At the time choosing Android seemed like a smart choice for phone makers. Many will now regret that decision.
Choosing Google’s operating system was a shortcut to the market. It saved time and money. A lot of money. It costs at least a billion dollars to build a phone operating system from scratch.
Android looked like it would do for phones what MS-Dos and Windows did for PCs.
In one sense it did. Android accounts for the lion’s share of the market. About 85 per cent of phones sold this year use the software.
What Android didn’t do was establish a level playing field. Only one, maybe two companies have benefited.
The problem is one Android phone is much like every other Android phone. This means a cheap Android phone seems like a bargain compared with a more expensive Android one.
To get around this, phone makers add their own software layers to the stock Android OS.
That could be a waste of time. Many customers prefer it when phone makers do less to change Android. It’s doubtful whether users think software overlays add any value to their phone experience.
Avoiding the Android overlay
Indeed some customers prefer it most when the phone maker does nothing at all. They buy Nexus phone models built with stock Android and no overlays.
When sales grew fast, phone makers stuck with the plan because there was a promise of an eventual payday.
Two market changes mean that is now unlikely.
First, the market slowed. In most of the world, the phone market is, in effect, a replacement market. IDC says phone sales grew just 1.6 per cent in the last year. There aren’t many more new customers to sell to.
Second, a wave of Chinese phone makers challenges them with low-cost, good quality alternatives.
In the parts of the world where there’s still room for growth, customers want cheaper phones. That means lower margins for companies making phones.
LG, Motorola and HTC lose money every time they sell a phone. There is no clear path to profitability for these companies. None of them is in good shape.
Sony was in a similar place this time last year. It has since rebooted to focus on selling high-end models. The company dropped about two-thirds of its models.
Up to a point the strategy paid off. Sony’s phone business is now profitable. Although the margins are so small it might be better to describe it as break-even. This year’s tiny profit is little compensation for years of huge losses.
Samsung was struggling to make money from phones for a while. It now makes a respectable profit. The company is doing so well that it can afford the recent recall of Galaxy Note 7 models.
Until recently only two phone brands mattered: Samsung and Apple. LG, Motorola, HTC and Sony are insignificant. They lose money. They lose so much money you have to wonder why they stay in the phone business.
Soon we can stop wondering. One or more of these brands will close their phone making operations. At Mobile World Congress HTC was more interested in selling virtual reality hardware. Both Motorola and LG were pushing devices other than phones — at a phone industry event no less.
Huawei emerging as challenger
The elephant in the room is Huawei. It is now the third largest phone maker in unit numbers. It is also the third in revenue.
While Huawei doesn’t break out phone financials, we can assume the business is profitable. It has scale. Huawei has factories working around the clock in Shenzhen and elsewhere churning out phones.
The recent Huawei flagship phone, the P9 sells for about half the price of a Samsung flagship. It might not have the feature list or the brand recognition. Yet 90 percent functionality for half the price is a compelling sales proposition.
Huawei is no slouch with innovation. The P9 beat Apple to market with a dual-lens camera by five months or thereabouts.
Chinese phone makers
Behind Huawei is a flotilla of smaller Chinese phone makers. They all offer low-cost phones with functions to please users who want a working device, not a piece of jewellery to flaunt.
So let’s look at where the market seems to be heading. Apple iPhone sales may or may not have peaked. It doesn’t matter. The company has momentum and a loyal band of followers who will snap up whatever it offers.
Apple’s ecosystem is greater than just phones. There are productivity benefits for those who commit to it.
Reports this week say the new iPhone 7 is selling out in stores. This tells you Apple will continue to make more profit from phones than anyone else.
For now, we can assume Samsung’s Galaxy Note 7 problem is just a stumble, not a sign of deeper problems. There will be a financial hit and some reputation damage. Yet the company should get over this fast enough. It will be interesting to see if Apple, Huawei or anyone else benefits from the incident.
Samsung sells twice as many handsets as Huawei and makes three times the revenue. That means it should stay in front for now. Huawei is growing fast. The company has deep pockets. If necessary, it can subsidise its phone business from its lucrative network hardware sales.
That telco relationship will also serve Huawei well. It opens doors that Samsung doesn’t have access to.
Huawei built up a head of steam and continues to grow faster than the market.
It’s possible Huawei or another Chinese phone maker buys one of the established brands. Yet that’s fading. After all, Lenovo’s acquisition of Motorola hasn’t been a great experience.
LG, HTC and Motorola fading
More likely LG, HTC and Motorola will fade into the background. We’ve seen something similar happen with Microsoft and Blackberry.
Sony has a better chance of making it in the phone business. Although the parent company may find more lucrative investment opportunities in its other markets.
At the time of writing Apple, Samsung and Huawei account for two-thirds of all phones sold. In effect they account for all the profits made from selling phones. For the near future it looks as if the story of the phone business will be how they perform compared to each other. The other brands are no longer important.