Thursday, September 19, 2013

In an attempt to turn its fortunes, HTC streamlined their offering and released one of the most critically acclaimed smartphones ever but why are they still struggling?



A couple of days ago, we heard the news that HTC laid off 20% of its American employees. This just happens to be the last of a barrage of bad news about HTC that we have heard in the past few months. How can this be? How can a company who just released one of the best phones ever in smartphone history, that has made headlines and invited praise from journalists throughout the world, keep on struggling?
In a study published earlier this year, ABI research predicted that China will surpass the US as the world’s biggest smartphone market in 2013. The research firm also said that Brazil and India will be in the top four countries for smartphone shipments in 2018. They also forecasted that by 2018 BRIC countries (Brazil, India, China and Russia) will account for 33% of the world’s smartphone shipments, equaling the North Americas and Western Europe combined.
One of the primary reasons behind this is the fact that the North American and Western European markets are already nearing their points of saturation. Most people in these regions, bar the most late of late adopters, are already using smartphones. Hence exponential growth in smartphone market share in the future can only be expected to happen in the developing markets.
The BRIC markets represents the bulk of future smartphone growth, thus tailoring products for these markets is key to future growth for any smartphone manufacturer.
What are the similarities between these emerging markets? One of the most important one is the fact that phones in these markets are sold with little to no subsidy.
This is where the problem lies for companies like HTC. So far, HTC has yet to offer models that are tailored to the preferences of consumers in these unsubsidized markets.
While it is important to produce an exemplary flagship product to grab the headlines and mind share of tech media in the developed world, doing so without a winning strategy to capture the interest of consumers in the non –subsidized emerging markets will not yield any meaningful growth.
For a developed market like the US, the HTC One is a really good device. But, in markets where people are expected to pay around $800 for one, the phone made little sense other than impressing the tech bloggers.
I would have loved to use my own local market, Indonesia, for this discussion but unfortunately data for the Indonesian smartphone market is few and far between.
We will instead use a country that ABI research predicted will be breaking the top four list for smartphone market shipments in the coming years, India. From my observations and correspondence Indian and Indonesian smartphone markets share plenty in common. Both have very large populations with comparable average monthly income. Subsidy is also practically non-existent in both markets, thus phones are sold at their real prices, direct to the consumers. Both markets are also showing a similar and important trend that will be  explained below.
Second quarter numbers for 2013 released by IDC showed that there is a rapidly growing demand for devices with 5-inch or larger displays amounting to almost a third of the Indian smartphone market in the quarter. A  17 fold year on year increase to 2.8 million units from a mere 160,000 units in the previous year’s second quarter.
This phenomenon is also evident elsewhere in the Asia-Pacific region with Barclays Bank, as stated in the article cited above, projecting that global sales of “phablets” or phones with 5 inch and above screens will grow exponentially to 230 million in 2015 from 27 million in 2012. Remember this device category is less than two years old, it was started by Samsung when they launched the original Galaxy Note at the end of 2011.
When explaining about the popularity of “phablet” devices in Asia, a number of  mainstream tech media are quick to accuse vanity or brand as a driving factor. Claiming that having big phones are considered to be status symbols in these regions. While appalled at the notion, I personally am not too surprised with such claims. Why? Because these were the same sources that ridiculed the original Galaxy Note when back it was launched and continue to enjoy ridiculing devices such as the Galaxy Mega.
While it’s true that Samsung took 26% of the Indian smartphone market in q2, it does not explain how local vendors were accounted for more than 50% of the total smartphone market in the quarter, with Micromax and Karbonn trailing Samsung closely in second and third place. If brand snobbery was indeed the primary driving force behind the phenomenon, surely this could not have happened?
In one of his analysis posted on tech-thoughts.net , analyst Sameer Singh grouped smartphones into two major categories based on usage. The first segment is what he called “pocketable computing” a segment in which the consumers’ usage patterns are geared more towards tasks that were traditionally  conducted on PCs/laptops such as, heavy media consumption, and browsing as well as light productivity tasks such as document editing or creation. The second segment is what he called the “communication” segment in which consumers in the segment use their smartphones more as a communication device with light content consumption and occasional social networking done every now and then.
In order to better explain the emerging market’s growing preference towards computing oriented devices and how it relates to companies like HTC, I combined Singh’s usage based segmentation with price oriented segmentation that I derive from observations conducted in both the Indonesian and Indian markets.
I propose a smartphone segmentation based on emerging market consumers’ perception of their prices as follows:
In the next installment we will  combine the price based segmentation above with Singh's and apply them to India’s smartphone market as proxy to better understand the emerging markets and what it means to HTC as well as Apple. Stay tuned!

Bobby Situkangpoles