Interview with Yankee Group's John Jackson
John Jackson, one of the most respected mobile device analysts in the industry, returned to Yankee Group in the spring as vice president of Enabling Technologies Research. In addition to covering mobile devices, he's looking at the competitive and emerging market strategies in the global communication technology industry.
Shortly after rejoining Yankee Group, Jackson authored a widely read note on the release of Apple's iPhone (iPhonedemonium: It's Not About the Network, June 29, 2007). We chatted with him recently to get his thoughts on this fast-changing market.
John, the hype surrounding the iPhone has calmed down a bit. When it was released, you thought it was good for the market. Three months after the release, what's your assessment?
Predicting a success for Apple is clever, like night follows day. I still think the game-changing aspect is the business model, though the form factor and UI moved the market as well. Lots of emulation is sure to follow.
That Apple has managed to ship 1 million iPhones in the first 3 months is impressive. Considering that most or all of these were shipped at $500 to $600 at retail, it's an extraordinary success. And there's yet more drama with the $200 price cut and the launch of the conspicuously iPhone-esque iPod Touch. The former gives us some clues around the business model in place with AT&T and a glimpse into the model now under consideration by the Europeans as Apple ramps up operations there. The Touch is, I reckon, the phone without the phone in it. This is sure to cannibalize the iPhone opportunity. I don't know if it's calculated, a miscue or a calculated miscue. I suspect Apple is pioneering the latter.
So what about the business model is disruptive?
I'm frequently asked about the business model in place with AT&T. Nobody among the analyst community knows the specifics of this; or if they do, they're not at liberty to say. This is also true of the financial analysts, though I've seen some plausible scenarios.
The US is almost exclusively postpaid. Thus, non-AT&T subscribers wishing to have an iPhone would have to pay contract termination fees around the $150 range. So there is a limit to the addressable market corresponding to AT&T's subscriber base, which is a subset of about 26.5% of US subscribers.
Apple had the non-cellular version of this model--the next-generation iPod Touch--in development at the same time. This will cannibalize iPhone sales, but it lets Apple address non-AT&T customers. It also lets Apple:
- Hedge against poor performance of the iPhone (This is not necessary, of course.)
- Hedge against limited distribution scenarios for the iPhone (It's likely that only one operator per market will get this--with the winners determined by Apple.)
- Exercise some business model leverage against operators
The last point is important. On the basis of the recent $200 price cut and announcement of follow-on non-cellular next-generation models, I assume that there's a revenue share in place with AT&T. Why wouldn't this be true? Consider the bill of materials cost estimated by a couple of teardown companies in the US, estimated at around $260. So even if Apple is funding the price cut, the model is still marginally profitable before marketing/selling expenses. But these expenses are massive, and Apple typically operates at much higher margins. So you can conclude that either:
- AT&T is funding all or part of the price reduction.
- Or, Apple can afford to fund the price reduction--arguably 1 million at $500 per device.
This signals that the addressable market of early adopters has been satisfied. The lower price logically triggers the next wave of volume, and Apple can fund its marketing expenses on a lower per-device margin, higher volume basis. Most likely, Apple can afford the price reduction because there are revenue share elements in place that are acceptable to both parties. I don't think it's a straight hardware play for Apple, but all parties have done a great job keeping the lid on the arrangement.
Let's move beyond the iPhone. What else do you expect to see in the market through 2008?
It's too dynamic a market to characterize as a singular entity. It's really multiple markets and points of disruption, albeit with many of the same players involved.
There's a need to facilitate the ecosystem's emphasis on personalization and personalized service delivery. It'll be hardware and software, and it won't be obvious. Disruptive technologies are now far more esoteric than cameras or Bluetooth. Yes, Apple has defined a trend with touchscreen on the back of a million or so units, so expect lots of this. But look (or don't look) for:
- Optimized browsing:Growth in mobile internet access is a safe bet in a sea of head-scratching service models.
