I plead guilty. I don't have an iPhone or iPad, and I don't plan to buy one, which is quite a "transgression" given that I work in the communications industry. Speaking in terms of the "Product Diffusion Curve Model," I think I'm supposed to belong to the group of innovators, which is the first 2.5 percent of people who are willing to adopt and take a risk on a new product, but I'm not. Sometimes, I'm not even part of the 13.5 percent of people that are labeled as early adopters. More often than not, I fit in the 34 percent of the consumers that comprises the group of early majority because I tend to avoid the risk associated with purchasing an unproven product.
But just because I still don't own any of the latest Apple toys and I'm not part of the hype doesn't mean I don't have an opinion. Everybody's talking about the fact that Apple will continue to produce incredible money-making successes. But a recent article kept me thinking. Finally, somebody is writing about something I've been saying for quite some time about the iPhones!
At what point will the mobile networks stop giving away the store?
"Right now they're paying most of the cost of each new iPhone, and undercharging for the data plans too. That's great for customers and great for Apple, and bad for the networks. The iPhone is an expensive data hog that soaks up airtime, and there's always a risk the networks will start playing tougher. Verizon, which lost out to AT&T three years ago for the right to carry the iPhone in the U.S., doesn't seem to be suffering as a result. Its investors have done no worse than those of AT&T. And its data traffic just jumped 20 percent, even without the Apple phone" ("7 Reasons Apple Shareholders Should Be Cautious", April 23, Wall Street Journal).
Perhaps that model was appropriate when growth in the wireless industry was powered by gross additions. The issue is that, just like Verizon, customers have already begun to turn away from the pattern of long-term contracts. "For the first time, the carrier had to rely on reseller partners who sign up lower-end prepaid customers to offset a 67 percent decline in the number of new contract customers added. The results come a day after rival AT&T posted a 43 percent decline in the number of new contract customers added."
As I've discussed in previous columns, I happen to believe that this will be the scenario on a global basis as developed markets saturate and emerging markets become more mature - that is, moving away from postpaid to prepaid, even under better economic conditions. Hence, the reality of the communications business is that the biggest danger to mobile operators is going to be overcapacity and low-margin customers. Mobile service providers may have subscribers, control the bill or possess the wealth of usage data, but they can't introduce new mobile services and applications rapidly and inexpensively. But here's what I keep wondering: Are smartphones the ultimate end game?
Globally, the Smartphone Game is Anyone's Game
Without continued subsidies for iPhone or iPhone-like devices, I am not sure it will become a mass-market phenomenon. The rising prepaid market in developed markets and already the vast majority in emerging markets will probably go for similar devices, but not quite Apple and not as expensive. How long mobile will operators in developed markets will be able to aggressively subsidize these devices, exclusive smartphone distributions and offer unlimited data plans?
Don't get me wrong; smartphone sales will continue to grow. But emerging markets will lead this growth and will increasingly determine market trends, something that will potentially change the rules of the game in the smartphone business and the mobile industry in general. We are already seeing how diverse emerging markets are in the smartphone segments, compared to the U.S. or UK.
A recent study by Pyramid Research concluded that "China will become the biggest smartphone market in 2010, and other key markets such as Brazil, India, Turkey and Nigeria will record compound annual growth rates above 30 percent through 2014."
What does this mean? "Players in mostly prepaid markets with regulations that prevent handset subsidies, such as MTS in Russia, are focusing on promoting valued-added services using attractive prices and free initial test periods while securing exclusive content. In Brazil, a segmented strategy by Vivo that focuses on entry-level consumers with the slogan "My first smartphone" and flexible data plans is generating substantial uptake. As operators' strategies vary across countries, so too do the market shares of operating systems. Because of local conditions, the BlackBerry has a strong market position in India, while Linux-based systems do much better in China."
The Global Smartphone Game Is a Different Game
Nokia still dominates the segment of cheaper smartphones aimed at emerging markets. But Analysys Mason predicts that Android will dominate the global smartphone market by 2014, overtaking Nokia. "Smartphone markets in the developed world will continue to be fiercely competitive, but key handset manufacturers such as Nokia and Samsung are lining up to tap a new opportunity in emerging markets."But the elements of a "successful mobile data proposition in emerging markets will be different to those in developed markets, and I don't think that an iPhone will be one of them."
The global smartphone game still remains wide open. Anything can happen in 3-5 years from now. But what I'd like to stress is the fact that in emerging markets fresh, new thinking goes beyond just smartphones. Honestly, I don't intend to pay $499 for an iPad, but I like Telefónica's recent move in Latin America. They will enable mobile users to access multiple social networks, via mobile browsers, downloadable apps and other mobile technologies, over mass market phones rather than just high‐end devices. The strategy behind Telefónica's move is to enable the delivery of next‐generation services for a broader consumer market, even in markets where many consumers can't afford an advanced smartphone.
As we continue to argue about high-end devices, things in emerging markets are moving in many different directions, and operators are trying to make money not just based on an innovators' mentality (Product Diffusion Curve Model). But overall, here's what matters. China is the market with the most mobile phone connections in the world. The latest annual Global Information Technology Report issued this year by the World Economic Forum in Geneva reported that India, Malaysia and Vietnam are among the fastest-growing centers for IT anywhere in the world. This tells us how emerging economies are fulfilling a larger role in our market. "Europe and North America will have to innovate to stay ahead" – but innovation beyond smart devices exclusively. It's an entire new business strategy.
The declining price of smart devices will continue to allow many emerging markets to make strides in our industry. Such progress may be diverse than the game being played in the U.S. between Verizon Wireless and AT&T, for example. With that in mind, we may well have a completely different discussion over smart devices and maybe even the entire mobile business in the near future.
By Monica Zlotogorski, Editor of TM Forum's Inside Latin America and Vice Chair of TM Forum's Latin America Advisory Board