Android shipments reached celebratory levels last quarter. But a closer look reveals the financial strain of winning market share, shelf space and carrier mindshare.
The chart below delivered last week by Arete Research’s Managing Director Richard Kramer at the Open Mobile Summit casts the success of Android unit shipments in a different light. Except for Samsung, Android smartphone manufacturers are operating at or below breakeven. This has happened because many smartphone manufacturers have not differentiated the consumer value of their smartphones.
Looking back just a few years when mobile phone network operators (MNOs) sold feature phones, there was much more differentiation in phone styles: color, clam, candybar, etc. Smartphone manufacturers have converged on the undifferentiated "black slab" phone design. If one looks at the last year of Sony Xperia smartphone introductions, there is little noticeable differentiation between the models. And many phones, such as those manufactured by HTC, look generally like the Xperia. Unless the consumer can perceive differentiation smartphone manufacturers are cornered into competing on price.
Changing consumer perception should be the first priority for smartphone manufacturers. Winning the consumer’s appreciation of the value of battery life, screen clarity, design and lightness of weight would reduce the reliance on price to win consumer purchases. But most smartphone manufacturers have little experience creating brand differentiation. In the business history of smartphone manufacturers most entered the business bidding on feature phone contracts from MNOs. The smartphone manufacturers won sufficient volumes to achieve margin goals and left the branding, marketing and selling of the phone to the MNOs.
Putting more pressure on smartphone manufactures’ profitability, the MNOs are increasingly seeking payments for placement in the MNO’s web stores. This expense does not relieve the reliance on prices as a differentiator rather than paying them to communicate the unique value of the smartphone.
Buying market share in a new market is unavoidable, but the challenge is in achieving sustainable profitability. The companies most likely to reach sustainable profitability are those most vertically integrated with the most differentiated products.
Samsung stands out with the most sustainable business model. Samsung’s mobile devices are differentiated with both strong creative advertising and unique design that create customer demand. MNOs like Verizon, AT&T and Sprint even anteed up additional marketing spending to introduce the Samsung Galaxy SIII. And Samsung is enviably vertically integrated. Samsung owns fabs that make semiconductor components and LCD displays used in its phones. It also owns valuable patents to LTE 4G wireless communications, freeing them from paying royalties to Qualcomm.
So enviable is Samsung’s vertically integrated manufacturing that Apple buys Samsung’s LCD displays and contracts with Samsung’s semiconductor fabs to build its Apple’s A4, A5 and A6 chips.
The Android innovation cycle is so fast that it is nearly impossible to predict what Android products will be sold a year from now and which smartphone manufactures will be leading the market, other than Samsung. The field is filled with exceptional candidates, but in the context of market share, shelf space and carrier mindshare, Samsung has an edge because of its manufacturing resources and scale.