There is a big debate about the viability of tablets market for vendors apart from iPad. I have heard the phrase many times that

There is no tablets market. It is just the iPad market.

In this article I have attempted to evaluate the above hypothesis and arrive at a conclusion one way or the other.

Current State Analysis:

If we look at the current trends, it would appear that Apple is in a dominant position with no vendor being able to provide a credible alternative. Apple had 67% market share at the end of Q3’2011 and no other vendor was close to it (refer the market share data in the chart below). There are close to 40 vendors on Android platform and their combined share is around 27% (dipped from 30% in Q2’11). The largest Android vendor is Samsung and apart from Samsung  (who produces the new 7″ Google Tablet T-Mobile and other popular models) no other vendor has even 1% market share. Motorola Xoom is now not even in the picture. Apple has sold 50 million devices in all till date against the Android sales of 10 million.

RIM and HP had huge plans for the tablets market but within a quarter of launch, HP has decided to quit the market and RIM is struggling. There are indications that RIM might also quit the tablets market if it does not do well after the latest changes in its strategy. Amazon has launched its tablet, kindle Fire but it is yet to hit the market.

All in all, currently there is no player who can even be termed as challenger to Apple.

Future of Tablets

Today, the tablets market is largely undifferentiated with all vendors trying to emulate Apple’s success but this is likely to change very soon as the market matures. I see the following 3 trends emerging that would change the way tablets are market today:

1. Price Discovery: All the vendors attempted to compete with iPad and sold at a similar price. This was a big mistake with the consumers preferring to buy iPad instead of other tablets as the value proposition of other vendors was weak at the same price point. When HP liquidated the stock at $99, their tablets suddenly vanished from the shelves. So much so that HP decided to produce some more tablets. Range of tablets are coming in across various price points mirroring the smartphone market which has products from $100 to $700. RIM has also decided to drop the pricing of the tablets to $249 while Amazon has launched its tablet at $199. I see $100-200 as a very lucrative and viable price segment for tablets. There is certainly a window of opportunity for someone to come up with a low-cost, user-friendly tablet likely built on Android that would have mass market appeal (chances are that it would come from a Chinese vendor).

2. Differentiated Value Proposition: So far the tablets have attempted to target the same consumer segment with similar value proposition. Their attempt has been to be the “Laptop Lite” and replace the netbooks. However, the market is much larger if tablets are not seen as replacement for either smartphones or netbooks. Instead vendors should look at it as a device that has multiple value propositions and we might need different kind of devices to meet those demands. Amazon’s Kindle would appeal to people interest in content and cloud based streaming services while the Chinese players can capture the enterprise segment that need cheap functional tablets. Indian Government’s $35 tablet is a perfect example of targeting a segment (education in this case) with a stripped down tablet.

3. Services Ecosystem: We have all witnessed the success of iPhone and one of the primary reasons for the success of iPhone was the ecosystem that Apple created around the device. Even in tablets, the services ecosystem is likely to play a big role in its success. However, in this ecosystem, the tablets will not be central. Somebody would develop an enterprise application and would sell the device as part of the managed service contract. I see a possibility of a company developing a courier management application on tablets or an order management system thereby creating a huge tablet demand as low end with minimal processing and multimedia capabilities.

Will the iPad party continue forever?

No, I do not think so. Apple is enjoying the high market share till the time people are not able to discover the use of a tablet. Today people are using a tablet as a gaming and browsing device. This is surely going to change once the differentiated value propositions emerge with different use cases. Once the tablets start getting used by sales guys or restaurant order management, the market would surely move beyond iPad.

Kindle Fire is most likely to spoil Apple’s party as it has a very good value proposition in terms of content and has priced the product aggressively. Amazon is subsidizing the Kindle and plans to monetize through content which would be difficult to match by any other competitor except for Apple. In a nutshell, we’re entering a near disposable e-reader/tablet era that will split the market between Amazon (consumption based profits) and Apple (high end brand profits). Every technology company caught in the middle is going to have some serious problems.

I see the Chinese players coming out with cheap tablets and capturing a sizable small and medium enterprise (SME) market. The Chinese players would be very aggressive and would not care so much about the brand and direct distribution as long as they can sell. They would be willing to customize the tablet based on the end user requirements that the bigger players would be reluctant. Their impact on tablets market would be similar to their impact on the mobile phone market.

In the longer term, Android would emerge as the operating system of choice as the cheaper tablets will have no other choice but to go for Android. In the process, the other tablet OS like BBX (RIM Playbook) and WebOS would die the natural death as they lack the applications ecosystem.

In the end, I would say that there is a tablets market besides the iPad market provided the other players create value propositions knowing fully well their strengths and more importantly their brand limitations.

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Since the launch of iPad, the tablets have caught our attention. Tablets have not been launched by many companies including Amazon which recently launched the tablet. Companies like HP decided to move out of the tablet business because they realized that the tablet market is not up to their expectation. All this makes us to think if there is indeed a tablet market or is it just the hype around iPad that is resulting in high sales of tablets. Till last year I would have agreed with the statement that there is no tablet market but only the iPad market but the suddenly Android seems to have captured a lot of tablet share and the vendors have realized that they need to discover the true pricing for their products. The table below from Strategy Analytics provides the tablets operating system share. Clearly, Android is silently gaining on back of Samsung and smaller vendors.

Mobile phones are expected to play a significant role in commerce and identity management in the future and one technology that would make this possible is Near Field Communications.

Near field communication, or NFC, is a set of short-range wireless technologies, typically requiring a distance of 4 cm or less which are designed to interact with consumer electronics, mobile devices and PCs. NFC is similar to radio frequency identification, except that it contains a tag and a reader, facilitating two-way communications. NFC always involves an initiator and a target; the initiator actively generates an RF field that can power a passive target. This enables NFC targets to take very simple form factors such as tags, stickers, key fobs, or cards that do not require batteries. In short, just by waving or tapping the phone, the money or the content can be transferred across devices.

Near Field Communications (NFC) has been in the news since its inception in 2002 by Phillips and Sony. It is one technology that has a lot of potential but still reached near death due to virtually no support from operators and banks. In the last few years a number of trials around payments and access kept the technology alive. Gartner has a concept of hype cycle which it uses effectively to predict the evolution of any technology. It shows that NFC has already crossed the peak of inflated expectation and is likely to get lower mind space going  forward before it starts to get back (refer to adjacent chart).

AT&T, Verizon and T-Mobile last month said they would work with Visa and MasterCard on their Isis joint venture, which was established to form a nationwide infrastructure for NFC-enabled mobile payments using mobile handsets in the United States. This coupled with interest in NFC from Apple and Google has resulted in an increase in forecast by many analysts. Currently close to 50 million NFC enabled handsets are sold across to world which is less than 5% of the handset market. However, the NFC enabled devices are  expected to increase at least ten folds over the current level (Refer the forecast below)

The forecasts from different analyst firms vary a lot on the NFC device projections but all agree that it would be significant by 2015. 

