ARCchart‘s latest report is titled ‘The New Age of Handset Customisation: 2006-2011‘. The report analyses the new players, business models and market trends that are changing the economics and dynamics of delivering uniquely customised handsets. As the lead author of that report, I will spend some time highlighting key findings of the research in the next few posts.
Twelve Stages So much time, money and energy is being devoted across the industry in producing handsets, yet there is scarse analyst coverage and analysis of the handset commercialisation process – understanding this process is key to all vendors wishing to play within the handset customisation business. The ARCchart report spends a chapter analysing this industry process – quite appropriately, the chapter is titled “The Silk Road of Customised Handsets”, and talks about the path of handset commercialisation, from brand licensing and industrial design to distribution and the retail experience”
Exactly how complex is the process of designing, producing, marketing and supporting a mobile handset ? The diagram below, taken from the ARCchart report, shows the twelve stages in the process of handset commercialisation:
This diagram is particularly interesting, given that it also portrays the stages where the major players in the value chain are active today, and will be active in the future. The report then goes on to analyse each of the twelve stages. Of particular interest is the analysis of ‘brand licensing’ and ‘last mile handset customisation’ stages:
Brand licensing “Handset OEMs have also typically been the brand owners. Companies like Nokia, Sony Ericsson and Samsung have both strong manufacturer organisations and healthy brands. However, with the increasing segmentation of OEMs, operator handset customisation and the entry of consumer brands, branded handsets for niche segments are slowly becoming a mainstream activity. Since brand marketing and handset manufacturing are two very different disciplines, a brand licensing agreement or proxy can bridge the gap.
Technically speaking, brand licensing involves a brand owner leasing the use of a brand to another company. It represents the exploitation of intellectual property in its purest form. Brand licensing typically involves contractual terms stipulating which products the brand will feature on, co-branding elements, positioning and rendering of the brand logo, product lifetime, distribution, pricing, promotion, retail placement and retail experience of the branded products.
The revenue model for brand licensing is a per-device royalty fee, often with a minimum volume commitment. This revenue model presents a low-risk, minimal cost endeavour for the brand owner, albeit at a limited potential for revenue returns. Brand owners may extend this model through strategic revenue share agreements, opting to share both increased potential revenues, with the potential risks.
Beyond 1-to-1 brand licensing between owner and licensee, there are a number of proxy companies specialising in multi-brand representation. These players secure long-term licensing deals with brands, which they then represent, sublicensing brands within their portfolio to product manufacturers. An example of a brand license aggregator is Global Wireless Entertainment, Inc. (GWE) which specializes in long-term brand acquisition and representation. GWE’s current brand portfolio includes Pele, Muhammad Ali, Warner Bros., DC Comics, Marvel, Lucas Film, NHL and NBA.”
Last mile Handset Customisation “The final stages of handset customisation aim to furnish the handset with the external branding, applications, settings and increasingly, user interface components, to satisfy the customer’s requirements (typically an operator or OEM). Essentially, this process customises the plastics, settings and software of a basic handset in line with client specifications.
Traditionally, client-specific handset customisation includes adding external branding elements to the handset plastics (such as the operator logo), adding local language support in the software and programming network-specific settings onto the handset. In today’s age of operator-led handset customisation, this stage typically involves embedding specific applications to support operator services (e.g. an IM application), or the OEM value portfolio (e.g. a push-to-talk application). It also includes embedding clientspecific software modifications (e.g. for handling special SMS messages, GPRS optimisations, specific codecs and Java APIs).
Increasingly, this stage of handset customisation includes modifications to the user interface. The user interface of a handset is essentially made up of the visual elements of the applications that sit on the device, including the homescreen and menu application. Therefore, to customise the handset user interface, the manufacturer needs to adapt these applications one by one for a consistent look & feel. In the last two years, UI customisation frameworks have emerged which enable manufacturers to deliver a completely customised user interface within much shorter development times. UI customisation frameworks and their vendors (e-SIM, Digital Airways, TAT and MSX) are analysed further in Section G.3.”
The report also discusses the cost and time-to-market of the typical handset commercialisation process:
“The complete handset commercialisation lifecycle typically takes 12-18 months: a considerably long time, given that it is similar to the typical amount of time over which handsets are replaced in saturated mobile markets.
The sheer number of stages involved in commercialising a handset also indicates that the total handset development cost is substantially higher than the basic bill of materials (BOM). Over and above the BOM, the total cost includes costs for handset production operations, testing and quality assurance, retail training and customer support training. In total, a low-end handset is likely to cost between $3 – $10 million to develop, while a high-end handset may cost $10 – $50 million.”