Handset vendors must beware complacency

Rethink
Samsung kicked off the handset sector‘s reporting season with its customary results preview earlier this month, and is set to record a bumper quarter buoyed by the Galaxy family and a period without a new iPhone.
 
The ensuing pattern will be predictable. HTC followed up with quarterly figures in sad contrast to those of its Korean rival, reflecting how Samsung and Apple are increasingly dominating the smartphone market between them, and squeezing the air supply of other contenders.
 
The next few weeks will no doubt see a solid quarter from Apple, and the promise of a massive Q4 ahead boosted by the iPhone 5; minor share gains, if any, at Motorola Mobility and Sony Mobile; progress in the mass market from Huawei and ZTE; more dark days at Nokia.
 
Meanwhile, RIM remains in suspended animation until it can get the BlackBerry 10 OS and devices out of the door, and though it cheered investors somewhat by losing less than anticipated in its fiscal Q3, the relief was shortlived – its shares dropped again last week as an analyst warned BB10 might not appear until March.
 
There are common threads running through the stories of the smartphone also-rans, particularly that the players have, in times of success, grown complacent and failed to innovate or change their formula in time. HTC‘s early headstart in Android, Motorola‘s renaissance on the back of RAZR, Nokia's and RIM's former glories – in all cases, the vendors have stood still for too long and seen others come up behind them, with better marketing, new product features and enhanced supply chains.
 
The onus is now on the big two to avoid a similar fate, and there is already frustration in some quarters with Apple‘s hesitancy at launching grand new devices (see separate item). Apple can certainly live on its massive brand and user experience appeal, coupled with marginal functional updates, for a while longer, but if it ever rests on its laurels, it should remember just how dominant Nokia used to be, and how unthinkable it was that the mighty Finn should fall so rapidly from its pedestal.
 
 
Samsung invests in new skills
 
Samsung must also learn the same lesson. It has built its success largely on its access to cutting edge hardware technology, especially screens; its massive distribution network; and newly strong marketing, both to consumers and carriers. These factors have been enough to give it the market lead in smartphones as well as overall handsets, and a credible position in tablets, especially with Note.
 
However, the Korean firm has weaknesses too, mainly on the software side. It relies on Google for its main OS, and has not delivered as distinctive a user experience as rivals like HTC, although TouchWiz is much improved. It does not control core applications and data in the way that Nokia controls its Maps or Google its search. And although it has been investing heavily in creating cross-platform content stores, it is well behind iTunes, Amazon and Google Play in that effort.
 
The positive side of Samsung is that, in the past year or so, it has more openly recognized these weaknesses and the need to keep investing and innovating, to stay ahead of rivals and to keep surprising consumers and market movers.
 
It may be predicting a 91% year-on-year leap in operating profit in Q3, largely based on the mobile business, but it knows how easily fortunes can be reversed – and not just by the hole in its Q4 figures that may result from damages awarded to Apple in the recent San Jose court verdict.
 
Samsung has been building up internal software resources and acquired US firm mSpot in May, whose technology became the basis of a rejuvenated Music Hub offering. The Korean firm plans to bolster this platform considerably and extend it to other types of content, and will make further acquisitions if necessary.
 
“The message we're getting from the top is to raise software compatibility, and buy rather than build, if needed,” Kang Tae-jin, SVP of Samsung's Media Solution Center, told Reuters recently. “Our focus on software is primarily aimed at driving hardware sales, rather than making money. We have a full range of handsets in so many countries and, to better market our products, we thought it's better to start our own software business.”
 
Another new move is to open several innovation centers outside Korea, usually the hub of all Samsung‘s R&D – and a source of competitive edge, given the strong support of the government for research programs, and the testbed provided by the highly advanced mobile broadband user base. However, new chief strategy officer Young Sohn wants to have a more international view, and says the firm will “reinvent itself” in terms of its R&D processes.
 
