1. Apps matter
Apps are the biggest reason why creating an OS for the smartphone market as of now would not make any sense. Microsoft tried its hand with Windows Phone but ultimately failed despite having made Nokia an exclusive partner and even going as far as to buy Nokia’s mobile phone division. Microsoft spent several billions of dollars trying to force its way into the smartphone market but to no avail. Universal apps might solve the problem to some extent, but even then the vast app-gap between Windows Phone and Android/iOS still remains.
By now you must be thinking that OK if a company can’t create a new smartphone OS, it will just be a hardware manufacturer. That also won’t work as I’ll explain in the next point.
2. Apple sucks all the profits, slowing sales
Apple has been capturing nearly 90% of the smartphone market’s profits over the past two years or so. The remaining 10% is what Android manufacturers get in their pockets. Even out of this, the vast majority goes to Samsung. In fact, most analysts claim that Samsung and Apple together command more than 95% of the smartphone market’s profits. This is because the losses of other manufacturers like Sony, HTC, BlackBerry and Microsoft is added to the profits of Samsung and Apple, helping them command more than 100% of the smartphone market’s profits. When it comes to profits, the smartphone market is pretty grim right now and unless you’re Samsung or Apple, you would hardly be earning any meaningful profit. [PC: Fortune] Forget about the disparity of profits amongst manufacturers, even geographically, smartphone profits vary widely. Developed markets such as US, Japan, South Korea and Europe are much more profitable than developing markets like India, Africa and Indonesia. However, the problem here is that most developed markets are already saturated. It’s definitely easier to enter a region when the entire market is growing as most users are first time users and there’s a good chance that your product will be given a chance. However, once a smartphone market saturates, most users have a preferred choice and a new entrant has little to no chance. Developing markets do offer a lot of growth opportunity, but are basically a race to the bottom for the most part. Manufacturers are constantly forced by intense competition to provide better specs at cheaper prices forgoing margins in the process. In most developing markets, smartphones are nothing more than commodities with ever decreasing prices. You now think that’s ok, a company can have a disruptive business model and enter an emerging smartphone market but that as well won’t work as I mention in the next point.
3. All business models have been copied
Smartphones for a long time have been sold in a traditional way that was similar amongst almost all manufacturers. Manufacturers would set up expensive and time-consuming retail distribution across the country. They would sell smartphones at a particular price point which included distribution costs, margins for retailers and marketing costs. Marketing budget would be spent on TV commercials, front page ads etc. The first alternate business model was a different and lightweight sales channel in the form of e-commerce. The second business model was using the smartphone as a platform. Google gives away Android for free but makes money through various Google apps pre-loaded on Android. Companies like LeEco are trying to make the smartphone a platform. The company pre-loads various entertainment apps on its smartphones, eventually hoping that the consumers subscribe to these multimedia content for a constant recurring revenue stream. These are the two alternate business models i.e E-Commerce and Smartphone as a platform. However, the problem is that these newer business models are no longer exclusive to the newer smartphone manufacturers and have largely been mimicked by others as well. Take Micromax for example, the company largely stuck with the sale of sub $100 smartphones through offline channels. However, the entrance of Xiaomi and Motorola made Micromax launch its own online brand in the form of YU which has competitively priced smartphones, some internet connected devices and even a forum of its own for fans to interact. Most manufacturers are now taking a hybrid sales approach. Micromax’s Yu for online sales while the conventional Canvas brand keeps selling offline as well. Similarly, Lenovo’s acquisition of Motorola gave it a strong online only brand while it still sells some smartphones offline. Huawei too has a separate brand called Honor for online exclusive sales. The benefits of going online only are now not limited to any one particular manufacturer or set of manufacturers as almost all incumbents now have their own online only smartphones. Even Samsung which largely resisted the temptation now has its own set of smartphones available only online. The benefits of using a smartphone as a platform in developing markets are yet to be seen. Most people in developing markets don’t spend much on software or services, in fact, most don’t spend anything at all. Plus if a person is choosing your smartphone only because it provides the best specs at X price point, it’s naive to assume the customer would then pay for apps or services which can be easily pirated for free. Online sales are brutal, to say the least. You could get a spike if you have a hit product amongst consumers, but that spike is temporary at best. It’s just a matter of weeks before another manufacturer comes in with a better smartphone at an even lower price. Online sales only exaggerate a race to bottom scenario even more as distribution is no longer a problem, so literally anyone can compete with you and the e-commerce companies are more than happy to provide marketing and other support if a manufacturer becomes exclusive. You can assume that a company can completely skip the consumer-facing market and target B2B companies for its smartphone efforts but even that seems to be failing these days.
