Hampus Jakobsson

Prioritize: Take over the world or Enjoy good margins

Prioritize: Take over the world or Enjoy good margins

The end of each quarter is always an exciting period in the mobile business, the average selling price and market shares of the manufacturers are disclosed. The third quarter, 2006, looked like this in terms of market shares:

Nokia 33.6%
Motorola 22%
Samsung 11.1%
Sony Ericsson 6.7%
LG 6.3%

(Source: http://www.theregister.co.uk/2006/08/28/moto_gains_market_share/)

As can be seen, the top five cell phone manufacturers own around 80% of the market, less than 10% correspond to a handful of Japanese OEMs and the remaining 10% of a collection of smaller brands. Result: The world will more and more be ruled by a few handset vendors, instead of many. (In the CDMA-space, Qualcomm has tried to create the opposite situation with 1-3% companies like Pantech-Curitel and the Japanese vendors, but as any monopolized market everyone involved pays a higher price. Due to a lot of reasons; cost being one of them, dependency from one player another, CDMA has not gained market share over time.)

Disclosure: Average Selling Price and Market share are connected
What then happens is that people look at the report to find statements like ‘Nokia device ASP of EUR 93, down from EUR 102 in Q2 2006‘ or from SEMC ‘Average Selling Price increases sequentially to 147‘. After this statement they usually make two statements: ‘Why are Nokia losing their margins?!’ or ‘Sony Ericsson is one of the few vendors who really know how to make phones!’. It is not that strange that Nokia and Motorola have largest market shares but not the best ASP. The world market looks roughly like this (divided by type of phone):

Low end (Voice phones) 41%
Mid/High-end (Feature phones) 42%
OpenOS (Smart phones) 17%

Source: Nomura 2005
(To avoid unnecessary discussion: the OpenOS-figure is rather high, Gartner for example has a guesstimate of around 10 %.)

In the stagnant markets (Western Europe, Korea, Japan) the devices that are sold are to a greater extent feature and OpenOS phones, and people switch phones at least once a year. Here it is a margin business; few phones with good margins are sold. In BRICE (Brazil, Russia, India, China, Emerging) mainly voice phones are sold and these countries has a LOT more people. This is a volume market; a lot of terminals, but with bad margins. (In US, and some other parts of the world, the gaps are as usual bigger and there is a large diversity.)

So with greater presence in these the volume markets you get better market share, but also lowered average sales price and margins. Bigger players always have the economy of scale to help them, but it is usually easier to increase price than to lower development costs and bill of material.

Vertical vs. Horizontal
Sony Ericsson focuses on the feature phone market and not voice phones. At the same time, they are doing something even more important to help their ASP: They focus on clear vertical segments. Sony Ericsson has created two recognizable sub-brands that actually help the user select phones: Walkman for music centric devices and Cybershot for the devices sporting a better camera experience. This is good marketing! The best way of making a consumer pay more is to make her understand why she should. Motorola’s four letter abbreviations (RAZR, ROKR, SLVR, etc) or Nokia’s N-series, E-series or four digit versions don’t bring the same clarity. (The 2xxx, 3xxx, 5xxx, etc series might be clear to Nokia’s marketing gurus, but they are certainly not clear to us consumers.) Samsung and LG haven’t even tried, but spend their time creating pushing the envelope of hardware instead.

What Sony Ericsson has done is to create a vertical device: A device which is dedicated to a certain usage (or at least better at this). Nokia with its S60 is moving the other direction: towards a horizontal platform. Most other devices are just fuzzy. There is another group of companies who has followed a similar strategy as Sony Ericsson has: ELLE, Bang & Olufsens Serene, Nokia’s Vertu, Goldvish and others with them. The ‘vertical’ is not a dedicated usage, but an attitude, a clear proposition.

The great thing of having a horizontal strategy is that you can become the required middle-man. Who would have built applications for anything but Microsoft Windows a couple of years ago? What we don’t know is whether the horizontals become important. Will people buy a handset so that they can download apps? Or will they choose a pre-packaged target group (and maybe add some links, wallpapers and Java-applications and games)? The risk of going for the platform strategy is that if a certain usage or application becomes dominant you risk become a pipe, or plumbing. Who would have thought that Microsoft’s greatest threat would be Google or Adobe?

Hampus Jakobsson, TAT

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