The Changing Shape of the Smartphone Market and What it Means for Samsung and Apple

When I study data and trends in every major smartphone market in the world several points stand out. The first is the dramatic rise of regional smartphone players. Most of these players are coming from Asian markets due to regional manufacturing infrastructure. This article includes a list of the top 15 Asian handset makers who are, for the most part, focusing only on certain regions of Asia. This is a major trend and is one of the most fascinating to watch. It is also perhaps the biggest challenge for companies like Samsung and Apple who are the brands dominating the global smartphone market today.

The second major trend is related to the price bands where all the growth will come from in smartphones the next few years. Since we have, for the most part, saturated the total addressable market for smartphones in developed economies, the vast majority of the growth (over 80%) of the smartphone market will come from devices costing less than $150. When you combine the two trends I just described, you can see why these lower cost regional players are rising fast and worth paying attention to.

To Be Global, Think Regional

Be global, think regional. This will become the mantra for every global tech company selling products to consumers worldwide. I am becoming increasingly convinced a global brand strategy will work but a global product strategy won’t. Global companies like Apple and Samsung will have to be sensitive to the unique market dynamics of each region and, in many cases, offer products and services unique to those regions. As I study larger regions like China, India, Indonesia, Brazil, and even Africa, it becomes clear there are specific things that are popular and working in those regions not available elsewhere. More often than not these are regional services like micro-payments, search, and local commerce (transit, leisure, etc.). This is not to say these things don’t happen in developed markets, but the infrastructure is highly localized in many cases. For example, in developed markets credit cards are a common method to handle transactions but in many of these emerging markets, credit cards are not common. The key takeaway for companies looking to compete in this region is the necessity to support and integrate the vast diversity of highly localized services dominating these regions.

These local players are succeeding, and in some cases dangerous to the likes of Samsung and Apple, because they are focusing so heavily on localized services. This is a key point due to the economics of these regions. We are seeing business model innovation in handsets due to the extremely low cost of these devices. The OEMs know the money is not in the hardware but in the services upside. This is why, for example, it is not out of the realm of reality (and would not surprise me one bit) if companies like Tencent or Alibaba got into the hardware business with a smartphone or tablet in China.

The massive growth coming from the low end is driving companies to focus more on localized services. This is an attractive proposition since these markets thrive on local services. Companies willing to go out of their way to cater to these customers and their localized needs are the ones positioned to succeed.

Samsung and Apple

Although often compared, Samsung and Apple are in very different positions when it comes to these markets. Samsung has risen on the basis of their low end smartphone business. The premium category line of Galaxy smartphones is relatively new and not where the bulk of their mobile hardware revenue comes from. Nor is the Galaxy lineup where they see the bulk of their mobile device shipments. Samsung’s mobile group thrives from the low end in markets like China and India. Coincidentally, the exact same markets where these regional players are squeezing them out of that low end. I remain convinced Samsung can not and may not even want to compete in the low end any longer with these upstarts. It is a battle they can’t win, especially when they don’t have a services business model to get incremental revenue beyond the hardware.

On the other hand, they are shifting to become more of a premium player. This is why they are willing to spend billions of dollars on global marketing for the Galaxy brand. With just over 200m ((Creative Strategies estimates)) Galaxy smartphones sold to date, it is a slow but steady crawl. Samsung’s only hope is to develop into a premium hardware player. Whether they can create a services revenue model on top of that hardware is yet to be seen. Samsung is in the more precarious position of any company in my opinion.

Apple, on the other hand, has no intention of competing in the low end with the companies I mentioned. This is the right decision. So what is Apple’s play, if any, in these markets? The first is their continued investment to support local services. Apple has shown, with regard to China, they are investing in features in iOS and Mac OS X to integrate local and regional services. There is still more to be done but this is a good start. While Apple has stayed away from carrier billing, it happens to be the norm in many of these markets. Whether it is embracing carrier billing, or integrating better with a local payment services, it is in Apple’s interest to integrate with the transaction models that are the norm for the regions where credit cards are not standard. Apple can not just be a hardware company in these regions but must be in a position to monetize software and services within their ecosystem. Going beyond credit cards is the key in these markets.

While it is reasonable for Apple to not go toe to toe with these low end companies, the risk is in the business model innovation happening around them. Xiaomi is a good case study to continue to keep an eye on. They have managed their brand well. They sell affordable premium devices at cost but monetize services as a part of the platform. They have global ambitions as well. Today, they renamed their company to Mi in an effort to expand globally with a name much easier to brand than Xiaomi. Very smart on their behalf. This business model may very well represent the future of OEMs. Premium hardware at cost but tied to services is a model to watch in every region.

Bl0IGRgCEAASD46.jpg-large

I don’t think Apple is in nearly the precarious position Samsung is but I will wait and see how they adapt to the global trends at all levels of their business, hardware, software, and services. Global brand, regional strategies are the key.

Does Samsung need Adult Supervision in the US?

Not long after Eric Schmidt became CEO of Google, people around Google started saying with Schmidt in charge, Google now had adult supervision. At the time, the two Google founders, Larry Page and Sergey Brin, were barely out of college and, while great engineers, they did not have the business background to really take Google to the next level. Schmidt had come from Sun Microsystems and at that time had just left the role as CEO of Novell. Eric Schmidt’s track record at Google speaks for itself. Google is the biggest search company on the planet, continues to rake in record profits and is clearly one of the most powerful companies in the world.