Here is a Video on the possibilities on NFC technology. Enjoy!!!

http://www.youtube.com/watch?v=ZdD2OKHi4qw

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(This article is written in personal capacity and does not reflect the views of my employer)

Android is the fastest growing smartphone platform and has attracted a lot of interest from the consumers as well as handset vendors. Last week Canalys estimated that in Q4-10, Android become the leader in the smartphones. Many vendors ranging from Samsung, LG, Sony Ericsson to Chinese vendors have adopted Android as it gives them the advantage in terms of time to market and frees up the resources to focus on the hardware. However, in the long term, this may backfire due to the following reasons:

1. Commoditization – Vendors who adopt Android find it very hard to differentiate themselves from other vendors using Android. Hardware and design are the only differentiators which are not sustainable in the longer term. This would lead to the mobile industry emulating the PC industry where consumers are very much brand brand agnostic. Also, with multiple vendors adopting Android and lack of differentiation, the margins are expected to be crushed significantly and may reach 7-8% as in the PC industry

2. Shorter Life Cycle – Due to waning differentiation, the product life cycle gets shortened for Android based handset vendors. Imagine the situation where HTC launches an Android based phone with certain features and within a month Motorola launches a better looking phone with similar or better features on Android. The sale of HTC handset would drop significantly within a month and the same would happen to Motorola if there is some other vendor that launches another model with better features leading to shortening of product life cycles. With multiple launches in a month by different vendors on Android, this situation is very real. Earlier most models would sell longer as the different operating systems provided distinct differentiation in combination with vendor brand, features, etc. Shortening life cycles would mean that the vendors will not be able to cover costs on many models.

3. Low Retention – A lot of consumers buy the same brand when they change their handsets as they are used to a certain user interface (UI) and experience. This had lead to a higher customer loyalty for mobile handset players than other similar industries. However, with many brands offering similar experience, there would be no barrier for a consumer to shift from Samsung to a little known Chinese vendor as the functionality and experience is likely to be the same.

4. Services and Applications – Google provides and control most of the services like messaging, navigation etc. on any Android device. This gives an advantage to the vendor in terms of time to market and service availability in case the vendor does not have the services. However, for vendors who have a services portfolio or have high gross margin ambitions should not adopt Android. Any vendor adopting Android should kiss good bye to its services play ambition. Apple is able to command a good gross margin because it controls the experience and services. Apple is a platform and has developed an ecosystem around its platform. The mobile game has now shifted to ecosystem and services and it is imperative for the vendors not to outsource this to any other company. Google has a very rigid stand on the usage of services and applications on Android and unless it is ready to re-examine it, it may not be in the best interest of the vendors to adopt Android.

5. Fragmentation – Google is known to introduce the new versions of Android very fast which is leading to a lot of fragmentation issues for the vendors. The control of application market place is with Google and hence there is no way the vendor can port the applications across the models if they are different versions of Android. In some cases, vendors like Motorola and HTC have a filmware on top Android but they are finding it difficult to keep pace with the fast changing Android versions.

Most of the vendors of aware of the problems with Android and therefore have some kind of alternate operating system strategy in place. Samsung is investing in Bada, HTC plans to continue to support multiple OS like BREW and Windows 7 while Motorola recently bought Azingo to reduce its reliance on Android. However, if the Android juggernaut continues to roll, the vendors would find it very hard to get consumer acceptance for other operating systems. There are benefits of Android ecosystem that cannot be ignored like the strong services and application support which really helps the vendors in bridging the services gaps that they may have. However, the adoption of Android should be a well thought out decision rather than to achieve short term objectives and the vendors should always have an alternate operating strategy in place.

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Android is the fastest growing mobile operating systemand has overtaken Apple’s iOS in the last quarter. A number of handset vendors are signing up Android to take advantage of an open smartphone OS. On its part, Android is quickly releasing the new versions to keep adding features and retain consumer interest. However, due to multiple versions and handset vendors, there is a real possibility of Android getting fragmented. The Linux platform (Android is Linux based) is particularly susceptible to fragmentation because its modularity and open license make it highly conducive to customization and derivation. This article explores the reasons for fragmentation and the repercussions of fragmentation on Android.

What is operating system fragmentation?

Operating system fragmentation is a term used to describe the situation when multiple versions of the same OS coexist and used by significant number of users. OS fragmentation results in a situation where the developer has to develop applications for all the different versions of the same OS to reach all consumers or the consumers of different versions may get different experience. The fragmentation is not good for any of the ecosystem players be it the vendor or operator or the OS owner. Platform fragmentation can weaken interoperability because applications that are built for one variant might not work on others.

Fragmentation reduces the addressable market of applications, increases the cost of development and could ultimately break the developer story around Android.

Reasons for Android fragmentation

There are four main reasons for Android fragmentation which are listed below:

1. Platform Versions: Android has been pretty fast in releasing new versions and has already released nine versions in around two years of its existence. There are predominantly four versions of Android OS and the share of different versions of the Android OS is shown in the image in the right (source: Android). On top of this, there are rumors of Android 2.3 and 3.0 versions coming to market any time soon. Most of the phones have specifications designed in a way that it can support utmost one more version update. With the replacement cycle of 2 years for the phones, there are enough phones in the hands of the users that run on old versions.

Version fragmentation is particularly acute due to the limited availability of an automatic update mechanism much like that found on the iPhone.

2. Form Factors: The challenges of fragmentation are more profound in the mobile space than on the desktop because the degree of fragmentation is compounded by the fundamental differences between different kinds of devices. From the developer perspective, it is important for handset vendors to have the same aspect ratio for screens. This is difficult to achieve when there are multiple vendors for the same operating system. There are rumors of MediaTek based vendors (read: Chinese Vendors) to come up with Android handsets. This would increase form factor fragmentation as the Chinese vendors would not only have different screen sizes but also different screen resolutions. Currently, there are over 8 screen resolutions for Android handsets and the most common screen resolution is WVGA but it has only 40% share of the Android devices. This means that the user experience can vary substantially across Android handsets.

3. OEM specific User Interfaces: The biggest problem for handset vendors in adopting Android is the fact that it leaves no room for differentiation amongst hardware vendors leading to low margins. In order to provide differentiation, some of the handset vendors like HTC and Motorola have come out with their own versions. The presence of these versions create additional compatibility pitfalls and need for vendor specific testing.

4. Multiple Device Categories: Android is being used for multiple device categories like the mobile phones, set top boxes, tablets, televisions, PNDs, etc. which is another source of fragmentation. On iPad which users iOS (from Apple itself), the Linkedin and other applications do not show up properly as these applications were made keeping iPhone in mind. If Apple with its few products can face this kind of problem, then Android is sure to face similar issues.

What is Google doing to fight fragmentation?

Android has started off well but is now getting sleepless nights on the issue of fragmentation which is going from bad to worse with each passing day. Google will need to take a pause some time and think how to handle the multiple vendors and form factors for Android phones. Google on its part is trying hard to keep the fragmentation to the minimum by focusing on portability by using bytecode for compilation of programs. Use of bytecode means loss in performance but makes up by providing portability.

