Smart Phone Market Shifting to Developing Nations, says Samsung

All markets saturate at some point. And the smart phone market might be closer to that point than most believe. In fact, Samsung, in reporting its latest fourth quarter 2012 earnings, already is warning that sales of smart phones will slow in 2013. 

That might be important, as Apple and Samsung represent the two profitable suppliers of smart phones. By most reckoning, all the other smart phone suppliers earn only a little, or lose money. 

"The furious growth spurt seen in the global smart phone market last year is expected to be pacified by intensifying price competition compounded by a slew of new products," Samsung said. In other words, expect slower growth in 2013. To be sure, one might argue that Samsung is talking here about its own prospects.

Growth in the overall market might continue. In fact, that is what Samsung seems to expect. 

"In the first quarter, demand for smart phones in developed countries is expected to decelerate, while their emerging counterparts will see their markets escalate with the introduction of more affordable smart phones and a bigger appetite for tablet PCs throughout the year," Samsung says. 

In other words, the smart phone market is approaching saturation in the developed markets, lower-cost devices will be needed to drive growth in emerging markets, while consumer spending might shift from smart phones to tablets. 

Aside from what a slowing smart phone market might mean for suppliers of smart phones, the big strategic issue for mobile service providers is replacement revenue sources, once smart phone driven data plan sales level off. 

Growth drivers have shifted, over the last couple of decades. For cable operators, it was video, then shifted to broadband access, then to voice, and now to business customer revenues. For fixed network operators growth shifted from voice to broadband to video entertainment. 

For mobile operators, growth shifted from "more customers" (subscriber units)  to messaging plans, to data revenues for Internet access. The coming saturation of the data plan growth driver is the looming strategic issue for mobile service providers. 

With U.S. smart phone penetration above 55 percent, saturation effects will start to show every step of the way to about 80 percent, when growth will really become difficult. That is one reason why some are skeptical about whether Microsoft, Research in Motion and Nokia can hold or establish a sustainable foothold in the market. 

By some reckoning, we are getting late in the game for major market share changes. 

Why Record Sales are a Problem for Apple, Samsung, AT&T and Verizon

The fourth quarter of 2012 was significant for the smart phone business. Apple, Samsung, AT&T and Verizon all had record quarters, where it comes to smart phones. 

Samsung earned record profits in the fourth quarter of 2012, lead by smart phones sales.

Apple reported record financial results in the fourth quarter of 2012, driven by sales of iPhones.

Separately, AT&T sold a record number of smart phones in the fourth quarter.

Verizon reported record smart phone sales as well, in the fourth quarter of 2012.

So you see the pattern: smart phone sales have grown dramatically in the U.S. market, a pattern one can see in other markets as well. But good news can the precursor for bad news down the road, as paradoxical as that sounds.

Virtually all observers will concur that revenue growth in the communications business now is lead by the shift to use of smart phones, which drives mobile data plan revenues. But all observers would also agree that growth will saturate, eventually.

And record sales only bring that saturation point closer. And the crucial question is what comes next, as the industry revenue driver? But there are more immediate questions, as well.
How much more time do rival suppliers really have to establish market share, when Apple and Samsung, which already earn most of the profit in the smart phone business, are possibly widening their already substantial lead in the market? The question probably is most salient for Research in Motion and Nokia.

There are profit margin issues as well. Both AT&T and Verizon reported that subsidies for smart phones, notably the Apple iPhone, were a drag on earnings. So the carriers have a mixed business interest, where it comes to the iPhone. The device drives consumer data plan adoption, but also carries the highest subsidy costs, and therefore hits earnings the hardest. 

The service providers would, in one sense, welcome a hit phone that did not cost so much, in the way of subsidies. The Galaxy is the closest example of that. On the other hand, neither do the service providers want to give one more supplier greater power in the ecosystem, either.

While welcoming Android for providing choice and competition for Apple, service providers likely also want to ensure that Android, in turn, has competition.
And despite the record profits, Samsung also warned that profit margins would be an issue, as marketing expenses are climbing.  Apple’s earnings growth and profit margin also emerged as issues in the fourth quarter of 2012.

