Monday, October 28, 2013

The technological divide that exists between the developed and the developing parts of the world presents an opportunity for mobile device manufacturers. Which companies are doing their best to democratize technology in these markets and which are not?

By Bobby Situkangpoles

"I lived at the West Egg, the - well, the least fashionable of the two, although this is a most superficial tag to express the bizarre and not a little sinister contrast between them. My house was at the very tip of the egg, only fifty yards from the Sound, and squeezed between the two huge places that rented for twelve or fifteen thousand a season. the one on my right was a colossal affair by any standard.. my own house was an eyesore, but it was a small eyesore, and it had been overlooked, so I had a view of the water, a partial view of my neighbor's lawn, and the consoling proximity of millionaires - all for eighty dollars a month. " The Great Gatsby (1.14).

In The Great Gatsby, which was set in 1920s USA, the East Egg was where the real "nobles" or the "old money" live whereas the West Egg was full of people with new money. The character Nick Carraway, who works in finance, chose to live in West Egg not because he was already a self maid millionaire like Gatsby, but because he wants to make his own success. He chose to live in a small, weathered house, in West Egg to associate himself with millionaires, hoping to use the house as a leverage to propel himself towards self made success.

Today's smart mobile devices are, in some ways, serving similar purpose to Nick's house. They can act as leverage, or bridge to allow people from less technology rich areas to stand shoulder to shoulder with their peers from more developed parts of the world. By bringing the internet to the hands of people in the developing world, mobile devices allow them to have equal opportunity to acquire and share knowledge and to have the same potential to influence the world.

Mike Elgan has an interesting take on Tom Hanks' latest movie, Captain Phillips. He sees the movie as an allegory to the gap that he observes to be present in today's world. The gap between the technologically rich and the technologically poor. At the end of his piece he made a remark that this chasm offers an opportunity for those who can "bridge the growing gap between technology haves and technology have-nots."

The problem of smartphone saturation

With the developing markets rapidly reaching their point of saturation, bridging the gap between the technologically rich and the technologically poor is no longer merely an altruistic action, it is quickly becoming the only option for mobile tech companies to have any hope of rapid and sustainable growth in the near future.

Samsung's recent earnings exemplifies this fact. For the sixth time, out of seven consecutive quarters, Samsung has managed another record breaking quarter with operating profits increased to 21.1% from 11.7% a year before. They managed this despite their television division under-performing. While it is true that their silicon business have contributed significantly, two thirds of their revenue still comes from their mobile division, a feature that Android Authority found to have remained consistent throughout all of their recent record breaking quarters.

In six months, Samsung has sold more than 40 million of their flagship Galaxy S4. That is more than the total number of phones, of any models, that LG managed to sell in both the second and third quarter of 2013. As impressive as it might seem, from Samsung's perspective, sales of the Galaxy S4 has not been as good as they had wanted it to be. Samsung expected to sell 100 million GS4's in 12 months, twice the total number of its predecessor, the Galaxy S3. Yet after six months in the market, the Galaxy S4 has not managed to reach half of Samsung's lofty 12 months sales target. Sales have also been reported to slow down with only 5 million Galaxy S4s sold in August, down from 7 million in the previous month.

The fact that the Galaxy S4 has not been selling as well as Samsung had projected can partially be blamed to the saturation that is happening across the (mostly heavily subsidized) developed markets. These are the natural targets for high end devices such as the Galaxy S4 since in unsubsidized markets, such flagship phones can cost anywhere from  US$700 to over $1000. Samsung raised the bar for their projections for the Galaxy S4 based on the fact that last year's flagship, the Galaxy S3 sold around 60 million since its launch in May 2012. What has changed is the fact that there are simply not that many people available this year who have not already own a smartphone and for some, last year's model are still good enough.

One can  argue that the competition in the high end space has increased as other manufacturers are improving the quality of their products to challenge Samsung's dominance. For example HTC's One is regarded by many in tech media as one of the, if not the, best smartphone of the year.

