By Chris Ambrosio, director, Wireless Device Strategies Service, Strategy Analytics
Editor’s Note: This is the third column in a new weekly feature at RCRNews.com, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from M:Metrics’ Seamus McAteer, Ovum’s Roger Entner and Current Analysis’ Peter Jarich.
Speculation continues to swirl around the iPhone, and I wish Apple would launch the phone if for no other reason so that I can stop answering questions about it! Just when that speculation started to ebb, Microsoft announced the Zune. This came at the most inopportune time, as I was traveling in Europe and paying T-Mobile $.99 per minute for international roaming. Finally, SonyEricsson’s mBuzz announcement kept me up through the wee hours and had me cursing all things music related.
My personal inconvenience aside, we are seeing some interesting initiatives from consumer electronics (CE) players, cellular OEMs, and giants like Apple and Microsoft, in trying to establish their own distinct brand value in the cellular media device space. When you add in Nokia’s recent acquisition of Loudeye, and Motorola’s early moves to offer iTunes-enabled handsets, these actions represent significant resource allocations by handset OEMs and software giants to copy Apple’s successful iTunes model—offer services to sell devices, and to establish a brand value more closely aligned with preferred Internet and content brands.
From a devices perspective, it begs the question—who is better positioned to capitalize on the media device opportunity? The short and direct answer, which I readily admit is not a common methodology for most analysts, self included—consumer electronics vendors. These players, led by Sony and Samsung, are better positioned to capitalize on the volume and profit opportunity that lies untapped in connected media devices.
There are three important issues underlying my views.
First, it is important to acknowledge the impact that service providers are having by using subsidies and distribution channel dominance to interpose their brands between consumers and the content/media brands they really want. This is not just a U.S.-centric dynamic. While service providers in Western Europe are increasingly willing to facilitate access to off-portal content, no stone is going unturned in the effort to keep their place (and revenue flows) intact in the value chain of mobile data services offerings and brands. It is also worth noting that 3G handset sales in Western Europe, from the Nordics to Italy to the U.K., are largely being supported and driven by broad subsidy allocations from operators. When discussing subsidies, even cable players have made set-top box and router brand choice a non-issue in the consumer buying decision on cable TV and Internet services. This subsidy power will extend the revenue opportunity for service providers easily through the end of the decade if not longer.
However, in all markets, the incursion of operator brands between consumers and their preferred media and content brands will serve to both deter consumers from using mobile data while simultaneously driving users to the lowest-cost source for accessing their favorite content and media brands—the Internet, via the cheapest connectivity/service platforms (read non-cellular.)
Issue No. 2—Microsoft and increasingly Apple, two strong players with unique positions in U.S. consumer brand perceptions today, will both be competitors in this device domain as well.
Microsoft owns the computing environment for both consumer and business users. One could safely say that it already owns the digital media experience in the home, and when the company brings its huge resources to bear, it will make an impact in the mobile device domain. This has borne out in the gaming platforms market via its steady improvements on Xbox. That being said, the Zune is a phase-one step into the portable media platform market, and Microsoft’s success should be evaluated after the version it launches in 2011, not 2007.
Apple has established a unique connection between the device and the content. We have to go back to the early days of AM radio being developed as a means to sell radios to draw a similar equivalent. And how about radio being an advertising-supported business model? Sorry, that’s a different topic! In terms of usability, Apple outperforms all comers, and in this regard has established a very strong end-user brand value. The company will effectively continue to use the performance advantage of its brand in order to sell connected i”insertmediahere” devices.
That brings me to my third issue. U.S. consumers have already formulated distinct brand perceptions of cellular OEMs as well as CE vendors. As they gain experience they are increasingly making decisions based on OEM brand BEFORE they choose their carrier. Those of us in the objective third party know that in the long term this brand-value migration will continue, and that both cellular vendor and service provider brands will eventually be subjugated to the value of the media/content brands in the mind of the consumer.
These issues form the basis for my bright outlook potential for consumer electronics vendors in this connected media device domain vs. cellular handset OEMs. CE vendors have distinct assets in place that will allow them to more easily separate their CE-centric brand from the service providers. They will struggle to overcome subsidy power in the WAN-connected world, but as the drawing power of content and media brands via low-cost service and non-WAN radio connections overpowers the brand of the service providers, WAN device brand presence in non-cellular channels will become increasingly important in order for cellular OEMs to ensure long-term volumes.
Terminal vendors today are obsessed with improving the coverage of their distribution assets in cellular distribution channels. Samsung and SonyEricsson aside, only Nokia is beginning to position a product line—the N series—in CE-like product SKUs. But even here, Nokia’s presence in non-cellular channels is non-existent, and it will take years and significant resources to establish a competitive retail presence in this environment.
Secondly, at the end of the day, CE players are about selling boxes. They are either agnostic about their software choices (Samsung) and will leverage Microsoft’s and Apple’s success, or they have established a broad product set on a proprietary software platform (Sony) in the mind of the CE user.
Furthermore, via rapid technology and design evolutions, CE vendors have been able to obtain leadership in user perceptions on innovation and technology. The RF roots of Nokia and Motorola form the basis for their vision of the mobile device opportunity, and in combination with entrenched profit protection mentalities, combine to slow their ability to both integrate and adapt new technology as rapidly as the CE players. As an example, the Razr was in product development for nearly four times as long as the Playstation 2.
As any good analyst should do, I’ll caveat my comments. In order for the CE vendors to capitalize on this advantage, it will require major upheavals in long-established corporate structures. This is no small issue, as CE players will struggle mightily to break down long-held, artificial internal structures to better leverage resources across different and soon-to-be connected product categories.
But that’s another issue, for a more well-rested analyst.
Questions or comments about this column? Please e-mail Chris at cambrosio@strategyanalytics.com or RCR at rcrwebhelp@crain
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