Category: Industry

Mobile Computing Industry

Per Lindberg predicts things

“The N8 is certainly a step in the right direction, it’s much more multimedia,” Per Lindberg, an independent technology analyst at MF Global in London, told Marayam Nemazee on Bloomberg Television’s “Countdown.” “But whether it will move Nokia’s market share upwards is more debatable,” he said adding that Android phones are becoming an “formidable force.”

via Nokia Says Preorders for N8 Smartphone Are Strongest Ever Seen – Bloomberg.

This is the same Per Lindberg who, in January of this year, reiterated his February 2009 Sell rating on Apple and the entire smartphone industry:

“There is no doubt, in my mind, that the whole sector is hugely overstretched,” says the London-based physics PhD and MBA graduate who joined MF Global Ltd. in 2008 after 10 years at investment bank Dresdner Kleinwort.

“The whole sector is priced as if the average player would sustain 25 per cent margin in eternity,” he adds.

“It’s bordering on absurdity. This will end in tears.”

He is willing to use the b-word: “Many stock bubbles are generated by sell-side analysts generating enthusiasm for the companies they cover.”

To date however, it’s Mr. Lindberg’s call that’s been the costly one for investors. He has maintained his sell rating on Apple since early February of last year, causing investors who followed his advice to miss out on a more than 110-per-cent surge in the share price.

Meet Apple’s sole skeptic – The Globe and Mail

In February 2009 Apple’s stock price was $89. Yesterday it closed at $267.

What happens to the fightback now?

On July 2nd,  Anssi Vanjoki wrote that “The fightback starts now.”

via asymco | Nokia says the fightback starts now. Oh Really?.

Anssi Vanjoki has just resigned from Nokia.

This is potentially a positive development for Nokia as the “fightback” as Vanjoki defined it was certain to fail. His departure might allow a new team to accelerate the response to the disruption using an asymmetric approach. The odds are massively stacked against Nokia but the more turnover is seen at high levels of the organization the better their chances.

Gartner Predicts Mobile OS Market Share

Lots of people apparently think it’s a big deal that Gartner is predicting Android will surpass iOS for second place. But why is that necessarily a good thing, given that they’re predicting Symbian will remain in first place? Who thinks Symbian is actually doing well? Nokia’s board sure doesn’t.

via Daring Fireball Linked List: Gartner Predicts Mobile OS Market Share.

I also noted with amusement that by 2014 “other” is slated to sell 85 million units or nearly 10% share, up from 6.1% in 2009. These “others” will be selling more than twice what Apple is expected to sell this year. Is “other” WebOS, Bada, MeeGo, LiMO? If so they’re in for a healthy future.

But dwelling on details like these is missing the point. To see how improbable this prediction is, let’s go back to 2006 and ask what Gartner was forecasting would happen now.

First thing to note is that in 2006 Gartner was busy tracking PDA sales. You might wonder why this is relevant. The reason is because a significant proportion of RIM’s Blackberries counted as wireless PDAs and were therefore considered to compete with Palm’s Treos, HP’s iPaq and Dell’s famous Axim. Nokia was in the running with its Communicators. Here is how Gartner characterized the equivalent market in early 2006:

So I’ll just come out and say it: In 2006 Gartner did not have a clue what a smartphone was. By their admission:

Gartner defines a PDA as a data-centric handheld computer weighing less than one pound that is primarily designed for use with both hands. These devices use an open market operating system supported by third-party applications that can be added into the device by end users. They offer instant on/off capability and synchronization of files with a PC. A PDA may offer WAN support for voice, but these are data-first, voice-second devices.

In other words, in 2006 Gartner was splitting phones with operating systems into two separate markets: data-oriented wireless PDAs and voice-oriented smartphones. The split was mostly based on the judgement of the analyst on whether a device was “voice” or “data” oriented. I suppose they used the primary input method as a proxy: numeric keypads meant the device was one-handed and therefore voice-oriented. If the device had a full keyboard and/or a stylus-actuated touch screen then it was a two-handed data-oriented device. But even this proxy was not quite enough, sometimes devices were classified whimsically.

To make it more complicated, they bundled non-cellular but Wi-Fi enabled PDAs with wireless PDAs. This made some sense from a corporate IT point of view (their primary customer base) as these data-oriented devices would be used either on a LAN or a WAN (Wide Area Networks: what Gartner anachronistically called cellular networks.)

The presence or absence of a cellular radio did not enter into their view of these devices. So if you asked Gartner in 2006 to forecast smartphones (as we know them now) in 2010, I suppose you’d get what they forecast for “data-centric” devices.

So assuming that today’s smartphones are mostly “data-centric” we would have to look back on their view of that market and not the voice market which was seen as an entirely different thing. Their answer should have had something to do with the market leaders and participants in 2006. As the table above shows Gartner showed that RIM, Palm and HP led in 2005 with Nokia and T-Mobile[1] pulling up the rear.

