Why basic smartphones will win in the race for 'the next billion' users
21st Apr 2013 | 09:00
Is Nokia onto something?
With so many high-end smartphones about, the market for cheap PAYG phones is long dead. That's the received wisdom, but it's wrong – so wrong – because it's predicated on a mis-understanding of where the 'market' is.
If you hadn't guessed already, the US, Europe and the rest of the developed world ain't where it's at. All consumer electronics companies – and handset makers in particular – are looking much further afield.
"The big opportunity is in how we put smartphones into the hands of the next billion," says Dan Appelquist, Open Web Advocate at Telefónica Digital. "And we do not believe that the situation we currently see with smartphones in developed markets will necessarily be replicated as this happens."
Cue basic 'feature' handsets like the new Nokia 105 and Nokia 301. After an era of 'quaint Western bias' the accountants are waking up to the fact that iPhones and Galaxies don't cut it in India and other developing economies – and that's where the money is. "Market leaders in the developed world don't have the technologies or the price points to succeed and will have to innovate rapidly to do so," says Victor Basta at Silicon Valley-based analyst firm Magister Advisors.
"China and India alone have a population two and half times the combined population of the US and Europe." Analyst house IDC estimates that almost 920 million mobile devices will ship this year, predominantly in developed nations, but with seven billion souls on the planet, there's a long way to go.
"There is a trend towards cheap 'light-weight' versions of Android and iOS devices aimed at the third world in a bid to build brand loyalty for the future," says Kevin Curran, senior member at the Institute of Electrical and Electronics Engineers (IEEE). "Currently, top of the range Apple and Google smartphones are simply too expensive for the common people."
Cue the rise of basic challenger smartphones. "Some smartphone users are turning their back on Apple and Samsung for so-called 'basic phones' like Blackberry and Nokia Windows because we are now entering a new phase; one that sees a diminishing return on the extra investment for a premium handset," says Peter Chadha, Founder of DrPete and CEO of Steegle.com.
"These 'basic challenger phones' can provide their users with excellent email, internet access and even applications. This is a real shift as these alternatives historically struggled, with poor screens that lacked capacitive touch, and tardy processors." However, the likes of Siri, voice recognition and 'face unlock' are features too far for most people on the planet.
What's the world's most popular smartphone brand?
Despite what we've said about cheaper phones gaining in popularity, there's an aspirational aspect, too. A poll of 3,670 people in Brazil, India, Nigeria and Saudi Arabia last month found that Samsung is currently the brand of choice (32%) in these markets, with Nokia coming in second place (22%) and Apple in third (21%). Compare that to the UK/US, where Apple is still the frontrunner at 32%.
The same Upstream 2013 Emerging Markets Mobile Attitudes report also found that a third of emerging market consumers would buy a device from a brand that has similar functionality and features to a high-end brand, but at a lower cost. And here's the rub: 38% of Nigerians, 15% Indians, 11% Brazilians and 9% of consumers from Saudi Arabia want a smartphone for less than $100 USD, while half of those polled would be prepared to spend $100-300 USD on their mobile.
For instance, China's most popular search engine Baidu sells smartphones made by Lenovo (and it even has its own Google Glass competitor, the Baidu Eye). Its latest handset is the LePhone A586, which has a 4.5-inch screen, runs Android 4 – including Baidu's own cloud features, apps, voice search and even voice unlock – and costs just £100/$153 USD. That's easily four times cheaper than an iPhone.
Once it's dominated China – something that's predicted to achieve next year – Lenovo and Baidu are off to Brazil where smartphone penetration is a mere 14%.
Can smartphones in developing countries easily access the internet?
No, and it's all about infrastructure – or lack of. "Across Europe you will see dozens of ISPs competing for customers, there are peering arrangements in place between them to help maximise Internet traffic efficiency both domestically and internationally, and the resulting savings are passed to the customers," says Axel Pawlik, managing director of the RIPE NCC, a Regional Internet Registry that allocates IP numbers to its members in Europe, the Middle East and parts of Central Asia. "The developing world is often a very different picture – Internet connection can be unstable and slow, and often limited to certain geographic regions."
