What Really Drives Mobile Devices Market Performance CSC

2013
WHAT (REALLY) DRIVES

MOBILE DEVICE MARKET
PERFORMANCE?
CHETAN SHARMA
A MOBILE FUTURE FORWARD RESEARCH SERIES PAPER
WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?
Table of Contents
Introduction ............................................................................................................................. 4
US Mobile Market ................................................................................................................... 6
Smartphone Market Lifetime Index ...................................................................................... 9
The Rise of Samsung ............................................................................................................. 10
Zuned Out ............................................................................................................................... 11
What Really Drives Device Market Performance?............................................................... 13
Brand Equity (BE) .............................................................................................................. 13
Marketing (M) .....................................................................................................................14
Competition (C) .................................................................................................................. 15
Channel (CH) ......................................................................................................................16
Product (P) ..........................................................................................................................16
Supply Chain (SC) ............................................................................................................... 17
Market Performance Score ....................................................................................................18
Tablet Market Performance .................................................................................................. 22
Short-term vs. Long-term ..................................................................................................... 24
Can Something Go Wrong for the Leaders? ........................................................................ 25
New Entrants ......................................................................................................................... 26
What Do Consumers Think? ................................................................................................ 26
Conclusions ............................................................................................................................ 29
Acknowledgements ............................................................................................................... 30
Mobile Future Forward Publishing....................................................................................... 31
Papers ..................................................................................................................................31
Books....................................................................................................................................31
About Mobile Future Forward ............................................................................................. 32
About Chetan Sharma Consulting........................................................................................ 32
About the Author ................................................................................................................... 32
Introduction | www.mobilefutureforward.com
Copyright 2013, All Rights Reserved. Use without permission is strictly prohibited.
Disclaimer
Chetan Sharma Consulting is one of the most trusted advisory firms in the global mobile
industry. This research document presents some in-depth analysis about the future of
the mobile industry. However, the author or the company assumes no liability
whatsoever.
This paper is part of the Mobile Future Forward Research Paper Series. For past papers
and books, please see http://www.mobilefutureforward.com
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strictly prohibited.
3
Introduction
The computing landscape has drastically changed over the last five years. Consumers
are increasingly seeking connected devices with majority of them being mobile. In fact,
due to the aggressive buying habits of the US consumer, the overall computing
landscape in terms of quarterly sales has unquestionably tilted towards smartphones
and tablets. While Apple wasnt the first one to launch the smartphone, its iPhone
completely changed the market dynamics. Googles Android and Samsung have also
ridden the tidal wave perfectly. The US market has been ground zero in the battle of the
mobile ecosystems, the war of computing platforms, and quarter-over-quarter sales
hand-to-hand combat.
During the 2008-2010 timeframe, it was obvious that the gap between the iPhone and
rival offerings was tremendous. The user interface, ease of use, and just the quality of
product design won consumers over. Microsoft to its own admission completely misread
the shifting landscape and paid dearly. Its once dominant share of computing (95%) was
cut into less than half in a matter of four years. The disruption from iOS and Android
was so intense that Microsoft had to go back to the drawing board. Microsoft wasnt
alone in being complacent. Once proud leaders of the mobile smartphone era Nokia
and RIM were in denial for a long time of the changing market. They did end up
launching pretty credible offerings in 2012-2013 but were clearly late by half-a-decade.
LG who once used to go toe-to-toe with Samsung in all major markets just couldnt keep
up with the frantic pace of innovation and product cycles and its weak structural beams
gave up under stress. HTC, once the Android darling of the industry, had several missteps and hasnt been able to recover ever since despite launching some great devices.
Given the massive shifts in the computing landscape, it will be instructive to understand
What really drives device market performance? What factors influence the purchase
behavior of the consumer? And can OEMs change their strategy to impact sales? Why
have Microsoft and Nokia not been able to make a dent in the trajectory despite having a
compelling OS, range of devices, consumer-friendly price-points, better distribution,
and increased level of advertising dollars? Will Blackberry be able to recover? Why
hasnt HTC One been able sell in similar numbers as the Galaxy S4 despite being better
by most accounts? What will it take for LG to increase share? Can Motorola stay
relevant? Can new entrants disrupt the waters? Can ZTE and Huawei come from the
bottom and disrupt the top players? Will Apple and Samsung be able to protect their
position on the top?
We have tried to address these questions using a framework that looks at the
complicated equation of market performance. It is based on subjective assessment but it
is informed by data on some of the key variables that impact device sales. The model is
applicable to tablet sales as well. It gives us a reference model that can provide an
understanding of the shortcomings of certain OEMs relative to others.
By honing in on the model, and with real-time inputs to the model, one can also get a
fair assessment of the future device sales. However, sales is just one metric to consider.
One has to also look at revenue and profits along with the competitive positioning in the
marketplace to truly assess the market performance of the player. Having a strong
unit share position in the market place is desirable but not a necessary condition to have
a strong market performance in a given market. The size of the revenues and profits
matter a great deal as well. Similarly, how a company manages and maintains its
competitive advantage is very critical. From 2007-2011, Nokia had a dominant unit
share but its competitive roadmap looked terrible and the market recognized that.
Similarly, Blackberry (then RIM) was the dominant smartphone player of 2008-2009
but it was pretty clear that it is going to end up at a significant disadvantage if it didnt
change its ways in responding to the iPhone.
The mobile market is far from static, it has changed dramatically over the last ten years
and it will change again in the next ten. However, the factors that drive market
performance are likely to stay consistent.
The paper is primarily focused on the US market; however, model can be adapted for
any region or country provided that enough reliable data is available to feed the model.
Using the model and our understanding of the industry, we will try to answer the
questions raised in this introduction and discuss the most important question of them
all What really drives device market performance?
US Mobile Market
The US mobile market is the most interesting market to study because it generates the
most amount of revenue, has been leading the globe with 4G deployments, and is the
most important market for the computing and device players because of the size of
sales.1
Figure 1. US Mobile Revenues 2009 and 2012 2
China and India clearly trump US in terms of unit sales opportunity over the long haul, the price-sensitiveness of
the per unit sales will keep the overall revenue opportunities small relative to the US, at least in the near future.
Western Europe as an entity is an equally important and large market.
2
Source: Chetan Sharma Consulting, 2013
US Mobile Market | www.mobilefutureforward.com

