The annual gathering of media industries, Media Evolution - The Conference in Sweden, had a young and interesting speaker this year – Mark Kaigwa, Kenya-based digital marketing expert, consultant, start-up founder, writer and more. Mark gave an engaging talk at the conference, where he explained the extent to which the mobile phone industry has penetrated Africa.
One of the facts he highlighted might sound a bit banal yet it carries a fundamental truth. What he said was “There are more mobile phones in Uganda than light bulbs” but behind the quirky statistic lies an important realisation – mobile phones have taken over the world. The market for these devices is huge and - for now - bottomless. Why? Because of ongoing, steady, focused and determined innovation. If you buy the newest smartphone today, one year on it will be outdated. Love it or hate it, that’s a fact.
Ask Apple (AAPL:US), the most valuable company in the world with a market capitalization of $629.50bn (£397.88bn), whether the mobile phone industry will come to a slowdown anytime soon. In 2006 the iPhone did not exist. In 2012 Apple’s second quarter profits were $11.6 billion (£7.33 billion) of which 58 percent came from sales of the emblematic smartphone.
In the 21st century mobile phones are no longer the brick-like devices carried around by workaholic businessmen. They have become a necessity for a great many humans and integral to so many elements of modern life. The market for such goods is highly lucrative with a guaranteed high demand, which means cutthroat competition will continue to be rampant.
Currently there are five major firms holding the largest market share and quite a few smaller participants. It’s unnecessary to list all the small ones but the big five are Samsung (SMSN:LI), Nokia (NOK:US), Apple, ZTE (000063:CH) and LG (LG:US). According to the International Data Corporation (IDC), these five companies hold 61.3 percent of the mobile phone market. The remaining 38.7 percent is distributed among the 50 or so manufacturers which operate on a much smaller scale.
Nokia is a Finnish multinational telecommunications and information technology company which from 1998 to 2012 held number one spot amongst the world’s mobile phone vendors. But over the past five years the company’s performance has deteriorated. Nokia has seen its shares plummet from $40 (£25) in 2007 to just below $3 (£1.9) this year. This downslide is generally seen to be a result of Nokia’s inability to get itself firmly onto the smartphone rollercoaster. The Finnish company has yet to prove it can provide high-quality smartphones in a fast-paced highly competitive market.
Samsung is a South Korean multinational conglomerate and, since earlier this year, the largest mobile phone maker in the world. Unlike Nokia, Samsung has shown itself to be supremely adaptable to the new smartphone trend and managed in the third quarter of 2011 to overtake Apple in smartphone sales, with a total market share of 23.8 percent. Its recent great success is the Samsung Galaxy range of smartphones, with the latest Galaxy S3 being labelled by some market observers as the “iPhone killer”.
US-based Apple is currently the most valuable company in the world, on a market capitalisation basis, owing its huge success to an incredible range of innovative products and a powerful marketing strategy. As noted earlier, the largest part of Apple’s profits come from sales of the iPhone, the most recent incantation of which being the iPhone 4S. Such is the pulling power of the iPhone, Apple managed to sell four million units of the 4S in the first three days after its release, making it the most successful launch of any mobile phone ever.
These companies – Nokia, Samsung and Apple - are currently the ’big three’ in terms of market share in the mobile phone industry. Nokia is severely handicapped by its ongoing inability to establish itself as a serious player on the smartphone market though recently the Finnish company seems to have acknowledged its shortcomings and has taken major corrective steps by partnering with Microsoft in the use of Windows 8 as the platform for its new range of Lumia smartphones.
Currently in the mobile industry there are two main types of phones – smartphones and feature phones (so-called “dumb-phones”). The trend is clear – there is a slow conversion of mobile phone usage from the traditional cell phones we have been using the past 15 years to the new touchscreen smartphones. But for the substantial price difference, we’d all probably have forgotten about dumb-phones by now. According to BusinessInsider, in the US the dumb-phone conversion cycle is already halfway complete. From May 2011 to Feb 2012, the percentage of Americans owning smartphones increased from 35 to 48, with feature phone ownership decreasing from 46 to 41 percent and the ’phone-free’ community down from 17 to 11 percent. A similar trend is noticeable in other developed countries, where people have a budget for discretionary spending high enough to afford the pricey smartphones. On a global scale the feature phones still outnumber the rest but, according to the IHS iSuppli Wireless Communications Market Tracker Report, smartphones will become the most popular apparatus in the mobile phone market as early as next year, two years ahead of earlier predictions, and running to a global 54 per cent of worldwide mobile phone shipments in 2013. By 2016, that share is expected to have increased to 67.4 percent.
