In an interview with Mobile World Live which took place at GSMA Mobile World Congress earlier this month, Richard Yu, chairman of the devices business at Huawei, came out with some fairly forthright opinions of the market.

The executive argues that with the majority of the profit from the sales of handsets going to Apple and Samsung, consolidation is an inevitability among the also rans. And that while there are volumes to be had at the low end, profit remains elusive as devices are “very, very low” in value.

There is some evidence to back this up. Take, for example, LG Electronics. The company recently ended a prolonged period of losses by capitalising on growth in the high-value smartphone market – as its total shipment volumes fell.

But that does not mean that the feature phone market is a zero-sum game. There will always be some customers who are either only able to or only prepared to pay a small amount for a handset, especially with emerging markets currently being one of the key drivers of subscriber growth.

There are some interesting opportunities out there, too. At Mobile World Congress, the heads of Bharti Airtel, VimpelCom and Telefonica Latin America called for smartphones to be pushed down in price, in order to drive adoption of data plans in emerging markets. A US$50 device would “dramatically alter the landscape,” according to Sunil Mittal, chairman and MD of Bharti Airtel.

Indeed, Telefonica’s work with Mozilla to create “all-HTML5” smartphones is intended to help in this aim, by reducing the costs associated with smartphone software and hardware. While figures were not revealed, Carlos Domingo, director of product development and innovation at Telefonica Digital, said the result is “way cheaper than what is out there – but the performance is really good.”

The challenge for vendors will be in how to unlock value in these low-cost markets. And this will not be easy as investors and the financial community (not without justification) look at margins as a key metric.

It certainly seems possible that a number of dedicated low-cost handset vendors, possibly without the focus on margins of a listed company, could move in to service niche markets in Asia and Africa, which are otherwise outside the focus of the global handset players. Indeed, in markets such as India and China, significant volumes are already being achieved by domestic vendors.

And this would create an interesting disparity between the rankings for vendors based on profit when compared to volume, with different names heading each list.

But the role of the operator in the ecosystem should also not be underestimated. Several of my colleagues have recently commented on the challenges of subsidies in mature markets (here and here). And, indeed, there is evidence that the growing costs of subsidising smartphones is eating into the potential service revenue gains from premium consumers.

But subsidising lower-cost devices is not such an onerous burden, and can help operators both get handsets into the hands of new subscribers, as well as easing the pain for vendors offering lower-cost devices. The question is who these low-cost device vendors will be, with the familiar names currently focused on growing their business in the mid-tier and above.

Steve Costello

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members