The smartphone wars: Fortune catches up with me
<p>Fortune magazine says <a href="http://tech.fortune.cnn.com/2010/12/22/2011-will-be-the-year-android-explodes/">2011 will be the year Android explodes</a> and makes a number of predictions that track what I&#8217;ve been writing on Armed &#038; Dangerous for the last year so closely that I have to wonder if their correspondents have been reading this blog.  </p>
<p>Nice work, guys, even if you are a bit late to the scene.  Me, I kinda thought 2010 was the year Android exploded, what with posting several quarters of market share growth in the 600% range and <a href="http://www.comscore.com/Press_Events/Press_Releases/2011/1/comScore_Reports_November_2010_U.S._Mobile_Subscriber_Market_Share">overtaking Apple in the U.S. userbase figures</a>.  But the article isn&#8217;t just old news presented as though it were breaking; there&#8217;s some <em>fascinating</em> info about a new chip from Broadcom that&#8217;s going to blow a Jupiter-sized hole in the price floor of the smartphone market.</p>
<p><span id="more-2835"></span></p>
<p>Broadcom thinks its new BCM2157 smartphone-on-a-chip will push the retail price of a smartphone &#8211; not the handset bill of materials but the <em>retail</em> price &#8211; below $100, and might push it below $75.  And they&#8217;re targeting it directly at Android OEMs.  Phones based on the chip are expected to ship in volume before mid-year 2011, with the first possibly hitting the trade show circuit in a month.</p>
<p>The article doesn&#8217;t note that something like this was pretty much inevitable about now; there was just too damn much money waiting to be made from single-chip smartphones as the dumb-phone base turns over, especially in overseas markets at lower pricepoints.   The only surprise, and it&#8217;s a minor one, is that Broadcom got there before Qualcomm.  Expect Qualcomm to follow suit, and expect at least one more competitive phone-on-a-chip from one of the Pacific Rim manufacturers &#8211; my first bet would be on Samsung, but I wouldn&#8217;t be surprised if we get one from mainland China.</p>
<p>The prompt effect will be to open a lot of additional daylight between Apple and Android pricing.  Of course Android phones have been less expensive all along, and that&#8217;s been fueling the explosive Android market share growth we&#8217;ve seen since late 2009, but the price gap is about to widen into a vast and yawning chasm.  Like, with a width in three figures.</p>
<p>I think Apple&#8217;s hopes of retaining market share above 10% will disappear into that chasm, especially since app developers are quite capable of seeing where the price and volume winds are blowing.   Given Apple&#8217;s history and Steve Job&#8217;s psychology, I do not expect Apple to try to compete seriously for volume in a market where midrange has fallen below $100; it is far, <em>far</em> more likely that the company will take a defiantly top-of-market position and hope they get enough lock-in from iTunes to defend that turf. Expect Apple&#8217;s brand positioning to shift further towards that of a luxury and positional good.</p>
<p>But that&#8217;s not going to be the biggest effect.  Oh, no.  The <em>real</em> impact of the BCM2157 and its kind will be on the cell carriers.  I&#8217;ve been writing <a href="http://esr.ibiblio.org/?p=614">for two years</a> that Google&#8217;s long-term Android plan is to break the carrier oligopoly over its knee, pry their customers loose from the contract system, and reduce the carriers to low-margin bit-haulers in cutthroat price competition with each other.  And Jean-Louis Gass&eacute;e has pointed out that around $89 retail is where shit gets real; at that point, the carriers stop being able to offer enough of a price break so customers will enter contract bondage to get it.  This, in turn, is going to kill off carrier locking on phones.</p>
<p>That&#8217;s no longer a distant future prospect.  It&#8217;s likely we&#8217;ll reach $89 before the end of 2011, and carrier locking probably won&#8217;t outlive that break point by more than a year.  Fortune, to its credit, gets some of the implications (maybe this means the rest of the business press will be belatedly catching up with where I was in 2008 over the next quarter?). They note that increased customer mobility is going to exert downward pressure on data plan pricing.  Yeah, will it ever.  </p>
<p>Increased customer mobility between carriers is also going to pump up competition in the already frenetic handset market as customers get used to moving their phones and their Android customizations more or less frictionlessly between carriers.  That means $75 won&#8217;t be where it ends; I expect a race to the bottom in the next three years, with cheap smartphones becoming nearly as disposable by 2014 as calculators are now. And the positive network externalities pulling people towards Android (most importantly, the size of the app ecosphere) are only going to increase as its market share does.</p>
<p>Big losers in this scenario start with Apple and the carrier oligopoly, for reasons I&#8217;ve already covered in detail.  RIM?  Stick a fork in them, they&#8217;re done &#8211; headed for a textbook disruptive collapse within that three-year timeframe.   The minority Linux-based smartphone OSes (WebOS, MeeGo) are noble but doomed, no-hopers.   Microsoft WP7 isn&#8217;t going to survive the smartphone price crash, either &#8211; their problem is that they need to <em>make money</em> from licensing fees, and that&#8217;s hard to do when your hardware platform is priced in the supermarket-giveaway range.</p>
<p>The largest remaining open question is whether Microsoft will drag Nokia down with it.  The most optimistic scenario for Nokia is that they evade the lure and bail to Android; in that case they end up as yet another handset maker but at least they have a line of business playing the pump-out-handsets-cheap game they&#8217;re historically good at.  The most pessimistic one is that Microsoft sells them on WP7 and they watch their market share drop like a rock as Android steamrollers right over it. It would be a billion-dollar fiasco, a classic don&#8217;t-do-that for the business-school casebooks. </p>
<p>If all this sounds crazy optimistic, don&#8217;t forget that people who should have known better said I was crazy optimistic two years ago when I analyzed Google&#8217;s grand strategy, and again almost a year ago when I predicted Android&#8217;s U.S. market share would break 50% right about when it happened.  The trade press is catching up with where I was, but where I was ain&#8217;t where I is; I&#8217;m looking to the future, and I see that chipsets like the BCM2157 and their followons are going to be bigger game-changers than Fortune magazine yet understands.</p>