Google controls Android Market and has been very particular about the compliance to the compatibility standard. This encourages hardware vendors to stay within certain boundaries and not deviate from the default code base to an extent that would make applications incompatible. The parameters of the Android compatibility definition are pretty restrictive. The standard requires devices to have a touchscreen, GPS, camera and Bluetooth. Any Android product that doesn’t meet the hardware standards is ineligible to ship the Android Market.

The Android fragmentation fear is for real unlike what Google may want us to believe. If Google wants to keep the OS relevance for the developers, it would need to be selective in partnerships and be more categorical about what kind of devices can join the club. In my view the MediaTek partnership will cost Android dearly in future.

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There is an interesting battle that is on in the American smartphone market between Apple, Blackberry and Android based phones. Blackberry has been the leader in the smartphone category for last one year but with the increasing popularity of Apple and Android, the future of Blackberry is under suspect. In the US smartphone market, RIM had a market share of 34.3% in in Q2-10 (down from 53.4% in Q2-09) with volumes of a little under 5 million contributing to almost 45% of its worldwide sales. Any problem in the US market would severely cripple Blackberry putting a question mark on its existence. Gartner predicts that in 2011, RIM would sell 15% fewer handsets at 62 million and expects that by 2014, RIM’s smartphone market share would have fallen to 11.7% from the current level of 18.2%. These are all worrisome statistics and need urgent attention but it seems that the problems of RIM are much larger than current statistics.

A quick look at the falling share price would reveal that the company has lost over 50% of its value (refer to first chart below).

However, what is more surprising is the fact that in the last one year, RIM has lost more value than Nokia (refer to the second chart above). Nokia has been the fall guy for the last one year and has been beaten down by almost every analyst. RIM losing more value indicates that the problems at RIM are much deeper. Lower market value also means that it becomes an easy acquisition target.

In my opinion, RIM has a difficult choice at hand – Remain independent and focus on improving the solutions or sell itself to somebody. I clearly do not see a bright future for Blackberry if it were to remain an independent entity and my reasons are as follows:

1. Employee activism forcing enterprises to think beyond Blackberry

RIM has been known to offer ugly looking handsets but many had no option but to use Blackberry as it was mandated by their companies. Many enterprises allow only Blackberry on their networks as they believe that it provides them higher security than any other handset vendor. They were unwilling to listen to the pitch of other vendors as Blackberry had the first mover advantage. However, this is changing now with the employees especially in the US pushing the companies to allow them to use iPhone. Executives buy iPhones for personal use and like them so much they bring them to work and tell their IT departments to service them. If the companies in the US start to allow use of iPhone instead of Blackberry, then the things would change in other countries very fast as the offices of US based companies would also start to use other phones instead of just Blackberry. Apple has been working has on its Enterprise offering and this has started to yield results with Standard Chartered bank giving its employees an option to use iPhone to access official mails.

Sanford C. Bernstein Ltd. survey found more companies opting for rival devices such as Apple Inc.’s iPhone. Of 200 companies in the U.S. and U.K. surveyed, 74 percent now let their employees use devices other than Blackberry.

2. Poor Brand Loyalty

A recent Nielsen study showed that only 42% of current blackberry owners desired another blackberry, compared to 89% for iPhone users and 71% for Android users. “I carry one because my company gives me one” is a common refrain that we hear from Blackberry users.

According to a survey by ChangeWave Research, consumer interest in the BlackBerry is declining at a time when demand for smartphones is on the rise. Just six percent of survey respondents planning to purchase a smartphone in the next 90 days intend to buy a BlackBerry. That’s fewer than half the number that were planning to do so during ChangeWave’s last survey, taken in March. And it is dwarfed by the 52 percent of respondents planning to buy an iPhone (up from 31 percent) and the 19 percent planning to buy an HTC handset (up from 12 percent).

Customer satisfaction with the BlackBerry is on the decline as well. Just 30 percent of respondents who own the device say they’re satisfied with it. That’s a record low for RIM after a seventh consecutive quarter of decline, compare this with iPhone where 73 percent of owners rate themselves very satisfied. (Click on the figure alongside to see the larger image)

4. Inability to improve the operating system

RIM is facing severe issues with its archaic operating system and is nowhere near the sophistication of iOS or the functionality of Android. Even its web browser is nothing comparable to browsers in other handsets. Blackberry OS 6 tries to address the touch as well as the browser capability issues but it has failed to  make a mark so far.

Smartphones are becoming a platform business in which third-party developers rule the day. RIM has been unable to attract the developers its operating system. A survey conducted on Telecom Circle a couple of months back, revealed that only 6% people think that Blackberry OS would be the mobile operating system that would win the smartphone war. This was lower than even Windows. RIM has been working on this aspect and brought an application storefront developer company, Cellmania and application developer DataViz (DataViz is one of the largest independent makers of Exchange and Office solutions under Microsoft licenses) in last one month. However, it remains to be seen if Cellmania would be able to transfer its developer base to RIM’s fold.

5. No patent in GSM or CDMA

RIM has no patents in either GSM or CDMA which means that it has to pay license fee to other vendors who hold patents. This reduces its ability to hold on to its high gross margin in the event of higher competition. It is increasingly getting evident that RIM would need to vacate the high end and can only hope to be present in the mid end. This is certainly going to put pressure on its margins. Should its ASP were to drop from the current level of $300, it would start to eat into its gross margins. Android is likely to go down significantly in price points and has a good security for enterprise which means that the potential competition from Android is going to give RIM a run for money even in mid end.

What should RIM do next?

RIM should seriously think about the opportunities and the resources required to exploit the opportunities. Playing catch-up can be expensive. The competitive landscape in the enterprise is also expected to increase as Microsoft launches Windows Phone7 with tight exchange and office integration, and HP revamps its Palm product. In such a scenario, the best option for RIM is to sell itself to Microsoft. RIM should sell itself now before it gets too late and its market value goes down even further.

Microsoft is a cash rich company and is looking for acquisitions in the mobile handset space. With more than $37 billion (and counting) in cash reserves, Microsoft has the means at tis disposal to pull off a RIM purchase involving a combination of cash and stock. RIM now has a market capitalization of $24 billion. Microsoft would have to pay a premium of 30-40 percent to complete a deal. A $34-35 billion offer, with the right inducements, might suffice.

Microsoft is very strong in the enterprise space and so is Blackberry. Microsoft is strong on the PC side while Blackberry on the mobile side. If the two companies can come together and offer the entire MS office suite seamlessly to the corporate customers, then they can form formidable entry barriers for other players. Through Blackberry, Microsoft would get to control the user experience. RIM can help solve Microsoft’s own problems in mobile space and its recent acquisitions of Cellmania and DataViz makes it a much more attractive buy for Microsoft.

Please let me know your views on this topic. Do leave your comments and participate in the poll.

