The Mediatek Phenomenon: the new smartphone disruption

[The next smartphone disruption comes not from the power struggle between Apple, Google and Amazon, but from silicon. Guest author Jay Goldberg analyses the Mediatek phenomenon and discusses how the smartphone power basis is moving further down the stack]

The ‘platformisation’ of basebands

The word “platform” gets used often in the mobile business. It is a heavily loaded term, which gets thrown around a lot, up there with ‘cloud’ and ‘open’ in terms of repeated, overused terms. Despite this linguistic abuse, there is still a lot of value in having an actual platform. Businesses seek to build platforms to create some form of lock-in. Use one platform and it can become hard to move off it, creating repeat business for its owner. A platform can block out competitors, bind customers in and create valuable partnership opportunities. Continue reading The Mediatek Phenomenon: the new smartphone disruption

The Tortoise and the Hare: The tale of Android evolution

[Android is moving too fast with software releases – too fast for the smartphone ecosystem to follow. At the same time, Android is moving too slow, as CE vendors are taking it outside of its mobile comfort zone with the introduction of form factors from tablets to in-car terminals. Guest author Tsahi Levent-Levi outlines the market forces straining the Android ecosystem and Google, as it moves away from smartphones to additional devices.]

Android evolution pic

Android is all the rage these days. In my meetings and correspondences with consumer electronic vendors around the world it is as if they have totally forgot about the “old“ “embedded operating systems” – pSOS, VxWorks, MontaVista, Nucleus, OSE, or any of the Linux and Unix variants that people have been using for years now.

While there are a few Meego strongholds and some Embedded Linux developers, most of the market has shifted to using Android. And it’s not just about mobile phones. It’s televisions. And tablets. And media phones. And set-top-boxes. And DECT phones. And DVRs. And Digital Picture Frames. And In Car navigation and entertainment systems. Every device that has a screen is now a prime suspect for migrating to Android.

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Chipset vendors have taken notice of Android. Chipset vendors who aren’t catering for mobile devices had no Android in their near future for plans for early 2011. That was 3 months ago. Today, these chipset vendors are joining the bandwagon and are updating their roadmaps and strategy by embracing Android – they have figured that it is better to join the club than to fight the tide.

The Hare: Moving too fast
While this is happening, Google is shifting gears. In 2010 they have shortened the release cycles for many of their products and are raising a new challenge to companies who wish to stay ahead of the game and compete in the market.

With 5 or 6 releases of their operating system in a single year, it may seem that Google is moving too fast with Android. While that is definitely true, Google and Android are also moving too slow at the same time.

Android Version Release Timeline

If you look at the mobile handset arena, Google is definitely not waiting for anyone.

The sheer amount of releases places handset vendors in an uncomfortable position of being unable to follow suit. Sony Ericsson released their Xperia X10 with Android 1.6 on August 2010. Dell out-did them with Dell Aero running Android 1.5 on August 2010. Older devices were launching with Android 2.1: Motorola Droid X released on July 2010 and HTC EVO released on June 2010 are such examples.

At the same time, Google has had to cope with different implementations of their API set for developers by the different handset vendors through their CTS (Compatibility Test Suite) program.

These changes between Android versions are not only additions – some of them are infrastructure changes that affect developers and break compatibility across versions. Take for example the addition of Stagefright – a new media framework released alongside OpenCore in Android 2.2 – will Google be keeping OpenCore moving forward or will they deprecate it in future releases?

Andy Rubin, VP of Mobile Platforms at Google said in an interview that their launch cycle “will probably end up being once a year when things start settling down”. Is that going to happen any time soon with iOS innovations and the introduction of Windows Phone 7? Unlikely.

The Tortoise: Moving too slow
On the other hand, Google hasn’t been able to address the hockey-stick market demand for the Android platform.

Back in 2007, Google created the OHA (Open Handset Alliance) consortium as a governance framework where Google could establish handset compliance requirements and thereby run the show (see their CTS and CDD requirements recently published. Following the same philosophy, they set up Google TV for Android-powered televisions. The next product category that Google will focus on will be tablets. But what about in-car systems, set-top boxes or media phones? Enter the OESF.

The OESF (Open Embedded Software Foundation) is an open alliance formed in Japan and active throughout Asia Pacific. It is the first non-Google consortium initiative for Android. Its charter is to define new API sets that cover the products that Google doesn’t. In that regard, the OESF has already introduced its own Market Place SDK and is making strides in areas related to home networking, VoIP communication, security stacks, automotive and more.