However, making the best smartphone in the world has not helped HTC much. In the quarters following the launch of their highly-praised One, bad news about HTC has kept on coming. HTC kept losing money and in the last quarter, they ended up with their first quarter without any profits. Furthermore, it has been reported that there are signs that HTC is reducing their production capacity, a number of key executives have also left the company in the months after they launched the one. The fact that bad news surrounding HTC keep on coming supports our initial hypothesis that saturation is a more prominent factor that is hurting the sales of high end smartphones. To put it simply, the mobile cake in developed markets is approaching its limits for growth and from here on out, the competition to grab each slice of the cake will only increase.

How did Samsung manage to keep breaking their records even under the increased pressure of saturation hurting their flagship line?

The answer to that lies in the fact that Samsung has a large portfolio of devices catering to every niche and price range. They have smart devices with various screen size and specs that are available from under $150 all the way to $900 without subsidy.

Thus, we can take Samsung's Q3 2013 earnings as yet another example of the importance of producing devices that are relevant to people who do not have access to artificial pricing. In other words, the people that according to Elgan's piece, stand on the other side of the technology gap, the emerging markets.

The characteristics of the emerging markets

In a previous 2-part series (Understanding The Emerging Markets), we discussed the characteristics of these emerging markets at length. In general, such markets are characterized with comparatively lower average income and lack or absence of carrier subsidy.

Performance to price ratio (or more accurately, productivity potential to price ratio) is paramount to most people in this segment. For obvious reasons, the perceived productivity potential of a device is directly proportional to the size of the screen. Moreover, the recent surge in the popularity of large screened phones in Asia comes as no surprise as such devices can also function as net book replacements. In India the two companies trailing Samsung's market share are both local brands (Micromax and Karbonn), with little to no international recognition, that offer a number of decently built and respectably spec'ed devices with large screens.

Companies  working to meet the demands of the emerging markets and grabbing the opportunity it presents

In China, a literally three year old company, Xiaomi, has managed to put itself two notches above Apple in terms of market share by selling high performance phones at close to cost and relying on services as their primary source of revenue.

In the past 24 months or so, Lenovo, the world's biggest PC maker, has also been making their mark in a number of countries outside their native China such as, India, the Phillipines, Malaysia, and Indonesia through saturating the market with devices having high productivity-potential to price ratio for virtually every price segment imaginable.

Mind you, these devices are not the crappy cheap Androids of old. Mostly powered by Mediatek chips, a lot of these sub $300 off-contract phones have quad core chips, large (5 inches an over) HD IPS displays as well as 8 or 13 MP primary camera modules. It is not a stretch to say that most of these affordable phones offer performance that rival the $700+ super phones of 18 months ago.

Underdog brands are not the only ones interested in leveraging Mediatek's affordable chips to bring high technology to these emerging markets and grab their share of these massive "growth engines".

In June, Sony launched the Xperia C, a 5 inch phone powered by Mediatek's quad core chip.The company is reported to be launching yet another Mediatek powered phone in November, codenamed Tianchi. This one is rumored to be one of the first phones from a major vendor to be powered by Mediatek's octa-core next generation processor.

Samsung has also been reported to be planning to launch their own Mediatek powered phone in 2014. 

TechinAsia reported that, in China, Mediatek is expected to take almost half of the smartphone chips market and almost 20 percent of tablet chips market by the end 2013.

Just how big are these emerging markets?

In the essay "New Players on The World Stage", William Antholis gave us an idea of just how large these "emerging markets" are. Obviously, two of the largest developing countries in the world are China and India. According to Antholis, in order to roughly match the combined population of China and India we need to take the US, add Mexico and Brazil plus the rest of North and South America, then add the 500 million people living in the European Union and then multiply the total by two! 

As massive as they are, India and China are but two of the countries that belong to this category. There are also (comparatively) smaller giants such as Brazil, Russia, and Indonesia.

Some companies that have chosen to ignore this opportunity

Now that we've gained a bit more understanding about the massive role that the emerging markets will play in the future, one might think that it would be crazy for any company to continue to ignore them.

As crazy as it might sounds, there are still ones that choose to live in ignorance.