Over the last 9 months I have actually become quite a fan of Samsung products. During the last two years, their designs have become more innovative and to my surprise their software prowess has increased exponentially. While many have criticized their Gear smartwatch, I personally really like it and use it daily. I did not think I would be a fan of any phablet but my use of the Galaxy Note Pro has changed my mind on this type of smartphone. It sits in my back pocket and while not my main smartphone, it is the one I use for surfing the Web, connecting to my Gear watch and, because of its large screen, is the book reader I use the most when mobile. I must admit as I age my eyes have trouble reading on a smaller screen, which is partly why a phablet sized screen appeals to me.

But I have become increasingly concerned with Samsung’s lack of understanding of the American market/culture and how to market within the US. If you were at the launch of the Galaxy S4 smartphone and Gear Smart Watch or saw it on video, you know how cringeworthy that event was. Using a Broadway-like show to introduce tech products and, even worse, creating scenes that were controversial for their demeaning women in the office and you had a disaster most of us will not forget. While the final decisions on producing this production and including these controversial stereotypes rested solely in S. Korea, how in the world did their US executives not question it and allow it to go forward as it was scripted?

A side note to this is I have been covering the PC and CE business for 35 years and can tell you horror stories of when tech companies tried to be cute and added theatrical twists when introducing new technology or new devices. Radio Shack’s use of a motorcycle and cop on stage to show off CB radios turned out poorly or when Sony brings Hollywood stars into their keynotes that have nothing to do with what is being introduced are just a few examples. Who can forget Intel’s use of the Blue Man Group in a CES Keynote? Their CEO at the time, Paul Otellini’s, interaction with them was lame. My recommendation to those doing tech introductions of products is to show off what the product can do and let the product speak for itself. Just keep everything in a tech presentation focused on the product and ditch the entertainment.

Although Samsung has had other cultural challenges in our market, the recent one in which Boston Red Sox player David Ortiz took a selfie with the President when the team was at the White House, then Samsung using the selfie to promote the new Samsung smartphone Ortiz was using was completely out of line. Again, how in the world did no one in Samsung’s US executive ranks question the idea of doing a promotion using the image of the president without his permission? It showed a complete lack of understanding of the fact the president does not endorse any product by nature of his job, which implies he has to be neutral when it comes to any product, company or service.

Perhaps they need a PUSCO or Professional US Cultural Officer that all US events, ads and communications go through to keep them from making these types of errors that ultimately reflect poorly on the company and its overall leadership. If you caught the banter from the media over the Broadway launch of the Galaxy S4 you know how this one event has really colored how many in the media and even some consumers view Samsung today. With all the publicity Samsung received over the Ortiz presidential selfie, this too did not help the image of Samsung — a great company with great products.

Let’s just hope they’ve learned an important lesson from these two major missteps and some adult leadership focused on these types of issues comes soon. I would hate to see Samsung get any more black eyes in the US and would rather see their US marketing become smarter and more US savvy.

India And The Future Of The Smartphone Wars

Perhaps I should have titled this “India Is The Future Of The Smartphone Wars”?

The appointment of the highly capable Satya Nadella to lead Microsoft only partly explains why I am thinking more about India and technology. The other reason is that it increasingly appears that the future of smartphones, and the winners and losers of the global smartphone wars, will be determined in large part by what happens in India. Great news for Google, possibly even for Microsoft and Nokia. Less good for Apple.

Despite the rather remarkable success of Indians in Silicon Valley, many of whom, like Nadella, are now leading tech companies, I still meet far too many analysts who remain disproportionately focused on what’s happening in China, or in Europe, while steadfastly ignoring the speedy, highly iterative tech landscape in the world’s second-largest nation.

Consider the following about India:

  • There are over 1.2 billion people — that’s about 4 USA’s
  • The median age is 25 (China’s median age is 36 and the US is 37)
  • India is the world’s 11th largest economy — and still one of the world’s fastest-growing
  • Annual per capita income is a dismaying $4,000 (by comparison, China’s is $10,000 and in the US it is $53,000)

Populous, young, growing, eager for technology, eager for connectivity, albeit with relatively meager resources to spend. It seems to me that is the perfect mix for disruption. Likely, this disruption centers around what is now our most important tool, the smartphone.

There are already about 150 million total smartphone users in India. Despite that number, and despite the nation’s large population, India is the world’s fastest-growing smartphone market. The giant feature phone market is collapsing.

feature phones to smartphones

According to IDC, 44 million smartphones were sold in India in 2013. Phablets (smartphones between 5-6.99 inches) garnered at least 20% of the Indian smartphone market, though other sources place this number much higher.

Using IDC’s latest data, Samsung is the leading smartphone company in India, with India-based Micromax and Karbonn trailing. (Nokia, a leader in feature phones in India lags, though sales of its Lumia devices have steadily increased and the company now may have a 5% share of the market there.)

India smartphone market

Given the size of the market, and its rapid growth, and the number of new users, current sales rankings may not matter much. As DNA India notes:

Tier one smartphone brands are ignoring the writing on the wall in the world’s fastest growing smartphone market in order to cater to a global market. This could be a dangerous thing to do especially at a time when the market is growing at a rate of over 150 percent and with 85 percent users still using feature phones. (emphasis added)

2014 could prove a watershed year, considering that:

  • 225 million smartphones will be sold in India just in 2014 — compared to 89 million in the US
  • Of these 225 million devices, an amazing 207  million will be to first-time smartphone buyers — the largest proportion of new users to existing users anywhere in the world

More so than the spread of 3G/4G, and the rapid improvements in mobile-optimized services, it is the almost unbelievable low prices of new smartphones that are enabling the rapid jump to smartphones in India:

“The median price of a handset has fallen from 8,250 rupees (Dh490) in 2012 to 7,000 in 2013.”

