At the moment the situation in the smartphone world is as follows. Google’s Android is the unquestioned number one ecosystem. It has experienced rapid growth during the last couple of years and is supported by most of the major manufacturers. However, it seems that only Samsung has managed to turn the Android frenzy into gold. Even Motorola that is nowadays fully owned by Google, made a net loss of $121 million. Then there is Apple. Although iPhone shipments have shrunk a little it’s still the most profitable, taking in majority of the smartphone market revenue. These are the two already established ecosystems. No one is really questioning their power or future. What’s debatable is the third contender. Microsoft’s Windows Phone (used by Nokia) is often referred to as the third ecosystem – most often by Microsoft itself. Of course there are companies like RIM who might have something to say to this, but other than that, it’s pretty much accepted. So, there we have it. This is the current status quo. Smartphone war, if there ever was one, is over. The top three have received their medals. They are the winners. If you do not belong to one of these three gangs you’re an outsider and inevitably – a loser. At least that is what the Western world would like you to think, whereas in reality the truth is actually much more complex.
The current situation that was just described holds truth in the Western world. But who cares about the Western world when the growth, people and ultimately demand is somewhere else? Russia, India and China are all huge markets where the economic growth is boosting the shift from feature phones to smartphones. Last month it was reported that smartphone shipments in China, the world’s biggest mobile market, had for the first time exceeded feature phone shipments. The trend is the same in Russia and India as well. You might think that because smartphones are doing well in China so are Samsung, Apple and Nokia – but you’d be wrong. China is a peculiar market. Think of it as an island, a forbidden market behind a Great Wall. If we think of the smartphone market as game of three, with already established market positions i.e. rules – it’s not like China wasn’t respecting the rules of the game but more like they don’t give a damn about the game in the first place. In China the rules are different because the game is different. Apple, Google, Samsung, Nokia etc. are all outsiders in China for the simple reason that they’re not Chinese. This is not a country ruled by iPhones but by the likes of local giants Lenovo, ZTE, Huawei, Yulong and K-Touch. Even popular services such as Facebook and Twitter have been Chinafied by local companies like Alibaba, Baidu and Sina Weibo that offer the same service but with a localized twist. These examples prove a point – what works in the Western world doesn’t necessary work in China. Therefore it’s anything but certain that the mobile spectrum would be divided between the three American giants: Apple, Google and Microsoft also in China.
Android is really big in China but not in the way you might think. You don’t see people with shiny new Samsung Galaxy S III’s but rather with something like the Xiaomi MI-ONE. With what you ask? Xiaomi is a local manufacturer that has a smartphone called the MI-ONE. This device runs on dual core 1.5 GHz Snapdraggon S3. It features a heavily-modified user interface that is build on top of open-source Android. The device costs around 256€, that’s 380€ less than the iPhone 4S in China. According to Xiaomi they have already sold more than 3 million phones in the last 10 months. Now, that number might not (yet) be in the same league with the big boys but it’s still a lot of phones. And Xiaomi is just one example.
The MI-ONE is a good example of what is going on in China. According to Canalys by 2015 almost half of Chinese smartphones will be handsets under $200 (160€). At the moment even the local star MI-ONE misses that mark so how are the Western companies going to compete? It is pretty clear that at least Apple with its iPhone will never reach that price range, nor will it probably never even try to. But Apple is a luxury product and in China, besides cheap, luxury sells. Therefore if you’re a smartphone manufacturer dreaming of success in the Chinese market you pretty much have only two choices of how to go about it. You either aim for the sub $200 market or the luxury market. China is a typical example of two extremes. It’s either black or white, but very seldom grey.
China is the worlds largest smartphone market and therefore equally crucial for all smartphone manufacturers. It’s also a very difficult market and one where the name of the game is very different when compared to e.g. the Western world. Although Android might have a good thing going on in China at the moment, the situation is far from ideal for Google. Android is open-source i.e. free for the manufacturers to use. Android comes with free Google services which end-users are expected to use for Google to collect data and to display ads. However, the Chinese manufacturers sometimes strip these Google services and replace them with their own or other local equivalents. Therefore leaving Google with no place to display their ads on i.e. to make money. But it’s not all bad. The advantage is that the Android market share grows bigger, which again encourages local developers to build more apps.