**The Battle So Far **
It is beyond anyone’s doubt, even amongst Apple’s biggest critics, that Steve Jobs and his company were the first to truly invent the modern-day smartphone. Being first though, while giving a crucial advantage, can only get you so far on the journey to dominance. Other companies are quickly catching up with their products, most notably Samsung - now viewed as Apple’s main competitor in the smartphone market. And to gain ground on the rest, companies can resort to three broad strategies. They can provide higher quality products, lower prices or select a third and nowadays very common option – lawsuits.
The late Steve Jobs has been quoted in a biography as saying that Android “ripped off” the iPhone and that the features of the rival operating system amounted to “grand theft”. He vowed that he was “willing to go thermonuclear” on Google and “spend every penny of Apple’s $40 billion in the bank, to right this wrong.” The spat started with accusations but quickly progressed to lawsuits and counter-suits. Here follows a short summary of the smartphone patent war:
In October 2009 Nokia sued Apple in a US court for alleged infringement of its wireless standards. The case was resolved in June 2011 when Apple agreed on a settlement and paid an undisclosed amount to Nokia for its patents and royalties.
Apple started the war on Android in March 2010 by suing Taiwan’s HTC over 20 patents. The International Trade Commission issued an injunction and halted imports in the US of two HTC phones. Since the lawsuit got under way, HTC shares have fallen by 72 percent and Apple’s shares have gained 65 percent.
Apple then launched another lawsuit, this time against Samsung in relation to its Galaxy phones and tablets, which were using the Android system. At the end of August Apple scored a major victory with a US court ordering Samsung to pay $1.05 billion (£665 million) for infringing a number of Apple’s patents. The American company hopes to use the momentum it has accumulated so far to achieve an even bigger victory – halting the release of Samsung’s Galaxy S3 in the US market. If it succeeds, expect an unprecedented hit on Samsung public stock.
With many lawsuits still pending, the legal war has yet to reach its climax. Patents are being registered every day and smaller companies with promising technology bought off at the drop of a hat. It all feels like an arms race but instead of weapons, firms are struggling to get ahead with innovations. Apple once again has a huge advantage in the race – it is sitting on a $100 billion (£632 billion) pile of cash, giving it the muscle to outbid – and out-lawyer – its rivals.
Android vs iOS
Mobile phone manufacturers aside, there is a clash on an even larger scale between smartphone operating system developers. Apple’s iOS and Google’s Android are without doubt the leaders but there is a new contender looming on the horizon – Microsoft’s Windows 8.
From a standing start a mere two years ago, Android has moved rapidly to gain hold of the largest OS market share – latest data from IDC shows 68.1 per cent of the mobile phones shipped globally during the second quarter of 2012 were using Android. The rest of the market is mostly dominated by iOS. It’s not surprising that Android has gained the ascendancy since the platform is used by a number of mobile phone manufacturers whereas the iOS is limited to one product – the iPhone. Yet, despite Android’s impressive performance, Apple is winning the platform war for now. That’s because it commands the lion’s share of industry profits – earning a staggering 77 percent of the mobile industry’s profits in the second quarter of 2012. This means that, on an operating system basis, iOS is outperforming the rest of the mobile industry by 3 to 1.
John Kirk from tech.pinions has provided a profound explanation on why profit share is more important than market share. When people outside the tech industry are asked to choose between selling more products and making more money, they will certainly choose the latter. It’s common sense but it does not necessarily apply to the tech industry. Microsoft is the best example out there to prove it. With a variety of competing platforms, Bill Gate’s company managed to grab the largest market share by licensing so many copies of the Windows operating system to its hardware partners that Windows simply overwhelmed the market. And the more Windows was selling, the more valuable became compatible hardware and software. This is the so-called ‘Network Effect’.
If market share and the Network Effect are so important, then why is Android losing the mobile phone war? This, according to Kirk, is because in the smartphones platform war, it isn’t customer share which matters but the developer market share. Developers which create smartphone applications are thereby creating value for the platform and triggering the Network Effect. Apple iOS customers buy more apps and pay more for them, which in turn means developers receive more money and are incentivised to create new iOS-compatible apps. To this point at least, Android users have been buying far fewer apps and spending much less money on pimping up their devices. Currently there are seven iOS Apps for every three the Android platform can offer. Fab.com, the high-end flash sales site, says a third of its visits are mobile and of those visitors, 95 per cent are via Apple gadgets. The bottom line is that Android users are simply less likely to use apps.
But the thing about the mobile phone industry is that everything is short term. Predicting what will happen a year from now is simply shooting in the dark. Apple might be making the most money now but the situation changes rapidly and today’s leader might be struggling to catch up tomorrow.
Come September 12th and Apple is expected to reveal the iPhone 5. This has yet to be confirmed by the company itself but several media outlets have reported that the date has been set for a launch event in San Francisco. Analysts expect that this, the sixth edition of the iPhone, will be the top-selling smartphone device for the foreseeable future – meaning the period until it’s superseded. Samsung meanwhile released the Galaxy S3 over the summer of 2012 and on July 22nd announced that sales have passed 10 million. The South Korean company also announced a pending new version of its Galaxy Note – the 5 inch + smartphone, sales of which have also passed the 10 million mark.
