For months I’ve been predicting that a flood of ultra-cheap SoC-based Androids is coming at us from China, motivated by the prospect of Third World and BRIC sales volume in the billions and beginning in 3Q2011. The iCube announcement was one harbinger; today we have some others. It’s worth another look at what this trend is going to do to associated markets.
First, a telling anecdote. My wife is finally considering getting an Android. She had been refusing this prospect because she found smartphones too big and ungainly; she has small hands and small pockets and wants something not too much larger than her rather tiny dumbphone. She’s willing to trade away display pixels for this. This is not a crazy set of requirements; smartphone makers, focused on marketing ever-jazzier displays, have been underserving people like her.
Cathy has found a device that tempts her in the T-Mobile store. It’s the T-Mobile Comet, which is specifically designed as a cheap entry-level Android for people transitioning off dumphones. Inexpensive, small, and light are the selling points here, pivoting the relative crappiness of the display from a disadvantage to an advantage. At 240 x 320 pixels it’s no worse than her work-issued Blackberry 8830. Having researched the device, I’ve told her that I approve – it is a good value in current market conditions and does seem well matched to her requirements as I understand them. The street price is $149 and dropping, $99 reconditioned used.
And what is the “Comet” beneath the T-Mobile branding? It’s a Huawei 8150 aka “Ideos”. It is in fact exactly the kind of cheap Chinese takeout I’ve been expecting. It’s a safe bet Huawei is price-taking in the relatively price-insensitive North American market as it ramps up production for BRICs and the Third World; consequently, we can expect prices for this class of phone to drop by $50 or so over the next 90 days, especially if the 8150 is not yet SoC-based.
Comes now The Democratization of Android: 13% of All Mobiles Are From Unknown Brands. The article calls out Micromax, Spice Mobile, and Yulong Coolpad, but Huawei and ZTE – neither exactly a household name in the U.S. – could just as well have been included. Read the whole thing, it’s short.
The invasion begins. And no ESP is required to see what the effects in the U.S. and worldwide are going to be.
To begin with, cheap Chinese takeout is going to put brutal price and margin pressure on brand-name handset makers. Nokia, Apple, RIM, and Motorola are (for differing reasons) probably the most vulnerable. But even established Asian makers like Samsung are going to feel it. It’s not even going to be safe to assume that the cheap Chinese won’t compete on features; the Democratization article notes, for example, that MicroMax and Spice have made a reputation selling multi-SIM phones.
The news is most dire for RIM and the Nokia/Microsoft alliance. Nokia, historically a high-volume/low-price player, can’t survive on the lower margins the Chinese will accept. Even if NoWin actually manages to ship a WP7 phone before the market window for that platform slams completely shut (which is in itself highly doubtful), its odds in price competition against dirt-cheap Androids therefore look very poor. RIM, too, is hideously exposed and lacking a convincing product offering since the Playbook launch cratered.
Apple is exposed in a different way. While it has a brand-loyal customer base at the high end of the smartphone market, the iPhone’s value proposition is weakening in a way well symbolized by the fact that the upcoming iOS 5 will copy some key aspects of the Android UI. Just as the price gap between iPhones and cheap Chinese Androids widens to a chasm, Apple’s vaunted “user experience” is looking like much less of a differentiator than it used to. Apple will face a cruel choice: sacrifice margins or risk disruptive collapse of its market. It may not even be possible for Apple, an American-based company with relatively high baked-in costs and margin requirements, to follow the likes of MicroMax or ZTE far enough down the price curve to remain competitive.
Motorola is an Android partner, but vulnerable for the same reason Nokia and Apple are – as a U.S.-based company, it has higher baked-in costs and margin requirements than the Chinese. To remain competitive it’s going to have to find ways to increase product value while holding the line on unit costs. This is almost certainly the drive behind experiments like the Atrix oh-look-it’s-a-netbook docking station. Very likely it’s behind the recent policy shift to unlocked bootloaders; that’s a way to increase product value by spending less engineering money.
HTC, Samsung and other established Asians have a better fighting position because their cost base is similar to that of the Huawei/MicroMax/Spice/ZTE tier. Still, competition at the high-volume end of the market will have its usual effect. It is likely, for example, that HTC’s Sense overlay will fall by the wayside as prices plummet; in a market where carrier skins are on life support, handset-maker skins hardly look any healthier. Motorola’s recent announcement that it’s shitcanning the MotoBlur brand is a leading indicator here.
Cheap Chinese takeout is also going to be tough on the carriers. The problem here will be the collapse of the contract system and increasing phone sales through third parties like Walmart. The older model – expensive phones sold mainly through carrier outlets with the price spread out in contract-plan charges over multi-year terms – gave carriers a lot of control over handsets and customers. That control is now fast disappearing; the Chinese invasion will probably kill it deader than the dodo.
Without handset control, increasingly carriers are going to be forced into head-to-head price competition on their voice and data plans. Multi-SIM phones even open up the possibility that consumer-grade devices might begin doing automatic cost-sensitive routing over multiple carrier networks. That development would hammer the carriers flat.
Who gets good news out of all this? Smartphone consumers, obviously. This is the free market in action, doing its usual relentless smashing of inefficiencies and rent-seeking. Less obviously, this is Google winning the grand-strategic war that Android was designed to fight. As the carriers are flattened into low-margin bit-haulers and the handset manufacturers increasingly sell cheap generic Android devices, Google will suck up through its advertising business a larger share of the profits in the entire value chain.
And all, mind you, without needing to collect a dime in Android licensing fees. This is what open source triumphant looks like.
UPDATE: And if this isn’t dramatic enough, contemplate what’s gong to happen when SoCs reach the shanzhai…