The Next Round of Smartphone Disruption

• 408Views
• 51Likes

Take a casual glance at the smartphone market today, and you could be excused for thinking that the once fierce war between tech giants is grinding slowly towards a stalemate. The Android ‘empire’ dominates the battlefield, led in large part by Samsung, but Apple holds tenaciously to the high ground (read: high profits) with iOS, facing no apparent threats to its stronghold. Consequently, four out of every five US smartphones are either an Apple or a Samsung device, and Android and iOS combined make up over 95% of the OS market.

It’s hard to imagine anything that could overturn such dominance. But if history tells us anything, it’s that the smartphone market is highly unpredictable and regularly disrupted by the entrance of new technologies and competitors.

Change is a Constant

To illustrate the point, take yourself back 10 years: Your first forays with a smartphone were likely with a Palm (in the US) or a Symbian device (in Europe). Or perhaps, like me, you doggedly battled with an unreliable Windows brick and its clunky stylus-based interface. Soon enough, we all dropped those first attempts to get our hands on a BlackBerry, which a couple of years later was overshadowed by the launch of the iPhone in 2007, and subsequently the rise of Android as a true force in 2010-11.

In 10 short years, we’ve seen the rise and fall of at least six dominant operating systems and countless associated OEMs. So if change is a constant, what does the future hold? And more importantly, when can we expect the next round of disruption to begin?

The Race to the Bottom

It already has. The global smartphone market is moving rapidly beyond its emergence era. Once driven forward with frenetic energy by iconic devices such as the Apple iPhone and Samsung Galaxy models, the market is now entering a new phase of maturity that will bring some significant transformation through commoditization. We’ve seen this all before with laptops, netbooks and feature phones, and we are about to witness it again with smartphones: The coalescing around a dominant OS, a general slowing in innovation and feature releases, and the remake of devices in so many permutations and from so many manufacturers that the product becomes fully commoditized, with the only remaining differentiation being price.

So begins the race to the bottom, where cheaper hardware and razor margins will ultimately win the day. Perennial challengers such as HTC and LG have been wilting under the pressure for some time now, and the next big player to stumble may well be Samsung. Sounds improbable? Pause for a moment, and consider some recent news highlights:

• While Samsung still dominated global smartphone shipments in Q1 2014 with a third of the market, six of the top 10 manufacturers are now Chinese OEMs (versus zero just four years ago), and all of them are growing significantly faster than Samsung.
• In China itself, Samsung is being pushed out by upstart challenger Xiaomi, a company that was only founded in 2010. Spearheaded by its $120 RedMi device, Xiaomi outsold Samsung in Q2 this year, with nearly a third of its buyers being Samsung switchers.
• The success and growth of these upstarts is not limited to China. While Xiaomi is expanding rapidly in SE Asia, Shenzhen-based Gionee is focusing on India, capturing 5% market share within a year of entering the market, and predicting 6X growth for 2015. To say nothing of the strong global presence enjoyed by better-known Chinese manufacturers like Huawei and ZTE.
• Samsung is now starting to feel the impact. In Q3, at the same time as Apple was selling 10 million new iPhone 6's in its launch weekend, Samsung reported a 20% decline in overall revenue and a 74% decrease in profits within its mobile division..

Of course it will take some time for Samsung’s market dominance to erode. But what is certain is that Samsung now finds itself squeezed on the one side by commodity hardware, and on the other by a software partner that doesn’t particularly need Samsung to maintain its own success. This severely limits software-based differentiation, forcing Samsung to increasingly compete on price—and it need only look to HP and Dell to understand how that story ends. Indeed, it turns out that smartphones really are a lot like PCs: The hardware maker with its own operating system is dominating profits, while the rest eat themselves alive to the benefit of their software masters.

Hello Moto (again)

This is all rather good news for one manufacturer: Lenovo. The Chinese tech giant just bought Motorola from Google for $2.9 billion (a steep discount from the $12.5 billion that Google paid in 2011), which includes the recently launched Moto X and Moto G handsets as well as more than 2,000 patent assets. This is highly significant, because Lenovo has a reputation for turnaround-by-disruption. It acquired IBM’s flagging PC business in 2005, and within a few short years had done the unimaginable, turning a throwaway business into a goldmine and surpassing HP and Dell to become the world’s #1 PC manufacturer.

In Motorola, it finds the beginnings of a similar story—an iconic brand fallen on hard times, but with many of its assets intact and awaiting a partner with the right design and manufacturing rigor to rejuvenate its fortunes. Lenovo is likely to be just that partner. Itself no stranger to smartphones (it’s the #4 manufacturer outside of the US), the acquisition of Motorola gives it brand recognition, entrée to the important US market, and deep relationships with the Western carriers.

If ever there was a threat to Samsung and the other Android-based OEMs, Lenovo is it—a proven winner in the commodity game, with pockets deep enough to fight to the death. It is noticeable that Google has taken $750 million of Lenovo stock options as part of the Motorola sale; it too is clearly betting on another Lenovo success story.

Content is King

While Lenovo and its Eastern compatriots are disrupting the low end of the market, the top end is not immune to change either. Amazon’s launch of its Fire phone in June represented a significant new entrant to the smartphone market, not purely due to the device features (although who isn’t intrigued by 3D interactions?), but more importantly because of the supporting ecosystem.

Apple has already proven that its ‘walled garden’ approach is highly engaging, sticky and profitable when the garden is lush with apps and content. Amazon is one competitor that can go toe-to-toe on that score, with a massive library of rich video and audio content backed up by Amazon Prime to deliver a value advantage. Sure, the Fire phone sales have been underwhelming to date, but like its tablet cousins, the device itself represents clear intent from the one-time book seller. But Amazon is surely not alone in wanting a piece of the high-value Apple pie, and we can expect one or two new entrants at the top of the market, likely originating from equally non-traditional sources. What is certain is that they will seek to avoid commoditization by offering compelling content differentiation with seamless availability across your personal connected device-scape.

Brand Love and the Ensuing Disruption

Tracking the smartphone market, staying abreast of breaking trends and predicting the next point of disruption is a full-time job for us market researchers. However, it is just as important to understand how consumers respond to these fast-moving changes and the impact on loyalty to the device manufacturer, the operating system and the wireless carrier.

In turbulent times, love is put to the test. With that in mind, Market Strategies recently published the results from the third wave of its “Brand Love” study, which looks to understand brand loyalty in telecom: what drives it, what changes are occurring and where the loyalty currently lies. Take a look at the headline results, or contact me to view the report and/or simulator.

from http://www.marketstrategies.com/blog/2014/07/the-next-round-of-smartphone-disruption/