Apps and especially local apps are the key to Chinese market. Apple is only now in iOS 6 introducing integration for local Chinese services. Nokia has, maybe the longest history of supporting local app development but the switch to Windows Phone means that most of these apps are now redundant. China was once one of Nokia’s strengths but not anymore. Mobile phone business is still doing fine but it’s the smartphone business that’s struggling. Last quarter Nokia accounted for only 6 % of the Chinese smartphone sales. Launching the 1699 yuan ($269) Lumia 610 does not seem to have helped much. Overall tackling the low-end market can be very difficult indeed. Local competition, with the support of local services and cheap price tags can be very challenging to meet. Nokia insists that by pushing the Lumia range to ever-cheaper price points it can fight Android with Windows Phone. However, we are yet to see any indication of this plan working. Manufacturers who use WindowsPhone have to pay licensing fee to Microsoft, which makes it really challenging to beat Android devices in price, without lowering margins. It’s easy to see why low margin, low-end devices are mostly powered by Android. This poses a question: Is WindowsPhone the right operating system for low-end devices in China? Can WindowsPhone ever compete Android on price?
WindowsPhone is totally unique when compared to the competition. You could even say that there’s WindowsPhone and then there’s the rest as all the others look and feel so much alike. WindowsPhone doesn’t offer the flexibility or customization of Android. Rather it has all the same disadvantages (closed system) of iOS without the hipness of an iPhone. Indeed WindowsPhone is unique, which together with great hardware has all that is needed of a luxury device. However, we’re yet to see such a device on the market. WindowsPhone has the potential of succeeding in the high-end. I’m just not at all certain that it will work for the low-end.
I think that the Chinese market has proved time and time again that in order to be successful in China you need a localized solution. What you need in China is something that is free, robust and flexible. Going against all the local manufacturers not to mention Shanzhai is impossible. Therefore, why waste resources by fighting them? Make them join you by offering a robust OS for free. Make it easy for the local developers to create apps for it and you’re pretty much set. As your competitors work to make your platform bigger and stronger you can concentrate on the high-end. Why produce million cheap phones when you can make more money by selling only a few very expensive phones? Nokia used to have the perfect product to do just that. It’s just sad that they decided not to bother. Yet, all hope is not lost. Finnish Jolla is picking up where Nokia left of with MeeGo. There must be some very bright minds at the helm of Jolla as the very first thing they did was to secure a distribution deal with a Chinese operator. Android is spreading like a disease just because it’s free. The only way for anyone ever to fight its dominance is to release something that is better yet still free. MeeGo coupled with Qt would have been the perfect solution – probably the only solution. Jolla has a great chance of creating something extraordinary if they a) take localization seriously and b) create a device that screams exclusivity. Same goes for RIM as well. RIM has actually hinted that it might license its upcoming BB10 operating system to other manufacturers as well. I think RIM should seriously consider making BB10 open-source i.e. free. If Nokia did not have the cojones to make this move, someone else for sure ought to.
Overall Nokia has put itself in a fairly difficult spot in China. Its WindowsPhone based devices are not really hitting the mark at neither, the low-end or the high-end. It’s true that WindowsPhone is different but what if different is not what the customers want to buy? Nokia and Microsoft will need to use a lot of resources just to educate the customers of WindowsPhone. This is a totally unnecessary expense for Nokia and one that will cut the already small margin on low-end devices even further. Autumn will show what improvements WindowsPhone 8 brings to the table in this sector. One thing is for sure; Windows Phone 8 could not have a better name. Eight is considered auspicious in China, even so much so that the Beijing Olympics were rescheduled to commence at 8/8/08 at 8pm. (Nokia if you’re reading this; Lumia 888 might not be a bad idea)
I for one think that the Chinese smartphone market will be the one to watch. In this market all the talk about the three ecosystems is just pointless rambling. Anything is possible and any manufacturer no matter how small or big, new or already established has a valid change to succeed. And I’m not just talking about the Western companies either. It’s the local manufacturers that’ll be the most interesting to follow. Who’s to say that one day we won’t all be using a Xiaomi?