Google have decided in the past that tablets should be running their Chrome OS – a networked based operating system – and not Android. They also stated that vendors should wait for Honeycomb Android release and not use FroYo or Gingerbread for tablets. Vendors have not been convinced, preferring to use Android instead, with its currently available version. In September 2010, during IFA Berlin , a slew of new Android-based tablets have been introduced: Toshiba Folio 100, E-Noa’s InterPad Android tablet, Elonex eTouch tablet, ViewSonic’s ViewPad 7, Archos’ tablets and Samsung’s Galaxy Tab. Deutsche Bank’s Jonathan Goldberg has compiled a list of 30 tablets planned to launch by the end of this year alone.

The Samsung Galaxy Tab released to the market with much fanfare last month is the first Android tablet that comes from a large vendor and backed by Google through its Android Market. This clearly shows Google’s new stance with tablets. The application layout issues that are expected with this tablet due to different resolutions than those available on mobile phones are going to cause headaches to both users and developers in the short term.

Factor into it the growing hype in China around Android and we are bound to see innovation happening out of Google’s campuses around Android.

Will these issues be solved in Android’s next release – Gingerbread, or only in the one after that – Honeycomb? Will Google try pushing vendors to Chrome OS instead for tablets? These open ended questions show how slow Google is in addressing non-smartphone markets.

This issue of form factors is the second dimension of Android’s fragmentation. There are three more dimensions: implementation fragmentation, user experience fragmentation and codebase fragmentation. If Google wants to retain their control over the Android platform, they will need to solve all of these five dimensions of Android fragmentation.

The crystal ball
Google is moving fast with Android and at the same time are trying to solve fragmentation issues of their platforms: they are working hard on reducing the amount of handsets running older versions of Android, they are trying to solve implementation fragmentation with their CTS suite and they are now focusing on user experience issues.

It is not going to be enough. The Android platform has captured CE vendors of all types. Any device requiring a user interface to operate is either moving to Android or will move to Android soon. By ignoring these devices, Google is leaving a wide door open for other vendors and organizations to cater for their needs: the OESF are doing that on the standardization front, while new entrants to this market such as Amazon may become the ones providing the application stores for such devices.

At the end of the day, Google will be able to focus and control a relatively small number of form factors: smartphones, televisions and maybe tablets. The rest of the market will be using the Android platform without Google’s direct assistance and control; we should see other application stores enter this market, which is a genuine opportunity for the likes of the Amazon app store (Android-based, white label Kindles, anyone?) and all the other service providers out there to compete with Google’s services on Google’s own home turf.

– Tsahi

[Tsahi Levent-Levi is Director of Technology and Solution at Radvision. He has been involved with the mobile video telephony market for 8 years, dealing with design, development, standardization, interoperability and marketing of such technologies. You can follow him on twitter or through his personal blog at http://blog.radvision.com/voipsurvivor/.]

Waking the Dragon: The Rise of Android in China

[Android is leading the smartphone revolution in Western Markets. But what about China, the country with the biggest mobile user base? Guest author Hong Wu analyses the state of Android in China – from chipset vendors to software developers – and how the dragon is waking up.]
The article is also available in Chinese.

The Rise of Android in China

HuaQiang Road, ShenZhen, GuangDong, China, an ordinary weekend.

At 10 o’clock in the morning, there are few pedestrians around. Sanitation workers are cleaning up hundreds of deserted mobile phone packages and plastic bags near mobile phone supermarkets, along with bundles upon bundles of mobile phone manuals, and even a few dozens of broken CDs, with labels showing clearly the words “HTC” or “SonyEricsson”.

Clerks in more than a dozen bank branches on HuaQiang Road and ZhenHua Road are busy refilling cash into their ATMs. In the next 5 hours or so, those bank clerks and ATMs will be responsible for hundreds of millions of Yuan in cash transactions. Yes, cash and stock products are the rules of transaction here. This commercial business district, often called as “HuaQiangBei” (or north of HuaQiang), is the strike-it-rich spot for many poor grassroots classes in ShenZhen. This neighbourhood has become the global hub for consumer electronics.