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Intel, the world’s largest chipmaker, has announced that it would buy Infineon’s wireless business solutions group (WLS) for $1.4 billion in cash. WLS’s has annual revenues of ~$1.16 billion but ranks at No. 5 in the chipset industry, far behind sector giants Qualcomm, Texas Instruments and Broadcom.

There could be several reason to Intel acquiring the wireless business of Infineon some of them are listed below:

1. Reduced reliance on Personal Computers: The mobile business especially the smartphone business has been booming and it is important that Intel places some bets on the mobile and other handheld devices. Intel, which sold its chip business for mobile handhelds and cell phones to Marvell Technology for $600 million four years ago, faces pressure as Apple’s iPad and other tablet computers chip away at demand for notebooks and PCs. Intel, for its part, has been steadily increasing its mobile presence. In May, the company unveiled a new Atom-based processor platform specifically aimed at the smartphone market. Intel recently also combined its Moblin Linux OS with Nokia’s Maemo to form MeeGo. There is a clear trend in Intel’s recent moves towards reducing its dependence on computers.

2. Relationships with top handset OEMs: Infineon has been supplying chips to most of the top handset vendors including Nokia, LG and Apple. This deal would give Intel a foothold into the mobile handset business and assured business as the chip set suppliers are normally long term partners for an OEM due to complexities in the manufacturing process.

3. Move to embrace LTE: Intel had earlier placed its bets on WiMax as a 4G technology but increasingly it is getting clear that LTE might turn out to be the technology of choice. Infineon’s acquisition can be an indication of shifting loyalties of Intel in favor of LTE. Intel has suffered several setback in the WiMax space including the write off of $1 billion investment in Clearwire. Already TD-LTE is emerging as an alternative to WiMax in the same spectrum band. In such a scenario, its acquisition of Infineon is not a surprise.

4. Access to Talent: Talent pool is always one of the important aspects of any acquisition and I am sure Intel will benefit a lot from the key talent at Infineon.

5. Interplay between PC and Wireless: Intel could potentially equip every PC with 3G which could accelerate its 3G volumes and directly challenge Qualcomm’s 3G dominance. This would result in blurring differences between PC and smartphones.

While the McAfee purchase has led to a certain amount of head-scratching from industry watchers and Intel investors who failed to see the synergy between Intel and a security software maker, the Infineon deal appears to be a better fit. I would request your views on the reasons for this deal.

Recently, O2 announced a revised set of data tariffs for new and upgrading mobile customers in the UK. Customers will have a choice of “smartphone tariff plans” with a bundled data allocation of 500MB, 750MB or 1GB, depending on the total monthly fee, which ranges from £25 to £60. Earlier this month, AT&T had withdrawn unlimited data plans from its network. If the AT&T and O2 are any indicator of the future, the unlimited data plans could soon be a thing of the past.

In April 2010, Opera Mini users generated over 398 million MB of data for operators worldwide. Opera compresses the data by up to 90% and despite that this huge data was consumed by its users. Opera has close to 26.23% market share as per a report from Statcounter as of June, 2010. This means that the total data consumption across the world is much larger than 1150 million MB (Cisco estimates it to be closer to 2000 million MB) and this has been growing at over 100% annually. Cisco has predicted that the mobile data usage would continue to grow at over 100% CAGR until 2014.

If the data consumption continues to grow at the rate forecasted, the operators have a huge problem at hand. The increasing market share of iPhone and Android (Android has reached 10% share of smartphones in just 6 quarters) is likely to make the situation worse than Cisco’s forecast. In the figure below, it is clear that though Apple and Android have just 25% share in smartphone sales, they consume almost 67% of the total data traffic. This means that the average data usage on iPhone and Android based phones is a little under 3 times than that on any other phone.

The data networks were hugely under-utilized before the launch of iPhone. Operators had invested huge money in 3G networks and the due to low usage, they were finding it difficult to recover the investments. In order to increase usage and adoption, the carriers started to offer flat data plans and some of them went a step further by giving unlimited data plans. This was a great strategy on part of carriers and the analysts lauded it profusely and even lectured the carriers that were not offering unlimited data plans on its value proposition. With the advent of iPhone, the mobile Internet usage shot through the roof as the applications became more data intensive and the users started to download full track music, use peer-to-peer (P2P) file transfer and streaming services.

In US and some European countries, iPhone has really high market share putting extra strain on the carriers in those countries. O2 revealed that less than 0.1% of its subscribers account for a third of all network data traffic. Just 3 percent of users on smartphone tariffs account for 36 percent of its smartphone data traffic. The disproportionate data network usage by smartphone users (especially iPhone) meant that the other users were subsidizing the data usage of smartphone users. This is not only unfair but also unsustainable. O2 has been spending around £1m a day to upgrade its network to cope with the “exponential demand” for data on smartphones. AT&T had also claimed similar numbers on data usage.

It is getting increasingly clear that the operators in most of the countries would be left with two choices: either increase the data capacity by investing in the newer technologies like LTE or stop offering unlimited data plans. Given the financial health of the carriers and the maturity of LTE, it is likely that the carriers would adopt the later approach, i.e. stop offering unlimited data plans to consumers. Alternatively, the carriers can adopt the approach of promoting and offering incentives on handsets like Nokia and RIM that are either more data efficient or the data usage is lower by consumers on these phones.

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Apple WWDC 2010 – Steve Jobs Keynote Quicknotes (Contributed by Navdeep Manaktala)

iPhone 4

• US Smartphone Market Share – RIM: 35%,iPhone: 28%, Windows, 19%, Android 9%, other 9%
• US Mobile Browser Usage – iPhone : 57%, Android : 23%, RIM : 13%, Others : 7%
• Hardware
  • New design (leaked iPhone)
  • Thinnest smartphone ever (claim) – 9.3mm thick; 24mm thinner than the iPhone 3GS
  • Stainless steel body for strength
  • Glass display for optical quality and scratch resistance
  • Integrated antenna – The outter rim of the case is the phone’s antenna
  • Display :
    • 3.5 in display
    • 960×460 pixels (4x more than current iPhone)
    • Retina display – 326 pixels per inch (300 is supposedly the highest for the human retina). Highest ever resolution on a phone
    • 800:1 contrast ratio (4x better than current iPhone)
    • IPS Technology for superb color and wide viewing angle
    • Going to set the standard for displays over the next few years (claim)
• A4 processor (same as on iPad. Designed by Apple)
• 40% improvement in battery life (larger battery + improved processor) – 3G Talk (7 hrs), 3G Browsing (6 hrs), WiFi Browsing (10 hrs), Video (10 hrs), Music (40 hrs), Standby (300 hrs)
• 32 GB of storage
• Quad-band HSDPA/HSUPA
• 3-axis gyroscope, adding pitch/roll/yaw, rotation around gravityvide 6 axis motion. Gyro + accelerometer pro – Perfect for gaming
• Camera : 5 Mpx, front & rear, backside illuminated sensor, allowing more light to get to the sensor, 5x digital zoom, LED flash, tap to focus
• Video : HD (720p @30 fps) video, tap to focus, built-in video editing, one click sharing, flash support for videos also
• iMovie App : Create video clips with ability to add pictures, backgrounds, location, music, etc.
• Software (iOS4)
  • Folders, task switcher, unified mailbox, enterprise features (as outlined earlier this month)
  • Choice of Bing for search
  • Will ship 100 millionth iOS device (iPhone, iPod, iPad) this month
  • iBooks now also comes to the iPhone (including download same book for all your apple devices at no extra charge). iBooks will also automatically sync your notes, books, and place wirelessly across all of your deivces
  • PDF support
  • Support for video calling (being called Facetime), front and rear camera support, only via Wifi in 2010, support for landscape and portrait mode
  • To be also made available for existing devices
  • Colours : Black, White
  • Price : $199 for 16GB, $299 for 32GB ; iPhone 3GS (8 GB) is going to be $99
  • Availability : Jun 24^th