Figure 2. Connected Devices Landscape in the US (2012) 3

In 2012, the US mobile market grew 42% overall from 2009 with the device segment
growing 152%.4 In the next three years, the device segment is expected to contribute
significantly to the overall growth and make up for the sharp declines in the voice and
messaging revenues in the industry. In fact, devices and access will contribute almost
50% of the growth in the next three years.5
As figure 1 shows, the overall growth opportunities in the US market are going to be in
access (sold by the operators), device (smartphone and tablets) sales, and the OTT
services. The tablet sales have already eclipsed 100M annually in the US6 and will
continue to see tremendous growth. It will also be very rare to find non-connected
devices. Either through cellular or WiFi or both, most consumers will seek connectivity
as a key feature of the device (figure 2). Figure 3 shows how fast the featurephone
species is becoming extinct in the US market. In the not so distant-future, most of the
major operators will largely stop selling featurephone devices.
Source: Connected Consumer, Chetan Sharma Consulting, 2012

5
6
4

Figure 3. US Smartphone sales by OEM (2010-2013)7

While we wont go into the details about the computing landscape and its shifts, it is
important to at least discuss briefly the drastic change that has occurred in computing
and its implications on the mobile ecosystems in the coming days. Figure 4 plots out the
share of the computing sales for 3 major platforms over the last four decades. Clearly,
Microsoft dominated the eighties through mid-2000s. However, as soon as iOS and
Android arrived, its share eroded rapidly. What Microsoft used to do to rivals is being
done to its empire though its fate wont be similar due to its extremely strong franchises
and command over the enterprise business. While Microsoft has made the right moves,
it has also made some key strategic errors in reading the market.
Figure 4. The evolution of the computing landscape8

7
Source: US Mobile Market Update Q1 2013, Chetan Sharma Consulting, 2013

Smartphone Market Lifetime Index

Over the last three years, the time a smartphone model remains in the market has been
shrinking. If we consider end of life of a model the marker when the device sales per
month fall below 10,000, the months to end of life has come down from 15 months in
2009 to 12 months in 2012.9
However, the trend is not evenly distributed. As figure 5 shows, Apple models stay in the
market for much longer duration compared to rest of the OEMs and they sell much
more on average. Apple models stay active in the market for almost twice the duration
than others and sell almost seven times the rival models in monthly sales.
Figure 5. Smartphones (US) How long does a model last in the market?10
One of the reasons of this disparity has been due to the many models introduced by the
OEMs. We are already seeing the likes of Samsung (Galaxy) and HTC (One)
consolidating their product portfolio to limited models. Given that Apples one model
8
Source: Chetan Sharma Consulting. 2013 number are based on estimates

Source: ITG Market Research
10
Source: ITG Market Research and Chetan Sharma Consulting, 2013
9
Smartphone Market Lifetime Index | www.mobilefutureforward.com

strategy has worked so brilliantly in the US market, the business case for a low price
iPhone for the US market is poor. However, there is a strong business case for a cheaper
iPhone model for the developing markets which have no or negligible subsidy and are
very price sensitive. As a result, Apple will be forced to address that segment one way or
another.11 Such a device then could find its way into the western markets.
Figure 6. US Smartphone Sales: iPhone vs. Android12

The Android market in the US shows some peculiar characteristics. It is largely
unaffected by the iPhone release and sales cycles. Overall, over the last six quarters, it
has stayed pretty flat in terms of unit sales per quarter. When the iPhone is launched,
there is a big boost in the devices sold but Apple is largely keeping the net-new device
sales. Amongst the Android players, bulk of the device sales goes to Samsung.
The Rise of Samsung

In 2012, one of the most fascinating stories of the US smartphone (and indeed the global
landscape) industry has been the spectacular rise of Samsung. In 2010, Samsungs
smartphone volume in the US was 50% that of Apple. However, by 2012, it caught up
with Apple and became the overall phone leader in not only the US market but also
globally by displacing long-time leader Nokia. Several strategies helped Samsung attain
a dominant position in the marketplace.
11
So far it has tried to counter the lack of a low-priced model via promotions and discounts to incentivize
consumers to purchase iPhone in such markets.
12
10
The Rise of Samsung | www.mobilefutureforward.com