4. Normal phones becoming good enough
Creating smartphones for specific businesses or use cases can seem like a good idea. After all, if your smartphone meets the needs of a business then the business would be happy to procure smartphones from you even if it is sold at a considerable margin. However, the problem is that consumer-grade smartphones itself are becoming good to such an extent that they are more than fit for general use in corporate industries. Take BlackBerry for example, the US government was one of BlackBerry’s top customers however iPhones and Galaxies itself have become so secure that the senate is now replacing BlackBerries with either iPhone SE or Samsung Galaxy S6. Silent Circle also made a privacy-focussed smartphone but actual revenue realized by Silent Circle in 2015 was just $10 million while projected revenue was around $750 million. Smartphones like Samsung Galaxy’s Active series with every iteration are becoming more durable and water resistant. The water resistance and durability offered by Samsung’s Active series makes it suitable enough for use in many heavy industries. Sure there are still some heavy industries where Galaxy Active might not be usable yet, but it’s tough to see those industries not being covered by future iterations of Galaxy Active. Ok, let’s just forget about smartphones, what if a company decides to become a component manufacturer?
5. Component manufacturers
The story of component manufacturers is no different. Just like Microsoft, even Intel tried to brute force its way in the smartphone market with its x86 based processors and failed. Intel spent billions of dollars on a “contra-revenue” method whereby they actually subsidized the cost of developing and maintaining devices using Intel’s Atom processors but to no avail. Just like Microsoft, even Intel has abandoned their mobile efforts. Display manufacturer Sharp which in itself was a combination of the struggling display units of several Japanese giants was sold to Foxconn this year. Being a component manufacturer requires an investment of several billion dollars i.e if you’re actually going to manufacture the end product. Also, the current smartphone market growth is driven mostly by low-end Android smartphones which carry very low to negligible margins. Android smartphone manufacturers themselves need to maintain a scale of several million units every year to have a sustainable business. If you’re a component manufacturer like Qualcomm and Mediatek, you need a scale of several hundred million units to survive in the smartphone industry. Most top end smartphone manufacturers like Apple are facing a slowdown in shipments as the high-end smartphone market saturates consequently even companies that supply Apple are facing the heat. To quote from Nikkei Asian Review “Taiwan-based Hon Hai Precision Industry, also known as Foxconn, achieved rapid growth, thanks to its production of iPhones. In January, however, sales at the world’s largest contract manufacturer of electronics fell 14.7% on the year, marking the second straight month of year-on-year decrease. This trend indicates a slowdown in demand from Apple. The monthly data was released on Feb. 5 when Hon Hai Chairman Terry Gou visited Osaka for bailout talks with Osaka-based ailing electronics maker Sharp.” “Another potential victim is Sony and its operations making image sensors, for which the company holds the world’s largest market share. Last November, sales of smartphone sensors slowed abruptly, although they had until then been a profit center for the company. Sony is likely providing Apple with components specially designed for iPhone models. According to Kenichiro Yoshida, Sony’s chief financial officer, and executive deputy president, the components are unlikely to support other companies’ devices, and therefore, if demand decreases, the impact will be greater than with other products. Sony stocks have lost 12% of their value this year, due to concerns over the company’s slower growth in the next fiscal year, starting April.”
Conclusion
There’s honestly no space in the smartphone market anymore. The only place that can still provide a chance is apps. Latest hits like Prisma and Pokemon Go show that at least when it comes to apps, we can still have huge hits. But when it comes to smartphone OSes, hardware or smartphone components, the saturation is close to 100% with very little to no space to grow.