That’s $115.

In fact, about 2/3 of all smartphones sold in India are priced under $200.

The derisively labelled “race to the bottom” is in truth, connecting India, and the world, and gifting us with unbelievably accessible technology. 

Mozilla is seeking to create a $25 smartphone. Nokia’s X devices are all priced under $150. The new BlackBerry Z3 costs less than $200. This is amazing and laudable. Indeed, marketing firm Jana, has cleverly predicted that 2014 may be the year when a smartphone costs less than a carton of cigarettes. 

The world will never be the same, and what’s happening in India offers us clues to our future.

As the Guardian notes, 2014 is when “the number of mobile internet users in the developing world will overtake those in the developed world.”

new smartphone users

Connectivity is flowering in abundance. Equivalent access to everyone and to nearly every data resource will very soon be in the hands of the old and very young, male and female, rich and poor. This may be a first in human history.

We can’t know how this will change us, or change the world. But I suspect that watching what happens in India, and it’s happening so very fast, will provide us with many clues.

Predictions

Sorry. This market is too big, and moving much too fast for me to offer any reliable predictions. That doesn’t prevent me from sharing my thoughts, of course.

Apple

Meh.

Right now, Apple simply has nothing much to offer India. Offering the iPhone 4 for over $200 as they are again, when there are so many other amazing, new smartphones available for far less seems to me almost certain to fail. In fact, I think marketing very old devices against clearly superior ones, at the same price, only harms Apple’s brand. They shouldn’t even bother.

For example, India’s own Lava offers the following Android device for around the same price as the iPhone 4, but here’s what you get:

A sleek, sexy product running on stock Jelly Bean 4.2.1 with a magnesium alloy body, a 4.7-inch HD display, a MediaTek MT6589 chipset, 1GB of RAM, an 8MP camera in the back, a 3MP camera in the front, a panel that includes Sharp’s OGS solution, and Gorilla Glass from Corning.

Or, you can get a Moto G. Even the new Nokia X devices are all available for much less — and they carry the beloved Nokia brand name, look great, and include multiple popular Microsoft services.

In addition, India loves phablets — which pose a direct threat to iPads. Thus, even sales of iPad are hemmed in. Apple probably won’t have anything to offer India for years, in fact.

Will this harm the bottom line of the world’s largest tech giant?

Not so much, and certainly not in the near term. As long as Apple can peel off the world’s top 10% of buyers, they’ll be fine. It is a shame, however, that Apple and the world’s biggest democracy have so little a connection.

That said, Apple can certainly learn from the India market. For example, Indian handset makers are known for their ability to rapidly iterate, offer a host of new products, new models, all with the latest, most affordable hardware, and all at breakneck speed. Apple offers a minor iPhone upgrade about once a year, and a major upgrade about every 2 years. This has to change for success in the developing world — and it may already be underway. As the Wall Street Journal recently discovered, Apple is “hiring hundreds of new engineers and supply-chain managers in China and Taiwan as it attempts to speed up product development and launch a wider range of devices.”

Google

Android is the most popular (smartphone) OS in the world. This is especially true for India, where Google Android may make up 90% of the market. Google should do all it can to continue India’s love of Google Android.

Consider that nearly a third of “Android” smartphones shipped worldwide — that’s now over 70 million devices per quarter — come without Google apps and services installed. Blame, or thank, China, and don’t expect this to change soon. Chinese handset makers, Chinese app stores, Chinese web companies, and the Chinese government itself have little reason to embrace Google or to embed the company’s apps and services into their finished product. If Apple should ignore India for now, as I suggest, Google should similarly ignore China, which will continue to be unfriendly to the company, and instead embrace India.

Google should ensure that its very best tech, its latest services, its most amazingly affordable visions for computing devices all flourish in India, where value and accessibility are paramount. Efforts such as Project Ara, where Google hopes to offer a DIY smartphone for $50, should be heavily promoted and tended to in India, China’s manufacturing prowess notwithstanding.

Nokia

The widely mocked Nokia move to incorporate Android in its new Nokia X line could prove a rather bold, canny move. A feature phone stalwart in India, Nokia has to make an aggressive move to retain relevance in the country’s rapidly shifting phone market. Given the country’s speedy, almost wholesale adoption of Android, this may simply not be possible if Nokia remains fully wedded to Windows Phone.

Nokia’s new X phones will operate on Android, which is everywhere in India. However, they will carry the Nokia brand, retain the familiar Nokia design, keep the look and feel of Windows Phone Metro — and just might renew the company’s smartphone fortunes, all while potentially bringing millions more into the world of Microsoft services.

As Ben Bajarin states:

[Nokia X] is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Should the Nokia strategy fail, it’s hard to envision any other OS that is not Android finding any appreciable success in India, no matter the cost.

Where this might be wrong, although I think it unlikely, is if Chinese manufacturers such as the aggressively capable Xiaomi, successfully push out the top Indian mobile phone vendors (e.g. Lava, Karbonn), and thus effectively force them to offer something unique — Windows Phone, even Firefox OS, for example.

Understand, however, that India’s homegrown phone makers are formidable. I do not expect China’s own manufacturers, even such capable ones, to crush India’s leading vendors.