However, from a platform point of view, at the beginning of 2006

Microsoft Windows CE was the No. 1 PDA operating system (OS) in 2005 as 7.05 million PDAs were loaded with the OS, up 33 percent from 2004 shipments of 5.28 million units. Palm OS PDA shipments declined 34 percent to 2.96 million units in 2005.

In late 2006, Gartner made further predictions for the year:

In 2006, Gartner expects the PDA market to increase by 6.3 percent to 16 million units. The market will continue to be driven by broader availability of cellular-enabled PDAs from wireless carriers. Gartner estimates that 53 percent of all PDAs shipped in the first half of 2006 featured integrated cellular capability, up from 46 percent during the same period in 2005. “The share of PDAs purchased by enterprises will continue to increase; it accounted for 49 percent of all PDA shipments in the second quarter of 2006 and Gartner expects that the enterprise market will account for 52 percent of all PDA shipments in 2006,” said Todd Kort.

At this time I have not yet dug up a Gartner “Wireless PDA OS” four year forecast from the year 2006 but I suspect it would not show devices running Google’s Android operating system or any running something called iOS.

I also seem to remember that they were suggesting that Windows would be the leading mobile platform. Although it was trailing in 2006, Gartner was quite bullish on the disruptive challenger from Redmond.

[1] T-mobile is in the list because it was common practice in 2006 for operators to market Pocket PC Phone Edition devices made by HTC under their own name. Orange, Vodafone and Verizon also had own-brand HTC Windows touch-based devices. Now what does that strategy remind me of?

Elop utters the D word

He said that the technology world was facing a “moment of fundamental disruption” thanks to the advent of the smartphone, social media such as Facebook, and “cloud computing” which uses the internet to increase the capabilities of home computers.

Via: BBC

It’s encouraging when an incumbent realizes when they are being disrupted. The textbook says however that it usually happens too late to reverse the damage done.

With a new CEO, Nokia may cut one year off from their response cycle but it’s not a certainty that it will happen.

Asymco assessing Nokia’s response cycle

Tight supply of iPhone 3GS?

Just noticed that the Apple online store now says it takes 1-2 weeks to ship an iPhone 3GS. I think this just changed from 5-7 days shipping.

Is Apple having supply problems again with the 3GS model?  Or perhaps Apple is saving supply for a China launch? Or using production capacity to make iPod touches?

via tight supply of iPhone 3GS? | The Mac Observer Forums.

The news today that Foxconn can only produce iPhones at the rate of about 4 million per month shows how constrained Apple’s production is. Demand is far, far higher.

The discussion about iPhone vs. Android share is usually framed around questions of demand or distribution, but may really be a question of production capacity right now.

Why OPK was fired

Under Kallasvuo Nokia embarked on the most dramatic shift in its business since entering the mobile phone business in the early 90s.

The shift was not into mobile software which began in 2001 under his predecessor. It was not into enterprise solutions which also preceded his tenure. OPK’s main contribution was the move into mobile services.

The concept of mobile services may be an unfamiliar one for casual observers because it has not become a visible business for operators and certainly not for handset vendors. It’s also a complicated business model that requires some deeper understanding of the way the telecom industry is structured.

What Nokia had in mind was to offer various value-added, billable services to operators which would be enabled by Nokia handsets. The types of services included music subscriptions (Comes With Music), email (several acquisitions), photo sharing, and navigation.

The idea was that since many operators would not be capable of rolling out own brand services and could not do the heavy back-end lifting or the integration with handsets, someone could step in and roll out white labeled solutions world-wide. Third parties would also find it impossible to integrate and would lack the relationships Nokia had with operators world-wide.

For example, Nokia could enable a South American operator to offer email services to all their customers (with or without smartphones) and that service could be offered at a certain incremental price over the basic voice plan. The client implementation could be device independent but Nokia devices would probably work better. This would lead to higher ARPU which could be shared with Nokia.

Anyone can see that this is a complicated business plan and is therefore unlikely to be successful. But what makes it a complete failure is the realization that most buyers will resist the idea of paying for individual services separately. $1/mo for email, $2/mo for music, $3/mo for maps, etc. is repulsive. Users stampeded instead to unlimited data plans and smartphones which offered all these services and hundreds more for free or at prices negotiated with third party providers, rather than the untrusted network operators.

And therein lies the entire cause of Nokia’s strategic failure: an operator centric point of view. It led to poisoned devices and irrational business plans.

Which leads to the question in the headline. Is this mistake recognized and is it big enough to cause such a disruptive CEO dismissal?

I argue yes. Strategic errors are forgivable, but the they become a capital offense when they turn into a derailment of the core business. Instead of being enhanced with value-added services, the core business collapsed under the disruptive attack of unlimited data.

But it gets worse. Like the capital offense that Robbie Bach was guilty of at Microsoft, there has to be some direct accountability. To add insult to injury, OPK single-handedly pushed through the biggest and stupidest acquisition in Nokia’s history. To support this flawed vision of mobile services OPK bought Navteq for $8.1 billion in October 2007.