Samsung was already a household brand with several lines of products such as desktops,
laptops, TVs, washing machines, refrigerators, etc. in the market place. While it lacked
the brand cache of Apple, its brand value has been steady increasing as shown by the
data from Interbrand. In 2012, it did something decisive it upped its marketing and
promotion budget so much that it ended up outspending Apple 2:1 and to some extent
negating Apples 3x advantage on brand equity. Additionally, unlike Apple, Samsung
experimented with a range of device featureset. While Apple initially stayed away from
larger screens, Samsung succeeded in impressing the consumers with a larger screen
with Galaxy Note and subsequent Galaxy series of devices. They were a big hit.13
Samsung was also fast and furious in releasing handsets at different price points in the
marketplace. It also started using its clout to focus on building a market franchise in the
Galaxy line of products. It allowed Samsung to start consolidating its advertising efforts
and budgets under one roof.
Samsungs smartphones just like devices from other Android OEMs were getting better
with each release and closing the gap with Apples iPhone. Given that Samsung exerts
almost similar control over the supply-chain and the Android competitive landscape, it
has been able to release devices into the market at a fast pace and keep the margins in
check.
Zuned Out
Apple launched iPod in 2001. During the early days, Microsoft ignored iPod until it
realized it better start paying attention to the growing phenom. It asked its suppliers to
build them a Microsoft iPod. One by one, they all failed. Frustrated, it took matters into
its own hand and introduced Zune in 2006; full five years after the first iPod came into
the market. By that time, Apple had already sold 66M units and still hadnt hit its peak.
As is customary, Microsoft took another few iterations to get it right. By the time a
competitive product came out, it didnt matter. The main reason was that the Microsoft
was Zuned Out. Zuned Out is a phenomenon when being late to the market shuts you
out of the market. It doesnt happen in a year or two but plays over the course of the
many years. In the case of Zune, customers had already made their choice, invested their
time and money into a platform and it will take more than a crowbar to move them onto
something new. Microsoft retired Zune in 2011.
2007 was a big milestone for the mobile industry. iPhone came out. Nokia, RIM,
Microsoft and others dismissed it and more importantly failed to understand and
acknowledge its impact. Their corporate schizophrenia is well documented. Microsoft
wisely realized that it cant just keep paring down the mothership OS for mobile and
took time to rewrite it. The new OS was actually good and well designed, it was quite
fresh. iOS and Android would do well to borrow some ideas from it to enhance the user
experience. However, Microsofts partners by this time were more enamored with
Android. So in Nokia, Microsoft found a partner who can help shine the light on its new
13
Apple subsequently increased the screen size with iPhone 5.
11
Zuned Out | www.mobilefutureforward.com

shiny OS. By the time initial credible versions of the new windows OS started to ship
(almost 5 years since the iPhone launch), Apple had already shipped over 270M units of
iPhone. By the time RIM shipped devices with the new OS; Apple had shipped over
320M units. Consumers have already invested their time and money into platforms and
ecosystems. Will Microsoft, Nokia, and RIM get a second chance or will they be Zuned
Out?
Then came the iPad in 2010 that completely took Microsoft (and others) by surprise. It
pioneered the concept a decade earlier but was completely outflanked by Apple. Zune
wasnt significant to Microsofts core business. It had ignored mobile as well for the
better part of the decade as it didnt disturb the Office and Windows PC franchises. But
tablets are different. Apple singlehandedly created a new category in 2010 and has
dominated it ever since. It is altering the basic notion of computing. Enterprises are
dumping their PCs and moving to iPads.14 All of a sudden, there is a direct threat to
Microsofts core business. This time the implications are very serious. It can no longer
afford a misstep. So, instead of letting partners produce mediocre products that have no
chance of success in the market, Microsoft took the matters in its own hands early on
and produced Surface. It can use its products, distribution power, developer ecosystem,
and the bank balance to alter the scales. But Apple had a big lead. By the time Surface
came out, Apple had sold over 100M iPads. If Microsoft executes, maybe there is a
chance to not get Zuned Out this time around. If it fails, the company itself might be
Zuned Out in due course along with many of its longtime partners.
In the theory of market entry, fast follower is actually a smart strategy. Microsoft was a
master at it. However the strategy has its limitations. Against an agile and ruthless
competitor like Apple or Google, you better be a really fast follower (Samsung) else time
starts to work against you. A slow follower strategy only works if you have something
truly innovative (iPhone) or the incumbents are asleep at the switch (Xbox) or the
business model is disruptive (Netflix). Also, the fast follower strategy is only sustainable
when you are adept at anticipating competitors future chess plays. In todays
environment, one has to respond fast else risk getting Zuned Out.
Does this mean Microsoft is out of the game? No, far from it but the window of
opportunity might be closing if the sales dont pick up steam soon.
14
In a first of kind study on SMBs, we found that 30% of the businesses had moved away from PCs and Notebooks
to smartphones and tablets The ABCs of SMB Transformation: Apps, Broadband, and the Cloud by Chetan
Sharma Consulting and AT&T
12
Zuned Out | www.mobilefutureforward.com

What Really Drives Device Market Performance?