Not all aspects of India’s smartphone market will have a direct parallel elsewhere. The popularity of phablets may never be matched in the US and Europe. Features such as dual SIM are irrelevant in many parts of the world. Nonetheless, the smartphone skirmishes that take place in India will reverberate far beyond its borders. Analysts should pay more attention to this market and its users.

Why Nokia is Better Positioned Than Samsung

I wrote today about why Nokia’s move to support Android is bold, risky, but also filled with potential. As I watched Samsung’s press conference, the stark contrast between the big news items of both companies was evident. Samsung chose to focus on evolution rather than revolution. This is exactly what they should be doing. They took no risks and focused more on serving the market rather than over-serving it. Samsung’s press conference made it clear to me that they have accepted their role as a follower rather than a leader in this industry. There is nothing wrong with this strategy. However, once the basis of competition shifts, this strategy could be the undoing of their mobile division. What’s more, is that Samsung is playing it safe in the saturated areas of the market–the high end. This is not a growth segment. As this slide points out:

Screen Shot 2014-02-13 at 8.00.47 AM

While Samsung continues to address all the price points in the above chart, their ecosystem is failing to lock-in consumers. This is what they hope to do with the Gear products but again those products are not focused on the low-end. Nokia, on the other hand, is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Nokia is including their own app store on the Nokia X as well as popular app stores from each region. This strategy will not just appeal to first time smart phone owners, but the Nokia X has appeal to existing smartphone owners at very aggressive price points. There is another interesting move Nokia has done with the X Android smartphone. They have leveraged their strong relationship with carriers and will offer carrier billing support for app store transactions with over 160 carriers worldwide. It is a little known fact that carrier supported billing for transactions can see up to 10x the conversion than when a credit card is the only purchase option. This means Nokia and Microsoft have a good story for developers looking to monetize. It is conceivable that in the near future Microsoft could have more developers in its Android ecosystem than its Windows Phone ecosystem.

Microsoft is quietly going to use Nokia to acquire customers and meet them where they are. The key word being thrown around is “embrace and extend.” This is exactly what Microsoft needs to do to begin to build a new foundation and serve new sets of customers. Interestingly, Nokia launched several other new low-end smart phones today. A feature phone and a new Asha line. Each one has some Microsoft service on it. Nokia sold over 200 million feature phones last year. This market is in decline. Still, devices such as the Nokia 230 at $49 dollars and Nokia 220 at $29 dollars will still sell massive volumes and these customers will touch a Microsoft service likely for the first time.

Ultimately Samsung is being eaten alive at the low-end. India is still one of their strongholds, but it is also a market where Nokia has brand affinity. Samsung has not created loyalty in the low-end, and this is an opportunity for not just Nokia, but Microsoft is in a position to capitalize also.

Samsung and their Fragile Relationship with Google

For Insiders I wrote a while back about Samsung’s precarious position in the market place. Samsung finds themselves between a rock and a hard place. It is not surprising that a bit of news surfaced stating that the next version of their Galaxy Gear will run Tizen not Android. Tizen is a joint venture OS between Intel and Samsung. Several other big name firms are involved with Tizen as well but Samsung is the largest to date said to actually take it to market.

Samsung’s move to run Tizen on their smart watch platform, if it does indeed turn out to be true, would not be a surprise. As many PC OEMs will attest shipping someone else’s software can only take a hardware company so far. When the day comes where a segment of the hardware industry becomes a commodity it makes life for hardware companies difficult. Samsung is a hardware company who desperately needs to become a software and services company. If history is our guide then it favors software and services companies. Facebook’s acquisition of WhatsApp emphasizes this point.

Samsung is not in a position to control their own destiny. Samsung’s challenge is that they struggle for customer loyalty. Currently, there is little reason for a customer to choose next years Samsung phone when they upgrade. If there is a better Android device on the market that catches their eye they are equally going to consider that device as well. What Samsung, and other Google Android OEMs, do is help drive loyalty to Google and Android but not necessarily to their brand. Apple does not suffer from this problem since their loyalty is built on more than their brand but on their ecosystem of not just hardware but software and services. This is why Samsung appears to be teetering on the edge of going vertical as much as they can without fully leaving the Google Android ecosystem. Samsung needs Google. Yet they need to not need them for their mobile group to thrive.

A Tizen based Galaxy Gear could be a step in this direction. If Samsung were to release an SDK around this Tizen Galaxy Gear product and get a critical mass of developers and apps creating applications for a product unique to Samsung then it could be the foundation for a Samsung ecosystem. It is worth noting that Samsung does not run Android on their Smart TVs. These Smart TVs do have apps but a critical mass of apps or developers exist for the Samsung Smart TV platform. Mobile is inherently where Samsung needs to have a critical mass of developers. If Samsung can’t figure this out and destined to be stuck in the rut of a hardware company then very troubled times are ahead for their smartphone and tablet operations.

Samsung does not have a services business to support forking Android. Amazon does. Xiaomi does and both have been successful at taking Android and building a services platform on top of it. Similarly, Microsoft could have a strong business case to layer their services on top of an AOSP implementation of their own. I’m yet to see something similar from Samsung. Which leaves them in a position to have to “platformize” Google’s version of Android as best they can without over stepping their boundaries as a Google certified OEM.

What we must watch with regard to Samsung is how they make steps in this direction on devices for which they don’t have to go through Google’s certification process. Products like their TVs, Smart Watches, or even new product categories, that are ecosystem boosters, are where they can start to lay a foundation to grow and foster their own platform.

