The smartphone is a mass market product

We’ve been taking for granted what I think may be a central insight:

The smartphone is for the masses, not a high-end niche of techno-geeks and status seekers.


Within 5 years, smartphones will represent roughly 50% of mobile device shipments, 75% of device market revenues, and 90% of industry gross margin potential.  In developed economies, smartphones will represent 40-50% of the installed base of users.  In 7-10 years, virtually all mobile phone subscribers will carry a smartphone.  Different markets will develop at slightly different rates based on replacement cycles, how prepay vs. postpay plays out, etc.  But the end result will be the same:  People will own smartphones like they own toasters or microwaves or shoes.

Quick messaging devices (QMDs), feature phones, and basic mobiles are the niche devices:  A smaller segment of users willing to accept a constrained experience in exchange for…  In exchange for what, exactly?

In the US, the $99 value menu is already dominated by late model smartphones such as the iPhone 3G and earlier Blackberries.  In some other markets, the iPhone is already free with a subscription.  Costs and prices will only go down from here.

Displays, memory, processing power, battery life, wireless broadband connectivity – all are getting cheaper by the day.  The major barrier to smartphone adoption was the user experience.  The smartphones of three years ago (think Symbian or Windows Mobile) could do lots of things but none of them very well.  And the added capabilities would come at a steep price premium.  Under those conditions, people chose a device with limited capabilities – a targeted device that worked well for the activities that a particular customer or segment cared about.   A device that could be squeezed into a low enough price point to attract a wide enough audience to recover all the non-recurring engineering costs associated with the broad product line required in such a market.

But these conditions no longer apply.  The smartphones of today and tomorrow (think iPhone, Android, Blackberry, WebOS) are joyfully easy to use, and can meet all of these customer requirements in just a few form factors.  The functionality of a smartphone is as seemingly infinite as that of a PC – perhaps more so as many additional use cases are opened up by the anytime, anywhere availability of having a smartphone in your pocket.  Costs will come relentlessly down.  Performance and capabilities will improve.  Late model and “pre-owned” smartphones will find their way to the bottom of half of the market, either shipped to developing markets or sold on Ebay or Craigslist.

How will the market be different with billions of smartphone users?  How will the world be different?  These are the fundamental questions facing our clients.

More from 4G World: WiFi bets and femtocell confessions

At 4G World here in Chicago, the debate is raging on about the potential value of femtocells.  One audience member asked yesterday, “If I already have a 20 Mbps broadband connection and a WiFi access point, then why do I need a femtocell?”  I think he was on to something, but it is interesting to go back in time a little and see how the relative business cases for WiFi and femtocells have changed as the market evolved.

This feels like a confession:  Three years ago, I was a proponent of femtocells as a solution for indoor coverage, particularly when compared to WiFi UMA.  Too few devices had WiFi, and it seemed unrealistic to expect many users to adopt a solution that required such a constrained selection.  Different family members or different personnel within an organization may have very different device preferences or be at different points within the replacement cycle.

By contrast, femtocells allow installation of customer premise equipment where it is needed, and the problem is solved.  Individual users don’t need to change their behavior, and if the costs were right, then it could be an attractive solution for many households and businesses.  But the costs were too high (I priced one at $300 at the time) and commercial availability was and still is limited.

Fast-forward three years and the market has changed dramatically:

1. Lead by the iPhone and RIM’s Blackberry, smartphones are rapidly gaining share – in developed markets, the majority of users will have one within two device replacement cycles


2. The challenge is no longer only about indoor coverage, but now also includes an immediate need for additional data capacity to support high bandwidth applications


3. Leading smartphones will nearly all be WiFi-enabled

The result is that homeowners and businesses no longer need to pay to install a femto cell, and users no longer need to be constrained to specialized, suboptimal devices.  For most people, WiFi coverage already exists in their home and office, and these same people are likely to carry a WiFi-enabled smartphone now or within two upgrade cycles.

These smartphones are also responsible for driving a massive increase in data traffic and clogging up 3G networks.  WiFi provides a mechanism for operators to offload 30% or more of this traffic without massive upgrades -- and in advance of LTE networks coming over the next 3 years.

Device makers are scrambling to offer smartphones that match Apple’s iPhone as the key competitive benchmark (including WiFi).  Mobile operators are responding to increasing smartphone usage with investments in WiFi assets and improvement of seamless switching between WiFi and wide-area cellular to offload some of the associated explosion of data traffic.  The way the iPhone restricts high-bandwidth applications so they can only be used over WiFi is a good example of a first step in this direction.

Meanwhile, the level of investment in femtocells is small by comparison, involves a tough value proposition to customers, and is focused on solving a problem that is largely taking care of itself.

My money is on WiFi.

Less is more, when it comes to smartphones

At the moment, we're particularly focused on two themes:

• 'Less is More' - how you can get the most value out of product creation (R&D) by offering fewer products, with fewer features, spending less on in-house R&D resources and working less hard


• 'Get Smart!' - what the future of convergence looks like: smartphones + 'cloud services' + advanced/premium infotainment (video and apps) + smart home hub

The two come together in a recent survey by Best Buy:

"...a large portion of adults in America plan to buy a smartphone in the next 12 months. However, many barriers stand in their way, including confusion about the technology, the shopping experience and price."

"Of adults who do not yet own a smartphone, nearly half (47%) claimed they are too confused by the vast assortment of models and features."

Big takeaway: if you make things too complicated and offer customers too many confusing choices, they won't buy. The key to portfolio management is not allocating the available resources, but optimizing the choices that you offer to customers.

Moreover, the survey also confirms one of our key themes; when it comes to apps for consumers, entertainment is critical:

"More than half (58%) feel it is important to be able to listen to music on their mobile phone. Forty-one percent feel it is important to be able to engage in social networking such as Facebook, MySpace or Twitter. And 36% said being able to play games is important."

Not much reported, but fascinating because it speaks to the key economic question of share of wallet, was the fact that most consumers would give up alcohol rather than give up their mobile phone:

"Six in ten (60%) of those surveyed shared they would rather abstain from alcohol for a week than give up their mobile phone"

This says that mobile phones and smartphones can take share from other categories of seeming unrelated spending. Unless we now categorize smartphones primarily under entertainment, along with drinking and socializing...