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Stuck Inside of Mobile

Why the smartphone market could soon rapidly implode.

 

Chris Middleton explains why there is more to Microsoft’s decision to scrap the Nokia handset brand than meets the eye. At stake is our increasing economic reliance on the mobile phone market, which is beginning to look like an unsustainable obsession. Behind the scenes, China could change everything.

This article is expanded from two reports by Chris Middleton first published on UCInsight.com, edited by EastwoodMiddleton, owners of Strategist magazine (UK).

TECHNOLOGY SHORTUPDATED Microsoft is scrapping the iconic ‘Nokia’ badge for its mobile phone handsets, in favour of its Lumia brand. On the surface, this might seem like a simple rebranding exercise: mere window dressing on the shopfront of a bustling and ebullient marketplace. Nothing could be further from the truth.

The scrapping of the historic Nokia marque – in smartphone handsets – closes an important chapter in mobile communications history. However, it points to a less than certain future for a market that, to an outside observer, might appear to be in permanent upswing.

In days of yore…

Nokia

A glimpse into the past…

In the 1990s, Nokia’s user-friendly devices and innovative designs made it the market leader in the early days of the mobile revolution. It was so successful that Nokia cut its ties with some other sectors, such as cable, electronics, and rubber (on which it had built its business in the 19th century) to focus on telecoms.

In the 21st century, however, Nokia began to lose its hold on the smartphone space as products from RIM – later BlackBerry – Apple, Samsung, and others using the Android OS, caught the public’s imagination. Nokia’s abandonment of Symbian to develop primarily for the Windows Phone OS failed to win back the public’s loyalty. By the end of 2013, it had laid off over 24,000 staff worldwide.

All of that happened in little more than one decade for a company that was founded as far back as the 1860s.

Nokia forged an alliance with Microsoft in 2011, before its mobile handset operations were finally acquired by Microsoft in a £3.6 billion deal in April 2014. A ten-year IP licensing deal added a further £1.5 billion to the value of the tie-up.

Shorn of its loss-making mobile unit, Nokia has announced a return to profit in its Q3 2014 results – barely two quarters after the Microsoft deal. Good news for Nokia and its customers, but the implications for smartphone handset makers are troubling.

Through the square window

So where next for Microsoft in the mobile space? A report in the Guardian quotes Dan Dery, vice president of Alcatel (now in Chinese hands) as saying that the future of the Windows Phone OS is at the low end of the market, not at the high end where Microsoft has tended to focus its Lumia hardware. Windows Phone handsets are made by a variety of manufacturers, including HTC, Alcatel itself, and fellow Chinese giant, Huawei.

“Carriers from across the world have consistently told us that entry-level Windows Phones work, but not at the high end,” he told the Guardian. His thinking was that the top end of the market is saturated and ‘flagship’ devices don’t sell in high numbers. A move down market could work for Microsoft because Windows Phone performs well on lower-spec devices, whereas its Android counterparts struggle.

All of that may be true, but the economics look less than sustainable – and not just for Microsoft.

Mobile phones: a sunset market?

Nokia is not the only mobile brand to suffer the slings and arrows of mobile fortune. BlackBerry endured a market reversal (and may be acquired), and even Korean giant Samsung – which in 2013 seemed to have seized the initiative from Apple – has announced poor financials in 2014.

Samsung’s tanking results – plunging by more than 50 per cent year on year – were blamed on its mobile division, suggesting that smartphones are becoming less and less profitable for any company that doesn’t own the OS, the apps, and/or the ecosystem. In this regard Microsoft is in a strong position, but it’s strategically weak: a follower, not a 21st century marketmaker.

But the question remains: if a Korean company such as Samsung can’t make the economics of phone manufacturing work, then who can?

Take Samsung…

Unlike Apple, Samsung does not make the operating system for its phones, which leaves it heavily reliant on Google: not a situation in which any technology company should feel comfortable. As a result, its ability to innovate and differentiate within its own mobile lines is severely curtailed, and its likely margins in the long term could be vanishingly slim.

The constant media-fuelled comparisons of Samsung with Apple now look ill-informed and misconceived, given Apple’s ownership of every part of its business, and its longstanding investment in growing a global community of app developers and peripherals manufacturers.

Apple’s a walled garden in which millions of people play. Samsung’s flowers are wilting in Google’s global back yard.

To continue succeeding in the mobile phone space – a market where leaders such as Nokia, BlackBerry, and others can fall overnight – Samsung faces a sisyphean task: pouring more and more money into marketing fashion-led hardware in a sector in which prices and loyalty are plummeting.

Not only that, but programmable SIMs (likely in Apple’s iPhone 7) will move the economic whirlwind to the networks, forcing them to compete on price and service quality, driving down costs into commodity territory. Fantastic news for customers, for whom mobile operators’ expensive drive to become content providers will be irrelevant when users can switch to whichever network is cheapest, potentially at will.

On 22 October 2014, AT&T lowered its revenue outlook for 2014 amid what the FT called “a bitter price war for iPhone users”. AT&T is the US’ second largest mobile carrier.

Time to wake up

In all, the Western world’s economic obsession with mobile phones is beginning to look foolish and unsustainable, given the heightened expectations it creates, the superheated risk to OEMs and (at the same time) the market’s near-exclusive reliance on low-cost Chinese manufacturing.

Everyone understands that computing, communications and the world of work are now mobile, flexible and collaborative, but the absurdity of an economic model in which tens of millions of high-end computers become landfill within months is becoming apparent. Not least because it’s clear that manufacturers can become landfill too in nearly the same timescale.

While on the surface, this leaves a rudderless Microsoft to duke it out with Apple and Google for market dominance – in apps and operating systems at least – in reality it leaves China holding the balance of power.

A glimpse into the future...

…and a glimpse into the future.

China’s tech giants – Lenovo, Huawei, and countless others – are on the prowl, and they have the US and Europe in their sights. All are investing massively in European expansion, all are buying up Western brands (BlackBerry, perhaps?) and discarded markets, such as PC manufacturing. Lenovo is now the world’s largest PC maker by volume.

They each have a domestic market of more than a billion people, and yet more than 50 per cent of their business, on average, is now overseas.

A roll call of Foxconn clients alone should give pause for thought: Amazon, Apple, BlackBerry, Cisco, Dell, Hewlett-Packard (currently), Microsoft, Motorola Mobility, Nintendo, Nokia, Sony and Toshiba. It makes the iPhone, the iPad, the Kindle, the PlayStation 4, and the XBox. Taiwanese Foxconn is primarily a contract manufacturer. But for how long?

Given that huge parts of the US technology sector are entirely reliant on low-cost Chinese/Taiwanese outsourcing and components (and therefore, in some cases, IP), who would bet against those makers? Sooner or later they’ll turn the screw: the technology equivalent of Russia’s power over gas.

If China’s own economy is cooling, that may happen sooner rather than later. TS

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