The smartphone industry has reached a state of commoditization. When an industry becomes commoditized, products are hard to differentiate. Brands stop being the major driving force in consumer decision and low price becomes paramount. Due to this, differentiation has become a challenge for manufacturers.
Laptops and desktops have become commoditized over the past decade. It started with Dell, which used just-in-time supplies and customization to make its PCs a low-cost household item. But as others began to replicate Dell’s successful business practices, Dell became just another PC maker. And consumers learned that price was really the biggest differentiator among brands.
Another example is that of smart phone users. The ability to buy hardware off the shelf and run it with the freely available Android operating system, has led to a new breed of smartphone makers in developing countries, who are giving established brands a run for their money. Since this new breed of smartphone makers do not have overheads like R&D, manufacturing plants, etc., they have to focus only on sales and service unlike the major brands who incur much higher costs. Encouraging sales through online retailers have also lowered selling costs and solved the distribution problems for some of these companies.
What has driven the commoditization?
Google’s strategy of providing open source Android platform free to mobile manufacturers has played a key role in the commoditization process. Mobile manufacturers could therefore concentrate on hardware manufacturing and marketing. Android currently dominates the mobile OS market. Google benefits from this model as it has access to an increasingly large pool of android users to whom it can target its ads and services. Microsoft is now trying to adopt a similar strategy by providing free Windows phone OS to mobile manufacturers. Earlier, Microsoft used to charge about $5 to $15 for each handset using its OS. The waiver of these charges could make handsets cheaper for consumers and lead to adoption of more Windows phones in the future.
Another aspect which has helped in the growth of low cost smart phones is the arrival of fabless chip makers like Taiwan’s MediaTek. Fabless chip makers only design the chips and leave the actual chip manufacturing to sub-contractors. Manufacturers from emerging markets like ZTE, Huawei, Micromax, Lenovo, etc. have benefitted the most from these inexpensive chips as indicated by their robust growth. While prices of smartphones have been declining rapidly, fabless chip makers like Mediatek, Spreadtrum and Qualcomm have seen robust growth. Fabless chipmakers have also been providing reference designs to handset manufacturers, laying down the minimum hardware specifications for using their chips. ABI Research believes that by 2019, more than two-third of the smartphone shipments would have reference designs from fabless chipset makers, thereby increasing their influence over the industry.
Pricing: Key to Emerging Markets
When a product gets commoditized, pricing becomes the key differentiator. Buyers from emerging markets like China and India are more price conscious than their Western counterparts since handsets are not subsidized by carriers in these markets. In the US, a high end handset is available at $199 with a 2 year contract while the same would cost around $650 without subsidy. This makes pricing less relevant in these markets. The large number of people that are expected to upgrade from feature phones in emerging markets make them an attractive proposition for manufacturers as developed countries like the UK and the US are close to saturation. Entry level smartphone prices are expected to fall further in the coming months as hardware gets cheaper. Motorola for instance successfully launched their entry level handset Moto E costing about $120 in India.
A Peek into the Future:
Smartphones are not only getting cheaper but they are getting better with each launch. The development of a modular smartphone by Google under the codename Project Ara could change the dynamics of the industry when launched in 2015. Established players like Apple and Samsung would have to innovate in order to keep the exclusivity of their phones in the face of such competition. We are already seeing companies venturing in to wearable technologies like Google Glass and Smartwatch. Looking ahead, it is vital for manufacturers to not only keep their costs in check and remain innovative, but also react quickly to the changes in the industry.