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By John Jackson, vice president, consulting and senior analyst, M:Metrics
Nokia, Motorola, Sony Ericsson, Samsung, and LG commanded between 80-85 percent of global unit volume sell-in over the last three quarters—a figure that continues to increase. The gap between market share “haves” and “have-nots” is even greater in UMTS (see chart below).
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Merriam Webster’s defines an oligopoly as “a market situation in which each of a few producers affects but does not control the market.” I’m no economist, but it’s tempting to characterize the global handset market thusly. However, all manufacturers remain under intense margin pressure. None has true control of the channel and retail pricing, or even product specifications in key markets. R&D investment runs on average less than 10 percent of revenues. The market/channel development burden is an estimated 6-7 percent of revenues. For all this, at a billion units per year, there remains plenty of room for new entrants.
Supplier consolidation is logical as markets mature. But what’s the ripple effect? There are winners, losers, and endgame implications for upstream technology markets, sub scale competitors and content and services channels. Let’s have a look at the tea leaves and draw conclusions about the next 24 months.
Tier-2 Shakeout a Fait Accompli:
The most conspicuous victims of global competition have been the tier-two manufacturers. BenQSiemens is the latest and perhaps most public vendor to exit Western European GSM/WCDMA markets. French aerospace and defense giant Groupe Safran is actively evaluating options to unload loss-making Sagem.
Most of the Japanese vendors including NEC, Fujitsu, Toshiba, Sharp, Mitsubishi, Sanyo, and Panasonic who developed a global GSM presence, have quietly retreated to home markets. Several are experimenting with various partnerships or alternative business structures. None has scaled, and all are loss-making. Many, such as NEC, make extensive use of ODMs and EMSs, who will also feel the pinch.
None of the incumbent tier-twos mentioned here are positioned to retrench or take share in major GSM/WCDMA markets in the next 12-18 months. Thereafter, the window of opportunity will be closed.
Emerging Markets, Local Brands, (more) Operator Brands, and Cheap 3G:
But hope is not lost for aspiring market participants. New, sub-scale, or non-traditional vendors are showing up almost weekly in both emerging and 3G markets. Examples include local brands such as Gradiente (Brazil), Usha (India), and Grundig (Western Europe). Beyond the modest volume of Taiwanese-manufactured Windows Mobile units, operator-centric examples range from captive supplier arrangements as in the case with Vitelcom/Telefonica, and a persistent stream of on-offs.
The latter include 3G models like the O2 Ice (Pantech), the H3G “Ministry of Sound” (Amoi), and the Onda 5000 (Amoi), and Virgin’s 2.5G “Lobster” series (Innostream/Emblaze, HTC). At best, these are beachhead strategies for manufacturers and point-solution experiments for operators. They are not a threat to incumbents.
An exception is the recently expanded sourcing relationship between Vodafone and Huawei for midrange 3G handsets. In this instance, Vodafone essentially specifies the handset around hero services such as Radio DJ. This is a direct threat to tier-one vendors—particularly those in favorable 3G IPR positions such as Nokia and Sony Ericsson who now dominate 3G volumes with a heavy bias toward higher-end, higher margin models. Nokia’s N-Series and Sony Ericsson’s Walkman and Cybershot initiatives will presumably serve as vehicles for content distribution initiatives (Loudeye and M-Buzz respectively).
Operators are loath to subsidize what they perceive to be expensive R&D, branding, and marketing costs of OEMs that are not aligned with their long term interests.
In Huawei, Vodafone has found a flexible supplier with neither a brand nor content agenda or associated overhead. Vodafone and Qualcomm (at the chipset level) subsume much of the R&D burden associated with specification and technical integration. The extent to which Huawei will be cost-impaired by 3G IPR exposure remains unclear, but for now, they’re well positioned to be the People’s 3G ODM. To be sure, it’s a model not lost on Amoi, Pantech, ZTE, and others.
The ODM/EMS model or new sub-scale manufacturers are increasingly able to use mature, stable silicon/software reference designs to enter the market with niche offerings in a profitable manner. This appears to be true in 3G (Qualcomm, TI, Ericsson Mobile Platforms), as well as in low-cost markets where the 2.5G incumbents are intently focused.
Ultimately, however, advantage stays with OEMs with enough scale and money to compete globally. This means branding initiatives, channel development, IPR assets, and the ability to associate handsets with burgeoning content-centric revenue streams. Barriers to entry for competitors are low. But the barriers to developing effective, scalable distribution will remain a challenge for sub-scale vendors.
New manufacturing models and advanced board-level hardware/software integration should enable profitable sub-scale niche competition. But the global oligopolistic market structure will ossify. This will hasten consolidation among numerous application-framework and UI vendors as well as 2.5G chipset suppliers who don’t find expansion opportunities in low cost markets.
Questions or comments about this column? Please e-mail John at jjackson@mmetrics.com or RCR Wireless News at rcrwebhelp@crain.com.
