WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE?

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1 2013 WHAT (REALLY) DRIVES MOBILE DEVICE MARKET PERFORMANCE? CHETAN SHARMA A MOBILE FUTURE FORWARD RESEARCH SERIES PAPER

2 Table of Contents Introduction... 4 US Mobile Market... 6 Smartphone Market Lifetime Index... 9 The Rise of Samsung Zuned Out What Really Drives Device Market Performance? Brand Equity (BE) Marketing (M) Competition (C) Channel (CH) Product (P) Supply Chain (SC) Market Performance Score...18 Tablet Market Performance Short-term vs. Long-term Can Something Go Wrong for the Leaders? New Entrants What Do Consumers Think? Conclusions Acknowledgements Mobile Future Forward Publishing Papers Books About Mobile Future Forward About Chetan Sharma Consulting About the Author Introduction

3 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 Any use or reprint of the material discussed in the paper without prior permission is strictly prohibited. 3 Introduction

4 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 wasn t the first one to launch the smartphone, its iphone completely changed the market dynamics. Google s 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 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 wasn t 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 but were clearly late by half-a-decade. LG who once used to go toe-to-toe with Samsung in all major markets just couldn t 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 hasn t 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 hasn t 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. 4 Introduction

5 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 , 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 but it was pretty clear that it is going to end up at a significant disadvantage if it didn t 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? 5 Introduction

6 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 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, US Mobile Market

7 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 US 6 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. 3 Source: Connected Consumer, Chetan Sharma Consulting, Source: Chetan Sharma Consulting, Source: Chetan Sharma Consulting, Source: Chetan Sharma Consulting, US Mobile Market

8 Figure 3. US Smartphone sales by OEM ( ) 7 While we won t 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 won t 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 landscape 8 7 Source: US Mobile Market Update Q1 2013, Chetan Sharma Consulting, US Mobile Market

9 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 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 Apple s one model 8 Source: Chetan Sharma Consulting number are based on estimates 9 Source: ITG Market Research 10 Source: ITG Market Research and Chetan Sharma Consulting, Smartphone Market Lifetime Index

10 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. Android 12 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, Samsung s 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 Source: Chetan Sharma Consulting, The Rise of Samsung

11 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 Apple s 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. Samsung s smartphones just like devices from other Android OEMs were getting better with each release and closing the gap with Apple s 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 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 hadn t hit its peak. As is customary, Microsoft took another few iterations to get it right. By the time a competitive product came out, it didn t 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 doesn t 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 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 can t 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, Microsoft s 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 Zuned Out

12 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 wasn t significant to Microsoft s core business. It had ignored mobile as well for the better part of the decade as it didn t 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 Microsoft s 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 competitor s future chess plays. In today s 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 don t 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

13 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, Apple s 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. Nokia s brand value started to decline almost at the same time Apple and Google were seeing the rise. It s worth noting that Microsoft has maintained its brand value over the last decade. 13 What Really Drives Device Market Performance?

14 Figure 7. Brand Value growth of major technology companies 15 Marketing (M) Advertising works. That s why it is half a trillion dollar industry. While one can argue, the traditional ways of advertising are a waste and the advertising industry hasn t 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 What Really Drives Device Market Performance?

15 Figure 8. US Device Advertising Spend by major OEMs ( ) 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 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 $ What Really Drives Device Market Performance?

16 Figure 9. US iphone Sales: new vs. old models 16 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 consumer s 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 Source: ITG Market Research and Chetan Sharma Consulting, What Really Drives Device Market Performance?

17 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 doesn t have the desired outcome. Figure 10 presents a snapshot of the value of these variables by OEMs (in Q1 2013) in the US market. Apple s journey of domination began with the iphone introduction in 2007 but it wasn t 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 US Source: Chetan Sharma Consulting, What Really Drives Device Market Performance?

18 Android was launched in 2008 but didn t really become an important (and dominant) part of the equation until Verizon decided that it needs a counter weight to AT&T s exclusive iphone deal (which was a master stroke that turned AT&T s 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 Q and Q 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 didn t 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 Source: Chetan Sharma Consulting, Market Performance Score

19 What s 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 market Source: Chetan Sharma Consulting, Market Performance Score

20 Figure 12. Monthly US Smartphone Sales: Apple vs. Samsung 20 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 Source: ITG Market Research and Chetan Sharma Consulting, Market Performance Score

21 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 doesn t 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 Market Performance Score

22 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 weren t 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 couldn t 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 consumer s 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

23 Figure 13. Understanding the relative strengths of different Tablet OEMs in the US Market 21 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 Source: Chetan Sharma Consulting, Tablet Market Performance

24 Figure 14. Market Performance Score for leading smartphone OEMs in the US market 22 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 Source: Chetan Sharma Consulting, Short-term vs. Long-term

25 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 won t 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 don t 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 Apple s 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 haven t 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?

26 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 can t take their market position for granted. And competitors shouldn t 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 didn t 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 don t 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 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

27 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 hasn t 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. Apple s 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 demographics 23 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 Source: Chetan Sharma Consulting, What Do Consumers Think?

28 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-man s-land and will struggle to have a foothold without improving on the services front. 28

29 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

30 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

31 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 31 Mobile Future Forward Publishing

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