Subba’s Serendipitous moments

July 25, 2009

The iPhone’s game changer — Analysis and questions!

Enough has been written about the success of the iPhone. It’s been truly a game changer. Some recent statistics will help us keep the success in perspective.

In the first weekend after launching the 3G iPhone Apple sold 1 million phones. Compare this when Apple sold 6.4 million units of its first generation phones in one full year after launch. Based on some preliminary analysis, the gross margins for the 3G phones are above 60%. Currently the iPhone 3GS (16GB) is priced at $199 and the 32GB model at $299. Well, one can expect some price discounting, but even then the margins are pretty healthy.

If the device has been a runaway success, the App Store with over 65,000 applications and about 1.5 billion downloads has been another game changer, much in the same way the ITunes store bolstered the sale of iPod devices.

Apple has only a 3% market share of the global cellphone sales, yet it actually actually accounts for 35% of the entire industry’s operating profits. A Deutsche Bank’s report actually states that before the end of the year Apple and RIM may have a combined market share of 5%, yet account for 65% of the industry’s profit.

In contrast, Nokia the market share leader has been struggling. In the most recent quarter it reported a 25% drop in sales and a 66% drop in earnings. The company has lost over half its value in the last 12 months. Clearly the company has failed to respond adequately to the threats of Apple, RIM and Google’s Android.

There’s nothing noteworthy about Sony-Ericsson, Samsung or LG. Motorola has clearly lost the game. HTC and Palm are new players in the game and their future will be determined in 2 years time.

What’s equally amazing to me is how numerous Japanese companies like NEC, Sharp, Panasonic who make excellent cellphones have largely confined themselves to Japan and never seized the opportunity to go global. An excellent analysis of this phenomenon is covered here. The analysis is interesting (recommended reading) and highlights the fact that as the underlying ground shifts from hardware to software, the Japanese companies may be found increasingly wanting compared to the iPhone and Android.

In hindsight, everyone knows that Apple created a game changer. But hindsight is 20/20. And everyone who’s studied Apple over the years would say that this was a replication of the iPod/iTunes phenomenon.

The key thing is not just a great technology wrapped in a cool design as most people believe it to be. I believe that they took a great technology and wrapped it in a great business model. It was truly a business model innovation redistributing the billions of dollars of value.

But here are some of the questions for which I am keen to hear views:

  • Did Apple see the weaknesses of the incumbents and then develop the complete business model? Were they prescient about the future course of events?

  • Were the incumbents (Nokia, Motorola, Samsung, Sony) too lazy or unimaginative with their competitive responses even when news got around that Apple could announce a iPhone?

  • Did Apple’s innovation with the business model, technology, and its eventual success laid bare the inefficiencies of other players?

  • Is a consolidation in the mobile phone industry imminent in the next couple of years? What are the likely scenarios?

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2 Comments »

  1. It’s not that touch-screen technology is new. So why does it take an Apple to reveal it as an “revolution”?

    I would say many of the incumbents had their blinkers on. They were too close to their customers (cf: the Innovator’s Dilemma) and there was a fair degree of complacency. MOTO for one relied far too long on variants of the RAZR.

    The stark difference in user friendliness and user-interface also partly reflects the background/genetic make-up of these companies.

    This may go down in future as a classic MBA business case study.

    Comment by Foong — July 28, 2009 @ 11:35 am | Reply

  2. MY VIEWS:
    No doubt iPhone’s success is because of the great technology wrapped around creative business model. However this business model is not very new to Apple as it had a similar business model which worked well with i-pod and i-tunes. Apple has always taken a close garden approach since Mac, not reveling much of the platform details. This has left less space for developers to dig platform and offer independent solutions.
    Apple was able to launch under $500 phones because of reusable components/technology of i-pod. However it would be difficult for any other player to offer these set of features under $500 and even if they, profit margins would be low.

    Last year most of the handset OEMs targeted mass market phones where volume is high but margins are low as compared to smart phones/feature phones.

    These days Open mobile platform is picking up. We can see a trend where all the major OEMs are moving towards Open Mobile platforms like Android. Mobile networks Operators have now started driving OEMs. I think moving forward consolidation would happen in the mobile industry and would be driven by close understanding between Tier 1 & Tier 2 MNO and OEMs.

    Comment by Gururaj — July 31, 2009 @ 2:51 pm | Reply


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