Big Tablets and The Shift in Mobile Computing

I believe 2014 could be a big year for bigger tablets. The bulk of the tablets sold over the past few years have been tablets in the 7-8″ range. By our estimates the install base of tablets 9″ or larger is only 33%. Which highlights the point that most tablet sales over the past few years have been in smaller tablets.

Now, if you read what I wrote a few weeks ago you know that we believe we are on the cusp of a new buying cycle for more computing capable devices. While we can argue that even some smaller tablets are computing capable, we can’t argue that the more productive someone wants to be the more they may value a larger screen.

We believe we are on the cusp of a market buying cycle for larger screen computing devices. Some of these may be notebooks, some may be desktops, but we think the larger screen tablet has a real opportunity to take a percentage of sales in this upcoming refresh cycle.

Bigger Tablets Trending

It seems like most of the larger PC OEMS and tablet OEMs sense this opportunity as well. Samsung introduced their Tab Pro 12.2 at CES this year. I got to spend some time with this product and can attest to it being more impressive than I originally thought.

I was somewhat skeptical of the 12″ tablet form factor but after seeing the Tab Pro 12.2 I can see this being an attractive form factor for many large screen tablet intenders. One of the things that impressed me the most with Samsung’s new offering was the virtual keyboard. I am a heavy iPad Air user and I can type faster than most people on the virtual keyboard with ease. Samsung’s keyboard was even a bit larger than the iPad’s allowing me to incorporate my pinky into they typing process, which is a finger I don’t use on the iPad.

Ultimately Samsung’s, and all the other Android OEMs, challenge with larger tablets will be with the apps. The iPad is the uncontested leader in tablet optimized apps and I don’t see any evidence that is changing anytime soon. For larger Android tablets to have a strong case as more productivity devices the way the iPad Air is the tablet optimized Android app ecosystem will need to grow dramatically.

Emerging Market Growth

Interestingly the potential for larger screen tablets to grow as a percent of overall tablet sales in not limited to developed markets like North America and Europe. I met with several of the main SoC companies providing chips for tablet OEMs in China and India who told me they are seeing demand for larger tablets as well. While the US and Europe had a higher install base of tablet 9″ and larger, emerging markets had a very low install base of this form factor.

Several of the devices going into emerging markets are also slated to be a duel-boot Android and Windows tablet. Micromax, a popular brand in India, was showing off their LapTab dual-boot Windows 8 and Android tablet device. They were telling me the demand for this product in India was quite high. I remain quite skeptical of the dual-boot Android and Windows tablets in developed market but I can see them doing moderately well in emerging markets.

Consumers in many of these markets have never owned a PC. And while they are increasingly purchasing small tablets for primarily entertainment use cases, at some point in time they may graduate to more computing capable tablets. The likely-hood is that many of these will be larger screen devices.

All these points add to narrative that leads me to believe that 2014 could see strong growth of larger tablets. The reality is that bigger screen computing devices remain relevant for hundreds of millions of consumers. In emerging markets we are seeing new computer users coming online with tablets first.

Larger screen tablets will play a critical role in the future of computing and we think 2014 is the year we start to see progress in that direction.

Below is my firm’s slide showing forecasts for larger tablets.
Screen Shot 2014-02-05 at 8.31.19 AM

The Future of Microsoft, Apple, and Google

It seems today like the dominant players in computing, social media, infrastructure, services, and many other big industry segments is settled. It is easy to look at the current environment and say Google and Apple have both won. Both have large thriving ecosystems in the hottest segments of technology. Yet as Benedict Evans and I discussed on our last podcast, while everything seems settled, in reality, the future is still very much anyones game.

Taking into all the major players strategies is essential. Here are some thoughts on a few of the major players.

Microsoft

Microsoft faces some of the most difficult questions in my opinion. What kind of company is Microsoft going to be in the future? This is the key question a new CEO must address. The market where they dominate market share, the PC, is contracting in annual sales every year. They are not participating relevantly in any of the growth sectors like smartphones and tablets. Is Microsoft a commercial company whose destiny is to focus on backend services like IBM and be a much smaller company than they are today? Are they going to choose to only focus on commercial applications and ignore consumer ones?

If their current commercial which aired during the Super Bowl yesterday is any indication then lets hope they see themselves as a technology company rather than just an operating system company, software company or an enterprise services company.

Microsoft is among the top spenders in research and development. Ranking #2 of the top 2,000 companies according to the European Union. Samsung was number 2, Google number 13 and Apple number 46. Samsung should not be a surprise given the number of businesses they are in. Microsoft on the other hand is not in nearly the same number of businesses as Samsung but spend nearly as much as them in RND in 2013. If Microsoft can commercialize their R&D spending in a meaningful way they can evolve beyond their own platforms and enable a broader ecosystem. While I have serious questions and doubts about Microsoft going forward, I’d be more optimistic about them if they evolved into a broader technology company driving growth for themselves and others out of their R&D.

Apple

Apple may always have the smaller ecosystem. A fundamental question to explore is now much this matters. There are industry executives who have seen and participated in key paradigm shifts in this industry who believe that the smaller ecosystem always loses. Yet there is no clear answer from them as to why. It is not a foregone conclusion that the smaller ecosystem always loses. As long as an ecosystem is supported by a long list of third parties the ecosystem will thrive. There does come a point in time when an ecosystem is too small to support, take RIM and Windows Phone as examples.

