The Challenge of Breaking into the US Smartphone Market

This week saw one of the newest entrants in the US smartphone market, Andy Rubin’s Essential, drop its price by $200 from $699 to $499, undoubtedly a response to poor early sales. We’ve also recently seen the debut of the second generation of Google’s Pixel smartphone line, after a first year in which one of the biggest names in consumer technology was unable to shift more than a couple million of its flagship devices. Why is it so tough for even seemingly high-quality smartphones to break into the US market?

Carriers Dominate Sales

The first obvious answer is that the major wireless carriers dominate smartphone sales in the US, and that’s especially true when it comes to premium smartphones, which are predominantly attached to carriers’s postpaid wireless plans. Well over 70% of overall US smartphone sales go through the carriers, and in postpaid that’s likely even higher. Even when sales go through third party retailers like Best Buy, they’re often selected from the limited range of devices stocked by the carriers anyway, so the same effects apply.

That matters because the carriers stock a very limited number of brands on their shelves. For the most part, that means stocking Apple, Samsung, and LG phones essentially across the board, with limited support for other brands at each individual carrier. You might find the occasional BlackBerry, Kyocera, HTC, Motorola, or ZTE device, but shelves in your local store will be dominated by the three big brands. Carriers have little incentive to take risks on the smaller brands when the vast majority of demand is for the big three anyway, especially when the smaller brands offer little positive differentiation. As such, they’re often used to fill small niches but rarely to flesh out a high-end portfolio.

The Big Brands Dominate Share

Partly as a result of the carriers’ limited support for other brands, but in large part also because people have now established preferences and habits which make it hard to get them to switch, the big brands dominate market share. Counterpoint Research estimates that 75% of sales in Q2 were of phones from the three big brands, and 86% from four brands, including ZTE, which is strong in the prepaid segment. At three of the carriers, the big three account for over 80% of sales, and again on the postpaid side alone the dominance would be even more complete.

The reality is that the vast majority of customers are limited in the options they have available, and fairly happy with those options, providing few incentives for them to choose new offerings, or for the carriers to Mae them available.

Exclusives Remain Attractive but Ultimately Fruitless

One of the few ways to break through the carrier resistance to the new is to offer exclusives for attractive new phones, thereby giving the carriers incentives to range a phone in hopes of winning customers. We’ve seen this happen with both the Essential Phone and both generations of Pixels now, with Sprint getting the exclusive on the former and Verizon the exclusive on the latter.

Neither, though, appears to have served either the carriers or their device partners well – both devices have sold poorly despite strong promotional activity from the mobile operators, and both have also shut themselves off from the benefits of being sold by all the major carriers, which every major device vendor has long enjoyed. I’ve written previously about the dubious merits of this strategy for Google, which surely doesn’t need the brand recognition extra promotional activity provides.

AT&T and Nokia long ago proved that exclusives can’t overcome the fundamental resistance to change in the market, and these new entrants should give up on the strategy too. At least the Pixels have the advantage of being sold by the largest of the US postpaid operators, while the poor Essential Phone is stuck on the smallest and weakest of the big four.

Slow and Steady Wins the Race

Both Google and Essential will be hoping that they can change minds in time, even if their early efforts have been fairly fruitless. And there’s some evidence from other brands that a long-term strategy can pay off, though the starting point should likely be somewhere other than premium smartphones. ZTE and TCL-Alcatel have long proven that there is room in the market for low-priced brands targeting the prepaid segment, while Blu has been successful in selling prepaid phones direct to consumers rather than going through carriers.

ZTE’s persistence in particular over the course of many years has finally earned it a slot on a carrier’s postpaid roster for the first time, albeit with what’s likely to be a marginal phone, the Axon M, in AT&T’s portfolio. There is no real precedent, though, for a premium brand to break in by means of this strategy. Brands have instead had to start at the bottom and work their way up – a strategy that arguably worked for Samsung in several markets in the past too. That doesn’t bode well for Essential or Google, though both are deep-pocketed enough to continue to pursue the harder path to success for several more years if they choose to do so.