The strong smart phone sales trend also means saturation will be reached “faster” in developed markets. And though forecast rates of growth also are high in developing markets, there will be retail price issues to be confronted by both Apple and Samsung.



That would suggest there is reason for the warnings about profit margin. One has to expect that, as the smart phone sales battle shifts to the developing regions, unit prices will have to fall. Typically, as sales of devices shift from developed markets to developing markets, gross revenue growth slows, and profit margins contract.

So, oddly enough, record smart phone sales are hastening the day when "what do we do next?" becomes a very-practical question for executives trying to drive the next quarter's revenue and profit margin numbers.

Who Does Google Really Compete With?

It never is too hard to find a communications executive or company that worries about what Google might do next, or where Google might compete directly with service providers. 

In an abstract sense, Google evokes fear because of its ability to innovate fast, its ability to surround a competitor or business, its cash, its ambition and only as a byproduct its ability to make itself the "thing" consumers bond to, not the ISP dumb pipe. 

Of course, the perceived "threat" is very concrete to some contestants in the communications ecosystem.

The NexusOne handset means Google is a device supplier. The Android handset operating system makes it a major mobile supplier to many other original equipment manufacturers, and gives Google influence over the pace and direction of mobile OS development. Google Play is among the handful of truly significant app stores. 

Google's investment in Clearwire, and past willingness to bid on 700-MHz Long Term Evolution spectrum, mean Google potentially could be viewed as a future access provider in its own right.

Google Fiber, even if only at one location, has become a reality. And some might point to Google Voice, or Google's ownership of dark fiber as other ways Google already is a part of the industry ecosystem.

Google also was on the other side of the net neutrality argument from most service providers.
 And Google Wallet does compete directly with Isis, the mobile wallet backed by AT&T, Verizon Wireless and T-Mobile USA.

Google continues to experiment with mobile and untethered access networks. You might argue Google still has a clear and simple business objective. It makes its money from Internet advertising. People who do not have the Internet cannot become prospects. So Google wants everybody to have Internet access.

Ad inventory also hinges on access speed. Faster page loading, for example, also means Google can display more inventory. In a real sense, ad inventory is contingent on access speed. Experience also shows that faster speed leads to higher usage, and hence more potential to show inventory.

But some would argue that despite its potential future competition with communication service providers, Google has other bigger challenges to face, including Facebook, other search providers, Microsoft and Apple.

And some might even argue that, given the growing importance of mobile "search," commerce is becoming more important. And the firm most significant in that area is Amazon.

That isn't to say there is no scenario under which Google might entertain becoming a mobile service provider, in some way. But that is more attractive to Google only if the biggest ISPs fail to upgrade their networks or extend coverage. 

In the meantime, Google faces greater immediate challenges from the likes of Apple and Facebook, as well as future challenges from the likes of Amazon. 

Mosaic, First Real Web Browser, Turns 20

The web, as a mass medium, is 20 years old in Jan. 2013, some might say. as  Mosaic, the visual web browser, was released on Jan. 23, 1993.

While not the first graphical web browser, it was the most popular one of its time and still the model for today's browsers, many would say.

Unlocking Your U.S. Phone Becomes a Crime Jan. 26, 2013

I'll be most of us did not see this coming: on Jan. 26, 2013, it becomes a federal crime for the buyer of a smart phone to unlock  it, at least before the expiration of the contract, if there is one. 

The change is because a smart phone operating system is considered copyrighted material under provisions of the Digital Millennium Copyright Act (DMCA). 

In October 2012, the Librarian of Congress, who can determine exemptions to the DMCA, decided that unlocking mobile phones would no longer be allowed. 

The rule apparently does not apply to devices sold unlocked in the first place, such as full retail price devices, or perhaps any smart phone sold to a user unlocked by the carrier itself. 

Apparently, it will continue to be illegal to unlock a tablet or game console. 

The legal foundation is that users only license, and do not own, the software on their devices. Some might be shocked to learn that the same legal principle  underlies a "purchased" library of songs, as well. 

Actually, it is unclear whether a user actually "owns" the songs in an iTunes library, or are only borrowed. In other words, what used to be a product now is sort of a subscription. 

