Much has been written about how a debacle like the Note7 happened and what Samsung might do to repair its reputation. Samsung’s challenges also shed light on a unique fact about the U.S. smartphone market: the high degree of vendor concentration. Industry research houses show Apple and Samsung represent nearly 75% of smartphone share in the US (Apple about 45%, Samsung 29%) and about 90% of the profits. The remaining share is spread among several vendors, with LG at nearly 10% and Motorola at about half that. Concentration has been creeping up in recent years. Four years ago, the combined Apple/Samsung share was just under 60%.
The picture is quite different in other parts of the world. Globally, as of Q2 2016, Samsung was the leading vendor at 23%, Apple had a 12% share, Huawei had 10%, and all others had 55% combined, according to IDC. The vendor share picture varies quite dramatically by region and even by country. Chinese vendors Huawei and ZTE have made significant progress in Europe, having captured some 25%+ share between them in certain countries. China, the world’s largest handset market, is a veritable vendor free-for-all. Nowhere is the market as concentrated as in the US.
Why is this the case? Well, one factor is our iOS-centricity: Apple’s share in North America is some 2x that of just about anywhere else. We also like our flagship devices. Average selling prices here are among the highest in the world, and US consumers show a particular penchant for the ‘latest, greatest’ iPhone or Galaxy. Another factor is the strong role the carriers play in the US market. Many of their pricing promotions and ad campaigns are centered around iconic iPhone and Galaxy launches.
This fall’s handset developments have revealed why this might be a problem. First, Apple introduced the iPhone 7 which, although a terrific device, received mixed reviews. I am sensing a bit of Apple ennui, particularly among younger users. Sales have been pretty good but replacement cycles are creeping up. Then there’s the Note7 debacle. It is hard at this point to gauge the long-term damage to Samsung’s reputation and whether it will significantly affect the company’s market share. But this has been both difficult and costly for Samsung’s major customers in the US, the wireless carriers, who play an outsized role in distribution compared to operators in other countries. We learned last week that Samsung is offering $100 vouchers to consumers, among other measures, but little has been said about what Samsung is doing to repair its reputation with the operators.
I believe US operators and consumers are left vulnerable by this concentrated market. First, Apple has never been all that operator-friendly — in fact, it continues to do things in the crosshairs of the operators, such as last year’s move into equipment financing. Second, what if the next iPhone is a dud or gets delayed by a few months? Operators have become pretty addicted to that clockwork September iPhone launch to meet their 4Q numbers. What if Samsung’s supply chain and QA problems are more far-reaching? What are the fallback options?
The challenge other handset OEMs have had in capturing share in this market over the past several years is a bit baffling. LG, Motorola, and HTC, among others, make excellent devices. In segments of the market where price is more of a factor, such as prepaid and MVNOs, their combined share is proportionately higher. But they can’t compete with the gargantuan ad budgets of Apple and Samsung and the carriers just haven’t given them all that much love.
I’m surprised the operators haven’t pushed harder. Why are they leaving themselves so vulnerable to an Apple or Samsung hiccup? Why haven’t they put more pressure on pricing? Why aren’t they exerting more influence on the phone’s user experience? With a leveling off of smartphone growth and longer replacement cycles, I am a bit surprised at operators’ order-takery mentality on devices.
Perhaps this is why Google is taking a renewed and more vigorous crack at the handset business with the recently announced Pixel phones. It realizes the market is increasingly tilting toward ecosystems and software—areas where it can exert an influence as long as the hardware is good (which seems to be the ante needed to play in developed country markets). Consumers buy iPhones, in large part, because of the Apple ecosystem. There is no single torchbearer for the Android ecosystem or even a device that maximizes Android’s potential to deliver a fantastic user experience. So, Google is thinking that embedding Google Assistant into the Pixel, plus the ability for Pixel to integrate with other announced Google hardware, such as Home, Hub and even the fledgling Project Fi service, could be part of a next-generation ecosystem play.
Why would vendor diversity be good? As protection in case of an Apple or Samsung hiccup (or worse); a hedge against said vendors’ occasional arrogance; a lever on inflated prices; and as a spur for innovation. This would also give the operators more skin in the game—a position they had not so many years ago.