Tuesday, 18 February 2014

Why is it important for BlackBerry want to sell a low price handset?

I originally wrote this blog in February but though it worthwhile to up update it now that BlackBerry have launched the Z3, their first smartphone for the masses

There is lots of discussion about cheaper smartphones and lots of disparaging remarks made about the low cost market.  Tim Cook, CEO of Apple dismissed low cost devices as the Junk market. I suspect he will regret that remark in the not too distant future. To see where the future lies is not difficult if you look at it objectively.  

To work out where the market is heading we need to look back to 2011. Something unprecedented happened very quietly,  there was a seismic change within the computer-chip industry. Manufacturers began offering off-the-shelf smartphone chip sets optimised for touch screens. This change combined with the rapid adoption of Google’s free Android operating system, made smartphones and tablets easier and cheaper to produce. 

To add impetus to the already rapid changes within the market, Taiwan-based chip makers MediaTek and Spreadtrum, started offering “turn-key” systems: phone designs plus a set of chips with Android and other software preloaded. Spreadtrum says it plans to sell 100 million of these units units this year.

A perfect example of a company taking advantage of the change is Xunrui Communications in Shenzhen Province, China.  A year ago this company didn't make smartphones, this year, 2014, 38-year-old entrepreneur Liang Liwan, CEO of Xunrui Communications expects to build 10 million of them.  He will do this by buying generic commoditised smartphone components and then feed them to several small factories around Shenzhen. There, workers assemble the parts into low end smartphones that retail for $65.

Manufacturers built about 700 million smartphones last year. But the market has moved to two extremes. On one side are familiar names like Apple and Samsung, selling expensive $400 to $900 handsets; on the other hand there are a couple of hundred lesser-known Chinese and Indian  manufacturers selling sub $200 brands manufactured by over a thousand small factories.
Larger Chinese companies, like Lenovo and Huawei, have aggressively targeted China’s burgeoning market with decently specced mid range handsets costing closer to $200. Using this strategy Lenovo captured 12 percent of China’s market last year.

What's in it for us?
So what has all this activity in the emerging markets got to do with the “sophisticated” western consumer.

Quite a lot it seems.  A well-publicised report by the IDC and another by Gartner has shown that sales slowed significantly in developed markets in 2013 and this trend will continue into 2014 and beyond.  The report concludes that consumers are finding less reason to fork out big dollars, pounds and Euros for products that have not changed an awful lot over the past couple of years. The IDC chart below shows the projected average price of smartphones up to 2017.  A trend analysis shows that the cost of mobile phones is expected to drop dramatically everywhere except in the North America.

Worldwide Smartphone  ASP by Region and 5-Year CAGR

2013 Smartphone ASP*
2017 Smartphone ASP*
5 Year CAGR*
North America
Latin America
Middle East and Africa

(ASP= Average selling price)  (CAGR=compound annual growth rate)

Samsung of course continue to take the top overall sales spot with an increase of just 0.8% year on year.  Although Apple had a decline in sales overall from 2012 to 2013, it saw an uptake in sales in the fourth quarter of 2013, with 50.2 million sales.  This jump was attributed to an increase in the popularity of the iPhone 4S in emerging markets.   Samsung had a 1.6% decrease in sales over the same period, due to lack of sales in developed markets.

This market slowdown indicates market saturation for high end devices in developed countries.  Until the next technologically disruptive leap, flat growth is expected. 

So what happens next?  The battle for the Western smartphone consumer has been fought to a standstill with Samsung and Apple being the two clear winners, the market expansion is cooling towards slower growth and it will now be the job of the marketing people to spend their Billions in order to maintain the status quo.  All of the other handset manufacturers are now consigned to the “others” category.  Even with it 2.5 Billion dollar marketing budget, MS/Nokia could barely scrape its sales figures into relevance.  Blackberry could do well in this market as a niche within a niche but unless all the high end uses have an unlikely change of direction there is currently not a lot of room for relevant growth in the Western consumer space.  

Mind the Gap (analysis)

There are 6 Billion Mobile Phones in the world.  About 1.6 Billion Of those subscriptions are smartphones, 4.5 Billion are feature phones with users who statistically will upgrade to a smartphone within the next 2-5 years... We now know where the next market is. 
(I am using North American measurements so one thousand million = 1 billion)

Worldwide Smartphone Forecast by Region, Shipments, Market Share and 5-Year growth(units in millions) These figures are constantly being increased.

2013 Shipment Volumes*
2013 Market Share
2017 Shipment Volumes*
2017 Market Share
5 Year growth
North America
Latin America
Middle East and Africa
To address this market Blackberry teamed up with Foxconn to manufacture phones for this huge market.  The phone is called the Jakarta, has launched in Indonesia and is rumoured to cost about $190 dollars.  The specs of this phone showed an oversized battery, useful in countries where wall sockets are scarce. The plan is that the Jakarta will sell in numbers that will allow the BlackBerry device Brand to become relevant again. 

BlackBerry is also working on high end models, similar in specs to the top end Android handsets, Perhaps this device will be optimised for the North American Consumer who is willing to pay more.

If the Jakarta project is successful and BlackBerry get back into the news for good reasons rather than its usual bad press, its profile (and share price) can't help but rise and hopefully some lustre will come back into the Brand.

I would see a target sales figure for these emerging market models to conservatively be in the order of 1,000,000 units per quarters with an average profit of $20/30 dollars per handset. This is not not an unreasonable figure given the huge gap in the market and the residual good feeling for BlackBerry in these Markets.

To Conclude
Sales figures aside I feel that the big win if the project works is that we get an operating system into the world that is disruptive to the present incumbents.  Currently we have Apple on one side who lock you in their space (eco system?)and use your data in order to sell you more Apple products.  On the other side you have Android, a free OS designed to collect data for Google to produce better advertisements so that they can monetise your activity more effectively.  Neither of these choices appeal to me.  There needs to be a better choice of mobile operating and OS10 is it.  But only if BlackBerry can get enough handsets out globally into the consumers hands.