September 2013 has been a very important month for the smartphones industry. There were three developments which will have significant impact on the smartphone industry and change the world as we know it… especially, Emerging Markets:
- Microsoft acquired Nokia (pending shareholder approval), potentially eradicating the ‘Nokia’ brand from the smartphones space, starting 2014
- Blackberry posted a quarterly loss of over USD 1 Bn, wrote down USD 934 Mn on unsold stocks of its latest flagship device, and is contemplating a proposal to be acquired by an investment firm and go private
- Apple launched two iPhones (instead of the usual one), and neither of them were cost-reduced devices
Impact on Emerging Markets Dynamics
These three events will have intense repercussions in the emerging markets smartphones space. Nokia has been a strong market leader and synonymous with ‘Mobile Phone’ in most of the emerging countries until recently. Just over two years ago, the brand had over 65% market share in the Indian smartphone space. The brand continues to resonate strongly with the consumers. And, various processes that the company set (in terms of retail distribution channel, margin structure, inventory price protection, etc) are aped by most players in the industry. The possibility of not having a ‘Nokia’ branded smartphone from 2014 is implausible for consumers in emerging markets.
Similar to Nokia, Blackberry has its loyal following among its target audience. Even when the company changed its strategy to focus on youth (in 2011), the adoption in emerging markets was instant and fast. Blackberry is also the first (and for a long time, the only) device brand that the carriers in emerging markets (primarily, retail markets) partnered with. Even as the company’s market share started declining globally (in 2012), it held its strong position in the emerging markets (until recently).
Apple is an aspirational brand and has an iconic following in the emerging markets. However, the lack of an affordable iPhone is not expected to grow its niche market share in these markets.
Source: Convergence Catalyst Research
With smartphones outselling featurephones for the first time in Q2, 2013, and the emerging markets still fairly unpopulated with smartphones, the fall of two popular device brands creates a large gap and a potential opportunity for various players to capitalize, especially in emerging markets. Although companies such as Lenovo, Huawei and ZTE are focusing on growing as global smartphone brands, we expect domestic brands such as Xiaomi (in China) and Micromax (in India) to be better positioned for growth.
Source: Business Insider – Future of Mobile Report
We expect the local smartphone brands to strengthen their brand and distribution in domestic markets and expand into other emerging markets more aggressively. While Micromax already has its presence in Latin America and Africa, Xiaomi is expanding into Russia and Latin American countries. One key factor that will ensure long-term sustainability of these brands is a ‘Signature’ Product Portfolio. And, this is where Xiaomi’s Android fork strategy – MIUI – built by a team of former Googlers and its revenue model of low device prices and monetizing services is expected to be successful. Xiaomi’s strategy of engaging consumers with strong feedback loop process is also highly effective. On the contrary, leading Indian brands such as Micromax, Karbonn, Spice, etc currently offer little uniqueness or differentiation in their product offerings and primarily depend on distribution and brand to sell their devices.
It’s All About Software and Services Now
On 23rd September 2013, along with announcing over 9 Mn combined iPhone 5C & 5S sales, Apple announced another critical statistic, which largely went unnoticed. In the first five days of launch, Apple witnessed over 200 Mn downloads of iOS 7. This was over 100% growth as compared to the number of iOS 6 downloads (in the same time) a year back. Smart devices are primarily a software play now.
Impact on Android: This is where Google’s Android strategy (of developing and freely distributing the OS) works well for the company, providing it rapid scale. However, Google does not have direct control over its OEM partners’ product development and software release cycles, and hence can never expect large scale and coordinated migration to its latest OS version. Also, ban on Google’s services in China (world’s largest smartphone market), emerging players such as Xiaomi creating forks on the base Android stock to create their own UIs and services (completely different from Android’s) and growing strength of Samsung as the Android partner will force the company to strengthen its partnerships with various local brands in different emerging markets.
China to be the Playground for Emerging Players: The ban on Google’s services in China, along with the country being the largest smartphone market is attracting multiple emerging OS players to focus on this market. Jolla, the maker of open source smartphone OS – Sailfish – is focusing on Chinese market for its launch. Oppo, another domestic Chinese brand has recently announced a Smartphone (N1) as the first device to be launched with the popular Android ROM known as ‘CyanongenMod’ out of the box. China is fast emerging as the playground for different smartphone OS players to grow.
Services-Based Business Model: While the smartphone device costs are declining rapidly, many players are looking to compensate this with services-based revenues. But, for services to provide significant revenues for mobile devices players, scale is utmost important. And, these services will also need to be customized for different markets. There also exist multiple operational issues such as regulatory approvals, micro-payments, local ecosystem partnerships, etc., for the success of services-based business. And, this could potentially be an issue for Xiaomi’s international expansion. While Xiaomi and other device players are trying to venture into services space to garner revenues, there exists another player with a globally successful services-based business model. And, if there is ever going to be an opportune time for Amazon to foray into smartphones space, it is now!