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YEAR 2, VOL. 4, APRIL 2012

The insider
view of the
mobile market
In a Nutshell The Story The Facts
The launch of the iPhone The mobile handset market is in turmoil. Since The smartphone market will reach $219 billion in sales in
Apple launched the iPhone in 2007, OEMs have 2012, according to IDC. The top ten competitors in this
fundamentally changed the basis of market are:
been seeking to jump on the smartphone
competition, eliminating players
bandwagon. Five years later, few have managed to
without a vibrant ecosystem (i.e. do so profitably. Even though more companies are
iOS or Android). Android then Vendor Total handset Operating
gaining a significant market share, only two seem to volumes margin
commoditized the production of be making a profit out of it: Apple the creator of (2011) (Q1 2012, est.)
smartphones, reducing the the market in the first place and Samsung, a fast
follower. Attractive profit margins seem elusive for Apple 93M 48%
importance of economies of scale
most of their competitors. Some are toppling from
that had made Nokia a leader in Samsung 327M 18%
their former glory (Nokia, RIM), while some new-
the past and sending market comers seem to be gaining speed (ZTE, Huawei). HTC 45M 7,5%
concentration in a plunge. But will they manage to become profitable?
LG 88M 1,4%
To sustain profitability in the RIM 52M (3,4%)
commodity smartphone market, More than 80% of handset profits
OEMs need to create a tailored are captured by two companies: Nokia 417M (5,2%)

value chain. Apple has done so by Apple and Samsung Motorola 41M (5,5%)
innovating at each point of the
Sony Ericsson 34M (10%)
value chain. Among all other
OEMs, only Samsung has created a ZTE 64M N/A
unique value chain configuration Huawei 41M N/A
by integrating across hardware Source: vendors, VisionMobile estimates
production and capturing profit at
multiple links of the value chain. Apple, despite having only a handful of smartphone
models, captures a substantial part of the market and
Together Apple and Samsung
experiences strong growth (85% in Q1 2012). It also has
capture more than 80% (and an exceptional profit margin compared to its competitors.
rising) of the profits in the handset
market. Samsung's handset division accounts for 51% of revenues
and for 73% of total profit in Q1 2012 . Operating profit
margin of the division improved to 18,4% from 11% a year
ago. In Q1 2012, Samsung ended Nokias 14-year reign as
Source: Asymco, VisionMobile estimates largest handset maker by volume.

02 Apple & Samsungs Profit Recipe

01 Smartphones play by different rules than feature Many companies are now getting a chance in the
phones When Apple launched the iPhone in 2007, the basis smartphone market: the amount of OEMs with more than
of competition in mobile phones changed radically. Instead of 2% global market share went from 6 to 10 in two years
performance of the device (hardware features like battery life time. However, in this commodity market, market share
or colour depth, software features like address book), the doesnt guarantee profitability!
success of a smartphone now depended on the ecosystem it
tapped in to (i.e. apps, driving much wider use cases for the 03 Apple is the innovator According to Harvard strategy
device). The success of such ecosystems is driven by network professor Michael Porter, to gain a competitive advantage
effects that create lock-in, turning them into winner-takes- companies must create a unique value chain configuration.
all markets. Two dominant ecosystems emerged: iOS and There is more than one recipe to achieve that. Apple has
Android. Any handset manufacturer that missed the Android chosen to innovate across the chain: the Cupertino
train was left behind. Notably, Nokia failed to compete using company owns its own platform (iOS), enhanced with
Symbian, the dominant pre-smartphone platform, which was content and services and an outstanding product
built for OEMs, not developers, and could not keep up in the experience; it has a strong, tribal brand, while on the other
new apps-driven ecosystem world. One other company
Is the handset RIM did have a valuable ecosystem (built on a messaging
network and email synchronization). However, its value went
market up in smoke when the foundations upon which it was built
Market concentration plunges
were commoditized by OTT internet services like Gmail and
consolidating WhatsApp.
into a duopoly? 02 Mobile phone production is now a commodity Back in
Glad you the day, the proprietary devices we now call feature phones
followed a traditional industrial model: supply-side
asked... economies of scale were key to keeping costs down and
margins up. This led to a gradual concentration of the
market, resulting in a small number of dominant players,
headed by Nokia. In 2008, soon after the appearance of the
modern smartphone, Google launched Android, a free to use
platform to build smartphones, with the explicit intention to
lower barriers to entry, and therefore commoditize the
making of smartphones. Android succeeded in its goal: time-
to-market decreased, development costs went down and
smartphones converged into a virtually homogeneous form
factor. As barriers to entry went down, many companies
small and large could now make Android smartphones. This
is immediately apparent in the market concentration, which
plunged after 2008 as devices became more and more Estimated HerfindahlHirschman Index for handset
uniform, as shown in the chart to the right. market. Source: VisionMobile estimates

