According to Gizmodo, Samsung has decided to exit the market for low-end phones, those old-fashioned devices that just let you make phone calls. They are unable to compete with the likes of Nokia. Meanwhile Nokia’s earnings are down 4% even as revenues grow 20%. So who is winning?
Five years ago I had a conversation with Shannon Maher about the future development of mobile phones. At the time most phones in the US did nothing but voice calls; most American consumers had never heard of SMS. Repeating the conventional wisdom in tech circles, I claimed that Moore’s Law would inevitably lead to ever more powerful and complex cellphones that would be like miniature PCs. Shannon surprised me with the first plausible argument I’d ever heard against this claim. [1]
He pointed out that for 20 years Moore’s Law had been driving the development of desktop PCs and mobile phones in different ways. PCs had gotten more and more powerful every year while staying roughly the same price. Mobile phones on the other hand had gotten smaller and cheaper every year without adding any new capabilities. Why wouldn’t this trend continue, he asked?
Shannon was right about the trend. But then two things happened. First, phones got so cheap that in the US, where carriers subsidize handsets to encourage people to sign up for long-term contracts, the price to the consumer reached zero. Second, almost everyone in the developed world who was ever likely to buy a mobile phone finally bought one.
If phones are essentially free and everyone already has one, there are only two ways for carriers to grow their businesses. They can keep cutting the price of phone service to take customers from each other, or they can persuade customers to buy more powerful phones and new data services. Handset makers don’t have much room left to cut prices on low-end phones, so they too want to sell us more powerful handsets. Or they can sell phones for a few dollars each to people in the developing world and seek The Fortune at the Bottom of the Pyramid
As the largest handset maker, Nokia bet on its economies of scale and has come to dominate the low end with hundreds of millions of nearly identical handsets. Much smaller rivals like Samsung could not compete. But every disadvantage is a potential source of advantage; because of their small size, Samsung, LG and others were more willing to do small runs of experimental handsets in hundreds of different configurations, with various combinations of color screens, cameras, keyboards, thumbwheels,
GPS receivers, Java, stored-value chips, music players, FM radios,
music players, 3D graphics engines, and memory. This was exactly the sort of expensive Darwinian process necessary to find out what consumers really wanted, and it is still going on.
Samsung briefly overtook Motorola to become the number two manufacturer in the world, but Motorola fought back with weapons that Asian manufacturers still haven’t mastered (and that a lot of people thought Motorola had forgotten): design and branding. Thanks largely to the RAZR, Motorola now has a ten percentage point lead on Samsung again.
Meanwhile Nokia still seems complacent about this vast middle of the mobile phone market. So do many of the entrepreneurs that I meet who want to develop applications and content for the mobile phone. Like Nokia, when they look to the future they look to smartphones, the $500 plus high-end devices powered by Symbian (or Windows Mobile), and they think that they just have to wait for consumers to catch up with them.
I am not so sure. While there are a lot of business customers for whom a smartphone makes sense as a low-cost alternative to a laptop, and a lot of rich consumers who just want to buy the most expensive phone on the market no matter what it does, the future of phones is being decided in the mid-market by Motorola and Samsung.
Despite their recent troubles - the loss of share to Motorola and the downward pressure on earnings caused by all that expensive experimentation - I think Samsung’s approach to the market makes more sense than Nokia’s. The future belongs to them. Or to LG, or Haier, or Motorola or whichever one of the dozen other players can best combine continuous innovation with design to own the mid-market.
And I see no evidence that what most people want is a miniature PC.
[1] ‘People don’t need that stuff’ doesn’t count. People didn’t need the wheel.