Android has recently become the hot topic within HuaQiangBei district. Sales figures of Android phones have been climbing on a daily basis at YuanWang Digital City. Most of these Android phones use Qualcomm’s chipset, while only a few of them run a chipset that’s made in China.

Nearby, at MingTong Digital City, one can find heaps of ShanZhai (山寨) mobile phones on sale (ShanZhai refers to Chinese imitation and pirated brands and goods, particularly electronics). There only a few Android phone models on display, but customers keep coming back asking for more. In the meantime, the software engine that powers ShanZhai smartphones has shifted from Windows Mobile to Android, and most of they are using chipsets that are made in China.

A 15-minute drive from HuaQiangBei business district, at CheGongMiao business district, are the headquarters of dozens of mobile phone design companies, who are in the midst of the mobile food chain. On a daily basis, engineers here crank out some very exotic prototype phones using MediaTek’s chipset solutions. Since 2009 when Android caught fire, sales guys from MediaTek, HiSilicon, Rockchip, Actions-Semi, and other chipset vendors are arriving day after day, hoping to sell their solutions and get a piece of the pie from the Android revolution.

Once an Android-based white label design is out, the phones will be manufactured in factories at Bao’An ShenZhen and LongGang districts. The plastics are then stamped with the right retail brand stickers, and put on the shelf at the consumer electronics crossroads that is HuaQiangBei.

The MediaTek powerhouse

MediaTek (MTK) sells between 300 to 400 million chipsets a year for 2G handsets, and is the predominant force behind low cost phones in China. MTK’s foray into the smartphone market began in February 2009 when they released the MT6516 design, at that time based on Windows Mobile 6.5 OS. MT6516 is a dual core solution; the application processor is an ARM 9 running at 416MHz, while the baseband processor is an ARM 7, running at 280MHz, supporting 2G (GSM/EDGE). This solution suffers somewhat in terms of performance when compared to the Qualcomm’s MSM7200, but its BOM is lower.

One step up, the MT6516 deluxe version includes a 2.8” QVGA resistive touch screen, 2MP camera, GPS, WiFi, and Bluetooth silicon, with a quoted wholesale price of $90. The basic MT6516 version with no touch screen or camera is quoted at $60. Note that approximately $10 of that quote goes towards the Windows Mobile license fee. In other words, expect prices to go down considerable with an Android design.

Despite its market mussle, MediaTek didn’t anticipate that the Android revolution would arrive so soon. For example, MediaTek didn’t join OHA until 2010 while the first MTK Android handsets are just making their first steps into the Chinese market (there is a rumour that a leading Android OEM had earlier veto’ed MTK’s entry into the OHA to avoid price competition).

TongXinDa in ShenZhen has been the first ODM to release an Android phone based on MTK’s MT6516 solution, the “TongXinDa TOPS-A1”. The phone boasts unique features such as dual SIM cards (both GSM and CDMA, and both at active states), a dual boot system (Windows Mobile 6.5 and Android 1.6 both stored in ROM) with 256MB RAM and ROM, and a 400×240 screen resolution. The phone ad is shown below (note that the HTC logo is a fake).

But these are just the first steps of Android as it awakes the Chinese dragon. The full MTK Android 2.1 solution won’t be out in mass production until the end of 2010.

More competition at low-cost Android phones

Rockchip, a design vendor based in FuZhou, China, showed its RK28 solution at HongKong Electronics Show in 2010, focusing on Android tablets and smartphones.

Rockchip is a homegrown chipset design company which conquered the market of MP3 portable media players with its RK26 and RK27 series. In 2009 Rockchip announced its foray into smartphone business with the RK2808 Android solution, but was not widely adopted due to chip heating problems and performance issues.

In a second effort at the smartphone market, Rockchip released its RK2816 solution in 2010, running on an ARM 9 application process at 600Mhz and an NXP baseband chip. The RK28 series is not as tightly integrated as MTK’s MT6516. MTK put both applications and baseband into one single chip, while RK28 used Infineon for their baseband. RK28 series’ advantage lies at its inheritance of multimedia technologies from Rockchip, with hardware decoding of 720p H.264 video.

Rockchip’s RK28 design has been taken up by Ramos (Blue Devil) to power an smartphone device under the model name W7. The device runs Android 1.5, sports a 4.8” 800×480 resistive touch screen, and is intended as competitor to iPod Touch, with a focus on video media playback features. BuBuGao is another OEM planning to deliver cheap smartphones using the RK28 solution.