- Magnetometers and accelerometers:I think the guys who sell these are about to come into some dough. These are the components that let you change the aspect of the screen by tilting it sideways, or let you roll a virtual golf ball into a virtual hole by moving your device around. Lots of applications are waiting to be hatched here.
- AMR-WB voice codecs:This is a 3G specification that enables "high-definition voice." We don't think people will pay for it, but handsets that support it will start to appear late this year.
I guess one obvious thing is the sort of tectonic shift toward slider form factors. I think there will be a trend toward landscape modes of interaction/viewing driven by or facilitating browsing, video and image rendering, etc. It's awkward to scroll left to right when browsing. We have strong evidence supporting higher data consumption associated with these form factors.
What can you say about the state and direction of the market in general? Who's in, who's out?
In: Guys who are big. The big guys--LG, Samsung, Nokia, Sony Ericsson and Motorola--have locked up most of the global market volume opportunity, capturing about 85% of volume quarter-on-quarter. It's difficult to see this structure changing dramatically, though profitability should trump market share concerns. There's a tradeoff here, and you can expect some place-jumping with the latter. For example, Motorola's pursuit of market share has not done wonders for the bottom line. It's tough to be dominant and profitable.
Out: Guys who have tried to be big. The Tier 2 guys have withered. All of the Japanese vendors--NEC, Panasonic, Toshiba, Fujitsu, Mitsubishi and Sharp--have essentially retreated to the home market. BenQ Siemens is out, and SAFRAN's management wonders aloud about Sagem's future.
On the fence: Niche plays. There's certainly hope for smaller vendors. Emerging markets offer massive untapped volume upside. HTC, Microsoft's successful engine in the market, is now charting its own brand strategy. Amoi, ZTE and Huawei are growing respectable beachheads in CDMA, GSM and UMTS in Europe. Numerous ODM/brand/contract manufacturer mashups are evident worldwide. I obsess a bit when I'm overseas and see a phone whose genesis I can't trace.
Sounds complex. What sort of innovation are you seeing to deal with this structure?
Long-term profitability will not come from manufacturing or up-market migration. This drives alternate business models, outsourcing, and strategic partnerships and acquisitions in content, internet, multimedia, distribution and consumer electronics domains. Handset vendors have a consumer electronics problem, or maybe an internet problem. Nokia's recent launch of Ovi ("door" in Finnish) combines the Twango (social networking), gate5 (location) and Loudeye (music) acquisitions into a content service offering that Nokia will control. Sound like Apple? How about BMG? Yahoo!? If you answered yes to any of those, you're at least partially right.
Ovi is the new "Club Nokia." But it's a sort of metaphorical club that beats back encroachment from oblique entrants and secures sustainable margins and demand for its hardware. This is disruptive to established business models that have been mutually lucrative for vendors and operators alike. Nokia is using its dominant market presence as insurance against alienating its dominant channel: the operators. Give Nokia credit for getting out in front of "the CE problem."
Motorola appears to be headed in a distinctly different direction. Its shopping bag of acquisitions is full of core technology companies such as Leapstone, Modulus, Terayon, Tut Systems and Netopia. This is in stark contrast to Nokia's consumer-direct content-centric vector.
LG and Samsung aren't doing much at all in terms of insinuation into revenue streams for content distribution. Sony Ericsson--via the M-Buzz and Gracenote client implementation--are taking a more partner-oriented route.
Lastly, it must be said that the current Intellectual property rights (IPR) standoff has massive potential implications for the future of 3G and 4G development and proliferation. QUALCOMM--an IPR giant and world-class chipset vendor--has been besieged by lawsuits, trade commission complaints, etc. in numerous geographies. Its business model is starting to be affected materially by this. 3G's and probably 4G's market outlook is highly dependent on the industry's ability to strike a harmonious state of interaction with QUALCOMM. Unfortunately, it's tough to see a resolution to all the outstanding issues within the next 12 months.