There is no one factor or statistic that helps explain the device sales patterns completely.
In this section we discuss the six major variables that make up the formula for
understanding devices market performance.
Market Performance = f (Brand Equity, Marketing and
Promotions, Competition, Channel Efficiency, Product, Supply Chain)
Each of the six variables has some dependent variables and each of the sub variables has
a weight (or importance) that defines the impact of the sub variable / variable over the
overall equation. Each of the variables is informed by either the factual data from the
field or the subjective assessment of the relative strengths versus its competitors. By
taking a deeper look into each of these variables, one can understand why some OEMs
are doing better than others, what will it take to move the needle in terms of market and
profit share, and can some OEMs even catch-up?
Brand Equity (BE)

This is the loyalty index of any brand that keeps the consumers coming back to it
because they feel the affinity to that brand and its products. Historically this has been
measured through the dollar value assigned to the brand. Interbrand has been tracking
brand value for over a decade which is illustrated in figure 7. Clearly, Apples brand
value has risen manifold since the iPhone came out and it continues to grow. Samsung,
the next dominant US OEM is behind by 3x in the brand value. So, Apple has been able
to use that loyalty and brand equity to its significant advantage.
Another key factor in this equation is the ability of the brand to sustain and grow the
brand value. Nokias brand value started to decline almost at the same time Apple and
Google were seeing the rise. Its worth noting that Microsoft has maintained its brand
value over the last decade.
13
What Really Drives Device Market Performance? | www.mobilefutureforward.com

Figure 7. Brand Value growth of major technology companies 15
Marketing (M)
Advertising works. Thats why it is half a trillion dollar industry. While one can argue,
the traditional ways of advertising are a waste and the advertising industry hasnt made
progress at the same pace, advertising does work and plays an important role in
developing a narrative and story that influences consumer purchase behavior.
There are several components to the advertising variable, chief among them being the
amount the OEM is able to spend on their own, the advertising through the operator
channel, the relevancy, potency of advertising, and the promotion dollars pushed into
the various channels.
15
Source: Based on Interbrand data
14

Figure 8. US Device Advertising Spend by major OEMs (2011-12)

If we take a look at the US device advertising spend, it is clear Samsung got into high
gear in 2012 and over took Apple by a significant margin. In fact, if we add the
promotion dollars to the picture, Samsung outspent Apple 2x in 2012.
Competition (C)
The competition variable looks at the strength of the competitive products that can have
a negative influence on device sales. The timing of product launches, the price
differentiation, the regional and carrier adjustment for launch all play a role in assessing
the probability of device sales for a given OEM. Apple has been able to counter any price
point segmentation by making its older model available at low cost. It actually sells
more old model phones than new model iPhone (figure 9). Any new Android model that
comes into the market has to compete with iPhones priced from $0-200.
15

Figure 9. US iPhone Sales: new vs. old models16
Channel (CH)
In the US, the operator is the most important distribution channel. A good percentage of
the devices move through the operator channel. The relationship with the operator over
the long-term helps define how well an OEM will do in good times and bad. Other retail
channels are critical as well for e.g. Best Buy moves a significant amount of devices for
the operators and the OEMs directly. For Apple, its own retail operation has been a
massive competitive advantage. Other OEMs are just not able to counter that advantage
in any meaningful way. Samsung has tried to at least raise the stakes by a deeper
partnership with Best Buy that gives its products more prominence in consumers eyes.
Product (P)
Product is obviously the most important variable. If one has a bad or inadequate
product, no amount of marketing or channel efficiency is going to make up for it. Some
of the key sub variables are product portfolio, pricing, the ecosystem, and the subsidy
that the OEM is able to garner from the operator to keep the consumer eager to buy a
new smartphone. Apple disproportionately benefits from the subsidy model and it has
most to lose if subsidies disappear from the US market. However, that is unlikely to
happen anytime soon.
16
16

Supply Chain (SC)

The control over the industry supply chain matters a great deal not only for time to
market and margin expansion but also to keep the competitive forces at bay. Apple is
able to write big billion dollar checks that freezes the supply chain so that the smaller
OEMs are not able to procure adequate component supply in time to hit their targets
(HTC) or the pricing of the end product ends up too high (Motorola) that the product
introduction doesnt have the desired outcome.
Figure 10 presents a snapshot of the value of these variables by OEMs (in Q1 2013) in
the US market. Apples journey of domination began with the iPhone introduction in
2007 but it wasnt until 2008 that iPhone really started to have an impact on the mobile
ecosystem in the US market. The product differential with other OEMs was quite large
and aided with clever marketing, and supply chain mastery, it was able to suck out the
oxygen from the ecosystem.
Figure 10. Understanding the relative strengths of different Smartphone