iAds

• Objective – To help our developers earn money so they can continue building apps
• Selling iAds for 8 weeks now
• Adverisers so far – Nissan, Unilever, AT&T, Citi, Chanel, GE, Liberty Mutual, State Farm, Geico, Campbell, Sears, JC Penny, Target, Best Buy, Direct TV, TBS, and Disney. Have committed $60 million in iAd advertising
• Support for full screen and full interactivity

Platforms

• Apple supports two platforms – HTML5 (fully open, uncontrolled platform) and the AppStore (curated platform)

iPad

• 8500 native apps
• 35 million app downloads over last 65 days = 17 apps per iPad
• 5 million book downloads from iBooks over last 65 days = 2.5 books per iPad
• New feature on iBooks – Notes (post mark shows alongside wherever you noted)
• PDF support

AppStore

• 225k apps
• 15k apps submitted each week in 30 languages
• 95% of apps approved within a week
• Top reasons for rejection of submitted apps – App doesn’t function as advertised, Use of Private APIs & App crashes
• eBay app – 10 mn downloads of app since its launch last year. 600 mn transcations via the same in the first year and expected to do 1.5-2 bn transactions this year
• NetFlix coming to the iPhone (14 mn subscribers). Like on the iPad, you can resume movies from where you left off on other platforms. Full catalog and Instant Queue access
• Farmville by Zynga, one of the most popular online games of all time with 80 mn players currently, comes to the iPhone with pinch/zoom, notifications, etc.
• Guitar Hero with strumming (certain notes are swiped, rather than tapped) comes to the iPhone
• 5 billion downloads on iPhone. Across the 3 stores, there have been over 16 billion downloads
• Across all three stores (App stores, iTunes, iBooks), Apple has over 150 million credit cards users
• US$ 1 billion payouts to developers to date (70% of end user revenue)

Watch the video of the address on the Apple site.

The smartphones has been the fastest growing category within the mobile phone space for the last couple of years. In 2009, a total of 172 million smartphones were sold which was a growth of 24% over 2008 (source: Gartner) whereas the mobile phone category was more or less flat in 2009 in the backdrop of severe recession. Analysts expect over 240 million Smartphones to be sold in 2010.

What is a Smartphone?

Unfortunately, there is no one universal definition of Smartphones. Some analysts have defined it as phones using open operating system which means that Symbian, Windows and Android based phones qualify as Smartphones but then what about Apple iPhone and RIM that run on proprietary operating system? Some define it as phone that gives PC like functionality and for some, it is the one with most advanced mobile phone features and hence the feature set of smartphones keep changing. A few industry analysts define it at mobile phones running on operating system with standardized interface and that provide easy access to developers for application development.

Whatever is the definition, it is commonly accepted that Smartphones have strong email clients, third party applications of some kind, QWERTY hardware or software keyboard support, high-speed internet, powerful calendar, contact and organizational features and support for powerful processors and touch screens. The operating systems that can support the above feature requirements are Symbian, Windows, Android, iPhone OS, RIM, Maemo (Meego going forward with Maemo’s merger with Moblin) and Palm OS.

Why does everybody want to win the Smartphone battle?

Smartphones are not even 10% of the total mobile phones but still all the handset players want to win this battle for the following reasons:

1. High ASP - The average selling price of a smart phone is almost 3 times that of a non-smartphone which means it has a higher impact on not only the value share but also on the profitability. Apple and RIM though have just 3% market share in the mobile devices but have over 50% share in industry profits which reflects the high profitability of the smartphones.
2. Thought leadership - Success in the smartphone business gives the device vendor the status of “Thought Leadership”. Any vendor having the “Though Leadership” benefits in the non-smartphone devices as well as the consumers want to buy the devices from the leading brands (in terms of “Thought Leadership”) even if they are not buying the devices that gave the vendor this status. This status is like the quality assurance certificate.
3. Future of mobile phones – The smartphone market is expected to expand significantly in future to almost 40% of the total device market by 2013 which means that no vendor can afford to ignore this market.
4. Operators prefer Smartphones – The increasing popularity of iPhones has led to increased data usage on the mobile. This has enabled the carriers to maintain their ARPUs despite fall in voice tariffs. The data usage on smartphones is almost 3 times higher than a normal phone. 55% of iPhone users use mobile social networking and 80% use it for surfing web daily. The high data usage has led to the situation of data scarcity from data abundance and carriers love this situation.

Who will win the battle?

Anybody who wins in the smartphone business has to win it on back of the operating system.

Symbian has been the market leader in the Smartphone segment of the market with 47% market share in 2009. However, Symbian is facing a stiff challenge from iPhone OS, Android and RIM OS and has lost market share in the recent few quarters. The figure alongside gives Smartphone market shares in 2009. Android though has only 3.9% market share in 2009 but is making the most noise in the smartphone segment.

Each operating system has its own positives and negatives and before we attempt to answer the question that who is going to win the battle, it is important to evaluate the pros and cons of top operating systems:

Andriod:

This operating system has been developed by Google with the aim of not only to get a foothold in the lucrative mobile industry but also to change the way the mobile owners consume data on the net.

Pros – Open, free and supporting many devices. Great experience of Google’s web properties on the mobile like messaging

Cons- Fear of excessive fragmentation due to its open architecture and is also more susceptible to security threats

iPhone OS:

This operating system has been developed by Apple and is a closed, proprietary operating system and is only for Apple devices, iPhone and iPod Touch. iPhones have been so popular that they are now being blamed for the increasing data congestion on the networks.

Pros - Single unified platform and its biggest asset is the application store

Cons- Proprietary and hence its dependence on one vendor is a risk. Application submission process is a cumbersome and Apple keeps a tight control on the 3rd party applications.

Blackberry OS:

Blackberry OS is owned by Research in Motion (RIM) and is a proprietary operating system.

