Every quarter, significant space is dedicated to figures from Gartner, Strategy Analytics and their ilk, detailing how the global handset market is split. While the names change, the stories are usually the same, with winners and losers, and companies bucking the trend – whether for better or for worse.
But more and more, these figures have become divorced from the financial sector’s perception of a company, which revolves heavily around profit margins. Clearly this is an important metric: there is no point shifting twice the number of handsets as your rivals, if you make a loss doing so. It is far better to make more money from fewer devices. But this kind of thinking can make some sectors of the market significantly less attractive, leading to a glut of companies focusing on the most profitable niches – which can then lead to increased competition, price erosion, and pressure on those all-important margins.
It was the obsession with margins which saw HTC overtake Nokia in terms of market capitalisation earlier this year (prior to Nokia’s dramatic share price collapse), despite the fact that HTC is a much smaller company in volume terms. By focusing purely on smartphones, HTC has managed to position itself in the margin “sweet spot,” for which it has been rewarded by the financial community. And while they currently offer diversified portfolios, recovering vendors Motorola and Sony Ericsson have both publicly said that smartphones are central to their propositions – even if this focus means a lower ranking in the global handset vendor chart.
So, while selling millions of low-cost units in Africa and Asia may bolster market share, improving a vendor’s position in the top 10, it will have negative impacts on margins, making a company look significantly less attractive to investors. Which means that, for many companies, these markets simply will not be attractive enough to support.
Although the mass-market, low-cost device market may become a lot less appealing for a number of the bigger vendors, there will undoubtedly be others who will be prepared to fill the gap, including a number of companies based in developing markets, and those without listings on the major stock markets to worry about. Huawei and ZTE, for example, may be prepared to take a hit on their margins in order to grow their overall market share, while the Micromaxes, G’Fives and Spice Mobiles of this world also look to grow sales and profits through scale at the low-end.
Last week, research firm Strategy Analytics said that “rising cellular subscriber growth in Asia and Africa has led to the rapid emergence of low-cost, mobile handset suppliers to fulfil rising handset demand,” and that “in the long run, Strategy Analytics expects consolidation among some of these microvendor brands as the handset market saturates, with increased competition.” This is likely to lead to the creation of a new breed of handset vendors vying to break out of the “others” category in the pie chart.
In the medium term, what we may see is a “flattening” of the global market, with a single vendor (Nokia) no longer head-and-shoulders above its rivals, and the gap between the tier-one and tier-two vendors becoming much smaller. And while the many established vendors are likely to benefit from Nokia’s current troubles, especially at the high-end and in the mid-tier, in emerging markets it is just as likely that dedicated low-cost players will take up the slack, meaning the “others” categories will get larger.
Indeed, there are signs that this is already happening. According to the latest figures from Gartner, the top-three vendors (Nokia, Samsung and LG) all lost market share during the first quarter of 2011, while the “others” saw strong growth.
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