Smartphones: haves, hads and have-nots

new cellphone data

A bunch of cellphone industry researchers–Gartner, Nielson, Canalys–have all released data for the June quarter of 2010.  this post is an attempt to put the information into a coherent framework.  Here goes:

almost all the market growth is in smartphones

1.  The global cellphone market continues to grow, by about 14% year over year in the second quarter.  That’s driven almost completely by smartphones, however.  According to Gartner, Inc. sales of smartphones were about 50% higher in 2Q10 than in 2Q09.  Older “feature” phones, which still make up 80% of all units purchased, showed only a 4.5% increase.

Being able to offer an attractive smartphone is the real dividing line between haves and have-nots.  In the case of Korean cellphone company, LG, which has no signature smartphone, average selling prices fell by 27% in the second quarter and its cellphone division lost money.

market share

2.  Market share shifts are the second differentiating factor.

global

On a worldwide basis (Gartner, Inc. figures) the players look like this:

Nokia     41.2%, loss of 9.8 percentage points

RIMM     18.2%, loss of .8 percentage points

Android     17.2%, gain of 15.4 percentage points

AAPL     14.2%, gain of 1.2 percentage points

Others     9.2%, loss of 5.9 percentage points.

The really stunning figures here are highlighted–the emergence of Android and the precipitous drop in Nokia’s share of the market.

Two other things to note:

–shortages of components, particularly high-end active-matrix OLED screens, may have affected sales a bit

–AAPL ran down inventories of older iPhones during the quarter in preparation for launch of the new iPhone4.  The company estimates that it could have sold an extra 250,000 smartphones, were it not doing so.  That would have only nudged its market share up by about .3%, however, not enough to make a significant difference.

the US

3.  The Neilson Company data for the US show a similar story, with the significant exception that Nokia, with a 2% market share, is a non-factor is the domestic smartphone market.  The market share figures:

RIMM     35%, loss of 2 percentage points

AAPL     28%, gain of 7 percentage points

MSFT     15%, loss of 12 percentage points

Android     13%, gain of 11 percentage points

Others     9%, loss of 4 percentage points

MSFT has announced that it is, at least temporarily, exiting the smartphone market, hoping to reenter before yearend.  While it seems reasonable to assume that some market share loss comes from the announcement, I think the causality goes the other way.  MSFT had been steadily losing market share over the past year, long before it decided to regroup.

Neilson also provides data on the most recent quarterly trends on domestic smartphone purchases.  These data paint a somewhat different picture of the market from the installed base figures above:

RIMM     33%, down 3 percentage points

Android     27%, up 10 percentage points

AAPL     23%, down 4 percentage points

MSFT     11%, down 3 percentage points

Others     6%, down 1 percentage point.

Unlike the earlier data, which show the strong taking share away from the weak, these suggest that Android is taking share from all the others.  The timing of the introduction of iPhone4 may have something to do with this.  If so, 3Q10 data should show an unusual jump in AAPL market share in the US.   Nevertheless, this is something to watch closely.

brand loyalty

4.  These are Neilson figures for the US.

Asked what kind of phone they wanted next,

–89% of iPhone users said they wanted to stick with their brand.

–71% of Android owners want to stay with GOG, with 21% thinking of switching to AAPL.

Only 42% of Blackberry owners, however, intend to be repeat purchasers.  Of the rest, 29% said they’ll switch to iPhone; 21% intend to make a move to Android.

investment implications

have-nots

I don’t see a good investment case for the have-nots.   Value investors may disagree, however.  And it’s true the LG has been extraordinarily resilient in the past.

hads

Of the “hads”, cellphones are too small to be relevant to MSFT’s profits.  It might be a psychological boost for the stock if the company can demonstrate it can make money at any diversification away from the operating system and office productivity software businesses, though (not something I’d bet the form on).

I was a very large holder of NOK in the Eighties and into the Nineties.  I don’t know the company well any more (that I’m not compelled to make the effort to stay current is a statement in itself).  Despite its early entry, as far as I can see, the company doesn’t seem to be able to get the smartphone market right.  It’s competitive strengths seem to lie in other areas–low-cost manufacturing and established distribution networks in emerging markets.  My big worry is that it still has an awful lot of market share left to lose.  Again, value investors will likely disagree.

RIMM is an interesting case.  Its claim to fame is its secure mobile network for business users.  Recent  public demands from India and Saudia Arabia that RIMM give those governments access to its encripted data streams are a made-in-heaven third-party endorsement of RIMM’s security (remember, too, that the major leagues for the espionage business is corporate spying).  By implication, they say those countries have no trouble hacking into other cellphone networks.

So far RIMM is refusing. There may be an innovative solution to this problem.  At some point, however, RIMM may be forced to choose between its corporate core customers and having access to fast-growing emerging markets.

haves

It’s easy to get tied up in knots about AAPL.  It’s up about 25x from the lows of a half-decade ago and is now a cellphone company that happens to make PCs and other consumer devices.

I feel confident that the 25x is not going to recur.  But the company has only one significant rival, Android, in the smartphone market.  That market is growing by leaps and bounds.  One can easily imagine that smartphones end up being 60% of the overall cellphone market, which would mean a tripling in its current size.  Whether AAPL ends up being #1 or #2, it could at least double its share of the smartphone market over the next four or five years.  In other words, AAPL’s cellphone revenue might well advance 6x over the next half-decade.  I don’t think anything like that is factored into today’s price.

I find GOOG harder to handicap.  I’m not concerned about the ORCL lawsuit over Java.  I also think Android will be very successful.  In baseball, if a manager says during spring training that he has four third basemen it really means that he has none.  Well, I have about four different opinions about GOOG.  I’ll leave it at that.



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