Pros - Strong in enterprise mobility segment and has created a perception amongst IT managers of being a much secured OS. Strong messaging service

Cons- Proprietary and hence its dependence on one vendor is a risk. Aged operating system and requires the special BES server. Lack of focus on consumer segment in the past limits the lure to potential developers. This operating system also suffers from lack of optimization on touchscreen devices and a bad web browser.

Symbian:

Symbian is owned by Nokia  and used by many other vendors like Samsung, LG and Sony Ericsson. It is market leader but is seen as an archaic operating system. However, it is still holding out with promise to launch Symbian 3 and 4 by the end of the year.

Pros - Largest installed base and hence the economies of scale. Backing of Nokia, the market leader helps Symbian maintain its market leadership.

Cons- Aged OS and not really optimized for touchscreen devices. It is virtually absent in the North American markets and is facing huge competition from Android, iPhone OS and Blackberry OS. Dependence on Nokia is a risk as many of the other vendors are shifting to Android.

Windows Mobile:

This operating system has been developed by Microsoft and promises to mirror the PC experience on the smartphone. After continuous decline in market share in the past many quarters, Microsoft recently announced Windows Mobile Version 7 which has got rave reviews from analysts and handset vendors.

Pros - Backing of Microsoft which has virtual monopoly on personal computers. Microsoft’s ability to provide resources and its possible integration with its other hot properties like X-Box, Zune can ignite developer interest in this operating system.

Cons- Past failures to haunt version 7. Heavy operating system and hence requires higher hardware specifications. Last version had a bad user interface (UI) and web browser. I hope the new version has targeted the UI for improvement

There are many other operating systems like Maemo, LiMo, Samsung’s Bada that are trying to get a foothold in the lucrative smartphone business but only time will tell if they can manage to break into the top five operating systems.

I am not going to pass a verdict on which operating system will win but I will publish the results of the poll that I conducted on this site and no prizes for guessing the winner (refer to the image on the left). The winner was Android with over 40% of votes. In the backdrop of its popularity and the confidence that the ecosystem players are putting in Android, it is not at all surprising that it is going to be the fastest growing operating system for next five years. In the recently concluded Mobile World Congress, Android managed to get the highest number of handset announcements. Though even iPhone OS is a wonderful operating system but its proprietary nature would limit its expansion.

In your opinion, which operating system and vendor is likely to win in the smartphone space? Please do comment and cast your vote.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Often there is a debate on the next form factor (physical appearance) for mobile devices. There are fancy form factors like fold-able, morph, etc. that are often quoted but I believe that the next wave would be of an existing form factor which is QWERTY.

QWERTY phones have been in use for a long time but they have been widely marketed by device vendors as messaging phones. The trend of linking QWERTY with messaging was started by Blackberry with their ugly looking devices that had the perfect email solution. Later on any QWERTY device was labeled as business device. However, this myth is changing very fast now with the launch of cheap QWERTY devices particularly by Chinese vendors. Chinese vendors, known for innovation, launched QWERTY devices at around $50 price point which turned out to be the tipping point for such devices. These devices were lapped on by financially constraint individuals who were not much literate as well. They found that using a QWERTY phone made the storage of contact details in the phone book easy. They could write SMSs without any goof-ups like writing “Porn” for “POSM” (POSM-Point of Sale Material) or “Pink Panties” for “Pink Panther” while using the predictive text. It helps simplify the input mechanism which is a big barrier to cellphone adoption. The point is that it was wrong to club QWERTY devices with email and social networking. I am not saying that email is not easy with QWERTY but I am trying to emphasize that the market for QWERTY devices would have been much larger had the marketers realized the utility of QWERTY for the poor and illiterate people.

I would reckon that in the coming 3-4 years, we would see growth in shipments of QWERTY devices as high as 200% every year with most of the demand coming from emerging markets like China, India, Africa. The low cost vendors have been able to catch on with this trend pretty early. Will the established players see things from a different prism?

The launch of Apple iPhone three years back made the touch screen popular in the mobile phones. Long back, before Apple, Nokia had flirted with touch screens but did not get the same success as Apple. Some people attribute the success of iPhone, apart from itunes, to its capacitive touch screen and its ability to support multi-touch. Suddenly, all the phone manufacturers wanted to have touch screens but most of the vendors could only supply resistive touch screens which according to a few people did not offer the same user experience. So what is it about capacitive touch screen that makes it stand out? Before I share my views on this, I would first explain the two types of touch screens and the difference between the two:

Resistive Touch Screen

Resistive touch screens are composed of two flexible sheets coated with a resistive material and separated by an air gap or microdots. When pressure is applied to the screen, by a finger or other objects, the sheets are brought into electrical contact which causes a switch closure and a command is registered. The figure (source: Screen Tek) on the left shows how does a resistive screen works. Examples of resistive touch screen phones are Nokia 5800 Samsung Omnia, etc.

Advantages:

1. Cost effective and duarble
2. Can work in all climate conditions and in any environment like the restaurants, hospitals, etc.
3. Input can be made using a stylus or finger. However, stylus is better suited.
4. Less sensitive to scratches as compared to capacitive screens

Disadvantages:

1. Normally does not support multi-touch though Nokia has announced that on its handsets, multi-touch would be supported on both resistive and capacitive touch screens
2. Recalibration might be required over time as resistive touch screens are known to drift over time. However, this is a simple process and can be performed by users by a simple dot mapping.
3. While using fingers, slightly more pressure needs to be put on the screen
4. Provides only 75% optical transparency which means that its clarity is lower than capacitive touch screen

Capacitive Touch Screen

A capacitive touchscreen panel consists of an insulator such as glass, coated with a transparent conductor (mostly indium tin oxide). As the human body is also a conductor, touching the surface of the screen results in a distortion of the body’s electrostatic field, measurable as a change in capacitance. Unlike its resistive counterpart, capacitive touch screens must be touched by a human finger or some sort of conductive device being held by a human hand. The figure on the right from Electronic Design shows how does capacitive screens work. Examples of devices with capacitive touchscreens are the Apple iPhone and the T-Mobile G1. Advantages:

1. Higher clarity display (up to 90% optical transparency)
2. Supports multi-touch
3. High touch resolution
4. High sensitivity

Disadvantages:

1. Needs a human finger to register input. It is not possible to use this screen wearing gloves
2. Cannot be used in all weather scenarios

Which touch screen is better?

Due to the success of iPhone, there is a common perception that capacitive touch screens are better suited for cell phones than the resistive touch screens. However, I believe that it does not matter whether the mobile phone has a capacitive screen or resistive screen – what matters is the software behind it. The operating system defines the user experience and if the operating system is not optimized for touch screen, even the capacitive touch screen would not enhance the user experience.

Do you agree with me? I am eager to hear your views on the issue.

For the last fortnight, there has been a lot of talk about Apple launching its tablet computer. Apple finally unveiled its much touted device, iPad on 27th January, 2010. Such was the hype of this product that as many as 177,000 tweets happened on Apple within an hour of the launch event. iPad is a sleek looking, multi-touch device that has been positioned as a device between a smartphone and laptop. Due to its design a lot of parallels are being drawn between iPad and Amazon’s Kindle. Some of the analysts and blogs have sounded death knell for Kindle.

