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.

Why offer an extreme version - because of extreme aversion

There's an item on CNET today asking why on earth Microsoft plans to offer Windows 7 Ultimate?

Now, not having been involved directly in this decision, it may be because Microsoft genuinely believes that its the right product for a small target group of customers:

"There is a small set of customers who want everything Windows 7 has to offer," Ybarra said. "So, we will continue to have Windows 7 Ultimate edition to meet that specialized need.

"Windows 7 Ultimate edition is designed for PC enthusiasts who 'want it all' and customers who want the security features such as BitLocker found in Windows 7 Enterprise edition."

There's a better reason for an extreme version - extreme aversion. What? This extreme version will not just make a few über-geeks feel good, if they don't think they're being ripped off, but more importantly it will make those of us who don't buy it feel better.

The reality is that customers making choices do not behave in line with rational expectations. One of the important cognitive biases that we have when it comes to making choices about which products to buy is that we tend to avoid extremes, and prefer intermediate choices.

Although other factors may play a part, it seems that the most powerful motivation for this is so-called loss aversion. We value things we have to give up more highly than things we might obtain, typically by a factor of between 2x and 4x. An extreme choice involves a large loss relative to the other extreme; an intermediate choice involves less loss than either extreme. That's why there's sometimes also a barebones version that very few people buy, to provide an extreme at the other end of the range.

So, Windows 7 Ultimate will make all of us who don't buy it feel better.

The way in which customers really make choices amongst competing products has profound implications for product portfolio and pipeline management; these are explored more fully in a recent working paper: 'Less is More'.

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...