 
Like many mobile players such as Nokia and Ericsson, there will be a deepening attention to Silicon Valley – as web, computing and wireless technology merge, the heartlands of mobile innovation are no longer in Helsinki or even Seoul but in California. One of the first new Samsung centers will be in Menlo Park in Silicon Valley.
 
Sohn spoke at a recent conference about the challenges large companies face in being truly innovative. Referring to what he regards as success stories – Apple, Sun with Java, Lockheed with SkunkWorks – he said a common feature was that fairly small teams were allowed free rein, away from the big organization or operational pressures.
 
Sohn said: “We're opening an innovation center in Silicon Valley, away from Korea, away from the mothership. We'll be looking at the cloud, at big data. We're reaching out to global talent but it is also about culture and business innovation.” He believes that Samsung in Korea is excellent at manufacturing innovation but that business model changes still tend to originate in the US.
 
Other likely locations for new centers will be Israel and Cambridge, UK, and the firm expects to have about five such facilities outside Korea in the short term. "There are not that many places around the world where truly innovative thinking is going on," Sohn said.
 
More troubles at HTC
 
HTC went through its own innovative phase when it transformed its model from white label to highly branded smartphones, and led the charge into Android. However, its inventiveness seemed to desert it after that, and despite some well received device launches this year, its chances of achieving double-digit smartphone share are looking grim.
 
The company reported a 79% drop in third quarter net income, to NT$3.9 billion ($133 million), short of analysts‘ expectations of NT$4.43 billion, while revenue was also well below forecasts, at NT$70.2 billion ($2.4 billion), rather than the $2.9 billion investors had looked for. This was down from NT135.8bn ($4.5 billion) a year earlier and represented a 20% dip on Q212.
 
Like Motorola Mobility, HTC has been trying to simplify its smartphone family and branding to reduce costs and avoid confusing consumers. The One line is now its flagship offering but it has failed to steal share from Samsung and Apple, which will prove increasingly serious as the over-all smartphone market sees slowing growth, especially at the high end.
 
 
HTC, which has always led the mobile Windows sector until Nokia launched its Lumia range last fall, has unveiled the 8X and 8S to support WP8, but now faces an aggressive, indeed desperate, Nokia, which has placed all its hopes on the Microsoft platform, and even amid its current decline, has greater supply chain control and economies of scale than HTC.
 
The Taiwanese firm has identified China as its main growth opportunity in the near term, though this will be a fiercely competitive space, with local suppliers like Huawei, ZTE and Lenovo also getting serious about premium gadgets.
 
HTC‘s CEO Peter Chou admitted in an email to employees in the summer that the company lacked the "sense of urgency" necessary to fight effectively with the big two. He said the goal was to “continue to optimize organizational structure and resources to increase efficiency and competitiveness, focusing on key growth areas.”
 
But the gulf with Apple and Samsung is particularly large in the world's second largest smart-phone market, the US, which makes up 25% of HTC‘s shipments now, compared to 50% in the earlier days of Android.
 
Indeed, its falling profile was highlighted this week when the firm said it would back away from the US tablet space altogether. It is no longer actively selling its three products - the Flyer, the EVO View 4G and the LTE JetStream - nor will it launch a new slate for the holiday season in the world‘s largest tablet market.
 
Its models, while well reviewed, made only a tiny impact on the iPad, Galaxy Tab and Kindle Fire, and now the company has apparently decided the battle is too tough to be worthwhile. However, it insists it continues to monitor the situation and may re-enter the sector if it has the confidence it could "make a splash.”
 
“It was a great learning experience for us, and they definitely met expectations,” a spokesperson said. It seems that expectations were pretty low, and the vendor admits it needs to do something more radical to draw attention from the iPad – or perhaps shift to the low end and go up against the Google Nexus 7 or the Fire. That approach, where prices are $199 or less, would be in direct contrast to its previous strategy of positioning its tablets as premium offerings. The Jetstream launched at $700 and the Wi-Fi only Flyer was $299.
 