Let's Take a look at the expected prices for Apple's new iPhone 5S and the "cheaper" iPhone 5C for Thailand, both on and off contract (source: TechinAsia)

True Move H and AIS prices with a 2-year contract
iPhone 5S 16GB – 23,900 Baht ($770)
iPhone 5S 32GB – 27,500 Baht ($880)
iPhone 5S 64GB – 30,900 Baht ($990)
iPhone 5C 16GB – 19,900 Baht ($630)
iPhone 5C 32GB – 23,900 Baht ($770)

True Move H and AIS prices for the phone with no contract
iPhone 5S 16GB – True Move H 24,500 Baht; AIS 24,550 Baht ($780)
iPhone 5S 32GB – True Move H 28,300 Baht; AIS 28,250 Baht ($910)
iPhone 5S 64GB – True Move H 31,900 Baht; AIS 31,950 Baht ($1,025)
iPhone 5C 16GB – True Move H and AIS 20,700 Baht ($665)
iPhone 5C 32GB – True Move H 24,500 Baht; AIS 24,550 Baht ($780)

All the phones mentioned above have small screens that severely limit their productivity potential, thus it is easy to understand why Apple's market share is dismal, at best, in the emerging markets.

Apple's not the only one who is not showing serious intent to cater to the needs of the emerging markets.

When asked by the Wall Street Journal in June 2012 about the possibility for HTC to produce low cost devices, HTC's CEO, Peter Chou said, "We don't want to destroy our brand image....... We insist on using better materials to make better products that offer premium experience. Many consumers like that." HTC was making US$3.1 billion in revenue (Q1-2012) when he uttered the statement.

Fast forward 18 months into the future, HTC's revenue is down to US$1.4 billion while at the same time posting their first loss in in more than ten years.

So what's HTC's current stand about making affordable phones? 

The Guardian reported in October 14th that HTC's Global Online Communications Manager, Jeff Gordon, claimed that HTC will continue competing at the high end segment. Clearly, they are not planning to change course anytime soon.

Currently, HTC's latest and greatest offer in the affordable space is the Desire 601, a 4.5 inch 720p (HD) phone powered by a 1.4 GHz dual core processor and 1GB of RAM. In Singapore, the phone is offered at US$403 at launch, which pits it against the 6.1 inch Huawei Ascend Mate (US$326), Lenovo's Intel powered, metal clad, 1080p flagship the K900 (US$448) as well as Samsung's Galaxy Mega 6.3 (US$480). At the smaller end of the spectrum there are LG's Nexus 4 as well as Samsung's former flagship, the Galaxy S3, and both can be had for around US$420 from their respective distributors.

How about the One Mini? In Singapore, HTC's One Mini is priced at around US$556 off-contract, which puts it on par with the current off-contract price of the Galaxy Note 2 as well as Sony's Xperia Z with both alternatives offering better specs and capabilities.  

Is it useless to release smaller screened devices in the emerging markets?

We are not saying that it is futile to sell $300-$550 small screened phones in the un-subsidized developing world. There are still a few people who are interested in getting smaller phones. The kind of people interested in these communication oriented devices are those who already have a laptop, a tablet, or both.

For example, In the $300-$400 segment Samsung has the 4 inch GS3 Mini as well as the 5 inch Galaxy Grand, thus providing options for people with different needs. This approach also applies to the $400-500 bracket in which Samsung's offering currently consists of the Galaxy Mega 5.8, Galaxy S4 Mini and the Galaxy Mega 6.3, among others.

LG understood this as well. They just launched their $320 5.5 inch G Pro Lite to complement their midrange options.

HTC, on the other hand, puts all their midrange bet in two smaller screened, thus lower productivity potential, phones. It will surely be interesting to see what this strategy does to HTC's performance in 2014.

What about the segment of the market that can only afford sub $100 devices?

So far, we have talked about companies that are well poised to take advantage of the massive opportunity available in the emerging markets as well as companies that are not.

However, most of the devices we've talked about have only catered to the midrange and, at best, low end price segments.

What about the billions of customers who can't afford phones that cost more than $100?

While it is true that there are sub $100 Android phones, at the moment, the experience of using those are still not very pleasant, to put it nicely.

There is one high profile company that is putting considerable effort to provide compelling options for these people. We will talk about that company and its efforts to cater for the super low end segment in the second part of this series.

Stay tuned.