I believe Apple can successfully acquire and maintain an ecosystem of around 800-900m ((I have logic and deeper analysis from my firm Creative Strategies to justify these numbers)) install base of core device hardware. By core device hardware I mean computers small, medium, and large. Apple will inevitably offer peripheral businesses to the hardware core, and those may be software or other hardware businesses (new categories) but they will all revolve around personal computers small medium and large. At least for the foreseeable future.

Assuming Apple can maintain this core user base, which will err toward the higher more profitable segments of the market, then I am confident their ecosystem will sustain and thrive, despite what many believe about ecosystems (800-900m is not really a small ecosystem).

Apple’s latest ad 1.24.14 is an excellent insight into Apple’s product future.

30 years ago we introduced Macintosh. It promised to put technology in the hands of the people.

By the end of the video you get the sense that the iPhone is the promise and full manifestation of that vision. It ends making the point that the entire video was created with the iPhone in one day.

Personal computing is the focus. In the hand of many is the goal.

Google

Interestingly, while many seem to have established Google’s future being secure, I’m still not so sure. At least I’m not sure about what they offer today as being what sustains them or secures their future. Android is actually still a moving target for Google. It seems established but it is actually a quite fluid product and strategy. Android may look entirely different in 5 years if it even exists.

As evidenced by the recent Samsung and Google patent deal, which likely includes a lot more than the patents, Google is able to leverage their services to bend OEMs to their will. Which gives us a clear line in the sand between Android OEMs using Google services and those that are not. The focus then should not be on Android but Google’s services. Services like search, maps, the play store, and more are at the core of what Google uses to push their agenda.

This is what makes China so fascinating. 90% of the Android install base in China is Android Open Source Project (AOSP) and have not been certified by Google to receive their services. China is unique in that Google’s services are mostly blocked at a network level inside the country. This is why so many alternatives to Google’s services exist in China and are used by the masses. Android AOSP makes it very simple for a hardware company to install a platform and in essence create their own unique platform. This is the case with Amazon, Xiaomi, and many other OEMs. I estimated the market share of Android AOSP vs. Google’s Android with their services in the chart below.

Screen Shot 2014-02-03 at 9.56.05 AM

Developing regions like India, Latin America, and Africa are all big continents with lots of people where smartphones are growing the fastest. India has many local smartphone OEMs like Micromax, LAVA + XOLO, and Karbonn. While these devices do utilize Google’s services, what is stopping regional upstarts or entrepreneurs from creating their own set of competitive services to Google’s specifically designed to only serve the unique interests of that region?

Google is a services company that monetizes those services through ads. Whether advertising is their business model or something else in 5yrs time, or longer, I believe Google will see increased competition in many of their services which they depend heavily on.

Google Sells Moto to Lenovo for a Song, Exits Phone Hardware

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In the end, Larry Page tacitly admitted that the critics were right all along: In buying Motorola Mobility, Google created an irresolvable conflict with its Android partners. Today, it ended that conflict by selling Moto to Lenovo for a paltry $2.9 billion, which becomes a lot more paltry when you realize that only $660 million is in upfront cash.

Page wrote in a post on Google’s official blog:

We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users… But the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It’s why we believe that Motorola will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world. This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.

The Moto venture has been a major flop for Google. The company paid $12.5 billion for Moto and has absorbed more than a billion dollars in additional losses. It did receive $2.5 billion from Arris for the Motorola Home set top box division and will retain the bulk of the Moto patent portfolio. But it’s not getting much from Lenovo: $660 in cash, $750 in Lenovo common stock, and the balance in a three-year promissory note (in other words, Google is lending Lenovo the money to take Moto off its hands.) When the deal closes, and it requires regulatory approval in both the U.S. and China, Google will be taking a monster write-off.

But it’s probably worth the price for Google to simplify its relationship with the complex world of Android. The deal only made sense in the first place if Google were willing, at a minimum, to make Moto first among  equals in the Android OEM business. But Google was never willing to make that commitment–or to risk an open break with Samsung and other Android OEMs. That left Moto as just another struggling Android OEM and while it made some nice products, particularly the high-end Moto X and the Moto G for lower-income markets, it failed to gain much market share of get anywhere near to profitability.

Google, meanwhile, has been trying to move closer to its Android partners and, particularly, to ease a badly strained relationship with Samsung. It recently concluded a broad patent cross-licensing agreement with Google, an arrangement that makes more sense now that Google is keeping the patents but leaving the phone business.

For Lenovo, meanwhile, the move is risky but a clear sign that the Chinese-American hybrid is on the march. Earlier this week, the company reached a deal to buy IBM’s x86 server business for $2.3 billion (mostly cash.) Lenovo first rose from obscurity by purchasing IBM’s PC operations in 2005 and in recent quarters, it has been ejoying strong market share growth in a very soft PC market.

Did Samsung use Apple as an R&D Center?

Now that it has been proven in the courts that Samsung stole key intellectual and patented properties from Apple’s iPhone, I’ve been wondering if this move by them was actually calculated. Go back to the 2007-2008 time frame and we can see from this period that Apple pretty much over night reinvented the smartphone. More importantly, its impact on the marketplace was dramatic. Now imagine if you were a proven feature phone developer and had already been working on your own version of a smarter phone at the time. It would have flabbergasted these companies to see a virtually unknown entity in phones leap frog them with such a stunning product that had, in a very short time, created the defacto standard in smartphones. Even worse, these companies probably realized that their own efforts paled in comparison to what Apple had and were desperate to move quickly to become a competitive player lest Apple own this market by themselves.