In the tablet space, Actions-Semi has been designing a new chipset based on the mISP 74K kernel, running Android 2.1. Marketed under the EBOX moniker, the company aims to head-to-head competition with the iPad with support for H.264, MPEG-4, DivX and Xvid hardware decoding at up to 1080p resolution. Such specs are unheard of among current Android solutions.

Around five years ago, phones based on MTK chipset shook up Chinese cellphone market that was dominated by Nokia, Motorola, Samsung and other local brands like Bird, TCL and XiaXin. MTK enabled phones to be sold at very low prices while still boasting advanced features, including exotic ones like eight stereo speakers or 365 days of standby battery life.

Today, most local brands are gone, and the remaining few have reverted to using MTK chipsets for their phones. International OEM brands have to slash prices on their mid-end to low-end phones in order to compete in this fierce cellphone market. MTK’s entry into high end smartphones using Android may certainly repeat the history we witnessed five years ago. Android phones running FroYo selling for under $100? Maybe just a few months away.

Android Developers in high demand

With such a rapid growth of Android-related activities, Android developers are in hot demand today in China. A 2-year Android pro can command up to 20,000 Yuan (close to $3,000) per month; whereas a 10-year J2EE veteran makes probably the same salary if not less. Companies, big and small, are busy scouting for Android talent, but challenged due to the small pool of qualified engineers.

At ifanr.com we recently conducted a survey, with the help of the China Android Dev group (over 1,400 members, 18,000 messages, the largest and most active discussion group for Chinese Android developers) to capture the demographics of Android developers in China. Our survey received over 500 valid responses with some revealing insights into the state of Android developers in China:

In terms of demographics, over 80% of respondents are between 20 to 30 years old, while another 10% is between 31 to 35 years. These are pretty young and dynamic groups of developers.

When asked about how many years of mobile development experience they have, close to 40% are just getting started. And another close to 50% of respondents are within 0-2 years of experience, which is to be expected, given that Android is a two-year-old platform.

In terms of their role in Android development, 37% of survey respondents are part time developers, while over 40% are professional developers. Only 10% are students while about 15% are still holding out to see how Android progresses.

It’s also worth pointing out that over 60% of respondents are individual developers, a.k.a. one-man teams, while over 90% work in teams made up of less than 50 developers. There are companies with more than 100 developers, mostly likely big telecoms like China Mobile, as well as handset manufacturers and design houses.

Given that we targeted Android developers, almost 80% of respondents have developed on Android. We also see healthy shares of iOS, J2ME, Windows Mobile, and Symbian. Based on current trends, we can foresee Android and iOS commanding larger market share going forward, while J2ME, Windows Mobile and Symbian share will shrink further.

Over 45% of respondents have not yet published apps on Google’s Android Market. This is mostly because Android Market and Google Checkout do not yet support Chinese regions. This is a well known issue; there is a large number of developers in China wanting to publish apps onto the Market who can’t; for example many of them have to set up an overseas bank account in order to register and pay for the Market registration fee. It’s a major hassle for individual developers, and where hopefully Google has a mitigation to offer in the near future (PayPal integration perhaps?).

In terms of revenue models, about two thirds of paid apps are using ad banners, while the other one third are using pay-per-download according to the results of our survey. As for the types of ad networks used, Google AdSense comes out on top with nearly 50% of votes. AdMob comes in second with nearly 30% votes. Wooboo, Youmi, and Casee, ad networks from China, are also making strides here.

The level of satisfaction from app revenues is evenly distributed, with 20% of respondents saying they are not doing well and losing money, and 18% saying they are extremely satisfied and doing well or optimistic about the future (the rest 60% is for people who do not make money from apps).

In terms of go-to-market channels, Google’s Android Market tops with more than half of the share. China Mobile’s Mobile Market (MM) is also popular among developers. MOTO SHOP4APPS is surprisingly getting 5% (or 10% among the ones submitted).

Overall, Android has seen explosive growth in China. More and more developers are joining the ranks daily. However, due to the limitations of Android Market and Google Checkout in China, many developers are turning to alternative markets and payment gateways.

In the operator camp, China Mobile is making a big splash trying to woo developers onto its Android-variant, the OMS/OPhone platform. HTC and Motorola are also pushing their own app store agenda.