OEMs in US17
17
17

Android was launched in 2008 but didnt really become an important (and dominant)
part of the equation until Verizon decided that it needs a counter weight to AT&Ts
exclusive iPhone deal (which was a master stroke that turned AT&Ts fortunes for the
better). HTC saw early the potential for differentiation with Android and won acclaim
with several product launches. Samsung warmed up to Android in 2010 and just
changed the Android and Smartphone landscape in the US as well as across the globe.
Fast forward to 2013, the iPhone and Android devices from Samsung and HTC have
significantly narrowed on the product variable. Even Nokia and Blackberry have also
produced credible devices. Windows and Blackberry still suffer from low ecosystem
strength. Windows does have advantage of a strong three screen strategy but again missteps in the windows launch lead to poor adoption. Even though Microsoft spent a
significant amount of advertising dollars, the Q4 2012 and Q1 2013 sales have been
disappointing. Windows sold only 1.1 million units in the two quarters combined.
During the same time period, Apple sold 36M iPhones.18
One of the most fundamental errors Microsoft made was in segmentation. Instead of
focusing on the featurephone users (which was an equally big market), it went after the
iOS and Android users. The problem was that once a consumer invests in an ecosystem,
the cost of switching can be quite high. A perfect lock-in, especially for Apple. Customers
who tried Windows loved it. The problem was that not many tried it.There were several
other factors that didnt help Microsoft and Nokia like channel inefficiency and lack of
brand equity.
Market Performance Score

Determining the market performance of a player in the mobile device space is a
complicated equation as it is a multi-dimensional question. There are many factors that
help address the question how is an OEM doing in the market place? Market share,
revenue share, profit share, growth across all these variables, competitive landscape,
future pipeline, etc. all play a role in getting a pulse of the market. The Market
Performance Score attempts at taking all this in consideration with the help of variables
discussed above.
If we take all the input discussed in the previous section and feed that into a formula to
calculate Market Performance Score, the results are shown in figure 11. Apple clearly is
the leader in the US market when it comes to market performance which gives us an
indication of the device sales and device profits in the smartphone arena. So, even
though Samsung is now the undisputed leader in device sales in the US market selling
more than twice what Apple does, in the smartphone space, Apple has been able to keep
its distance though the gap is closing overall (figure 12).
18
18
Market Performance Score | www.mobilefutureforward.com

Whats more striking is the distance between Apple and Samsung and the rest of the
industry. There is no visible number three as has been evident observing the market for
the last two years. The chart also illustrates the scale of the problem that these players
have. In order to come even closer to the first two, they will need to improve
substantially over multiple fronts. Despite having narrowed down the gap in product,
the gap in loyalty and advertising is so wide; it is unlikely that they can make up for the
difference in the near future. Building Loyalty takes time and advertising takes
substantial resources. The existing crop of the tier-2 OEMs lacks both.
Figure 11. Market Performance Score for leading smartphone OEMs in the
US market19
19
19

Figure 12. Monthly US Smartphone Sales: Apple vs. Samsung20

So, the question becomes, can there be a solid number three in the near-term. The
industry does seem to go in cycles. After all, Nokia and Motorola were kings of the hills
not too long ago. Any mis-steps by the top two can provide an opening. However, given
the resources and laser-like product focus of Apple and Samsung, it can provide cover
for any issues with at least one product cycle.
Can new entrants make a dent? There are some dark horses in the industry that
depending on the strategy and scale that they pursue can have a shot at becoming a good
challenger. If you look look at figure 7, the only player close to Apple in brand value is
Google. Google also has the resources to match the advertising spending of the top two.
However, it faces some acute challenges on the rest of the variables (many of which can
be overcome) that need to be addressed. There are also risks to pursuing a formal device
strategy. It could fracture the Android coalition that has worked so remarkably well thus
far.
Another interesting player to watch is Lenovo. It is a brand known to the US consumers
via the PC and notebook businesses. It can also use the success in the Chinese market to
fund the activities in the US. But it is unproven on the product side. To catch-up in the
20
20

mobile space in the short-term, it will have to make an acquisition to make up for the
lost time. Else, it can lose valuable time to make its mark in the ecosystem.
Microsoft also has high brand recognition and sufficient resources to be a player if it
gets some pieces of its strategy puzzle right. The key question in front of the company is
if it should pursue a horizontal or a vertical strategy or play in both sub-segments.
While Samsung is at the top, it also faces key considerations. Despite becoming a
dominant player, it doesnt control its own destiny like Apple does. It is dependent on
Android and its Windows investment is small. The Tizen strategy is also a bit immature
right now and it takes some heavy lifting to build a new ecosystem. If Microsoft with all
its pedigree and resources is having a hard time, can a new ecosystem be built from
scratch? The attention and resources of developers are finite and they will only focus on
the platforms that given them the highest return in the short-amount of time. Right
now, iOS and Android are dominant platforms anyone cares about.
21