We also know from the court documents that Samsung claims to have been working on their own smartphones very close to the time Apple was developing their version. However, I suspect that whatever they were developing was not even close to what Apple had created and had to drop those designs and refocus on creating a product that was equally cool and powerful as Apple had on the market. But doing so meant time and I believe that Samsung decided time was not on their side if they were to be a serious player in smartphones. Also, doing a dedicated R &D project not only took time but bucket loads of money to do so.

I remember seeing the first Samsung Smartphone and thinking at first it was an iPhone. You may remember it since it was a spitting image of Apple’s design. Yes, it had Android as an OS and a few other features, but a lot of us analysts who looked at it were extremely surprised to see that it was pretty much a copy of what Apple had in the iPhone. Now when it comes to R & D, many companies reengineer products and try and put their own IP into it and make it different so it does not come off as a direct copy. However in this case it appears Samsung did not reengineer as much as do a direct copy of it in hopes it could get away with it.

From this move the amount that Samsung will pay in damages to Apple currently is around $850 million. There are other suits still on the table but lets say that in the end Samsung pays Apple $1.1 billion overall in damages. Samsung would have shelled out at least that much in their own R&D costs and been years behind Apple as a competitor. Even worse, they might have never even caught up using their own designs and could have been left in the dust. Given Samsung’s position in feature phones they probably realized that in not doing something close to what Apple had created could lock them out of this multi-billion user market and probably decided it was worth the risk in order to guarantee they would have a place in the future market for smartphones.

The result of copying Apple and getting their own smartphone into the market fast has paid off. Samsung sells 50% of all Android phones and has begun beating Apple in market share in some markets. They now have record profits, much if it coming from their smartphone business. They have become one the top players in smartphones and over time have created their own IP and designs so that they are no longer using any of the copied technology or designs from Apple. To say that Samsung has become one the most powerful CE and smartphone companies in the world would be an understatement.

Now, I don’t think copying and stealing to get a product to market fast is in the play books of any MBA programs but this time what appears to be a calculated risk on Samsung’s part to copy Apple to get their own competitive product to market fast has kind of worked. It only cost them whatever they will pay in final damages to Apple and in the end that amount will probably be less than they would have paid in their own R&D expenses if they had built their own smartphone from scratch and would not have had any guarantee that those early versions would be a success.
Using Apple for R&D is a bad business idea and I don’t recommend trying it, but for Samsung, whether calculated or not, it seems to have worked out in their favor.

Samsung’s Precarious Position

Samsung, I believe is in a precarious position. I’ve felt this way for quite some time despite their continued growth in mobile over the past few years. But my reasoning comes from understanding how Samsung got to the position they are in with regard to mobile and concluding that the current strategy is not sustainable.

Firstly, you need to understand that the vast majority of Samsung’s huge sales come from outside the United States. Take a trip to China, India, and other quickly growing smartphone regions and you see a vastly disproportionate amount of Samsung devices per others in retail. Samsung’s growth in these regions is tied to form factor variety and price that is it.

Samsung’s premium line has been steady doing ok in the US but still less than 20% of all US smartphone sales of devices wholesale of $500 or more. In other parts of the world Samsung’s premium line has done better as it appears the Galaxy line is on track to ship 43-45m units this quarter. Still most of those outside of the US.

In this chart we see what the distribution of current market share estimates by sales from each vendor on a WW basis.

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Apple dominates Samsung in premium devices sales in the US and to a degree in Western Europe. But when you look at the chart above you see that the rise of “others” is the source of Samsung’s precarious position. Growing strong regional brands like Xiaomi in China and MicroMax in India are rapidly eating into Samsung’s global sales of smartphones. And I don’t see this trend stopping.

MicroMax has done an amazing job managing their brand and going right at the core value proposition of Samsung in India. Similarly so has local Chinese brands like ZTE, Huawei and more important Xiaomi.

Many of these local and regional competitors are coming back and are employing strategies Samsung simply will have trouble competing with given their current strategy. What I mean specifically is that Samsung is not doing enough to create brand loyalty or ecosystem stickiness. Samsung is stuck in a continual cycle of competing for consumer choice. This is much more precarious position to be in because next year you must compete for the same customers as equally hard as you did this year.

I’d argue that this is not the case for Apple. They have loyalty that is un-parralled and upgrades from existing customers are practically an guarantee. Apple can focus on new customers, all the while satisfying existing in their ecosystem with new hardware, software, and services. Samsung does not have this luxury, they compete for new and existing customers every year.

Both Apple and Samsung, however, are going to be challenged by regional brands in areas like China and India where regional services are more relevant and more specifically proprietary. I’m convinced at this point that for Apple and Samsung to have a larger play in those regions they will need a much more regional centric strategy than they do today. I see what is happening in China and India as a problem for a global company deploying more global strategies than regional ones specific to those foreign growth areas.

Samsung understands its weak competitive position and it is the sole reason it is necessary for them to spend massive amounts of money on advertising.

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To the ecosystem point, this is exactly the fascinating strategy Xiaomi is employing specifically related to China. Xiaomi, has the potential to create services and ecosystem lock in if they do their services right. Right now they run a heavily customized version of Android but it is tightly integrated into their core services which is a cloud messaging service, security service, and backup services. This is likely to expand to media, games, social networks, etc.

The key takeaway for Samsung’s position is simply the rise of the local brands in the areas where they have been the most successful to date. We will see how Samsung responds and if they are capable of building their own services framework on top of Android. This in my opinion is absolutely critical for Samsung to get right if they want to remain a major player in the future of computing.