Intended as a service that could be rolled out on all phones and monetized through operator billing, Nokia maps is a free service that will never return anything to shareholders.

Missing where the puck was going is one thing but burning precious capital is another. This, in my humble opinion, is why OPK was fired.

Speaking of pucks, here’s hoping fresh Canadian eyes will see where it’s going.

Android is in 60 devices, in 49 countries, 59 operators and 21 OEMs

@tim Google often finds out about new Android phones the same day the rest of the world does. The joys of an open platform!

via (1) Twitter / Home.

Clears up why they rely on “activations” to find out what’s going on in the market.

Google vs. Android Part IV

Verizon, unfortunately, is also what ruins the phone. Or, rather, what it’s forced Samsung to do to the phone, which you could sum up in a word: Bing. Bing is the default—and only—search engine on the Fascinate. A Google Android phone. In the search widget, in the browser, when you press the search button. Bing. No, you can’t change it. There’s no setting for it, and the Google Search widget that you can snag from the Market is blocked (or at least very carefully hidden). Being unwittingly forced into Verizon and Bing’s conjugal relationship is infuriating on its own, but the implementation also feels like the sloppy hack that it is.

via Daring Fireball Linked List: Matt Buchanan on Verizon’s Samsung Fascinate Lightning.

John Gruber astutely adds:

Android is “open”, but who it’s open for, primarily, are the carriers. (Somehow I doubt we’ll see any Windows Phone 7 devices where Google is the one and only search option.)

The primary defense of Google’s Android strategy is that it’s beneficial in driving traffic to Google’s services/properties. This is by no means a certainty. To the contrary, it seems likely that the Android experience will be defined by operator back-room deals.

See also: asymco | Android vs. Google Part II

Coupling a lack of control over the platform, the revenue streams, the user experience, the potential banishment of AdMob from iOS and an attack on Google’s brand, Android is currently winning the war with Google.

However, my money long term remains with Google. They can and will eventually beat Android. Perhaps with Chrome.

[Footnote: if anyone wonders why Verizon, Google’s best friend in mobile, is gutting Android, you need to remember an exclusive five-year deal Microsoft struck with the carrier to provide search and advertising services on the phone. Microsoft was rumored to pay $500 million for the opportunity.]

Smartphone market growing faster than expected

IDC raised its 2010 smartphone sales growth forecast to 55 percent from 44 percent earlier. Citing booming smartphone demand it also lifted its forecast for overall cellphone market growth to 14.1 percent from 12.6 percent.

via Cellphone market growing faster than expected -IDC | Reuters.

Keep in mind the 55% growth figure when reviewing analyst forecasts for iPhone growth. If their forecast is less than that then it implies market share loss. When I suggested 50% compounded annual growth rate (CAGR) for iPhone going forward 3 years, there was a lot of skepticism but this market is growing faster than most people expected.

I still believe that Apple can grow the iPhone at least as fast as the market.

Here are the quarterly y/y growth rates for iPhone units since sales began:

159% 516% 88% 90% 644% 7% 100% 131% 61%

On a yearly basis:

2007: 3.7 million

2008: 13.7

2009: 25.1

2010 first half: 17.15

2010 (my estimate): 44.4

Will Apple need to cut margins on the iPhone?

Many comments on and off this blog raise the specter of the inevitable decline in Apple’s margins due to two forces:

  1. The iPhone begins to reach into more markets or points of distribution without exclusivity.
  2. The Android surge will apply competitive pressure forcing Apple’s pricing and hence margins.

The first claim can be countered by observing that Apple has not cut margins when switching from exclusive to non-exclusive distribution in several markets. In fact, Apple made this information public: When Tim Cook was asked in October 2009 earnings concall “So when you go from exclusive to multiple, you don’t change the charge to the carrier?” Cook answered, “Correct.”

The second claim can be countered by observing that innovation trumps pricing every time. When looking back at the three years’ history of the industry there is a clear but counter-intuitive demonstration of the power of innovation in the market.

Whereas one would expect that in a highly competitive market torrid growth would only be possible with lower pricing and hence margins, the opposite is observed in the phone market during the last three years:

[HTC data is over a two year period]

The graph shows that companies that grew the fastest had the highest margins, and the companies that grew the slowest had the lowest margins. The trend line in the graph above is precisely orthogonal to what would be expected in a commodity market.

The orthogonality of growth vs. margin points to the effect of innovation in this market. In a non-commoditized market (i.e. one where usable improvements in a product are quickly absorbed and highly valued) high growth and high margins are correlated.

In a commodity market (i.e. one where improvements in a product are neither absorbed nor valued) growth can only come at the expense of margins.

Being able to spot when a market tips from innovation-driven disruption to price-driven commodity sales is an essential skill for both investors and managers. It requires a comprehensive and integrated analysis of technology, finance, consumer behavior, competitive forces and a lot of faith in theory to make the right call.

As a keen observer I think the market still has a long way to go before it reaches this tipping point. I don’t see it happening in the next three years (which is just 2 product cycles–the most an outside observer can hope to roadmap).