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.

At 4G World here in Chicago, the debate is raging on about the potential value of femtocells.  One audience member asked yesterday, “If I already have a 20 Mbps broadband connection and a WiFi access point, then why do I need a femtocell?”  I think he was on to something, but it is interesting to go back in time a little and see how the relative business cases for WiFi and femtocells have changed as the market evolved.

This feels like a confession:  Three years ago, I was a proponent of femtocells as a solution for indoor coverage, particularly when compared to WiFi UMA.  Too few devices had WiFi, and it seemed unrealistic to expect many users to adopt a solution that required such a constrained selection.  Different family members or different personnel within an organization may have very different device preferences or be at different points within the replacement cycle.

By contrast, femtocells allow installation of customer premise equipment where it is needed, and the problem is solved.  Individual users don’t need to change their behavior, and if the costs were right, then it could be an attractive solution for many households and businesses.  But the costs were too high (I priced one at $300 at the time) and commercial availability was and still is limited.

Fast-forward three years and the market has changed dramatically:

1. Lead by the iPhone and RIM’s Blackberry, smartphones are rapidly gaining share – in developed markets, the majority of users will have one within two device replacement cycles
2. The challenge is no longer only about indoor coverage, but now also includes an immediate need for additional data capacity to support high bandwidth applications
3. Leading smartphones will nearly all be WiFi-enabled

The result is that homeowners and businesses no longer need to pay to install a femto cell, and users no longer need to be constrained to specialized, suboptimal devices.  For most people, WiFi coverage already exists in their home and office, and these same people are likely to carry a WiFi-enabled smartphone now or within two upgrade cycles.

These smartphones are also responsible for driving a massive increase in data traffic and clogging up 3G networks.  WiFi provides a mechanism for operators to offload 30% or more of this traffic without massive upgrades — and in advance of LTE networks coming over the next 3 years.

Device makers are scrambling to offer smartphones that match Apple’s iPhone as the key competitive benchmark (including WiFi).  Mobile operators are responding to increasing smartphone usage with investments in WiFi assets and improvement of seamless switching between WiFi and wide-area cellular to offload some of the associated explosion of data traffic.  The way the iPhone restricts high-bandwidth applications so they can only be used over WiFi is a good example of a first step in this direction.

Meanwhile, the level of investment in femtocells is small by comparison, involves a tough value proposition to customers, and is focused on solving a problem that is largely taking care of itself.

My money is on WiFi.

Two items this morning caught my attention, both reflecting on the potential of smartphones as ‘controllers:

• NetworkWorld has a piece of commentary on why the iPhone can’t be killed
• there are now pictures available of the new controller from Sonos

Carolina Milani of Gartner manages to both get it completely right, and completely wrong in NetworkWorld. First, what she got right:

Gartner analyst Carolina Milanesi says that the iPhone’s continued success in the smartphone market has as much to do with its relationship to other Apple devices and software as it does with its own capabilities.

“From technological perspective, there are devices out there that might have higher specs than iPhone,” she says. “But there’s nothing on the market today that pulls everything together to give the superior user experience that you get with the iPhone.” (our emphasis added)

Then I believe that she gets it completely wrong when it comes to the potential appeal of smartphones as a gaming platform:

“I think a lot of gamers would rather go for a full PlayStation [Portable] than a phone-based as a video game system,” she says. “At the end of day you have enough phones that do voice and they are small enough for you to carry a second device that does only video games. I’m not sure that a video game phone would bring much to Sony, to be honest.“

Completely missing the point. If your phone is a smartphone, with a responsive and powerful user interface, and motion sensing and haptics, then it’s an insanely great gaming controller. Two games on the iPhone illustrate this incredibly well:

• X-Plane -the amazing flight simulator
• Flight Control – the completely addictive casual game

X-Plane exploits the graphics capability and the motion sensors as a controller. Flight Control exploits the touch screen and the peer-to-peer networking. Both of them rock, and illustrate just how good a smartphone can be as a games controller.

In fact I was thinking of a post called the ‘Flight Control’ test; for other smartphones, can you imagine playing the game on them. In particular, it’s where the Nokia N97 currently falls short (I’ll update after the update); there’s just no way that it’d work for Flight Control.

On the other hand, the growing importance of interfaces like Facebook may mean that it’s home screen is a better answer than either iPhone or WebOS.

I’m even dubious about the Pre; sometimes it just lags in its responses to touch input, and that’d cause a major (virtual) mid-air collision.

We are already seeing a lot of investment in games for smartphones, and the iPhone in particular. If games developers like id Software are in love with it, as John Carmack said in an interview with VentureBeat:

Carmack’s endorsement means Apple has one of the leading game developers in the whole industry on its side.

“I love the iPhone,” Carmack said in an interview. “It’s a real game platform, not a tiny little toy.”

It would make a lot of sense for Sony [Ericsson?] to launch a great gaming smartphone that leverages the PSP franchise, and unsurprisingly there are recent rumours to this effect again.

The Sonos news is interesting; as any of you with both an iPhone and a Sonos music system will already know, the Sonos app for the iPhone is in many ways a better controller than the dedicated controller. In response, they’re launching a new touchscreen controller:

Sonos CR200 controller

This is important, because it represents another big application area for smartphones: home control.

