Today’s post is about technology and the dynamics of market saturation. My contention over the past couple of years has been that the mobile market in developed economies was becoming saturated to the point that the economics of commoditization would come to dominate the market place. The implication for both telecom operators and device makers could be stark.
Back in 2011, I noted an article which reported that three-fourths of Android handset sales were upgrades i.e. sales to people who were already mobile users. This is the definition of market saturation. It says that most Britons already own a mobile phone. So market penetration is nearly complete. There are no more new customers to take on. Instead firms in countries like Britain are focused on retaining customers or stealing customers from competitors – and in maintaining high average revenue per user.
Here’s the thing though. In saturated markets, competition means lower prices, lower margins and a commoditized offering. Look at Ireland, for example. Here, market saturation is just as high as it is in Britain. And even after the economy has started a rebound mobile telecom revenue is falling. In 2008, before the crisis, Irish mobile telecom operators garnered 45 euros per user per month. Now ARPU is only 27 euros per month. Some analysts say it could fall to 20 euros per month before stabilizing, puting debt- and capex-laden mobile firms at pains to make a profit.
With revenue down, the temptation is to fight to maintain growth by taking share. And that means cutting price, something that lowers margins that may or not be overcome by customer acquisition.
I am more interested in the dynamics of the hardware market that play out as a result of this market saturation effect because in mobile, it is the two hardware manufacturers, Apple and Samsung, that have been earning big profits. Mostly ARPU is down for mobile handset makers. Why? Three reasons: first, many existing customers already have good handsets that are powerful enough to do everything they require. They are less willing to upgrade at the same price. second, telecom operators are under price pressure too. They are less willing to subsidize handsets in order to make customer acquisitions. T-Mobile’s Uncarrier approach has accelerated this trend in the United States. Third, the dynamics of a saturated market call for taking share instead of relying on growth. And that necessarily means competing on price.
We have seen this picture time and again in the technology space. Think about your Sony Trinitron from the early 1990s or your Dell Inspiron laptop from the early 2000s. Not only did these units become completely outdated overnight, they also became commoditized – valued on price alone instead of brand and features. Today, a Sony TV has no incremental value over a similar spec’ed Samsung one or LG TV. Dell computers are no more valuable than Asus or Acer ones. This is where the mobile handset space is headed.
That’s why Amazon’s new Fire Phone is a curious first volley in Amazon’s move into the handset market. This is a phone that costs $649 unsubsidized or $199 on contract. And it is available only from AT&T. AT&T is just one of four major US mobile operators and they are known to lock bootloaders, meaning you can’t use their phones on other networks. How is this customer friendly?
It’s even worse than that. As Seth Weintraub put it, this is “an overpriced Android phone minus popular Googles apps/ecosystem/cloud but with gimmicks you won’t use.” You can’t use Google’s services out of the box. You can’t use or have access to all of Android’s app ecosystem. And you won’t use the bells and whistles Amazon has added.
I predict failure for the Amazon Fire phone. It is strategically the wrong phone for this time in the market’s evolution. I am much more likely to buy a Moto G for $199 unlocked and unsubsidized than I am to buy an Amazon Fire phone. The Amazon Fire phone is DOA.