is not about one company making profits out of phones in 2010. This race is for control of the ultimate tech platform of this decade - and the next.

PROFIT IS ABOUT TODAY. THE OS IS ABOUT THE NEXT DECADE

Profit is about today. Profit is a very valid consideration and a good company has to deliver profits. But the smartphone market space is treacherous. Some can't cut it and are unable to get a fair price for their phones (Motorola, Palm, LG). Others are barely profitable and struggling to hold onto market share (SonyEricsson). Others explore the market, get burned, and run away (Google, Microsoft). Others think they understand the technology, release phones that have a Death Grip problem (Apple). Still others come at the phone market from an adjacent industry like the PC market, think a smartphone is a tiny pocket PC and attempt to get into it, to devastatingly bad profits (Lenovo). Others have learned how to fight in this market, make smartphones that keep growing unit sales and market share - while making profits (Nokia, Samsung, HTC).

Market share in a platform is all about the future. There are 10 major smartphone operating systems supported today. That is far too much fragmentation. Today when there is astronomical growth rates in mobile (the smartphone market is growing at 45% annual growth rates currently), we are seeing several OS platforms continuing. Over time it becomes impossible to support all. The costs of maintaining a proprietary smartphone OS will become prohibitively expensive over time, as ever newer features are added to phones but trying to maintain backwards compatibility with older phones, and providing support to the developer community. Microsoft already took a severe hit when it decided not to make Phone 7 compatible with Windows Mobile. In that transition Microsoft lost a vital soldier in its army - the second biggest handset maker supporting the Microsoft platform - Motorola.

The very big phone makers like Nokia and Samsung can afford to maintain their own operating systems (Symbian and MeeGo for Nokia, Bada for Samsung). Nokia sells more than a million phones every day and Samsung sells three quarters of a million daily. Recognise that the total global shipment number of Windows-compatible personal computers never shipped a million computers per day for any quarter. This is the scale we need. Compare that with the likes of SonyEricsson, Motorola and Apple who sell about 90,000 new phones daily. At those levels the development costs associated with an operating system are very steep. Yes it can be done, if you are very profitable, with a very desirable superphone - like Apple with the iPhone or perhaps like RIM with the Blackberry - but for how long.

SO WHO WINS?

I am not saying we'll know the winners in this year or the next. But I do suggest that the battle for the smartphone OS today, is a battle for this decade and the next, not just for this quarter and the next. There will be winners, and the power of an Android or Symbian (and Nokia's evolution path to MeeGo) or Bada is far far more than that with Palm/HP or RIM or Apple iOS or even Microsoft Phone 7. This battle did not start in 2007 when the iPhone launched, nor in 2009 when Android launched. The battle started a decade ago. The iPhone is a blip on the radar and is meaningless in the long war for the OS. We have recently seen newcomers join the battle, but there was a time when Microsoft's Windows Mobile powered 3 out of every 10 smartphones. There was a time when Palm was the world's second bestselling smartphone. There are new rivals today, but the smartphone was invented by Nokia. The giant of smartphones, when Palm challenged it was Nokia. Palm died in that contest. The giant when Microsoft challenged for the smartphone market was Nokia. Microsoft lost its 2nd place and is today lingering in 5th place. The giant when RIM challenged for it, was Nokia. RIM growth has stalled and is now on a plateau or even declining. The giant when Apple challenged it, was Nokia. Apple's iPhone reached its peak market share in 2009 and is now in decline. Now the newest challenger is Android.

Differing from Palm, RIM and Apple, Google has built an army to challenge Nokia's Symbian army. Android has a far better chance than Palm or RIM or Apple did, when taking on Nokia and the Symbian army, by themselves. Android has a legitimate chance and is showing its muscle today. And Microsoft is trying desperately to make a return to the battle - the first Xbox was not a big global success but Micrsoft stayed in the game and the second generation Xbox did a lot better. Microsoft Phone 7 also has an army of manufacturers supporting it. Don't count Microsoft out of it.

The world undefeated heavyweight champion of the smartphones market share world battle is Nokia with Symbian. They are the champion who has to be defeated if you want to take the heavyweight 'belt' of the champion. You have to knock them out to take it. Apple, RIM, HP/Palm and the Japanese Linux Mobile platforms don't have any chance of the scale to even step into the title bout (and Microsoft's Windows Mobile has bowed out of the contest). Sooner or later some of these proprietary platforms will be terminated as too costly to maintain and develop. These makers will sooner or later join one of the major platforms.

The three real contenders to Nokia/Symbian/MeeGo throne are Google Android, Samsung Bada and Microsoft Phone 7. The size of the mobile phone market is so huge and growing so fast, that its quite possible to be viable for several years with just a fraction of the global market. But the phone makers will also make their bets and are likely to reduce the number of platforms they support, rather than increase the number. Motorola has already cut its support away from Microsoft (and focus on Android). SonyEricsson is said to consider a similar cut (to quit either Microsoft or Symbian or both, and focus on Android). Samsung will probably put most of its efforts to support Bada (and try to recruit some partners to the platform). Meanwhile Nokia will struggle with a complex dance of migrating Symbian smartphones to MeeGo, similar to how Microsoft shifted from DOS to Windows in the late 1980s and early 1990s. This transition will be costly and Nokia will be vulnerable in that transition which will take half a decade in time, probably.

The key point to remember is that we are examining a battle royale among smartphone platforms, not among individual phones. It matters not one iota who makes the best single phone at any one point in time. Profit matters only to the degree that the platform supporters are able to generate profits to some degree to remain in the race - the question of who makes the biggest profits is irrelevant. Remember the Sony Betamax lessons with being best and being most profitable.

What matters is scale. Scale driven by low price. Scale driven by an army of partners and suppliers. If you have an installed base of dumbphones - you have to be successful in converting dumbphone owners to buy your smartphones. And as this is not an open contest with 'fair rules' where the best value to the consumer will win the market success - this is an 'unfair' contest where carrier relationships will determine disproportionately who wins and who loses. In this race the handset makers have to cater not to consumers, but to the carriers. They are very few, they have all the power, and they will punish you for years, if you anger them now.

That is why I am following the smartphones bloodbath with such interest this year. This is the most dynamic time in smartphones, when for the first time ever we have 10 platforms for smartphones and at one point in this year we had 24 Global Fortune 500 -sized companies committed to offering smartphones. I said the the competition would be too intense, that the blood would run and we would see many twists and turns in the wars this year. So far Palm went bust, and so far Google, Microsoft and Vodafone have quit the smartphone manufacturing business. But the platform war continues. I will keep you posted.

 

 

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