The Android ecosystem in China is still a sleeping dragon, but is waking up day by day. There will be more ad networks, more app stores, and more payment gateways coming out in the foreseeable future before consolidation moves in. Android in China is probably at its most exciting stage right now.

– Hong

[Hong Wu is a seasoned mobile app developer based in Silicon Valley, US. He’s currently building an awesome product that hopes will make TVs enjoyable again. He’s also a core member of ifanr.com, the leading new media blog site in China that focuses on mobile Internet industry, smartphones, gadgets, and exciting startups in China. You can contact Hong at lordhong /at/ gmail.com or follow @lordhong on Twitter.]

The Wintel future for mobile: a wake up call for network operators

[The PC-esque commodisation of the mobile industry has been prophesied many times before, but never before has it become so lucidly clear. Research Director Andreas Constantinou uncovers the dynamics of the mobile industry that will lead to a Wintel future, and the impending disruption to the network business model]

We ‘ve all heard this before. The story of the bit-pipe future for mobile networks/carriers and the threat of Google and Facebook to the mobile industry status quo. But this time the facts are clear; the dice has been cast and is pointing to a Wintel future for the mobile industry. Bear with me – this is a long argument.

The virgin years of mobile
The mobile industry has rapidly evolved through two decades:
– 1990s growth: The 1990s was the decade of unrestrained growth, building up huge empires on thin air (a.k.a. radio spectrum). Operators invested on building networks with worldwide reach, on increasing spectral efficiency (more bits per pipe, setting 2G to 3.5G standards) and snapping up new subscribers
– 2000s competition: The 2000s was the decade of competition, reality check and disillusionment. Operators invested in competing with more complex tarriffs, deeper device subsidies, unique devices (custom or exclusives) and bundling fancy services on the device (from mobile TV to myFaves and social networking).

Next up: survival
The 2010s decade is about survival. It’s no secret that ARPU (average revenue per user) has been dropping for the last few years, and the much-promised data services have failed to deliver. Plus networks are threatened by the establishment of over-the-top services like OEM-own services (Apple App Store, Nokia Ovi, Sony Ericsson PlayNow, RIM Blackberry services), the entry of alternative payment providers (Apple iTunes, Paypal Mobile, Google Checkout), alternative voice providers (Skype, Google Voice) and of course the myriad of social networking services (epitomised by Facebook and Tencent).

So, how are operators differentiating today beyond tariff games?

Investing on device subsidies: Network operators are spending big money to snap high-spending customers away from their competitors; for example investing 300-400 EUR on the top models from RIM, HTC/Google and Apple (case in point: Orange France). The subsidies are recouped back from such customers in around 9 months, but without factoring in the disproportionately high cost to the network, where the cost increases linearly per-MB consumed. All this, for a short-lived advantage, no stickiness to the network. Worse than all – operators are pouring marketing and subsidy investments into the same companies – including Apple, Google and RIM – that aim to commoditise their network.

Selling broadband Internet dongles and mobile WiFi (MiFi) hotspot devices at flat-rate bundles that aim to drive revenues, but at the same time lead to surging network OPEX costs. To appreciate this irony, consider that operator marketing budgets are never linked to the network infrastructure OPEX budgets; and so marketing groups may spend away into fancy deals, while resulting in alarmingly high network costs, especially for network maintenance and upgrades. Operators are investing into the bit-pipe business without knowing how to monetise it.

Customising devices (a favourite pastime of operators) like Vodafone 360 and Orange Signature that aim to deliver own services on the mobile, while limiting the experience to high-end devices. Although 360 has some strategic attributes (locking customer contacts into the network), its execution has been inefficient to say the least with a team of 250 people at Vodafone needed to launch the service (which could have been accomplished with perhaps 50 people in a software startup environment). Operators are pushing Internet brands to the forefront of the customer experience (see Skype promos from Three and Verizon) for a short-lived advantage of customer attraction.

To sum this all up; operators are investing in their demise, pouring money into the same Internet companies that aim to commoditise them into bit-pipes. Worst of all is they ‘re drawn into a inward spiral, a black hole that is near impossible to escape from; as an operator, if you don’t have the latest devices and cheapest tariffs, your competitors will.