Amazon launched its Kindle device and created the e-reader segment. Barnes and Noble later launched Nook to take on Kindle but failed to take off due to product and software issues. However, e-readers caught consumer frenzy and around 1 million e-Readers were shipped in 2008 which are expected to go up to 28.6 million units bu 2013 (source: In-Stat). Nearly half of the e-Reader users spend $9 to $20 per month on the content which means over the life time of the consumer, the content revenues far outstrip the device revenues.

Kindle is a smart device which offers convenience as the value proposition. It is the hardware plus the book store plus the download experience of Kindle that has attracted many users to the e-book category. With Amazon Kindle, the users can download the books anywhere in the world without paying anything extra for the bandwidth. The most important aspect is that the Amazon is the data MVNO in this case and hence the users do not have to worry about buying bandwidth separately. Being the first mover and having a virtual book store is another advantage for Amazon as it has existing relationships with the publishers. Availability of a large collection of books and newspaper which can be downloaded in a hassle free way is a big plus of Kindle. In case of iPad, Apple has struck deal with five publishers (Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster). Unless Apple is able to broaden its base, it is unlikely to challenge the big e-book market.

We should analyze the market of Kindle separately from its DX version. Kindle is for $259 vs. iPad’s price tag of $499 which means that there would be a large segment that may not be willing to spend double the amount to buy iPad. However, the price differential between Kindle DX and iPad is just $10 and iPad offers so much more that Kindle DX. So, unless Amazon reduces the price of Kindle DX significantly, I do not see Kindle DX being able to compete with iPad.

Apple iPad is targeting a larger segment than the e-book readers. All iPhone applications are available on iPad which means that even the Kindle store on iPhone is now available to iPad users. Another functionality that works in Apple’s favor is the fact that it has WiFi which means it can connect to hotspots and download the content fast and/or free of cost. iPad has a color screen as opposed to grey screen of Kindle and can be used for a variety of other purposes apart from book reading. In fact, I am more inclined to say that the threat is higher to the net-book market than the e-reader. There would be buyers for e-readers like Kindle if the devices are priced in the range of $200-300. Kindle @ $259 offers great value. Amazon has already making aggressive efforts to fend of competition by launching KDK (Kindle Development Kit) for developers to develop applications for its device in an effort to make the device more valuable and functional to the users.

So, is game over for Kindle? Probably not yet.

Recently, I attended the India Telecom Meet in New Delhi where Mr Nandan Nilekani talked about how mobile phones can be used for authentication. Mr Nilekani is the head of India’s ambitious unique identification number (UID) and is planning to issue biometric based identity numbers to a billion citizens of India. The authentication would be online and since the mobile phones out number the computers, he is hoping that most of the authentication would happen on mobile networks using a mobile device. I normally do not write on any country specific issue but this opportunity is too big to be missed by any telecom player across the world.

There are two parts of the UID project – Issue of unique identification number and authentication services for verification of records. This means that after a number is issued, the record would be maintained in a database which can be fetched online anytime. This is a huge task and the huge opportunity has caught the interest of many companies including Microsoft, Yahoo and Cisco.

There are many use-cases of authentication services that UID is likely to provide. If anybody wants to confirm the identity of a person, all he has to do is to take the fingerprint of the person on a cellphone and send it across to the central database and receive authentication within seconds.The services can be used by a wide spectrum industries like the financial sector, health sector, mobile operators, etc. Many villages do not have a bank branch but banks have appointed their business correspondents (BCs) to help people transact. These BCs can use a mobile device to authenticate the account holder. Mobile operators and banks can use the authentication service to conduct KYC (know Your Customer) . The Government itself can use the authentication to distribute the money of schemes to the right person only after the claimant has been authenticated using his biometrics. This would help in reduction of corruption and the money would indeed reach the right person.  Such projects would go a long way in alleviating poverty in poor nations.

The benefits are likely to accrue to all the mobile ecosystem players. Device vendors would benefit from the demand of authentication enabled devices, the mobile operators would carry the authentication data between the server and the device and the developers would benefit from developing applications that use the authentication APIs. The APIs would be easily available to any developer for embedding them into a mobile application or an internet application. The opening up of APIs is the most interesting part of the UID project. This would enable the developers to create innovative applications which in turn would put the UID database to maximum use. Utility applications utilizing the power of identity of the user would give a big boost to the application economy. The overall opportunity for the various players is said to be around $4-5 billion.

I can think of a few applications (apart from the ideas mentioned earlier) that the developers can work on

• mGovernance – There is a huge potential for developers in the area of Governance. Applications can be developed to enable users to fetch land records, court case records, health records, etc. after proper authentication of the user. Open APIs from UID project can be embedded in the application for this purpose. Recently, addressing the community of developers, D Shivakumar, MD, Nokia Mobile phones and VP, Nokia said, “Government will be a major player in buying applications from the developer community” and urged developer community to think and build innovative applications, which will help government to implement in different sector.
• Micro-Finance Institutions provide loan to poor people to help them overcome poverty but themselves lack the basic productivity tools. This results in high administration costs and ultimately high interest rate for the borrower. Simple applications can be build with authentication mechanism to enable the money collectors to directly upload the data on collections.
• mEducation – Education is the biggest need of the country and I foresee a big role for mobile phones in imparting education and right skill-sets. Developers can work with the content providers to develop applications that enables authentic users to learn and appear in the examination.
• Mobile Banking and Commerce – This is yet another upcoming area that has huge potential but is most susceptible to fraud. Biometric authentication would go a long way in convincing the users and giving them the peace of mind. Again developers have a great potential here.

Global Scenario on Authentication

To put the entire opportunity in context, it is important to look at the Global Market Size for authentication products and services. A report by Goode Intelligence forecasted that mobile phone-based authentication products and services will generate $153 million in 2010 and that the market will grow to almost $760 million in revenue by 2014; an increase of $607 million. My view is that Goode has grossly understated the market and the market is likely to be much larger. As per another report, the market for fingerprint sensor chip alone is expected to grow from $40 million in 2008 to $428 million by 2013.The mobile phone with biometric authentication would be increasingly demanded by enterprise users so that data is safe. Biometric sensors on mobile phones not only protect private data stored on the device, but also can block unauthorized use of mobile phone services,  create personalized user interface shortcuts, and eliminate the need for remembering and typing passwords.It would not be wrong to say that the drivers for biometric sensor on mobile phone are stronger than that on laptops.

In the opportunity captured by various analysts, I am not sure how many have been able to size the authentication requirements of the Government and hence there could be huge upsides there.

Devices Readiness

The biometric includes fingerprints, iris and voice but currently the fingerprint sensors are the most popular form on mobile phones.  The cost of adding finger print module to a mobile handset is less than $10 and with economies of scale, it would come down even further. The biometric authentication phones are not available from the big handset vendors like Nokia and Samsung and if the big brands can come on board, the cost of biometric sensor would come down significantly.