Tablet Market Performance

The model discussed for smartphones can be easily applied to tablets as well. The two
segments are similar in nature. Figure 13 plots the various variables for the tablet
market place. With its iPad launch, Apple set a high bar for the industry. Others werent
ready and capable to respond for at least two years. The first credible response came
from a non-traditional OEM Amazon that gave Apple some heartache. The $200
tablet with almost no margins had a different business model. The expectation was that
Amazon can drive revenues from the services rather than the hardware. Just like Google
drives majority of its mobile revenues from search and advertising services and not
directly from Android or the hardware sales, Amazon was able to capture the attention
of the consumer from its services. While the quality of its first generation product was
sub-par, the price point was attractive enough to move the needle. Both Google and
Apple took notice. Google with its Nexus brand has done relatively well.
Apple was forced to launch a device with a smaller display and more important a lower
price tag. The business case for launching a mid-tier tablet was strong. Given that
Amazon and Google occupied the low-tier with the services based business model and
Apple occupied the mid-high tier with the iPad, it has left little room for others to play.
In fact, the trend has forced the OEM to answer the question, can there be a viable
hardware business with a sizable services business?
Microsoft also made its first foray into the hardware space with Surface RT which
suffered from incoherent messaging and value proposition. There is clearly a business
case for a solid windows tablet but Microsoft and the other windows OEMs couldnt
decide whether the device they were launching is a tablet and competes with iPad or a
thin notebook that competes with MacBook Air or both. The marketing sent one
message and the pricing another. The netbook phenomenon has also reset consumers
expectations of pricing of computing devices. The concept of $1000+ computing device
has become so esoteric and challenging.
Samsung has been able to stay in the game with pure brute force. It has launched tablets
across all device sizes and has made available its tablets at various price points.
Windows and to some extent Android also suffer from lack of a robust apps ecosystem.
This of course will improve over time. Figure 13 plots the relative scores for the top
OEMs across the six major variables.
22
Tablet Market Performance | www.mobilefutureforward.com

Figure 13. Understanding the relative strengths of different Tablet OEMs in

the US Market21
Figure 14 plots the Tablet Market Performance Score for the various players. The gap
between Apple and the rest is significantly higher than in the smartphone space.
21
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Tablet Market Performance | www.mobilefutureforward.com

Figure 14. Market Performance Score for leading smartphone OEMs in the
US market22
Short-term vs. Long-term

Market performance is based on a series of short-term and long-term factors. Some can
be improved upon in a product cycle while others take years to master, build credibility
and competitive advantage. Building brand equity is a long-term process; it takes years
if not decades to build a solid reputation about products, design, ethics, and
contributions to the industry. Similarly, it takes time to master the supply chain either
through building your own components like Samsung or having a larger-than-life
buying power like Apple. The channels through which the products flow also takes time
to build out one at a time. Given that mobile operators remain the most important
distribution channel for smartphones in the US, the ability to deliver time and time
again against tight deadlines and doing what it takes to make each other successful is
what builds a tight relationship over time. This is especially true for Android and
Windows OEMs. Nokia ignored the US market and it is still figuring out ways to build a
tighter bond with the channels in the market place.
The components that go into building a winning product is impacted by long-term
building blocks but on a short-term cycle. One hit product (Samsung Galaxy) can
22
24
Short-term vs. Long-term | www.mobilefutureforward.com

catapult a company into the big league while problems with a product cycle can sink a
company (Blackberry, HTC, and Motorola).
The unfair competitive advantage over competition is built over time. The differential
that Apple and Samsung have amassed over its rival over the last two years is just
immense that even when the products are solid, the competing OEMs are having a hard
time just staying in the game. Even though the operators desperately want a third strong
player, it wont happen overnight. To make up for the brand equity deficit and the
advertising bank balance, one has to really master the other variables make sure that
product is compelling in the first place, then it should make it to the channel in time and
at minimum cost, and perhaps through gorilla marketing drive more ROI from the
marketing dollars one has.
Can Something Go Wrong for the Leaders?

Nokia was the king of the hill all of the last decade until early 2012 when it was pushed
off by Samsung. Nokia peaked at 39% in 2008 soon after the iPhone launch. Similarly,
Windows OS was leading the world of smart devices until 2007 when it reached its peak
of 42% share. By 2011, its share was decimated to less than 3%. RIM peaked with 44%
share of smartphones in 2009 but lost the market position soon thereafter. Motorola
ruled the US market for a long time but now is left to reinvent itself under the Google
umbrella.
These ebbs and flow in the ecosystem are neither new nor specific to the mobile
industry. It is part of the industry and corporate cycle. Few companies are able to fight
the weight of the complacency that sets in after reaching the top. In the words of the
legendary Andy Grove, One must always be paranoid, or they dont survive. As
mentioned before, the lifecycle of a product/model have come down significantly. One
missed cycle and you can be Zuned Out of the market. With enough resources, one can
theoretically stay in the game or farm out strategic bets in such a way that the overall
strategy stays in play. It is also becoming a game for big players though their share can
be attacked using segmentation and demographics.
The pressure to keep the top position is intense on Apple and Samsung. Even though
Apple makes more revenue and profits than any other technology company, the vagaries
of Wall Street has cut Apples market cap by 40% in a matter of a handful of quarters.
Similarly, market expects Samsung to continue to perform and not lose its high perch.
Both companies have an Achilles heel software services. They are in the hardware
business but need to step-up on the software services side lest the likes of Google and
Amazon will see an opening to exploit.
The current crop of smartphones all look the same. Industry is in search for the next
blockbuster form factor and user interface. The integrated experience of the future will
include flexible displays, contextually intelligent OS, content bundling, and other
features we havent dreamt up yet. Whoever nails this down will be able to ride the next
wave of mobile device domination. Google is currently pushing the boundaries with
25
Can Something Go Wrong for the Leaders? | www.mobilefutureforward.com

