Sunday, 16 October 2005

The myth of the smartphone market

Who will buy smartphones? And what are the “killer” features?

One of the most common themes among people watching the mobile market is the quest for the ultimate device. “Which is the one everyone will buy in the future?” reporters ask me. Discussion boards have endless debates over the relative merits of the Treo, Blackberry, Microsoft Smartphone, and so on. The underlying assumption is that at some point we’ll see the emergence of one converged killer device that gets universally adopted.

I’m not sure why we’re all looking for one ultimate winner. Maybe it’s a hangover from the PC market, where one basic design did dominate the market. (Please, no angry messages from Mac or Linux users -- I was at Apple for ten years and I’m not ever going to write off the Mac. But you gotta admit there was a winner, folks.)

Anyway, I think the PC market is not a good analog for the mobile world. We need to cast aside our PC assumptions, including the assumption that there’s going to be a single unified mobile market.

At PalmSource we did a lot of research on mobile customers and what they want. The basic outlines of what we found were released to the public, so it’s okay to talk about them. Here goes:

About 60% of mobile phone users in the US and the major European countries are unwilling to pay extra for anything other than basic voice and SMS. In the US they typically take a cheap phone with a low-cost service plan, while in Europe they tend to be on pay as you go plans that let them limit their billing very carefully. They’ll even turn off their phones sometimes to limit the number of calls they take.

If you give them a phone with free features, they’ll accept it, of course. But what makes them distinct is that they won’t pay extra to use those features.

For an example of this effect, look at the high sales of subsidized cameraphones, and compare that to the low number of people who pay to send lots of MMS messages containing those photos.

Maybe someday it’ll be possible to coax these people into doing more, but they’ll be the last adopters, so you can forget about selling them anything advanced right now.

Three value-added segments

The good news is that about 35%-40% of mobile phone users are willing to pay extra for additional features beyond voice and SMS. With worldwide mobile phone sales running at well over 600 million units a year, that means you could sell more than 200 million advanced phones a year. Not a bad market, and far beyond today’s sales of smartphones, which are running at somewhere between six million and 25 million units a year depending on how generously you define smartphone.

Unfortunately, these people don’t all want the same advanced features in their phones. They split into three different market segments, each about 12% of the population, with very different needs and demographics. I think there are probably also a lot of sub-segments within each of the major segments.

The first segment is a group of people I like to call communication enthusiasts. These are extroverts who live to communicate with other human beings, and they’re often in people-facing jobs like sales and business development. To picture this user, think of the best sales representative you’ve ever met, warm and enthusiastic and always ready to chat.

These people are willing to pay for any advanced phone feature that’ll help them communicate better. E-mail, short messaging, IM, video calls, whatever. I think they’re the main people buying Blackberries and Treos.

The second segment is information enthusiasts. These people are a little more introverted, and tend to be in information-heavy jobs like medicine, law, and research. They need a tool that helps them manage all that information. Think of a doctor, trying to keep track of patient records and reference information on thousands of drugs.

The information enthusiasts will pay extra for features that extend their memory and help them work with information. Databases, larger screens, reading PC documents, and running lots of third party apps. Right now I don’t think anyone’s designing an ideal mobile phone for them (the Motorola A780 is the right hardware, but disastrously wrong software). Today a lot of these people buy handhelds instead.

The third segment is entertainment enthusiasts. These users are younger people (late teens and twenties) who want to keep their fun lifestyles even as they enter the workforce. They’ll pay extra for enhanced entertainment features -- music, games, video, fun messaging. They don’t have as much money as the information and communication users, so they can’t pay as much for their phones. There’s some evidence that this market sub-segments into game enthusiasts, music lovers, and so on.

The Danger Hiptop is aimed squarely at this demographic (check out the Snoop commercials), as is the Motorola Rokr (although at a price of $250 to hold only 100 songs, I am deeply skeptical of how well the Rokr will sell).

The misguided drive for convergence

In reaction to these different needs, a lot of people in the industry are trying to create an ultimate converged device that has features appealing to all three groups. So you get smartphones dolled up with e-mail clients, MP-3 players, and loads of information management applications.

These typically don’t sell well, for two reasons. First, unlike a PC, when you add features to a mobile device you pay a heavy price. If a PC gets a little heavier, or uses a little more power, no one will even notice. But do that to a mobile device, and it may suddenly become too heavy for most people to carry, or its battery life may become too short. Tiny differences in specs can create surprisingly huge changes in sales.

The second reason why “Swiss Army Knife” products don’t sell well is because most mobile customers are intensely practical. They buy mobile products like appliances, to do a specific job. All of the most successful mobile products are associated with a particular task that they do well. They may be capable of doing more, but there’s always a lead feature that they excel at. The iPod is fantastic at music acquisition and playback. The Blackberry is great at Exchange e-mail (and stinky at almost everything else). And the original Palm Pilot excelled at calendar and address book.

As far as I can tell, the only place where Swiss Army Knife mobile products are popular is in the online discussion forums that we all read. We technophiles, we few proud pioneers, are utterly out of touch with the needs and desires of normal mobile customers.

There is no smartphone market

What all this means is that there’s no unified smartphone market. Instead, there are a series of markets for phones that are smart at particular tasks. The way to win is not to create one ultimate device; it’s to create a series of products that are great solutions for certain customer groups. The market’s a series of rifle shots, not a shotgun blast.

So the best analogy for the mobile device market isn’t PCs, it’s cars. There is no car market, there’s a market for sports cars, a market for SUVs, a market for sedans, and so on. If we think of the mobile market the same way, we’ll all have happier customers and we’ll sell a lot more products.


Additional reading: Here are a couple of third party reports that explore elements of the smartphone myth. Unfortunately, you have to pay to read these reports, but if you work in a company that can afford it, the investment is worthwhile.

Jupiter Research: How to Succeed in Wireless Without Really Converging
A nice overview that, regrettably, doesn't dig into details on the value-added segments.

Forrester Research: Segmenting Europe's Mobile Consumers
This report is from 2002, but the findings are still valid. It's the best overview you can get, and at $700 it's a deal compared to a lot of other studies.

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