Abstract

Apple Consolidates Dominant Status in the Consumer Smartphone Field

For a long time, North America has been a major market for PCs, PDAs (Personal Digital Assistant) and mobile phones. As Smartphones possess characteristics of all these three products, North America has naturally become a key battleground for Smartphones as well.

Smartphones originated from PDAs, which were originally a type of mobile computing device designed for use by businesspeople, complementing desktop PCs. In the past, the major PDA suppliers were PC vendors such as IBM, HP, Compaq, Dell, Sony, Toshiba, and Acer.

Before Apple launched the iPhone in 2007, Smartphones were still positioned as devices that integrated PDA and mobile phone. Mainstream OS were Palm OS, Windows Mobile, and Blackberry, provided by the North American companies Palm, Microsoft, and RIM respectively. Products still focused on enterprise demand, such as e-mail, PIM, calendar, MVPN, data sync etc.

Although Nokia rolled out many high-end entertainment models adopting Symbian OS and S60 interface software, due to Nokia's platform development strategy Symbian was mainly used to segment mid-range and high-end products. Furthermore, because Nokia is Symbian's largest shareholder, Symbian has not been widely adopted by other mobile phone vendors. As a result, even though Symbian has a long history in consumer Smartphone development, it has lost control over dominant industry trends and has seen its market influence decline due to a lack of cooperation partners with whom to jointly operate this market.

The real consumer Smartphone market only started to blossom after the market launch of the iPhone. This market has grown rapidly recently, and has garnered much attention. It has become a key battlefield for mobile device vendors.

Apple's launch of the iPhone 3GS and the continued supply of the iPhone 3G, as well as the  excellent user experience and rich application software, are aimed at further expanding market share and influence. In the short term, it will be hard for other companies to challenge Apple's position in the consumer Smartphone market.

The market targeted by RIM is very attached to the push e-mail services provided by RIM. Currently, RIM still focuses on the enterprise user market, creating segmentation between itself and the consumer market positioning of the Apple iPhone. Therefore, in the near-term future the impact felt by RIM will be relatively limited.

Apple's iPhone Pricing Expected to Become Price Ceiling for Other Products

Since the iPhone 3G was launched in July 2008, the US$199 price set by Apple and AT&T already created large pressure on other vendors. With the high-end specifications of the iPhone 3G and its trendy design, a feeling emerged among consumers that the prices of other products could not exceed US$199. Therefore, models which were released later, such as the T-Mobile G1 (price: US$179) and the Palm Pre (price in cooperation with Sprint: US$199), did not challenge this price ceiling. US$199 has become a reasonably accepted price among consumers for Smartphone products (bundled with service packages).

Apple has now lowered the price of the iPhone 3G 8GB version to US$99, approaching prices of high-end feature phones. The user experience of this version still exerts strong influence on the market, making pricing strategies of other vendors more complicated.

In the future, when Apple decides to launch new follow-up models for the iPhone, other Smartphone vendors will closely watch whether Apple decides to only make minor adjustments to functions and maintain the US$99/US$199 prices, or whether it decides to significantly improve product specifications in order to get away from the previously set price ceiling.

Abandoning Hardware-centric Thinking, Improving Differentiated Value-added Service Capabilities Key to Escape Low-price Trend

In each development stage of the mobile phone industry there are different types of competitive thinking and trends. In the first stage of mobile communications, the most important competitive weapon for mobile phone vendors was control over communications technologies and their number of core patents. These two elements helped companies to increase their influence during formulation of communications standards and guide this process so that new standards would be more beneficial for themselves. Key companies in this period included Nokia, Motorola, Ericsson, Siemens, and Alcatel. Starting during the second stage of mobile communications development, the worldwide market and industry grew rapidly. Key competition elements during this stage were control over communications chips and understanding of demand in regional markets, in order to quickly develop and manufacture a large number of value-line, multimedia and multi-function mobile phone products that could be well received in the market. Companies that quickly emerged in this period included Asian companies such as Samsung, LG, Panasonic, Kyocera, NEC, Sharp, Bird, Amoi, and TCL. In the third stage of development, traditional voice services were no longer the key mobile communications services. Instead, data services became mainstream in the industry, centered on application services and expandability. Hardware elements such as exterior design, materials used, and value-added functions lost in stature, while software elements such as application services, user interfaces and OS moved to the forefront. This has resulted in the rapid emergence of companies that originally operated outside the communications industry, such as Microsoft, Apple, RIM, Google, and HTC. These companies possess software and application service capabilities.

Apart from Nokia, which has recently been aggressively trying to transform itself, the four other major mobile phone vendors are still locked into hardware-centric thinking, focusing on exterior design, hardware functions, etc. All these companies are trying to maintain a 10% profit margin. Companies challenging the top five vendors are Apple, RIM, Google, and HTC, which feature software-centric thinking. Currently, the strength of mobile communications companies faced with price reductions is not as robust as in 2004. With Apple leading the way in price reductions, hardware-focused companies have to quickly formulate strategies in response to these developments in order to stabilize their market shares and profit margins.

The current iPhone price reductions are mainly aimed at expanding the user base of the Apple Application Store. In this way, revenue from application software sales can cover for profits sacrificed in hardware sales. Even though other companies are also strengthening their competitiveness in software services, the revenue generated from application services is currently still far away from the scale reached by the Apple Application Store. Therefore, for other companies the impact of price reductions on profits will be more significant than for Apple.

In the current development stage of mobile phone products, software-conforming-to-hardware is changing into hardware-conforming-to-software. The past hardware-centric thinking, focused on low prices and multiple hardware functions, has to be discarded; instead, software capabilities have to be strengthened, including user interface, application software, value-added services and software integration. This is necessary to ensure product differentiation and enable companies to pull themselves out of the price reduction vortex.

Price Reduction Pressure Will Result in a Harsher Environment for Taiwanese Manufacturers

With Apple about to initiate a new price war in the North America Smartphone market, other vendors will adopt countermeasures to halt Apple's forward march in North America. One of the most direct methods is to go along with price reductions. If branded vendors face pressure to reduce prices, this pressure will likely be directly transferred to their suppliers.

Looking at the price reduction of the older iPhone 3G model from US$199 to US$99, Taiwanese iPhone component suppliers will experience an increase in operational pressure as Apple possesses strong bargaining power with its large-scale outsourcing orders. As for Taiwanese contract manufacturers, Apple could possibly look to add another outsourcing partner. The price competition between these different contract manufacturers could intensify competition even more.

Therefore, as price battles are expected to be unavoidable for Smartphones, supply chains will gradually become an important factor in international brands' competitiveness. Taiwanese mobile phone companies, which mainly operate contract manufacturing businesses as well as components, will have to improve their cost control in order to meet the demand of branded vendors.

Appendix

List of Companies