glasses and Microsoft with Xbox. Apple, Google, and Microsoft are all pushing for
competitive advantage across the three screens. Samsung with its R&D, reach, and
marketing prowess is global powerhouse. The emerging markets are seeing different
players. Will someone be able to consolidate the niches to garner scale? One thing is for
sure, the leaders cant take their market position for granted. And competitors shouldnt
wait for leaders to falter.
New Entrants
Another interesting question to ask is can new entrants disrupt the waters? Remember,
one has to perform against the 6 major variables that we discussed before. So, who has
the brand equity and the advertising spend power to level the playing field? Google and
Microsoft can match Apple and Samsung in those respects if they chose to though they
need to master other variables.
What about others? Google and Microsoft are well positioned because they own the OS
and hence a critical component of the stack. However, Amazon is trying to prove that
the OS layer is a commodity and the service layer is where all the value is and given its
size and scale, it has a pretty good shot at proving it but it does have an interesting
symbiotic relationship with Android, until it can have its own.
Can someone do to Samsung what Samsung did to Nokia? Huawei and ZTE are
continuously nibbling from the bottom and now at the top of the tier-2 OEMs (there are
only two tier-1 OEMs right now, no points for guessing who). But they are not a
household brand and their marketing budgets for the US market are non-existent.
Lenovo could be the dark horse depending on how it plays its card. It is completely new
to the space though they have worked around the edges. However, it is a better brand
than its two Chinese compatriots. It has beaten two large US PC companies HP and
Dell at their own game but it didnt build the business from ground up but rather
acquired it from IBM and improved the efficiency. It can do the same by acquiring a
weaker player in the ecosystem or partnering with a player that can give it quick access
to the market. It can then deploy its cost advantage to great effect.
There are other players like LG and Sony who have the brand cachet but need to beef up
on other fronts to stay in contention for the long haul.
What Do Consumers Think?

It is one thing to look at the marketplace from an industry point of view and another
thing from the consumer point of view. Consumers dont see the intricacies of the supply
chain but they see and feel the product. The might not see what goes into producing a
great product but can be influenced by advertising. They might not look at all the
credible competitive offering but stay loyal and comfortable to a brand. We ran a 1000+
consumer survey to assess the factors that influence their purchase behavior and
without a doubt it is pricing that drives their final purchase decision. Though there was
26
New Entrants | www.mobilefutureforward.com

some variance by demographics, universally, the cost of the handset ranked a very high
number one reason for their purchase decision. There are obviously niche segments that
are driven by brand loyalty or influenced by the store representative at Best Buy or
operator store or availability of apps but having all the other variables at parity, price
becomes the differentiating factor.
This is the reason that Apple hasnt had the same kind of success in the non-subsidy
markets. The $400+ subsidy that Apple is able to garner in the developed markets gives
it a significant competitive advantage. Apples subsidy is almost 80% higher than rest of
the OEMs in the US market. Additionally, the availability of older models at extremely
low cost makes the lives of other OEMs very difficult.
Figure 15. Cost as the influencing factor by age demographics23

Price is another reason why postpaid consumers find it hard to move off the subsidy
drug. Despite the gains made in the prepaid segment, US is still predominantly a
postpaid and subsidy market for the smartphones (and featurephones as well). Tablets
have brought in a different paradigm that is similar to the notebook model where a
consumer readily pays for the full price of the computing device. However, even there,
23
27
What Do Consumers Think? | www.mobilefutureforward.com

the market is segmented by price tolerance of a consumer. We have the high tier (and to
some extent mid-tier) dominated by Apple and the low-tier dominated by Android
(Google and Amazon). OEMs caught in the middle are in a no-mans-land and will
struggle to have a foothold without improving on the services front.
28
| www.mobilefutureforward.com
Conclusions
From the trajectory of the mobile industry growth, it is clear that the mobile space is
going to stay dynamic and vibrant for the next decade but who stays on the top and who
cycles to the bottom will remain a key question every year. By comparing relative
strengths of the various OEMs in different geographies/countries, one can understand
the market performance in terms of units sold, revenues, and profits earned for the
participants. The competitive nature of the industry also indicates what is at stake for
the players. By looking at their strengths and weaknesses, players can adjust their
strategies to build sustainable competitive advantage. One must understand what really
drives devices market performance in a given market, endeavor to work on building
unfair competitive advantage, and strive to build great products. However, without
clearly understanding the forces that drive device market performance, there can be no
sustainable competitive advantage.
29
Conclusions | www.mobilefutureforward.com
Acknowledgements
Author thanks and acknowledges the assistance of Gary Cohen, Steve Elfman, Sarla
Sharma, Frank Meehan, and numerous other industry colleagues for their input that
helped shape the discussion in the paper.
30
Acknowledgements | www.mobilefutureforward.com
Mobile Future Forward Publishing

Mobile Future Forward Community produces some of the most thought-provoking
mobile industry papers and books.
Papers
Each year, Chetan Sharma Consulting researches and produces industry-defining papers that look at new
opportunities, industry challenges, and the shifts in consumer behavior.
Books
Mobile Future Forward publishes the book series that consists of essays from speakers and thoughtleaders in the mobile industry. The Mobile Future Forward Summit is all about creating new ideas,
discussion and debate of opportunities and challenges. The essays from CEOs and senior industry
executives are focused on new technologies, trends, and business twists and turns of the industry.
More information at www.mobilefutureforward.com

