Summary: 'Hyper-competition' in the mobile handset market, particularly in 'smartphones', will drive growth in 2010, but also emaciate profits for the majority of manufacturers. Predicted winners, losers and other market consequences.
This is a Guest Note from Arete Research, a Telco 2.0™ partner specialising in investment analysis. Members of the Executive Briefing Service can access the full article and a PDF download here. Non-Members please see here for how to subscribe.
The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete's Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.
Arete's last annual look at global handset markets (Handsets: Wipe-Out!, Oct. '08) predicted every vendor would see margins fall by ~500bps. This happened: overall industry profitability dropped, as did industry sales. Now everyone is revving their engines with vastly improved product portfolios for 2010. Even with 15% unit and sales growth in '10, we see the industry entering a phase of desperate "hyper-competition." Smartphone vendors (Apple, RIMM, Palm, HTC) should grab $15bn of the $23bn increase in industry sales.
Longer term, the handset space is evolving into a split between partly commoditised hardware and high margin software and services. Managements face a classic moral hazard problem, incentivised to gain share rather than preserve capital. Each vendor sees 2010 as "their year." Individually rational strategies are collectively insane: the question is who has deep enough pockets to keep their vehicles in one piece.
Revving the Engines. Every vendor is making huge technology leaps in 2010: high end devices will have 64/128GBs of NAND, 8-12Mpx cameras, OLED nHD capacitive touch displays, and more features than consumers can use. Smartphones should rise 50% to 304m units (while feature phones drop 21% in units). As chipmakers support sub-$200 complete device solutions, we see a race to the bottom in smartphone pricing.
Software Smash-Up. The rush of OEMs into Android will bring differentiation issues (as Symbian faced). Beyond Apple, every software platform faces serious issues, while operators will use "open" platforms to develop their own UIs (360, OPhone, myFaves, etc.). Rising software costs will force some OEMs to adopt a PC-ODM business model, while higher-margin models of RIM and Nokia are most at risk.
Finally, the Asian Invasion. Samsung, HTC and LGE now have 30% '09E share, with ZTE, Huawei, MTEK customers and PC ODMs all joining the fray. All seek 20%+ growth. Motorola and SonyEricsson are being forced to shrink footprint, and shift risk to ODM partners. Nokia already has an Asian cost base, but lacks new high-end devices outside its emerging markets franchise. Apple looks set to claim 40% of industry profits in '10, as other OEMs fight a brutal war of attrition, egged on by buoyant demand for fresh products at record low prices.