And these days a major debate is raging on tech forums as to whether Microsoft’s Windows 8 will be able to butt in on the Android and iOS duopoly . Microsoft is next week scheduled to launch in New York new devices which will use Windows 8. As mentioned earlier, the Windows mobile operating system is seen as one of Nokia’s best bets for getting back into the game and breathing new life into its smartphone business. At least two Nokia devices are expected to be announced, one of them featuring an industry-first curved-glass display expected to be exclusive to AT&T.
It’s pretty safe to assume that the future of the mobile phone industry lies with smartphones. And that there remains ample room for significant growth in the market for some time to come. This is so especially in developing countries: according to analyst projections, China will outpace the US in smartphones sales by the end of this year and in IDC reports Brazil and Russia are identified as hotly growing and contested markets, where vendors are scrambling to capture new customers. In Western Europe, the UK takes first place as the fastest growing market, with even stronger gains expected from the deployment of LTE (Long Term Evolution) networks - successor to the UMTS 3g technology - and anticipated price cuts for HSPA (high speed packet access) phones.
So the future of the mobile phone industry is very much dependent on how the new batch of smartphones turns out. Will Apple’s iPhone once again captivate the world? Or will customers go for Android devices with much cheaper alternatives? September 12th seems to be a good date to start getting some answers.
On 5 September, Microsoft and Nokia showcased a range of devices in a major attempt to again become a contender in a smartphone market besieged by Apple and Samsung. The new Lumia phones, featuring bigger screens, cutting-edge cameras and running the Windows 8 operating system, were supposed to be the trump card in Nokia’s hands but reviewers said they simply weren’t impressive enough and gave them the thumbs-down. Industry analysts said the devices are solid and reliable but they did not “push the envelope” as Nokia CEO Stephen Elop has promised they would. Mark Sue from Royal Bank of Scotland gave credit to Nokia for making good progress but added that investors were looking for quantum leaps from the Finnish company yet received something far from revolutionary. "The challenge is that the world is working on the 4th, 5th and 6th editions of their devices while Nokia is still trying to move from chapter 1. It still has quite a bit to catch up,” said Mr Sue.
Another letdown for investors was the lack of details on how much the new Nokia Lumia smartphones will cost, when will they roll-out and which operators will be distributing them.
The New York launch had barely passed halftime, when Nokia’s shares in Helsinki began sliding and ended at €1.99, registering a loss of 13 percent - the largest drop for the Finnish company since June. Nokia’s US listed stocks dropped some 10 percent to $2.55.
According to Danske Bank A/S, fourth-quarter shipments of the Windows 8 handsets will be “relatively low” and the scarcity of Qualcomm Inc. chips used by the Lumia smartphones may result in a bottleneck. The Copenhagen-based bank has a €1.20 12-month target for the stock and gives a “sell” recommendation. According to data from Bloomberg’s survey of analysts, Nokia has been given 23 sell recommendations, 15 holds and 10 buys. The average price target is €1.98.
On 12 September Apple held a showcase event and even though the company never publicly announced it, everyone knew that the next iPhone would be revealed. Shares of the mobile phone manufacturer rose last week to a new all-time high of $683.29 as anticipation built up.
The iPhone 5 is thinner, lighter and faster with a bigger and more resilient screen. It bears quite a lot of physical resemblance to its predecessor the 4S with its flat glass, rounded corners and minimalist face, but also offers LTE wireless technology meaning that the phone will run on 4G networks. The device has a new and smaller adaptor called “Lightning” marking the first major change to Apple’s docking system since 2003.
For analysts, the iPhone 5 is certainly a great product that builds on Steve Jobs’ legacy but it does not open a new chapter in Apple’s long history of innovation. Adam Lynch, analyst at Ovum, seems to have pinpointed the issue: “The surprise was that there was no surprise. It is an incremental product upgrade, which is showing how mature the product is.”
Investors seemed perplexed and Apple’s shares had a roller-coaster reaction with ups and downs throughout the trading day. After 10am, stocks started to climb from a daily low of $657 and by 10.30 am they reached $668 at which point they lost momentum. By 1 pm, shortly after the event had ended, the stock retreated back to $657 only to jump back up and close at $669, marking a 1.4 percents increase.
Both Nokia and Apple did not surprise their fans with anything revolutionary. The difference is that for Apple it was hardly a matter of life and death while for Nokia further chances to capture the market’s imagination and dig itself out of its present malaise may be starting to recede. Apple can now lean back and let its powerhouse branding and customer loyalty to the App Store and iTunes work its magic. With Christmas approaching, analysts predict a killer season for the iPhone 5.