The Android segment of the mobile device business is a tough place to make money. Intense competition will see the average selling price decline from over $300 in 2012 to $200 in 2018. Apple, on the other hand, is in a class of its own, accruing an astonishing 95% of all profits generated by the industry, on 20% of the total volume. The only other OEM making money is Samsung, but their mobile business is under pressure.
Without new revenue streams, Android handsets are at risk of becoming an undifferentiated commodity. So how can this ecosystem create value when handset features and form factors are basically the same?
Most of the world’s handsets originate from Shenzhen, China, where two years ago factories were producing for 500 local brands. Today that’s down to 100, with four (Huawei, Xiaomi, Oppo and Vivo) accounting for half the domestic market. The factories are now closing. It’s not surprising when you can pick up a 3G handset for $US30 or a 4G with a 5″ screen for $US90. Competition is just as aggressive outside China.
Walk the halls of Mobile World Congress and you’ll see hundreds of devices with strikingly similar features: Android 6.x, high-resolution 5.5″ displays, gigabytes of storage and powered by Qualcomm or Mediatek processors. To stand out from the crowd, manufacturers are employing various differentiation strategies around hardware, OS/UX enhancements, and services.
On the hardware front, camera capability is a key area for innovation. Huawei this week announced the P9, a high-end device developed in conjunction with Leica. This has been done before – Leica partnered with Panasonic on the Lumix CM1 released last year. Every manufacturer boasts of more pixels and better pictures, which become easily copied. Modular designs, 360 degree cameras and virtual reality are other hardware novelties today, but will eventually become standard.
On the OS front, all Android devices run a variant of the Google’s “open source” software, with individual UX tweaks by each OEM. Some brands take customization further, using a forked version of Android called CyanogenMod. Brands like Cherry, Micromax, and Wiley Fox are using the Cyanogen operating system, allowing deep access to the phone to create new services e.g. audio, dialer, privacy and photography.
Can you tell them apart? Devices from Xiaomi, Oppo, LG and ZTE
Non-Hardware Revenue is Key
Xiaomi are the reining champions of value for money. The Beijing-based company achieved #1 market share in China and a $45 billion valuation by pairing a long list features with aggressive pricing. Their go-to-market has been emulated by competitors, down to the online flash-sales, and the high valuation is now being questioned. The “more features for less money” strategy is not sustainable over the long term. So they’ve diversified into fitness trackers, air purifiers and services e.g. games, payments and video. Xiaomi’s strategy is to become an Internet company like Alibaba or Tencent, rather than a box-mover.
Introducing services, especially around premium content, into a saturated market makes sense. Billions of dollars of service value has been created on mobile as a platform, and little of this has accrued to the OEMs. If mobile networks are a dumb pipe, then the phone is essentially a brick when it comes to participating in the stream of cash generated by apps, advertisers and commerce. What is required is a more sustainable model for creating recurring revenues beyond the sale of a single device.
OEMs have the potential to create sophisticated offerings, embedding new business models in the phone. Xiaomi has invested $1bn in content creation, aiming to be a major entertainment provider. Several OEMs have partnerships with sporting properties that could be leveraged into exclusive content that drives audiences.
Using a combination of deep analytics, premium video content and advertising, OEMs can create an integrated media experience on the device. Partnerships with network operators for zero-rated content delivery and sponsored data plans could claw back some of the margin lost to hyper competition.
To ensure a thriving mobile ecosystem, OEMs need to create new revenue streams based on unique media services. Figuring out how is key to the long term survival in the business. Otherwise the race to the bottom continues and Android consumers will be left with fewer choices and less innovation.