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The Race to the Bottom: Surveying the Smartphone Market

Android manufacturers have often been panned for engaging in a “race to the bottom” of producing a large number of handsets with small margins. What many are just starting to realize is being the winner in the mobile phone game, is being able to race to the bottom successfully. In the last week you have seen Apple’s share prices hammered because of the market perception that its new iPhone 5C was not cheap enough.

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To understand this, you have to take a look at where the smartphone market is at.  There has been a lot of talk lately about stagnating smartphone sales. The market that is quickly hitting saturation is that for mid-range and high end smartphones. Almost everyone on the planet who is in the market for a mid-range or top-of-the-line already has one. Future sales will consist mainly of repeat and– a large number of– first time smartphone buyers. However, the majority of these first time smartphone buyers are in the market for smartphones in the US$200 or less range to be used on postpaid plans.

While the smartphone market grew a healthy 52.3% year on year fromthe second quarter of 2013, overall mobile phone sales only grew by 6%. This 6% growth in mobile phone sales is actually pretty good. It is more than five times the annual worldwide population growth rate of 1.1%. Mobile phone adoption continues to grow faster than the number of people on the planet. With mobile phones now starting at about US$11, mobile phone market penetration is still increasing. The 52.3% growth rate in smartphone sales comes from feature phone users switching to smartphones. In the second quarter of 2013, fifty-seven million less feature phones were shipped as compared to the same figure last year. In short, growth in the smartphone market and mobile phone market is hinged on making devices available at lower and lower price points.

The size of the feature phone market is pretty substantial. This year, about one billion smartphones will be shipped, together with about 800 million feature phones. As Google’s Android, Apple’s iOS, Microsoft’s Windows Phone, and BlackBerry fight for market share, getting those feature phone buyers to switch to smartphones is where the substantial growth lies.

This is why you see Mozilla working on a operating system for cheap phones. Mozilla is not looking to steal sales away from Android. It wants to take a large chunk of feature phones users into the fold with its US$80 Firefox phones. There is a market for several hundred million phones at this price. This is also why you have seen Apple’s shares take a beating after announcing its iPhone 5S and 5C. While no analyst expects Apple to compete in the market for low cost iPhone’s, a capable mid-range iPhone 5C was expected to poach a fair number of Android and Windows Phone sales. With the Apple iPhone 5C being priced at US$549 in the United States and higher in other countries, it certainly will not be effective in taking some of the mid-range market from Android.

This new battlefield on which the next round of the smartphones wars will be fought, has serious implications on app, hardware and service development. Let us let this sink in a bit. On the next few days, we will look into how this new environment will affect the existing smartphone platforms.

The second part of this article is at this link.