Thursday, April 5, 2012

Google and the Commoditization of Mobile Computing

For a relatively new company, Google has not only disrupted numerous industries, but has also disrupted human behavior as well. Their brand is an action verb used almost daily by the technogeeks and the normals alike.

However, I’d argue their biggest disruption has claimed the smartphone market as its victim. With one fell swoop, Android essentially commoditized (apparently that is not a real word) the smartphone, dropping the margins of almost every incumbent in the industry, except for the suppliers (chip manufacturers, component manufacturers, etc..) and Apple.

This is no different to the strategy that Intel, Microsoft, and IBM employed to the PC market back in the ’80s. Thanks to the standardization of the hardware components and the availability of Windows, anyone could get into the PC game. Prices dropped, margins were squeezed, and companies suffered. IBM, the creator of this segment, left due to the lack of profits. Compaq, who previously relied on their specialized distribution network that targeted corporations and business users for sales, suffered since they couldn’t differentiate their product from the competition at the retailers. After all, the consumers were now smart enough to make purchases on their own at retail shops, no longer were specialized distributors required.

Google brought the same paradigm shift to the smartphone industry. Now, many have gotten into the smartphone & tablet game, because of the lack of capital required and because they may have a low-cost advantage due to geography. Gone are the expenses required for developing an OS or hardware platform. The latter are happily provided by Qualcomm and others. As more entrants enter, the profitability will reduce.

It shows in the financials. HTC has a gross margin of 29% and net income margin of 15% (Q4 2011). Another casualty, RIM, has also seen their margins squeezed as Android picked up steam.
The only exception is Apple. As it was during the PC era, their products were differentiated enough to justify a premium in price. In the mobile computing market, their differentiation is significantly larger due to their all-encompassing ecosystem they covers the entire product line.

But if you want an Android, what is HTC offering you that LG isn’t? What is Acer offering that Asus isn’t? Why would you choose a BlackBerry over any of these offerings?

Samsung is the only Android player with an advantage. Their own their supply chain with their design & manufacturing dominance in display panels, memory, and ICs; reducing their cost. They also have their appliance/consumer electronics business that could be integrated with their Android phones, providing differentiation.

Despite the intense competition by the handset manufacturers in the Android world, Google wins. As prices fall, more Android handsets are in market, and more users are inside the Google ad network. Eventually, the Android ecosystem will be dominated by those with the greatest low-cost advantage and Google will milk money from every ad displayed.

For other platforms to be a successful alternative, they will need to focus on differentiation.

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