Samsung’s Dangerous Smart Watch Gamble

Next week, just before the IFA consumer electronics show opens in Berlin, Samsung is expected to introduce their first smart watch apparently called the Samsung Galaxy Gear. By my count, this will be at least the 14th smart watch introduced in the last 18 months. I have had a chance to work with and review at least six of these so far and members of my staff have reviewed at least two more recently.

One thing to note about all of these watches so far is that they are all rather big, not very stylish and to be truthful, aimed mostly at male geeks. I can’t even imagine any woman clamoring for any of these early models and suspect that Samsung’s version will be just as geeky as the others given the technology available today for use in building this first generation of smart watches.

Most of these new smart watches are focused on being an extension of our smart phones and delivering glanceable data or information tidbits from our smartphones on a wearable screen. After using a couple of smart watches with this feature I can attest that this is a very cool idea and in fact, the watch will most likely become the #1 wearable computer in the market over the next few years, trumping things like Google Glasses that may take a decade before it hits consumer stride.

Although I think Samsung’s smart watch may actually be cool in functionality, one thing I am pretty certain is that it will not be stylish and be attractive to anyone but male geeks. While Samsung has created stylish smartphones and tablets, let’s be honest here; this design basically copied Apple’s iPhone and iPad designs and literally rode Apple’s coattails into these markets.

This is where introducing a smart watch now is a real gamble for Samsung. I fear that they are rushing this to market so they can say they beat Apple to the market but their model will be very similar to the smart watches already available. Sure, they have a strong marketing machine and big bucks to try to drive this into the mainstream but Samsung’s track record in creating ground-breaking designs in any product is historically weak.

While creating a product for male geeks is not bad in itself if these male geeks buy them, there is one very key issue about watches that will prove problematic to Samsung and that is “stylish” designs. Watches are fashion statements and very little about functionality to most people.

I believe that this will be at the heart of Apple’s eventual smart watch in which functionality will be important but stylish design will be equally important to whatever they finally deliver to the market place. And it is doubtful that Apple does not understand the difference in style design between men and women and will factor this heavily in their actual product designs.

Notice that Apple is not rushing a product like this to market just so they can have skin in the game. If you look at Apple’s history, they usually wait to see if a product takes off and then, and only then, do they re-invent the product with an eye on form, function, design and eco system that lets them control and drive their products into a broader mass market. Apple did not invent MP3 players. They reinvented them. Apple did not invent smartphones. They reinvented them. And Apple did not invent the tablet. They reinvented it and along with their iPhone launched the post PC era.

I suspect that Samsung understands this and is taking a calculated gamble by introducing the Galaxy Gear now. However, I think it is a dangerous gamble. While smart watch functionality is cool, in watches, style and fashion play a key role in its ultimate success. By introducing something before Apple does it runs the risk of not even coming close to what Apple will deliver and in the end, Apple will do the Apple thing and reinvent the smart watch that transcends the geekiness of todays models and be the one that drives the smart watch wearable revolution to the masses.

Now they have to wait for the other shoe to drop from Apple and if history is our guide, copy Apple again if they really want to be a player in the smart watch wearable revolution for the masses.

Leadership Matters More Than Market Share

A leader is one who sees more than others see, who sees farther than others see, and who sees before others see.
– Leroy Eimes

In studying the technology industry, the markets that encapsulate it, and the consumers who drive it, I am less interested in how much money a company is making, or how many devices they sell, or what a platforms market share is. Those are all interesting data points. What matters, in my opinion, is whether or not companies playing in this arena are advancing computing.

Apple’s Demise

It seems as though the popular “Apple is doomed” narrative will never go away. While this is a deeply naive statement filled with flawed pre-conceived notions, it is often thrown around publicly by those with an agenda other than genuine truth.

For some illogical reason, many are just waiting for Apple’s dominant reign to end. This line of thinking forgets that the only market Apple has dominated for a length of time was the MP3 player market. Apple may never secure a decade plus of device or category dominance like they did with iPod again but that does not mean that they do not have a healthy and profitable business that will last decades. Yet all too often ebbs and flows of markets, cyclical innovation patterns, and global adoption cycles, seem to fool people into missing the big picture.

I hear a subtle tone frequently whispered among analyst peers that Apple has had their day and it is time for someone else. That time may certainly come, but it is not today. I hold this view confidently because I am yet to see the emergence of a new leader. I see platforms gaining market share leadership. We may see devices become sales leaders, but without question Apple is still the envy of the industry. ((Being the first with a spec or some technological gimmicks does not qualify as leadership))

The Secret to Growth

“The real act of discovery consists not in finding new lands but in seeing with new eyes.” – Marcel Proust

We can debate until we are blue in the face whether the biggest growth opportunities like smartphones and tablets are saturated. But whether this point is true or not both markets will inevitably become saturated at some point. Growth will someday peak and only disruption can restart the cycle.

The key for a companies growth lies in new opportunities. Sometimes you have to create those opportunities and other times you can capitalize on opportunities others have created. But in either case vision and leadership are key.

Perhaps the next growth area is wearable computing, or the digital home and car. Perhaps it is something we have not thought about yet. This is what makes this industry exciting. The point remains, who leads these new opportunities is the key thing to watch.

Leading also means you often take some arrows in the back. It is hard and not all can handle the scrutiny. As I stated earlier, I am not naive in thinking that Apple will always be in a leadership position. But I’m yet to see another holistic leader in computing emerge.