Little Androids, On the Hillside . . .
Yesterday, my friend and fellow analyst Andreas Constantinou of VisionMobile delivered an excellent guest blog for mobile virtualization supplier OK Labs. In his post, Andreas posits that Android is changing the macroeconomics of mobile, increasingly to resemble the PC business. In particular, he highlights the emergence of cookie-cutter Android reference designs and ever-cheaper Android-based handsets from chipset vendors, ODMs and contract manufacturers in Taiwan and China. He segregates the coming wave of Android handset OEMs into Leaders, Innovators and Assemblers and projects that by 2015 the top 5% of the handset market will enjoy 50% of the revenue, in concert with today’s global PC marketplace.
There are indeed striking parallels between the PC business and trends in mobile-wireless, as well as important, persistent differences.
In the mid-90s, a decade before Linux Pundit, I worked as Country Manager at Acer Brazil. We constantly referenced Acer founder Stan Shih‘s “Smile Curve”. Let’s use my old boss’s paradigm (slightly updated) to compare the two markets.
Stan Shih's Smile Curve
Pre-commoditization, PC value-added was dominated by manufacturers cum hardware integrators — originally IBM, Digital and their peers. PC expertise sat in the hands of a few, those companies drew on components of their choosing and went to market through direct sales channels. Industry standardization gave rise to the “PC-AT virtual machine” (BIOS, memory maps, peripherals, etc.) and more importantly, the emphasis on PCs being defined by DOS and Windows software (and not the box they lived in). Standardization on these h/w and s/w parameters initiated the value shift into the “smile” that Stan described: the highest value today lies in key components — CPU, HDD, display, memory, GPU, etc. and OS — and in brand and channel, and not in with integrators and motherboard manufacturers.
Another angle to describe this value-added rictus is with barriers to entry: almost anyone today can put together a whitebox PC from available components — take a trip to Fry’s or visit the Mom-and-Pop PC stores that still dot developing countries. Design and manufacturing-wise, any decent team of hardware engineers can start a motherboard company is 9-12 months. But how much time and money must you invest to ship your own processors, hard drives, DRAMs or LCD displays? Ditto for brand and channel, which takes years and millions of Dollars and Euros and RMB to cultivate.
The global handset market, from its inception in the 1980s through most of its history, cleaved closely the legacy PC (frowning) ecosystem: handset OEMs defined what is a mobile phone (especially a smartphone), and held value-added captive. Nokia, Motorola, Samsung, LG, Apple and their cohorts essentially dictate(d) to chipset vendors and to OS suppliers the form and function of the shiny mobile baubles they produce(d).
The mobile business, however, departed and still departs markedly from its PC analogs in key parameters:
- handsets were (and mostly still are) content delivery vehicles (voice, data, video) and not stand-alone compute platforms (cp. pre-Internet PCs vs. modern desktops)
- core handset requirements were/are determined not by OEMs but by their channel partners, the mobile network operators (MNOs)
- wireless connectivity (GPRS, CDMA, etc.) while standardized as protocols and embedded in mobile chipsets, is not available to all comers: narrow and deep silicon sales channels and certification/homologation requirements restrict who can field a phone in most global markets; building a quality radio set is still an art.
- while barriers to entry in building handsets notch incrementally lower, building and profitably marketing mobile handsets is still difficult and arcane
The introduction and increasing ubiquity of Android is leveling the playing field and certainly can have the impact described by Andreas: lower-cost (cheap?) Android-based smartphones built by upstart Asian OEMs and sold through non-MNO retail and self-service channels. But building and shipping quality Android-based handsets (let alone functional ones) has consistently proven more difficult than it should be. Even branded T1 Android phones have received lackluster reviews. Moreover, while CES and MWC this year and last were replete with Android phone announcements, most devices have been late to market (or yet to ship), with underwhelming user experiences.
I do not argue that like the PC marketplace, the Android ecosystem is increasingly driven by applications. Indeed, the Android Market is flush with thousands of apps and poised to give the Apple iTunes App Store stiff competition n the next 12-18 months. But, for the moment at least, handsets, even smartphones are still phones first and application platforms second (I own Nokia Maemo devices but I use my iPhone all the time). OEM expertise still rules in delivering mobile phones to market, more in concert with the notebook market than its whitebox PC parent.
The undeniable value-added of technology vendors (Qualcomm, TI, Samsung et al.), of handset OEMs (Motorola, HTC, Samsung) and of full-service operator-centric channel will for years keep the mobile market from grinning Stan Shih’s pearly smile, or even from flashing the notebook sneer. Instead we’ll have the Mobile Handset Bite:
The "Handset Bite"
Unlike the PC Smile Curve, the Bite will be shaped by
- Android itself not adding value, but the hardware technology to support it doing so, as will key s/w components like CODECs, media players, home screens and of course, applications
- Upstart Tier II/III OEMs and ODMs adding little value to Android itself and the chipsets it runs on, but Tier I OEMs building Android handsets will enjoy better margins (sans royalties and subsidies), and delivering Android-based differentiated user experiences, hopefully/eventually on a par with Apple iPhone
- Cheap Android-based handsets flooding BRICK, developing and even developed markets through non-operator channels, with mixed results
So, to answer the question posed by the title of this blog — Yes and No. Android will not commoditize the mobile market (more than it already is), but it will help to keep it polarized between Tier I devices with high value-added and the rest of the (commodity) pack.
Also interesting will be a new category, emerging from Tier I OEMs – the Mass Market Smartphone. More on this topic in my next blog.
