Endeavour Partners - Blog

It seems that Samsung has recognized the importance of the smartphone market – Samsung aims to treble smartphone sales in 2010 | Reuters – and now has ambitions to treble its shipments. While a target of 18 million smartphones sounds impressive, that doesn’t make it a leader:

• Nokia’s shipping about 21 million units a quarter
• Apple’s shipping about 9 million

With Nokia’s shipments comprising about 40% of the smartphone market, it’s on track to be about 220 to 250 million units, depending on how fast it grows; that implies 7-8% market share for Samsung, split across the Android and WinMo platforms.

The $99 heavyweight

In the past couple years, even months, we’ve seen a sharp decrease in the price of smartphones.  With these high power devices more and more becoming necessities instead of luxuries for mobile consumers, and revenue from data and content based traffic rising, carriers are becoming more willing to subsidize these pricey devices to put them in reach of the average consumer.  And recently the $99 price level, previously reserved for more value oriented feature phones, has been shocked by the introduction of a true smartphone heavyweight: the iPhone 3G.

Even with other carriers beginning to increase value priced smart offerings, such as the newly announced $99 BlackBerry Storm, the value per dollar ratio still leans heavily in favor of AT&T and its iPhone 3G.  To back that up, here is quick overview of the best phones currently available on the value menu:

Verizon

1. LG Dare – A resisitive touch screen feature phone offering haptic feedback and a 3.2 megapixel camera.  Limited by a smaller 3″ screen and lack of a true smartphone OS.  Plus the web browsing experience leaves much to be desired
2. BlackBerry Storm – RIM’s first foray into touch screen phones running the standard Blackberry OS 4.7.  While it carries all the enterprise friendly Blackberry features, it has been criticized for having a cramped keyboard and being sluggish.

T-Mobile

1. BlackBerry 8820 – An aging offering from RIM now eclipsed by the Curve 8900.  Usual RIM enterprise features, but suffers from a lack of a camera.
2. Samsung Behold – Another resistive touch screen feature phone lacking a true smartphone OS.  Has sub-par web browsing and lacks WiFi.

Sprint

1. Samsung Instinct – A resistive touch screen phone lacking WiFi and with bad web browing UI.  Also lacks sizable internal storage.
2. Motorla VE20 – Barely deserves mention in this category.  No full web browser, WiFi, or enhanced OS.

AT&T

1. iPhone 3G – Capacitive touch screen device running the iPhone OS, with good web browsing experience, WiFi capability and sizable internal storage.  Lacks expandable memory.
2. BlackBerry Pearl 8110 – WiFi enabled trackball device with limited internal storage running BlackBerry OS.

This overview shows that there simply isn’t a contender to compete with the $99 iPhone 3G.  As these prices continue to drop, smartphone penetration will increase and it will become ever more necesarry to have true smartphones available at this value menu level.  And of course, this topic begs the question: How long will it be before we see the rise of free smartphone offers?  At that point the feature phone may become obsolete and this current value price level may be reserved for even smarter, heavier hitting devices.

It seems that LG has ambitions to be the #2 (by volume) mobile phone vendor. Their plans seem, however, to be focused on hardware, rather than software:

• in Q4 LG will launch a new “Black label” series phone, which will be positioned to compete with the iPhone
• LG is pretty happy with their luxury “Prada” phone line and is working on another Prada handset
• LG also has a plan to move even deeper into a luxury cellphone market, by creating it’s own extreme premium brand,  “similar to Toyota’s Lexus and Nokia’s Vertu”

The big unanswered question is about software and services. If the ‘Black Label’ is going to compete effectively, then great aesthetics alone won’t be enough; LG will need to deliver on the complete user experience, which means software and services. These have not been its traditional areas of strength.

We’ve already noted that despite the excellence of WebOS, Palm needs strong support to become a credible platform player, competing with the likes of Apple, RIM, Android, Nokia/Symbian/Ovi and even (because it might do something radical) Microsoft with WinMo.

The point is now not lost on even the analyst community (Kaufman Sets Hold Rating; Many Possible Suitors), who’ve identified several options:

“…potential suitors include Nokia, Samsung, LG, Motorola, Hewlett-Packard, Cisco, Microsoft and Dell.”

Let’s leave aside the question of why buy now, when in December Palm was trading at less than one-tenth of its current value with a market cap below $200 million, the value of Palm is in WebOS and its US presence, not the Pre, so let’s take a look:

Nokia – already bought and paid for Trolltech, and has Maemo – not likely, unless its struggles in the US make Palm worthwhile for that alone

Samsung or LG – {neutral | non-aligned | independent} device players – very hardware-focused – do they want to transform their business model become a platform player with WebOS, competing against Android and Microsoft rather than collaborating with them, or trying to co-exist?

Motorola – too many of its own issues, also already stronger in US than elsewhere

HP or Dell – clearly want to build positions in smartphones from their personal computer position, could they re-focus WebOS development in the right direction?

Microsoft – not unless or until it admits (to itself, most of all) that WinMo’s not going to get it there…

Cisco – the wildcard, perhaps as the basis for entry into smartphones as they become a key element of the the interwebs

There’s a lot of buzz about apps for smartphones. Not all apps are created equal, however, particularly when it comes to making money from them as a developer.

And that matters to platform players (Apple, RIM, Android, Nokia/Symbian/Ovi, MSFT/WinMo and Palm/WebOS) and device vendors (Apple, RIM, Nokia, Samsung, Sony Ericsson, LG, HTC and Motorola) because apps matter to consumers, and the choices that developers make will play a big part in which platforms win.

For the core apps like mail, messaging and browsing, their importance and economics means that platform players or device vendors have to deliver a great experience, they’ll be prepared to spend $/€ millions to do so, and they’ll give them away for free. That’ll make it difficult or impossible to compete against them. The world does not need another mobile browser company.

There’s a related category where other big businesses will also seek a presence on a platform, such as the iPhone, because of the payoff to their wider online or offline business, through for example increased brand awareness or reach. Think Amazon, Barnes & Noble or BA Flights (Yes, I’m a transatlantic bibliophile).

At the other end of the scale there will be a gazillion applets or widgets. It’ll be really hard to make money from these, because customers expect them to be free, and they’re often the fruit of individual developers scratching their own (sometimes idiosyncratic or even idiotic) itch. Maybe a little advertising money, but on a small screen, even a smartphone’s high resolution version, there’s a limited window for this. Perhaps if contextual information about who and where and what can be used, the value of a click-through can be raised, if privacy concerns can be addressed effectively.

In the middle, there seem to be two possibilities:

1. focused apps targeting a well-defined and stable job that people want to get done, and whose utility and usability is high enough that people will pay a few $/€ for them, but which are not so universal that they get bundled into the core and given away for free
2. infotainment apps, that can be renewed and replaced, fueling our insatiable appetite for amusement, such as games

There’s some really interesting analysis by ChubbyBrain (The iPhone Inspired 2nd Economy: Over $100 Million Goes from VCs to iPhone Startups) which estimates that $100 million in venture funding has already gone to iPhone apps insurgents in the middle of the spectrum. These are business for whom the apps are the core of their business rather than a complement to it, between established businesses that can fund iPhone app development themselves, and individual developers.

The three biggest categories, both by numbers of companies, and by amount invested:

• gaming and entertainment
• information provider
• social networking

Yup, it’s all about amusing ourselves.

Interestingly, this is also why the economics of video are so different from the economics of music.