Countries on the east coast of Africa were physically cut-off from the internet until 2009, only able to connect via satellite as there were no submarine cables linking to global networks. Even now much Internet traffic in Africa has to leave the country in order to switch to another network within the same country, making the internet prohibitively expensive.
Why do people in in developing countries want smartphones?
A major reason is WiFi and calling apps."Calling apps have made cheaper smartphones far more enticing by undercutting feature phones, offering longer term savings and greater coverage in exchange for a slightly larger upfront cost," says ex-Virgin Media founding executive Graeme Hutchinson, who now runs Ghost Telecom, producer of free-calling iOS & Android app FooTalk, which combines Skype-type VoIP with very low cost standard phone number calling. It even does Facebook calling, making it the world's first app to offer global Facebook VoIP – before even Facebook itself.
Apps like FooTalk allow smartphone owners to use the growing availability of Wi-Fi to fill-in the gaps in a developing country's mobile infrastructure, which is in turn changing the global focus of telecoms companies. "For operators, developed markets are at over saturation point and we're seeing a reduction in new user take-up," says Hutchinson. "Operator growth therefore has to come from emerging and developing markets. With data services central to the future of mobile, operators' traditional geographical boundaries are disappearing and they are looking to global strategies that embrace the developing world as a key part of their plans."
Premium vs cheap smartphones
"The developing economies are more price sensitive than the UK as just a difference of £10/$15 USD when multiplied into rupees or pesos starts to seem a lot more – and users who aren't particularly tech savvy will be more persuaded by price," says Chadha.
Mohammed Hussain, MD of mobile phone accessories retailer, Mobile Fun predicts that Google and Amazon will take a big stake in the low end segment of smartphones and tablets, with a Kindle Fire-style subsidised low-end mobile device possible. "We see the smartphone market evolving to offer two extremes in terms of handsets," he says. "There will be both premium and low-end handsets, leaving a dearth of handsets in the middle."
It's in the low-end sector that 'the next billion' handsets are destined, and the race to provide them could birth a new operating system – with Mozilla's Firefox OS one of them. It's due to launch this year in Latin America via Telefónica's networks, and it's a direst response to the closed app-ecosystems of Apple and Android.
Why don't Apple and Android suit developing countries?
"The current App store model present in the West, which requires consumer credit or debit card details, is not one that can be easily transferred across into emerging markets," says Marco Veremis, CEO at Upstream, which conducted the Emerging Markets Mobile Attitudes report.
It found that the lack of banking facilities available to consumers in these markets led to 42% preferring to pay for them via their mobile operator, so it's mobile operators, not platform owners, that have the advantage when developing apps and content. That explains why an open platform like Firefox OS makes sense in the developing world – and why Telefónica is so keen on it.
"We will see some unsuspecting winners in the open battle for emerging market consumers," says Veremis. Given the unique billing and marketing relationship mobile network operators have with consumers in emerging markets, they have the opportunity to be crowned Kings."
Since it's open source, Android will dominate low-end devices in developing countries for now, but Firefox, Samsung's Tizen and/or Nokia's budget Windows devices might takeover.
Will high-end smartphones survive?
The next billion handsets will not be iPhone or Galaxy-flavoured, but there's obviously still an appetite for high-end smartphones. "There will always be a premium device segment, especially as the middle classes grow rapidly in China and India – these middle class consumers want premium handsets," says Hussein.
"While some observers may think that a new cheap iPhone might drive down prices, we are sceptical that Apple will target the low-end segment of the device market. After all, devices such as the iPad Mini aren't exactly cheap, and Apple has a reputation for keeping its gross margins as high as possible."
However, even Apple needs to keep on its toes. "Already in China there are seemingly amazing iPhone 5 clone phones – normally based on Android – for less than £60/$92 USD, and in time, Telco's will start providing these types of smartphones as they are competing for users and market saturation," says Chadha, who think we might see a completely different type of mobile phone delivered for the high-end.
"This would require some sort of paradigm shift which alters the high-end smartphone to be a must have for all," he explains. "For example, flexible screens or using cyborg type technology to implant connections directly into your body – to your eyes and ears – where you would want high-brand, high-quality."
In the new world order the premium, high-end smartphone will have search once again for a new business model – and a new 'killer app'.