Emerald Group Publishing Limited
And when they were up, they were up
A regular column on the information industries
Article Type: Rearview From: info, Volume 17, Issue 2
Peter Curwen is a Professor at the Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK.
At times, it must appear to handset vendors that they are on a roller coaster without brakes, constantly thinking that they are on an upwards trajectory only to find themselves once again hurtling towards the earth. It is salutary to begin by examining the position at the end of 2006 – less than a decade ago. During the final quarter of that year, 22 million so-called “smart mobile devices” were shipped. Of these, 50 per cent were shipped by Nokia, 8 per cent by RIM, 6.5 per cent by Motorola, 5.5 per cent by Palm and 5 per cent by Sony Ericsson. No other vendor was considered to be worthy of individual mention. Furthermore, the Nokia devices were primarily based on the Symbian operating system (O/S), which was estimated to have an overall market share of 67 per cent, while Motorola devices used Linux.
During the second quarter of 2014, shipments of smartphones rose above 300 million units for the first time. Of these, roughly 85 per cent used the Android O/S, 12 per cent used the Apple iOS, 2.5 per cent used Windows Phone and 0.5 per cent used the RIM Blackberry O/S. However, this extraordinary turnaround in the type of O/S used in smartphones was also mirrored in the list of vendors. Taking 2013 as a whole, Nokia’s overall mobile market share had fallen to a mere 14 per cent, lagging by a large margin the market leader Samsung with a market share of 24.5 per cent. In third place was to be found Apple with 8.5 per cent, followed by a longish tail of also-rans including LG, ZTE, Huawei, TCL, Lenovo, Sony and Yulong.
What is remarkable about this list is first that only Apple appears to have retained anything like its previous status, and second, that five Chinese vendors have turned up among the top ten vendors. It may be argued, of course, that the overall market includes so-called “feature-phones”, but 2013 was the first year in which smartphones claimed more than one-half of the total market, a trend that is set to continue as an increasing number of relatively cheap smartphones reach the market – in 2013, one-third sold for less than $150. If attention is directed exclusively to the smartphone segment, then Samsung did even better with a 31 per cent market share, followed by Apple with 15.5 per cent and a number of also-rans including Chinese vendors Huawei and Lenovo.
One of the key factors that explain what is happening is the source of demand for smartphones. Towards the end of 2011, China overtook the USA as the largest smartphone market, and over 400 million smartphones are expected to be sold in China during the whole of 2014. Within a couple of years from now, the smartphone markets in India and Brazil are expected to exceed that in the UK, currently the largest in Europe. Another factor is the dominance of the Android O/S. In effect, aside from the Apple iOS, all other types of O/S have become niche markets.
This combination spells problems for Samsung, despite its market leadership in 2013, as it is unlikely to benefit from the evolving source of demand despite itself being located in the primary growth area of Asia. Indeed, at the end of October 2014, Samsung announced that its trading performance was deteriorating due to intense competition in the smartphone market. It added that it intended to combat this through the development of flexible displays, metal frames and wearable devices but admitted that this might not help all that much, as its competitors were themselves developing new features for their devices.
As noted, the mobile device market was once the preserve of, primarily, Motorola, RIM (BlackBerry) and Nokia, yet where are they now? So can Samsung, after its relatively brief flirtation with market dominance, hope to escape the same fate? At the end of October 2014, a strange name appeared in the list of the top ten smartphone vendors, namely, Xiaomi. Having tripled the number of devices shipped compared to a year earlier, it had overtaken LG and Huawei. It goes without saying that Xiaomi is Chinese, that it uses Android and that (for now) it largely restricts itself to its home market.
Leaving aside Apple, which is something of a special case insofar that its customers show a devotion both to the brand and its iOS, which other vendors can never hope to replicate – although its growth prospects are somewhat hamstrung by the high average cost of its devices – it is easy to predict that Samsung will be the main vendor to lose market share if only because it has the most to lose. Naturally, it is reasonable to argue that Xiaomi has yet to test itself properly in the international market, where it has poor brand awareness, so its growth is bound to slow down as the Chinese market approaches saturation. It is also a fair bet that the other vendors will begin to indulge in their favourite activity of lodging patent infringement proceedings against the company, but the constant restructuring of the market remains an unstoppable force.
In this respect, it is of interest to consider how Microsoft is dealing with this very matter as it adapts to the acquisition of Nokia’s handset business. At the end of October 2014, Microsoft announced that it intended to drop both the Nokia and Windows Phone brand names and substitute these with the Microsoft Lumia brand – rather than continue with the Nokia Lumia. In many ways, this is an extraordinary decision because it was arguably the Nokia 3310, which sold 125 million units after its introduction in 2000 (together with other similar looking handsets), that triggered a huge expansion in handset use. Although a few entry-level devices will continue to bear the Nokia name, it has now effectively been consigned to history, although attempts are being made to license the name to other handset vendors. Nevertheless, ask anyone (outside of China, perhaps) to come up with an instant brand and who would bet against Nokia as the most popular choice.
Furthermore, Nokia is not the only once-mighty vendor to suffer the indignity of a takeover. In addition, in October 2014, Lenovo completed the acquisition of Motorola Mobility – something of a blow to the pride of the US technology sector. In this case, however, Motorola is to be left as an independent subsidiary using the brands Motorola, Moto and Droid, which is probably wise given that Motorola’s brands are still viewed with affection in the USA, where Lenovo has no clout at all. What Lenovo promises is to restore Motorola to profitability which it may well achieve, and in the process, it will move inexorably towards a 10 per cent share of the smartphone market.
As noted, Apple is unlikely to lose much market share; although, in a rapidly growing market, a modest loss of market share still implies a sharp upturn in the number of units shipped. The bigger question is how much further Samsung has to fall and whether, in a few years, the two largest smartphone vendors will be Lenovo and Xiaomi, both Chinese – it may also be noted that in India, the world’s second-largest market, the overall market leader is the little-known Micromax, which is shortly also set to overhaul Samsung as the top smartphone vendor. Once upon a time, you went to China to source your handsets which you then branded using a name like Nokia which resonated with customers. But in recent times, the vendor world has evidently been turned upside down with the disappearance of the Nokia brand and Chinese vendors happy to brand as themselves.
It is difficult to come up with other examples of industrial sectors that have undergone anything as radical as this restructuring within the space of little more than a decade, and it even puts into the shade the restructuring of the network operator sector where, finally, after years of prevarication, it has been accepted by most parties that consolidation is a must even if they cannot agree how to go about it. The crucial lesson to be learnt is that (younger) customers (in particular) have become increasingly disinclined to buy the brand. They are more interested in what the product delivers than in who is delivering it and in whether others in the immediate peer group approve.
Peter Curwen can be contacted at: mailto:email@example.com