31
Mobile Future Forward Publishing | www.mobilefutureforward.com

About Mobile Future Forward

Mobile Future Forward is a mobile thought-leadership summit that attracts some of the most
influential minds in the mobile industry who are very instrumental in shaping the industry, in
innovation adoption, and in managing the growth of revenues and profits. The experts and
visionaries from around the globe will gather in Seattle on Sept 10th to explore the mobile
industry 2-5 years forward, envision what the user experiences and use cases look like, discuss
and debate the challenges and opportunities in the journey to that vision. More details at
www.mobilefutureforward.com
About Chetan Sharma Consulting

Chetan Sharma Consulting is one of the most respected management consulting and strategic
advisory firms in the mobile industry. We are focused on evolving trends, emerging challenges
and opportunities, new business models and technology advances that will take our mobile
communications industry to the next level. Our expertise is in developing innovation-driven
product and IP strategy. Our clients range from small startups with disruptive ideas to
multinational conglomerates looking for an edge. We help major brands formulate winning,
profitable, and sustainable strategies. Please visit us at www.chetansharma.com.
About the Author

Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in
the mobile industry. Executives from wireless companies around the world seek his accurate
predictions, independent insights, and actionable recommendations. He has served as an
advisor to senior executive management of several Fortune 100 companies in the wireless space
and is probably the only industry strategist who has advised each of the top 6 global mobile data
operators. He is considered a leading authority on the mobile data technologies and consumer
trends. Some of his clients include NTT DoCoMo, Disney, KTF, China Mobile, Toyota, Comcast,
Motorola, FedEx, Sony, Samsung, Alcatel Lucent, KDDI, Virgin Mobile, Sprint Nextel, Skype,
AT&T Wireless, Reuters, Juniper, Qualcomm, Microsoft, Reliance Infocomm, SAP, Merrill
Lynch, American Express, and Hewlett-Packard.
Chetan is the author or co-author of 12 best-selling books on wireless including Mobile
Advertising: Supercharge your brand in the exploding wireless market and Wireless
Broadband: Conflict and Convergence. He is also the editor of the Mobile Future Forward
Book Series. His books have been adopted in several corporate training programs and university
courses at NYU, Stanford, and Tokyo University. His research work is widely quoted in the
industry. Chetan is interviewed frequently by leading international media publications such as
Time magazine, New York Times, Wall Street Journal, Business Week, Japan Media Review,
Mobile Communications International, and GigaOM, and has appeared on NPR, WBBN, and
CNBC as a wireless data technology expert. He is also the chief curator of the mobile thought
leadership executive forums Mobile Future Forward and Mobile Breakfast Series.
Chetan is an advisor to CEOs and CTOs of some of the leading wireless technology companies on
product strategy and Intellectual Property (IP) development, and serves on the advisory boards
of several companies both startups and fortune 500. He is also a sought after IP strategist and
expert witness in the wireless industry and has worked on and testified in some of the most
important cases in the industry such as Qualcomm vs. Broadcom, Samsung vs. Ericsson, Sprint
vs. Verizon. Chetan is a senior member of IEEE, IEEE Communications Society, and IEEE
Computers Society. He has Master of Science degree in Electrical Engineering from Kansas State
University and Bachelor of Science degree from the Indian Institute of Technology, Roorkee.
32
About Mobile Future Forward | www.mobilefutureforward.com


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2013

WHAT (REALLY) DRIVES

A MOBILE FUTURE FORWARD RESEARCH SERIES PAPER

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 1. US Mobile Revenues 2009 and 2012 2

US Mobile Market | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 2. Connected Devices Landscape in the US (2012) 3

Source: Connected Consumer, Chetan Sharma Consulting, 2012

US Mobile Market | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 3. US Smartphone sales by OEM (2010-2013)7

Figure 4. The evolution of the computing landscape8

Source: US Mobile Market Update Q1 2013, Chetan Sharma Consulting, 2013

US Mobile Market | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Smartphone Market Lifetime Index

Source: Chetan Sharma Consulting. 2013 number are based on estimates

Smartphone Market Lifetime Index | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 6. US Smartphone Sales: iPhone vs. Android12

The Rise of Samsung

The Rise of Samsung | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Apple subsequently increased the screen size with iPhone 5.

Zuned Out | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Zuned Out | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

What Really Drives Device Market Performance?

Brand Equity (BE)

What Really Drives Device Market Performance? | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 7. Brand Value growth of major technology companies 15

Source: Based on Interbrand data

What Really Drives Device Market Performance? | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 8. US Device Advertising Spend by major OEMs (2011-12)

What Really Drives Device Market Performance? | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 9. US iPhone Sales: new vs. old models16

Source: ITG Market Research and Chetan Sharma Consulting, 2013

What Really Drives Device Market Performance? | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Supply Chain (SC)

Figure 10. Understanding the relative strengths of different Smartphone

Source: Chetan Sharma Consulting, 2013

What Really Drives Device Market Performance? | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Market Performance Score

Source: Chetan Sharma Consulting, 2013

Market Performance Score | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Source: Chetan Sharma Consulting, 2013

Market Performance Score | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

Figure 12. Monthly US Smartphone Sales: Apple vs. Samsung20

Source: ITG Market Research and Chetan Sharma Consulting, 2013

Market Performance Score | www.mobilefutureforward.com

WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?