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The Race to the Bottom: Cheap Smartphones will Push the Feature Phone to the Brink of Extinction

In the first part of this article, I wrote that the biggest increase in the smartphone market will come from pushing the feature phone to the brink of extinction. The tool: cheap smartphones. Cheap smartphones have been rolling off the productions lines, and will continue to do so at lower and lower prices. With two to three year old hardware becoming all but obsolete for mainstream phones smartphones, there are a lot of production facilities available to build cheap smartphones.

With the announcement of the Apple iPhone 5C, it is clear that Apple will not be participating in this race to the bottom. No one really expected Apple to retail a US$200 or less smartphone. It was expected that the iPhone 5C would go below the US$400 barrier and expand Apple’s market share in the mid-range. BlackBerry’s new BlackBerry 10 operating system cannot run on anything with less than 2GB of RAM, so the company will the keep older BlackBerry OS 7 phones available for some time. This effectively takes it out of the game.

So who will be fighting for this potential 800 million, or so, per year cheap smartphone market?

bolt-a40Google through its OEM partners is a reluctant player in this battleground. Just last week, Micromax of India, announced a new phone, its Bolt A40. The Micromax Bolt A40 is “interesting” since it runs on Android 2.3.5 Gingerbread. Google discontinued support for Gingerbread two years ago. Still, Android Gingerbread phones are widely available in developing countries, starting at somewhere around US$60. There is this rumor going around that the next version of Android, version 4.4 “KitKat” will improve support for lower end handsets and with this, Google would embrace the cheap smartphone market. We will have to wait and see. But really, all Google has to do is keep the hardware requirements for its operating system fixed for a year or so, and it will find its latest operating system making its way to phones to feature phone territory. In fact, there are a fair number of Android 4.2, Jelly Bean, smartphones selling for less than US$100.

Maybe no company is more cognizant of the value of this market more than Nokia. Nokia pushed a new line of Asha phones in 2011. Nokia either twisted Microsoft’s arm, or was given special consideration, in being allowed to release the Nokia Lumia 510 and 610. These Lumia’s did not meet Windows Phone minimum hardware requirements, but were by far the cheapest Windows Phone in the market. Nokia followed this up with the Nokia Lumia 520. The Nokia Lumia 520 will set you back about US$160. While Nokia has been highlighting its expensive camera-centric devices, the Windows Phone 8 powered Lumia 520 is the most important phone in Nokia’s arsenal.  It is the Nokia Lumia 520 which has fueled Windows Phone’s modest increase in market share and has given it a hold on third place. One in four  of all Windows Phone sold is a Nokia Lumia 520.

Windows Phone has never been cheap to manufacture. Windows Phone supports a very limited set of hardware, so even its lowest cost devices come with WVGA (480 x 800 pixel resolution) displays and dual core Krait processors. But like Google, if Microsoft keeps its Windows Phone operating system requirements low enough to support phones like the Nokia Lumia 520, it should be able to enter the sub-US$100 market next year. Microsoft has recently purchased Nokia, so it remains to be seen if Microsoft will follow the route Nokia has been following.

Fully embracing the cheap smartphone market is Firefox OS. With hardware that would have been considered to be a mid-range Android three years ago, ZTE launched a US$80 Firefox smartphone. I really do not think this one will fly. Android phones are already available at these price points, and unless Microsoft changes Nokia’s strategy, Windows Phones will also be priced pretty close to Firefox OS phones this time next year. A new platform offering a similar experience without an appreciable number of apps has little hope.

So what we do expect to see for the next two to three years is for Android and Windows Phone to increase their market shares by offering smartphones at all price points, with the floor dropping for the next two years. Apple will try to expand its market by targeting its traditional market and hope to bring in more Android, BlackBerry, and Windows Phone users to the fold.

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Basically, Android, iOS and Windows Phone will tangle for 55% of the market. Only Android and Windows Phone get to divide the remaining 45% pie between themselves over the next few years.

The third part of this article is at this link.