The loss of control points
The situation is much more dire, as the current balance of power in the mobile industry is about to be shaken up. Operators control around 70% of the mobile industry pie of $1 trillion, thanks to three very important control points:

device subsidies: operators (with few regional exceptions) pour large marketing budgets into promotions and device subsidies, thereby in effect dictating terms to their handset suppliers. Only Apple has been able to challenge this status quo to date, but on a tiny 2% of the mobile market. Yet, a new disruption is appearing in the form of Android that might extend to well beyond a tiny market share, to significantly drop retail price points and render subsidies meaningless (more on this Wintel phenomenon later).

mobile termination: by design, mobile operators are the exclusive gateway to reaching any specific subscriber. That’s how operators have been able to charge ridiculously high voice and roaming charges (incl. receiver pays model). However, mobile termination is slowly coming under threat as more and more services are being delivered over the network like social networking and VoIP, while flat-rate tariffs for mobile Internet is becoming the norm. Consider that Google might at some point offer free voice calls amongst Android device users. It’s a question of when, not if. But abstracting the service from the underlying network carrier, the service providers assume the mobile termination gateway role, by acting as the service transport across networks and devices.

payment broker: The premium SMS boom is the best example of how operators have leveraged their billing relationship outside their network, charging often 50-60% commission for reverse billing, i.e. the ability to charge users for a ringtone, game or televoting from their mobile phone bill. Yet, Internet players are now carving up their niche into the operator-own game in the form of Apple App Store (no doubt to be transformed into a payment gateway for third parties) followed by Paypal Mobile and Google Checkout.

Wintel and the Google game
A very important change in industry dynamics is underway. Google’s Android has morphed from a feared entrant to a loved ally, with all handset manufacturers (except for Nokia) investing in Android-powered handsets thanks to Android’s low cost of creating a differentiated handset. In parallel, chipset vendors led by Qualcomm and Mediatek are rolling out out-of-the-box solutions that pre-integrate hardware + a software platform + applications (e.g. Android Market), that can be easily differentiated in both plastics and UI.

These out-of-the-box solutions will rapidly decrease in price led by the impending price competition amongst chipset vendors (led by Mediatek exports) and the advancement in silicon manufacturing (with sub-40nm chips squeezing smartphone capabilities in feature-phone price points). Combined with Android (low cost of UI differentiation + bundled apps market so incremental revenue) this should lead to a diversity of Android-powered phone at $100 retail price points in the 3-year horizon. This is a game where Asian mobile and consumer electronics manufacturers will gladly play, by creating low-cost, on-demand phone + service solutions for media brands and operators.

This is the Wintel game of the PC industry, making its appearance in the mobile industry; only the title of ‘Intel-inside’ is still up for grabs. What’s more, with smartphone prices at $100 dollars, the operator subsidies are going to become meaningless, in effect creating a handicap for network operators and a sudden loss of negotiating power. The tables are slowly turning.

What about Symbian and Windows Mobile, you might ask? We believe Symbian will become a Nokia-only operating system (more this on a future post), while Windows Mobile is driven by short-lived motivations today (a fresh UI and an operator interest in it), which can easily be delivered by Android, once UI design and technology firms release customisable layers on top of Android (something that Ocean Observations is hinting to be working on with Brandroid = Brand + Android).

What about Apple, Nokia and RIM; the few tier-0 handset OEMs that have developed vertical propositions (from hardware to services) will still be able to command premium prices; making this so very similar to the PC industry where you can buy an Apple computer at premium price or get the same functionality for half the price in a PC clone.

The shock to the operators will be like the shock that the music industry got when they woke up one day and realised that the Internet has disintermediated their brick & mortar business model.

All is not lost
Operators can still get their act together. It’s rare that operators have invested in long-term strategy – see Orange’s investment in mega-SIMs in 2007 (albeit betting at the wrong standard). And there might be the odd operator that has the conviction and foresight at the management level to achieve such long-term planning. We ‘ve long advocated that operators should platformise (read: Network-as-a-Service) while creating new control points and meaningful brand deliverables – for a brief analysis see our Mobile Megatrends 2010 deck, especially the chapter on ‘new smart pipe strategies at the intersection of brands and consumers’. Or drop us a line.

Comments welcome as always,

– Andreas

Demolition Derby in Devices: The roller-coaster ride is on

[The economic realities will lead to a roller-coaster ride that will shake up the mobile industry. Guest blogger Richard Kramer talks about the impending price war, the implications for industry growth, and how this will alter the landscape of device vendors in the next decade]

With all the discussion of technology trends on the blogosphere, there are some harsh economic realities creeping up on the handset space. The collective efforts of vendors to deliver great products will lead to an all-out smash-up for market share, bringing steep declines in pricing.