03 Apple & Samsungs Profit Recipe

hand its strong control over the supply chain makes it behave came closest at a competitive advantage based on the HTC
as a vertically integrated company, pushing costs down and Sense UI and fast time to market, but this advantage is
appropriating profits across the supply chain. On the proving to be unsustainable. The Q1 2012 profits for HTC
distribution side, Apple is the only OEM to partially own the showed a 70%YoY drop.
retail channel, i.e. Apple stores.
06 A duopoly emerges, or does it? The result of Apple and
04 Among followers, only Samsung has got a unique Samsungs success in creating a tailored value chain, and the
advantage As competition is based on ecosystems, beyond failure of others to do so, is that the two companies between
Apple only Android-carrying OEMs are still in the game. them capture over 80% of all available profits in the handset
They are in a race to the best device, a race which cannot market (smartphones and feature phones combined). In
be won. Coming back to Porter, the only possible basis for 2011, they were the top two smartphone manufacturers in
profitability is a unique competitive advantage, i.e. a tailored volume, with a combined market share of 38,9% of units
value chain that is inaccessible for competitors and delivers shipped.
value for consumers. The only handset maker apart from
Apple who has built such a unique value chain today is This, however, should not be mistaken for a done deal
Samsung. The electronics giant not only assembles handsets, consolidation of the market. The smartphone market as we
but also makes a lot of the most valuable components, know it is less than five years old. While per-capita
notably screens and chipsets. This allows the company to smartphone penetration in mature markets is approaching the
capture profits across the value chain, where its competitors 50% point, there is still a lot of room for expansion in
can only capture the value of assembly. Where Samsung emerging markets, and therefore for new differentiated value
doesnt own a value-adding element (e.g. the platform or the propositions. Moreover, the drop in market concentration
retail network), the company hedges its bets. Thats why shows no sign of slowing down, which indicates that new
Samsung has multiple platforms and excellent operator entrants (or reviving incumbents) have an opportunity to
relationships. Samsung can then reinvest those gains in R&D create value.
(e.g. bada), marketing or acquisitions that strengthen the
competitive advantage it already has, creating a virtuous We can see at least two opportunities left at the table. In
cycle. mature markets, a company like Amazon could enter the
smartphone market with a unique business model of
05 Others left behind Samsungs competitors either dont have subsidizing (self-branded) hardware to drive a content and
the cash to invest in a virtuous cycle (due to streaks of losses), retailing ecosystem. This is akin to operators subsidizing
or they have no unique value chain configuration to invest hardware to drive voice and data subscriptions, only here
their cash in, making the spending ineffective. Nokia used to Amazon managed to have its own branded devices, which
have a feature phone cash cow and strong financial backing operators never managed to make a success. We discussed
by Microsoft, but it has divested several key value-adding this kindelization opportunity extensively in volumes 1 and
elements, notable the platform, now produced by Microsoft. 2 (year 1) of Mobile Insider. Secondly, the mobile user
ZTE and Huawei are backed by a profitable network experience is not always tuned to emerging markets, which
infrastructure business. For now, this money is proving will be the main growth markets in the coming years. This
ineffective at producing a highly profitable business. Money creates opportunities for value chain differentiation, for
can buy high volumes and fast growth, but without a tailored example by tuning phones for payments (of digital goods, in
value chain this growth is likely unsustainable. HTC perhaps shops or between people) without requiring credit cards.

04 Apple & Samsungs Profit Recipe

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