HTC is also finding it tough in Europe, after a major and - for a while - successful effort to re-brand itself there in 2010. In Q2, according to ABI Research, the firm had just 2% of the total world handset market.
 
 
RIM slides on reports that BB10 will wait until March
 
European slowdown and pressure in the US are also problems for RIM, whose main growth now comes from emerging markets, particularly Indonesia. The firm‘s shares fell sharply this week on speculation that the new BlackBerry 10 platform will miss a first quarter launch next year.
 
In a client note Peter Misek, an analyst at Jefferies, said he does not expect RIM to release its new operating system and smartphones – seen as the last chance for the firm to remain relevant in devices – until March. This would mean there would be no impact from BB10 in RIM's fiscal fourth quarter, which ends on February 28.
 
That delay would delay any BB10 licensing deals with other companies, added Misek. Persuading partners – perhaps those seeking their own mobile platform, like Oracle, or aiming to distance themselves from Google, like Amazon – may offer better hopes than RIM's own devices of achieving scale for BB10.
 
“The business uncertainty means parties are unlikely to acquire or license from RIM until BB10 launches,” Misek added. However, CEO Thorsten Heins told analysts on a recent conference call that he was already in talks with CEOs at various organizations to discuss licensing and other alliances, as well as demonstrating BB10 to operators to win their support for RIM's own new devices.
 
RIM‘ shares fell by 5.3% to $7.80 at the close in New York, its biggest decline since September 21. The shares have dropped 46% this year.
 
The firm‘s CMO Frank Boulben said in July that BB10 would debut in some markets in January, but subsequently executives have only said they would deliver in the first quarter or 2013.
 
The loss of confidence in BB10 will mainly benefit Apple and Android, especially with the rise of BYOD (bring your own devices) policies in large companies. But RIM also represents low hanging fruit for Microsoft, and some analysts say Windows Phone will overtake BlackBerry in a key market, Europe, as early as this year.
 
Windows Phone is making slow but steady progress, and some pundits are predicting that it will overtake iOS for the number two spot in smartphones as early as 2015 (Gartner for example). In the nearer term, BlackBerry OS is a softer target than Apple‘s platform, and Nokia‘s bid to push Windows Phone into lower end devices is starting to pay off. Microsoft‘s OS will knock RIM off the top position in Europe by the end of the holiday buying season, according to research by Kantar Worldpanel ComTech.
 
 
“Windows is making steady progress in the big European economies and is now challenging BlackBerry for third spot in the European OS league,” commented Dominic Sunnebo, global consumer insight director. “With the momentum Windows Phone 8 will bring towards the end of 2012, it seems highly likely that it will achieve this before the end of the year.”
 
Although the upgrade to WP8 and that platform‘s harmonization with the new Windows 8 will be important for growing Microsoft‘s base at the high end, Kantar identifies the mass market as being most important to the European shift in power. In particular, Sunnebo points to the popularity of the low end Nokia Lumia 610 in certain territories such as Italy and France. Windows Phone saw growth rates of 6.6% in Italy, 3.5% in France and 2.3% in the UK in the last quarter, and Microsoft's system has gained its first double-digit share in Europe, with 10.4% in Italy.
 
However, the importance of the midmarket raises concerns for the current quarter, since the WP7 devices are not upgradeable to the new WP8, leaving Nokia with the challenge of effectively starting from scratch in persuading its Lumia base to purchase a new WP8 model. However, this problem is nothing compared to those of RIM, which will not have its new BlackBerry 10 OS and devices until next year, missing the critical holiday buying period.
 
Despite progress, and some momentum around new WP8 devices, Microsoft has a long way to go, with only 2.7% of the global smartphone market in the second quarter, according to Gartner calculations. By contrast, Samsung alone gained 48% smartphone share in the top five European markets over the past 12 weeks, says Kantar, mainly based on its Android offerings though it also supports Windows Phone and its own bada. Sony Mobile also overtook both RIM and Nokia in the same five markets (UK, Italy, Spain, Germany and France) with its Android Xperia range, and has said it will not support WP8.

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