When I wrote Competition Creates Hype for iPhone Launch, I was struck by the similarities today in the smartphone industry to the cellphone industry in the 1990s. Back then as analysts and investment bankers, we had to create enormous spreadsheets to track all the new cell phone models, what standards they worked on and what carriers offered them, in order to estimate the subtle shifts in the competitive landscape among Nokia, Ericsson and Motorola. The cell phones had similar features (voice) and came in two forms - the flip phone (StarTAC was the ultimate standard) and the candybar phone.
Today, with the flurry of announcements regarding media events over the next two weeks, the expected features and looks of the smartphones are beginning to feel very similar and reminiscent of the period when cell phones were commoditized. Nearly everyone offers a high-MP camera, many with both rear and front facing lens, voice recognition, multiple-processors, music, video, and potential payment mechanisms through incorporation of Near Field Communication chips. The designs are similar and the price points will be influenced by carrier subsidies.
Tablets, similarly, are beginning to converge on features, size and form factors, although the tablet category lags smartphones by a couple years. Some manufacturers have been able to carve out niches, ie Amazon in the 7” screen, but those are eroding due to Google, Microsoft and Apple’s new and expected offerings into bigger screens, smaller screens, and advanced similar feature sets.
Two things happened in the cell phone market with the onslaught of commoditization. First, the consumer got confused over how to distinguish and select products. Second, data convergence and the smartphone came along and put cell phone manufacturers out of their misery.
What happens if smartphones and tablets all begin to look alike with similar products at similar price points?
Hardware feature sets already begin to feel commoditized and difficult to distinguish. Software does not because it can be modified and updated more quickly than changing out hardware. Software features on smartphones and tablets rely heavily on apps. The lead in apps and app developers set Apple ahead of the competition. Apple boosts more apps (600K) and app developers (43K) than its closest competitor, Google (with 440K and 11K respectively).
ComScore evaluated purchase decisions amongst tablet purchasers and found iPad owners cared most about app selection and brand while Amazon Kindle owners cared most about price, followed by selection of apps. Kindle owners cared less about operating system and brand. The results are not surprising and are, in fact, self-selective. But when Amazon’s price point and size niche become more crowded with competition, the lack of price advantage may send potential buyers back to looking at apps and brands.
What was surprising in ComScore’s study was that interoperability with smartphones was less important. This could be taken two ways. First, perhaps the Ecosystem Effect for Apple may be less strong than previously thought and provide some opportunity for new market entrants like Microsoft to carve out a niche. Again, however, a lack of concern over interoperability does not negate the need for apps. Microsoft would need to accelerate its app development as well as its appeal to the app developer community to gain ground against market leaders. Second, the finding may simply prove the stronghold of the iPad since the iPad has 70% market share while its compatible iPhone has 17%.
One lesson each of the participants in the smartphone and tablet markets should heed: be careful not to confuse the consumer which could paralyze demand. Keep product lines simple, limited and differentiated with clear value propositions for each. What two manufacturers learned the painful way in the handset industry is that too many product choices lead to consumer indifference and can actually turn customers away. This happened to Nokia and Research in Motion. Both had a dominant market share in various product cycles and both offered many similar product choices to its customers. On the other hand, Apple limited its offering to one, initially, and was able to lure customers with clearly-defined choice based on distinguished features sets.
The second lesson is that, for a decade, the companies, Nokia, Motorola and Ericsson, dominated the cell phone industry. They were competing hard in a commoditized business and ignored the impact that the emerging data convergence might have on their telecommunications industry. Ultimately, their focus on the bases of competition in cellular led to their demise as the industry evolved. If smartphones are becoming commoditized, what could be the new trend that shakes up this industry? Some contenders may be social networking, mobile payments, or e-commerce. With the new product announcements over the next two weeks, focus more on the subtle trends than the feature sets in order to get an indication where the industry is headed next - and observe who is doing it. We have come a long way since the voice phone.