Apple has its great Remote application which now has gesture control, and now almost all of the major home automation companies already have apps for the iPhone: AMX and Crestron, for example.

What’s more, the value and competitive importance means that other platform players are also targeting this; even Nokia through its home control technology and There venture.

Perhaps one of the interesting ways to think about smartphones that deliver great user experience is as ‘life controllers’.

At the moment, we’re particularly focused on two themes:

• ‘Less is More’ – how you can get the most value out of product creation (R&D) by offering fewer products, with fewer features, spending less on in-house R&D resources and working less hard
• ‘Get Smart!’ – what the future of convergence looks like: smartphones + ‘cloud services’ + advanced/premium infotainment (video and apps) + smart home hub

The two come together in a recent survey by Best Buy:

“…a large portion of adults in America plan to buy a smartphone in the next 12 months. However, many barriers stand in their way, including confusion about the technology, the shopping experience and price.”

“Of adults who do not yet own a smartphone, nearly half (47%) claimed they are too confused by the vast assortment of models and features.”

Big takeaway: if you make things too complicated and offer customers too many confusing choices, they won’t buy. The key to portfolio management is not allocating the available resources, but optimizing the choices that you offer to customers.

Moreover, the survey also confirms one of our key themes; when it comes to apps for consumers, entertainment is critical:

“More than half (58%) feel it is important to be able to listen to music on their mobile phone. Forty-one percent feel it is important to be able to engage in social networking such as Facebook, MySpace or Twitter. And 36% said being able to play games is important.”

Not much reported, but fascinating because it speaks to the key economic question of share of wallet, was the fact that most consumers would give up alcohol rather than give up their mobile phone:

“Six in ten (60%) of those surveyed shared they would rather abstain from alcohol for a week than give up their mobile phone”

This says that mobile phones and smartphones can take share from other categories of seeming unrelated spending. Unless we now categorize smartphones primarily under entertainment, along with drinking and socializing…

Computerworld is publishing the results of its mobile deathmatch between the iPhone and the Pre (Mobile deathmatch: Can the Pre knock out the iPhone) on Monday (6 July) and is asking for feedback on what to evaluate the devices on. FWIW, The Register has a good comparison as well.

I’ve been using both intensely since the Pre was launched (along with an N97, and less intensely a Storm, a G1, a Bold and an X1), and the Pre does come closest to the iPhone.

There are two key criteria which differentiate all of these devices:

• user experience (UX)
• ecosystem (apps and content)

And when you dig deeper, ease of use is not so much about any individual app, it’s about the ‘edge cases’. They’re all pretty much the same for an individual stand-alone task, except where the hardware lets them down (like the resistive touch screen on the N97 and WinMo devices, and the Storm’s horrible hybrid).

The big difference is if the job that you want to get done is an ‘edge case’:

• forward something from an SMS as an e-mail
• take a video and post it
• get information from a search and use it to navigate
• pick up a e-book for casual reading for a few minutes
• watch the second half of a movie on a smartphone that you started on the big screen TV last night
• search for and get directions to the nearest Starbucks (certified caffeine addict)

This is where the iPhone (particularly now it’s got cut-and-paste) excels. Easy to switch apps; lots of them.

They play nice together; take the integration of Where with Google Maps:

1. Swipe to the screen with Where on
2. Tap on Where
3. Tap on Starbucks
4. Tap on the nearest icon
5. Tap on Get Directions

Five taps, because there’s a nice little app, and good interworking; 17 seconds.

I just checked, on my big desktop it takes three times longer – ~50 seconds:

1. Mouse to the search field in Safari
2. Type ’starbucks’ into the field, hit return
3. Mouse over to and click on ‘Store Locator‘
4. Mouse over to the ‘Postal Code’ field and click in it
5. Type my ZIP code ‘01742′ into the field
6. Mouse over to and click on the ’submit’ button
7. Mouse over to and click on the nearest store
8. Mouse over to and click on ‘Driving Directions’
9. Type in my street address: about thirty characters and four tabs between fields
10. Mouse to and click on the ’submit’ button

Seven (7) mouse movements, about forty characters of typing.

Worth noting as well, with the app, Google sees much less; how will this affect its economics over the long-term?

Or the amazing Kindle app, which syncs to the last page read in the book that I’m reading.

For messaging and communication tasks, the BlackBerry (except the Storm) is better at mixing and matching modes than anything else.

The Pre’s pretty good as well. Where it falls short is in the complementary ‘cloud services’ and in the apps. The user interface is very elegant, and has some nice touches (pun intended), but it falls so far short on the apps side. The sync with iTunes does, at least for the moment, work surprisingly well.

There’re now a slew of apps on the Phone, like Where and At Bat (Red Sox fan, no zeal like that of the convert) and SugarSync and WordPress on which I depend. The Pre and WebOS has Where, but none of the others.

Without the strong support of either or both a major global network operator (Vodafone, Orange, T-Mobile or Telefonica) or licensing to and working with one or more of the top tier ‘independent’ device vendors (Samsung, Sony Ericsson, LG, HTC or Motorola) Palm won’t get the market momentum it needs to build an installed base to enroll developers. Shipping the SDK so late and expanding the developer program so slowly doesn’t exactly help, either.

So, evaluate smartphones on ease of use for edge cases, and their supporting ecosystem.

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.