In November 2009 I wrote a note about what Arete saw as the impending dynamics of the mobile device market. I called it Demolition Derby. This followed on from a piece called Clash of the Titans, about how the PC and Handset worlds were colliding, brought together by common software platforms and adopting common chipset architectures. As handsets morphed into connected devices, it opened the door for computing industry players, now flooding in.

New categories of non-phone devices
A USB modem/datacard market of 70m units in 2009 should counted as an extra third of the smartphone market, as it connected a range of computing devices. By the end of 2010, I believe there will be many new categories of non-phone mobile devices to track (datacards, embedded PCs, tablets, etc.), and they may be equal to high-end smartphone market in units in 2011.  Having looked at the roadmaps of nearly every established and wannabe vendor in the mobile device space, I cannot recall a period in the past 15 years of covering the device market with so many credible vendors, most with their best product portfolios ever, tossing their hats in the ring.  I see three things happening because of this:

 

1. First, a brutal price war is coming. This will affect nearly every segment of the mobile device market. Anyone who thinks they are insulated from this price war is simply deluded. I have lost count of the number of vendors planning to offer a touch-screen slim mono-bloc Android device for H2 2010. The only thing that will set all these devices apart will be brand, and in the end, price.  Chipmakers – the canaries in the handset coal mine – are already talking about slim HSPA modems at $10 price points, and $20 combined application processors and RF. Both Huawei and ZTE now targeting Top Three positions in devices, with deep engagements developing operator brands. They are already #1 and #2 in USB modems.  Just look at the pricing trends ZTE and Huawei brought to the infrastructure market; this will come to mobile devices.

2. Second, growth will rebound with a vengeance. I expect 15% volume growth in 2010, well ahead of the cautious consensus of 8%.  I first noted this failure of vision in forecasting in a 2005 note entitled “A Billion Handsets in 2007” when the consensus was looking for 6% growth whereas we got 20%+ growth for three years, thanks to the onset of $25 BoM devices. Consumers will not care about software platform debates or feature creep packing devices with GHz processors in 2010. Ask your friends who don’t read mobile blogs and aren’t hung up about AppStores or tear-downs:  they will simply respond to an impossibly wide choice of impossibly great devices, offered to them at impossibly cheap prices.

3. Third, the detente is over. The long-term stability that alllowed the top five vendors to command 80% market share for most of this decade is breaking down.  This is not simply a question of “Motorola fades, Samsung steps in” or “LG replaces SonyEricsson in the featurephone space”.  Within a year, there could be dangerously steep market share declines among the former market leaders (i.e. Nokia) to accompany their decline in value share. Operators are grasping control of the handset value chain; many intend to follow the lead of Vodafone 360 to develop their own range of mid-tier and low-end devices. Whether or not this delivers better user experiences, operators are determined to target their subsidy spend to their favourite ODM partners. In developed markets, long-established vendors are getting eclipsed: in 2010, RIM or Apple could pass traditional vendors like SonyEricsson or Motorola in units. RIM and Apple already handily out-paced older rivals in sales value, and with $41bn of estimated sales in 2010, are on par with Nokia.

Hyper competition
So where does this lead us? Even with far greater volumes than anyone dares to imagine, there is no way to satisfy everyone’s hopes of share gains, or profits. With Apple driving to $25bn in 2010 sales and Mediatek-based customers seeking share in emerging markets, the mobile device market is entering a phase of hyper-competition. It is all too easy for industry pundits to forget that Motorola and Sony Ericsson collectively lost over $5bn in the past 2.5 years. More such losses are to come.

Never before have we seen so many vendors acting individually rationally, but collectively insane. Albert Einstein once famously said that “the defintiion of insanity was doing the same thing over and over but expecting a different result”.

The men in the white coats will have a field day with the mobile device market in 2010.

– Richard

[After four years as the #1 rated technology analyst in Europe, Richard Kramer left Goldman Sachs in 2000 to form an independent global technology research group. Arete has 10 years experience dissecting the financials and industry trends in  semis, software, devices and telecom operators, out of offices in London, Boston, New York and Hong Kong. Richard can be reached at richard [dot] kramer [at] arete.net]