Low prices alone can't survive commoditized smartphone biz

Low prices alone can't survive commoditized smartphone biz

Summary: Cutting prices may work in emerging markets where consumers are more price-sensitive but survival will rest on investing in software, services and content.

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As the smartphone market inches toward commoditization, vendors need to differentiate their products based on software services and content as consumers start looking beyond hardware features.

According to Shalini Verma, principal analyst at Gartner, many smartphones vendors are finding it increasingly difficult to create differentiating factors on the hardware which inches the market closer to commoditization, Verma pointed out. This is because when consumers buy a smartphone today, they not only buy the hardware but an app store, a set of services and an experience, she explained.

While some hardware considerations are part of the purchase criteria, such as a wider screen, services and apps delivered on the smartphone are increasingly becoming the main purchase criteria, she added.

Hardware innovation alone not enough
As the market is not far from commoditization, innovation on hardware alone will not be enough for vendors to stand out, Maribel Lopez, principal analyst at Lopez Research observed. The differentiation comes from moving to software service and applications, he noted.

At the moment, many vendors such as HTC and Samsung are innovating at the user interface layer but that is not enough, he pointed out. Phones and tablets will become "screens" to users which means the value will reside in what services are around it such as cloud services and content, he explained.

Geoff Blaber, director of devices and software platforms at CCS Insight also observed traditional manufacturers have become dependent on their partners who provider broader offering of software, content and services.

"The smartphone business is going to be increasingly difficult due to the importance of a broader content and service offering, and the scope for disruptive entrants like Amazon and Google who use other core businesses to heavily subsidize the hardware," Blaber said.

For vendors who excel in building brand equity and innovation, they must keep a "laser-like" focus on the markets and the kinds of consumers they want to target to compete on factors other than price, he said.

They have to look at developing their own core technologies and innovate in areas that help them make smartphones meaningfully different to consumers, he added.

Lowered prices offer limited advantage
The vendors who stay on the market must be prepared to play by the rules of a commoditized market by competing on cost, speed to market and live on low margins, Wong Teck-Zhung, senior market analyst for client devices research at IDC Asia-Pacific observed.

Chinese smartphone vendors for instance, are thriving on the commoditized environment, making inroads into emerging markets in Asia-Pacific as well as mature markets like the U.S., because their smartphones offer a good value proposition, Wong pointed out.

Price erosion is inevitable given the dynamics of a commoditized market, Wong explained. The challenge will be sustaining margins which mean that only those who scale are likely to survive in the long term, he noted.

Verma also agreed, noting affordability was a criterion for consumers in emerging markets. However, in other markets, price was merely part of the purchase decision when all other considerations are equal in the devices being evaluated, she remarked.

Elaborating, Michael Morgan, senior analyst of mobile devices at ABI Research, said even though vendors have an advantage when they create devices at a lower cost, it is product differentiation which keeps them at the forefront of product differentiation.

Vendors need to fund expensive research and development, marketing and other business functions which will allow them to capture higher margins on their products, he explained, noting it was a "natural evolution" of low-end entrants such as ZTE and Huawei.

"While consumers in emerging markets are much more price sensitive, it will be those that can bring innovative features to the desired price points that will show long term success," Morgan said.

Topics: Smartphones, Mobile OS, Mobility

Ellyne Phneah

About Ellyne Phneah

Elly grew up on the adrenaline of crime fiction and it spurred her interest in cybercrime, privacy and the terror on the dark side of IT. At ZDNet Asia, she has made it her mission to warn readers of upcoming security threats, while also covering other tech issues.

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