25 phone models with authentication are shipping today, mostly in Asia Pacific regions. In Japan, phones truly lock down the FeliCa NFC payment function with biometric authentication. The Osaifu Keitai operators, DoCoMo, KDDI and SoftBank insist on having eWallet phones secured by “ facial detection”, “finger swipe”, handwriting, or voice recognition for authentication.

Atrua Technologies is the largest provider of fingerprint chips for mobile phones with other providers being Fujitsu, Authen, Atmel and UPEK.

Have you heard about HiPhone, Nckia and Sumsung? I bet you would have seen the phones but would not have realized that it is a fake. Welcome to the world of Shanzhai handsets or Knock-off phones.

I was surprised to read the quarterly results declared by MediaTek. In times of gloom, they managed to report a healthy 80% jump in 2^nd quarter (y-o-y) in profits and more importantly predicted shipment of 300 million of their chipsets for mobile phones in 2009. Given the global handset market size is 1.2 billion units, if all the 300 million chipsets indeed find their way into a handset, MediaTek can claim to have 25% market share. This is no mean achievement for an unknown Taiwanese company which has quietly pulled the rug under the top brands.

MediaTek is a design house in Taiwan that specializes in designing the chipset. MediaTek does not own manufacturing facilities and has outsourced production to become “Fabless”. MediaTek was one of the late entrants (2004) into the market and developed a circuit board that could inexpensively integrate the functions of multiple chips, offering start-ups a platform to produce a low-cost mobile phone. The chip is called SoC (System on Chip) and has helped the smaller players mushroom as producing a handset has now become a lot simpler. A new cottage industry developed in China called the Shanzhai phones which sourced its chipsets from MediaTek. Shanzhai in Chinese means “Mountain Hideout” and they indeed are the bandits as they flout the IPRs and copy the designs of bigger brands to produce what we call illegal and fake handsets. These handsets got a boost in 2007 when companies no longer needed a license to manufacture a handset.

Shenzhen is the foremost production base for Shanzhai handsets. It boasts some 10,000 mobile-phone firms, including 2,000 handset makers, 200 design houses, 3,000 components and parts suppliers, and 1,000 channel firms. It costs just 500,000 yuan (USD 75K) and 10 engineers to start the handset production business which is a fraction of the cost of big players. The time to market is just 28-30 days as the entire solution is provided by MediaTek. Many of the manufacturing units are in the basement of homes or in a small apartment.

In 2007, an estimated 150 million, or 20 percent, of the 750 million handsets produced in China were either counterfeit or off-brand phones, according to CCID Consulting, a market research firm based in Beijing. Of those, over 51 million were sold in China while the remainder were sent to foreign markets. In 2008, the volumes increased to 250 million handsets.

Shanzhai cell phones look exactly like the original branded products. When a new cell phone model is released, the copy hits the market soon after. The cost of production for shanzhai phones is much lower than for the actual products. Since they are technically illegal, the shanzhai producers do not pay any taxes or regulatory fees. Since they steal intellectual property from other companies there are no research and development costs. These phones do not follow standard safety checks leading to huge savings as compared to other brands. Lastly, the complete chain of core technology is provided by MediaTek at a much lower price than the other suppliers. The end result is a really good knock-off at 1/2-1/3 of the price of the branded product. An iPhone in China goes for around 4,000 RMB compared to a little over 1,000 RMB for the Star Phone. Interestingly, the shanzhai employ a concept called the “open BOM” — they share their bill of materials and other design materials with each other, and they share any improvements made; these rules are policed by community word-of-mouth, to the extent that if someone is found cheating they are ostracized by the shanzhai ecosystem. The figure alongside gives a break-up of the cost of a Shanzhai phone (source: New York Times)

The market for Shanzhai cell phones lies not only in China, but also in the surrounding developing countries in Asia or even third world countries in Africa and Latin America. They identify overlooked/underserved market segments by incumbents like the rural areas and focus on these segments. The outstanding sales performance of Shanzhai cell phones is usually attributed to their low price, (usually lower than $50), multi-functional performance and imitations of trendy cell phone design. Although Shanzhai companies do not use branding as a marketing strategy, they are known for their flexibility of design to meet specific market needs. For example, during Barack Obama’s 2008 U.S. presidential election campaign, Shanzhai cell phone companies started selling “Obama” cell phones in Kenya, with the slogan “yes we can” and Obama’s name on the back of the cell phone. They also designed “Bird Nest” and “Fuwa” cell phones in light of the Beijing Olympic Games.

For years, most users used “shanzhai” to just mean “fake”. But the vicious rivalry among Shanzhai mobile manufacturers is shifting the industry from imitation to innovation. With more than 10,000 black market handset makers in Shenzhen alone pushing units for profits of 10 to 20 yuan ($1.5-3) apiece, low revenues and high competition means Shanzhai mobile makers must now get creative to survive. MediaTek SoC has customized 100 different modules for customer differentiation. Shanzhai phones makers are now high on innovations like dual SIM, loud music (6-8 speakers), terrestrial television and even a telescopic lens attachment for the phone’s camera.

Who gains from Shanzhai Phones?

None of the stakeholders seem to gain from these low quality phones.

Consumers: The phones are low in quality and do not necessarily follow the safety standards. Most of the times, the radiations from these phones are beyond the permissible limits and can cause serious damage to the health of the consumer. The FCC has adopted limits for safe exposure to radio frequency (RF) energy. These limits are given in terms of a unit referred to as the Specific Absorption Rate (SAR), which is a measure of the amount of radio frequency energy absorbed by the body when using a mobile phone. The FCC requires cell phone manufacturers to ensure that their phones comply with these objective limits for safe exposure. Shanzhai phones do not follow the SAR norms.

These handsets do not have proper warrantee and have a high failure rate. This means, over time the consumer may have to pay the same amount as the branded handsets or in other words, the life time value of Chinese handsets is low.

Operators: Most of the Chinese handsets have dual SIM slots and allows the consumers to put SIM cards of two different operators. This means that operators would have to share their ARPU with other operators and the competition would lead to lower ARPU and multiple SIM phenomena

Government: The Shanzhai phones do not pay any taxes of regulatory fee resulting in revenue losses to Governments across the world wherever they are sold. Even the Chinese government is in a fix now as the exports benefits given out to these handsets are over claimed. Moreover, since the Shanzhai phones do not have an IMEI number, there is an increased threat from terrorists as it is very difficult to catch a terrorist who uses a mobile handset without IMEI

I believe that the issue of Shanzhai phones is not going to go away anytime soon. Chinese government is unlikely to clamp down on these phones as it would mean many would get unemployed. The entire business is worth over $ 10 billion as year and has already gained a critical mass by capturing huge market share in emerging countries. The consumers are still attracted to the innovative phone models which is a big driver for replacement sales and as the replacement sales increases in emerging nations as well, the established brands have a lot to worry.