Mobile Phone Industry Analysis: Smartphones vs Traditional

Executive Summary

The mobile phone industry is growing, but most of that growth results from gains in smartphones. Traditional phones are seeing slowing growth and increasing commoditization, as evidenced by lower selling prices per unit. The current market leaders are those focused on traditional phones, but they are losing share rapidly to those focused on smartphones. It is predicted that smartphones will supplant traditional mobile phones, leading to the conclusion that any company serious about maintaining a presence in mobile phones should focus on building out a portfolio of smartphones and adopting a penetration strategy. Firms that choose to remain in the traditional segment will need to adopt a cost leadership strategy.

Situation Analysis

The cell phone industry has revolutionized global telecommunications. The handset industry has matured in some markets, but there is a high rate of churn — with customers purchasing new phones every year or two — and this keeps sales figures relatively high despite slow overall growth. There are a few distinct segments within the industry, most notably the differentiation between smartphones (BlackBerry, iPhone, etc.) and conventional cell phones.

The industry leader, with a worldwide market share of 36.6%, is the Finnish company Nokia. Korea's Samsung is second with 21.8%. Rounding out the top five are Korea's LG (9.2%), Canada's Research in Motion (RIM), maker of the BlackBerry (3.6%), and the Sony Ericsson partnership (3.6%). The remaining companies in the industry comprised 25.3% of market share (IDC, 2010). The diversity of continents and countries represented indicates that cell phone manufacturing is one of the world's truly global industries.

The global cell phone market declined during the economic downturn as consumers delayed purchases of new phones until the economy showed signs of recovery. With those signs, consumers began upgrading their phones once again. Sales grew by 21.7% in the first quarter of 2010 on a year-over-year basis, with shipments of 294.9 million units during the quarter. There is a notable split in growth patterns between the industry's two major segments. The traditional cell phone segment is mature, experiencing relatively slow growth worldwide, while the smartphone segment is growing rapidly — a trend that led to RIM replacing Motorola in the top five cell phone vendors (IDC, 2010).

As a result of smartphone growth, the industry overall is becoming more profitable. However, firms without a strong smartphone portfolio are facing declining profitability, as they must cut prices to attract buyers. LG is one such company, as is Nokia, although both firms were expected to address this issue in the coming year. Both have strong brand recognition in the traditional handset industry, which has helped drive unit sales even as profitability and market share have declined. Samsung has a stronger smartphone portfolio. RIM has the leading smartphone in the BlackBerry and does not compete in the traditional phone market at all; it has tremendous brand strength in its segment as one of the pioneers of the device and remains at the cutting edge of smartphone technology. Sony Ericsson was struggling to introduce smartphones, causing volume declines, though the company returned to profitability and began overhauling its lineup to remain competitive. Motorola ranked sixth in the industry and had just begun launching smartphones in the US (IDC, 2010).

There are dozens of minor players in the industry as well. Some compete almost entirely in smartphones. Some smartphone companies focus on Western markets, while others are introducing low-cost smartphones in mainland China. While many markets are in a slow-growth phase overall, China is growing rapidly. Market penetration is already high, but Chinese consumers are moving towards smartphone adoption quickly, fueling strong growth (IDC, 2010).

With total worldwide mobile subscriptions estimated at 4.6 billion and headed toward the 5 billion mark in 2010, the cell phone consumer is essentially every person with enough money to purchase one (Parkes & Teltscher, 2010). Penetration is at 100% in over 70 countries (ITU, 2010). This makes segmentation for individual phone products difficult. Customers are generally segmented first by primary phone type (smartphone or traditional) and then largely by price point.

The most important factors in the macro environment are economic, socio-cultural, competitive, and technological. The political environment is of limited relevance to the industry — while each nation governs telecommunications tightly and independently, this is more a concern for service providers than for handset manufacturers. The demographic environment is also less relevant than one might expect. Because market penetration exceeds 100% in 70 countries, demographic breakdowns and trends matter little beyond global and developed-world population growth. Socio-economic trends are more relevant and are discussed below.

Macro Environment

The economic environment is critical to the mobile handset industry for two reasons. First, the industry is subject to economic fluctuations: during the global recession of 2009, the handset industry slumped as consumers delayed purchases. In 2010, the economic recovery buoyed sales. Second, a nation's economic status is highly correlated with telecommunications penetration (ITU, 2010), meaning that as nations develop economically, demand for mobile phones increases.

The socio-cultural environment is also important. In 1999, diffusion of mobile phones stood at around 900 million users. The younger generation adopted the devices enthusiastically, and as mobile phone usage became the norm, even slow adopters and resisters eventually purchased phones. In emerging markets, the trend toward mobile phone usage has resulted in consumers buying a phone as soon as their economic status allows.

The competitive environment is equally critical. The industry operates under monopolistic competition: there are many competitors and the product is relatively homogenous (McCain, n.d.). Firms attempt to differentiate through new designs and new features in order to temporarily achieve a monopoly-like position in a niche before competitors can imitate or surpass the innovation. Differentiation in traditional mobile phones is currently limited, which — combined with a maturing market — has allowed a large number of new competitors to enter, particularly at the low end. With smartphones, opportunities for differentiation are greater given the range of potential designs, operating systems, and features. The threat of new entrants is lower in smartphones, increasing the degree of rivalry among existing firms. Competition is intense in both segments as firms work to carve out market share in a constantly changing technological landscape.

The technological environment is another major external force. Technology in the mobile phone business has been in a state of rapid change since the devices were invented. The current trend is toward the commoditization of traditional phones and the introduction of feature-rich smartphones. The pace of technological change in smartphones is rapid, and this is reshaping the product life cycle. During the economic downturn, demand for smartphones held firm even as traditional phone sales slumped. The rise of smartphones has also enabled new players to emerge: RIM entered the top five mobile phone makers worldwide, and Apple emerged as the sixth-largest player. Firms not competing in smartphones are losing market share. The ability of traditional handset makers to adapt to smartphone technologies will be the key determinant of success going forward.

There are several notable opportunities in the market. The rapidly emerging smartphone market, though characterized by high barriers to entry, offers substantial opportunity for firms with the technological capability. Smartphone adoption may rival the penetration of traditional mobile phones within the next decade. A second opportunity lies in becoming a low-cost provider of traditional mobile phones — a strategy already adopted by China's Huawei. When low-cost providers can mimic the design and features of higher-end traditional phones, they can win considerable market share. Finally, there remains room for geographic expansion as economic development draws more of the world's population into the consumer market.