AT&T Sells Record Number of Smart Phones in 4Q 2012

AT&T Wireless sold a record number of smart phones in the fourth quarter of 2012, selling 10.2 million devices, which AT&T says is the most ever sold by any U.S. service provider in a single quarter. In fact, 89 percent of postpaid phone sales were of smart phones. 

AT&T also reported that wireless revenues grew 5.7 percent year over year, while wireless service revenues grew 4.2 percent.

AT&T had 780,000 wireless postpaid net adds, the largest increase in three years; with a 1.1 million increase in total net wireless subscribers. 

But that growth also came at a price. Since AT&T subsidizes smart phones, and since so many customers purchased Apple iPhones that have the highest subsidy costs in the business, earnings took a hit. In fact, 84 percent of all smart phone sales were iPhones. 

Verizon, for its part, added a "highest-ever" 2.1 million net new wireless contract customers in the fourth quarter, outpacing AT&T's growth. 

As expected, Verizon profit margins on mobile services dropped as smart phone subsidies grew. 

And that is an issue: though service providers want to sell more data subscriptions, which mainly entails selling more smart phones, the device subsidies are a drag on earnings. 

Google to Test Small Cell Network?

For some who worry that Google might someday decide to become an ISP in a bigger way, using either mobile or fiber to the home approaches, here is one more development to stoke concern.

Google filed an application at the Federal Communications Commission seeking permission to test an experimental radio system near its Mountain View, Calif. campus, using as many as 50 base stations and 200 end user devices.

The base stations will be both indoors and outdoors, using a “small cell” design. Indoor sites will have a range of 100 meters to 200 meters, while outdoor cells will have a range of 500 meters to 1000 meters.

Only Google knows what it is testing here. But the specific frequencies requested are 2524 MHz to 2546 MHZ and 2567 MHz to 2625 MHz.

These are bands allocated to the “Educational Broadband Service” (EBS) and the “Broadband Radio Service” (BRS), which are used by Clearwire for its mobile broadband service.

Google has tested a variety of networks and network elements in the past, so the latest effort is not unusual. But Google has suggested spectrum in the 3.55 GHz to 3.65 GHz could be used as part of a shared small cell service.

Google also in the past has asked for permission to test unlicensed devices in the 2.4 GHz band, 5 GHz band, and the 76-77 GHz band, as well as white spaces.

Aside from Google Fiber, Google also has invested in municipal Wi-Fi tests, invested in Clearwire, sponsored airport Wi-Fi and promised a minimum bid for 700-MHz mobile spectrum as well, in 2007.

The point is that Google remains vitally interested in new ways to expand Internet access, especially high-bandwidth, low cost access.

Google says the initial base station deployment will occur inside 1210 Charleston Road, Mountain View (and possibly 1200 and 1220 Charleston Road), and consist of five to 10 base stations (mounted on ceilings, or walls next to the ceiling, six to eight meters above ground), and up to 40 user devices.

Three base stations will employ directional antennas (dual-slant, two-way multiple input/multiple output, with 17 dBi max antenna gain), mounted on walls and directed toward the building interior; of these, base station one will have a beam width of 65 degrees, a 45 degree horizontal orientation, and a -4 degree vertical orientation; base station two will have a beam width of 90 degrees, a 315 degree horizontal orientation, and a -4 degree vertical orientation; and base station three will have a beam width of 65 degrees, a 210 degree horizontal orientation, and a -4 degree vertical orientation.

Subsequent deployments will occur on building rooftops at 1200, 1210, or 1220 Charleston Road, or possibly other buildings located on the Google campus.

Omni-directional antennas will be mounted either on external building walls at roof height, or on antenna masts above rooftops (extending no more than six meters above the rooftop).

Directional antennas may be used. No building on the campus is higher than 25 meters above ground. Google plans to test up to 50 base stations and 200 user devices during the requested experimental license term, and requests authority to deploy in these quantities. 

Each indoor base station will have a radius of approximately 100 meters to 200 meters. Each outdoor base station will have a radius of approximately 500 meters to 1000 meters.