Sunday, 21 January 2007

The shape of the smartphone and mobile data markets

With all the new mobile devices coming out, I thought it would be useful to give an overview of the market for mobile data. I covered some of this information in a post written about a year ago, but this one has a lot of new information, plus diagrams.

I believe the market for mobile data devices (smartphones, PDAs, mobile game machines, iPods, etc) is not structured the way most people think it is. A lot of new mobile products fail because they're not designed for the real market, or because they target imagined customers who don't really exist in large numbers.

There are two big erroneous assumptions that I think many people make about mobile data:

First incorrect assumption: Mobile data is for everyone. Most people assume that mobile data devices like smartphones will eventually be used by everyone. The idea is that they're being bought by early adopters now, but as prices drop they'll soon be adopted by the whole population. The market is supposed to look like this:

Higher prices are to the right. Smartphone sales start with the early adopters at the right, and then as prices drop everyone switches to smartphones and starts using all their features.

The only problem with this idea is that there's no evidence to indicate that it's true, at least not in the US and Europe (where I've done research). In fact, almost all of the evidence I've seen to date shows that the market is deeply divided into two groups. When surveyed, most people in the US and Europe say they will not pay anything extra for mobile device features other than voice and SMS. They'll use those features if you give them away for free, but as soon as you ask them to pay, about 65% of the population drops out. This makes them very unpromising targets for device companies that want to sell value-added devices, operators who want to sell advanced services, and software companies that want to sell mobile data apps.

Fortunately, the other 35% of the US and European population is willing to pay extra for mobile data features.

So the real market looks like this:

The people I labeled "value-added users" are the mobile data market. But that's only the beginning...

Second incorrect assumption: There is one smartphone market. Most people assume that there's just one market for smartphones, and that eventually we'll see the emergence of a single ultimate smartphone that everyone uses. I can't tell you how many times I got that question from press people and analysts when I worked at Palm: "Which is the device that everyone's going to use?"

The answer is, that device doesn't exist, because the people who are willing to pay extra for mobile data features don't all want the same features. They want conflicting things, and are very unwilling to pay extra for the features they don't want. The ideal hobile device for me might be completely repulsive to you, and vice-versa.

This misconception has fueled an uncounted number of online debates in which people argue why the device they like ought to be adopted by everyone. What they're really arguing is that everyone else should think and feel like them, which is why these online debates never reach a conclusion.

Rather than looking for the mobile market to "converge" the way that most PCs converged to Windows, I think we should expect mobile devices to diverge into different segments. The right analogy for the mobile market isn't PCs, it's cars. As the car market grew in the 1900s, it stratified into trucks and minivans and SUVs and sports cars and so on.

The same divergence is already underway in mobile data.

There are at least three segments in mobile data

If mobile data isn't for everyone on the planet, and if the market is divided into segments, the most important question to ask is what those segments are. What are the equivalent of the sports car, SUV, and minivan for mobile?

We researched that extensively at PalmSource, in a series of surveys that eventually talked to more than 12,000 people in the US, France, Germany, and the UK. In that research, we found at least three big groups of mobile data customers, each with different needs and tastes: people who focus on communication (e-mail, messaging, conferencing), people who focus on entertainment (games, video, music), and people who focus on managing information (databases, documents, note-taking). Each was about 12% of the population.

The results were very consistent across countries, so I'm comfortable that the same segments probably exist in most European countries. The only significant difference was Germany, where the percent of the population who said they were willing to pay for entertainment features was smaller. I don't know if that's a real difference in usage, or if folks in Germany are just less willing to admit that they might use a computing device to play games.

The results probably can't be projected to other places like Japan and China; somebody else needs to do that research (or I'll do it if you want to fund it ;-) .

Here's a little detail on each of the three mobile data segments:

The entertainment-focused users are generally younger than average; many are in college or their 20s. They see a mobile device as a lifestyle choice, and they're willing to pay extra for a device that'll help keep them entertained. Different people want different forms of entertainment, so there are sub-segments in the entertainment mobile market. The biggest division is game-playing vs. media (music and video). But entertainment can also include things like social messaging with your friends. It's anything you do for fun rather than a paycheck.

The communication-focused users are extroverts who live to communicate with others. They're often in people-facing jobs like sales. They're willing to pay extra for a mobile device that lets them keep up with others in multiple ways. E-mail, SMS, voice, conferencing, video calling -- basically, anything communication-related is compelling to them, and they will pay extra for a device that does it well.

The information-centric users are more introverted. Rather than focusing on their dialog with others, they tend to do a lot of thinking on their own, and want their mobile device to be a memory supplement and a means to capture new information. They're not by any means recluses, but ideas rather than social interaction are what really gets them energized, and so they're willing to pay extra for features that help them capture and remember ideas and information. What they really want is a brain extender. They often work in information-heavy jobs like medicine, law, science, and academia.

Of course, there's always some overlap between markets -- for instance, you might have a doctor who also wants to stay entertained when off work. So if you draw the three mobile data markets, they overlap a bit, like one of those Venn diagrams you drew in primary school:

Understanding the products

Now that we've mapped the customer landscape, we can start plotting various products on the chart. This is where we'll start to get some interesting insights. But first, we have to add one technology overlay: in the mobile world, some mobile devices have phones built in and some don't. So add a gray circle in the center:

Now let's chart some products.

The communicators:

This is the most crowded market (in fact, I left off a number of products because I ran out of space on the chart). Although there used to be communicators without phones built in (RIM's early products were an example), putting all communication in one place is a huge benefit to a communication-centric user, so merging the phone and communicator was an obvious move in this market.

I classify the Danger Hiptop as a borderline product between the entertainment and communication markets because it's focused on social communication for young people. Sony Mylo is another borderline product, this one without a phone.

The Palm Treo, SonyEricsson p900 line, and touchscreen Windows Mobile products are on the border between communication and information management. They all have touch screens and a lot of information management features, but also attempt to deliver robust e-mail. At this point, they are being outsold by the much more communication-specialized RIM Blackberry line.

In the entertainer market, you can see the strong role of sub-segments. The game-player market has been dominated by Nintendo's GameBoy, with the recent addition of Sony's PSP. The media market is ruled by the Apple iPod.

The iPhone is an attempt to create a phone + media entertainment device. It'll be interesting to see how the iPhone does in the market -- it was an obvious move to combine a communicator with a phone, but it's not as obvious that the entertainer is a natural match with a phone. The danger to Apple will be if users see iPhone as the worst of both worlds: a phone that lacks a good keypad and an iPod with very small memory.

Information managers are an underserved market. Early PDAs targeted these users, but the device features were too limited to build a lasting franchise. The main champions of the PDA market, Palm and Microsoft, have now both focused most of their effort toward communicators. As a result, information manager innovation has basically ground to a halt, and the users in this space are very frustrated.

What it means: Opportunities and dangers

Some types of convergence are better than others. Combining phone technology with a mobile data device can be very successful when you stay within a single usage market. You tailor both the phone features and the data features to the needs of that particular type of customer. But trying to converge two markets is an extremely risky idea, something mobile companies should avoid. The needs of the markets conflict, so there is an extremely high risk that you'll end up being cannibalized on either side by products designed specifically for the needs of single markets.

The communicator market is over-crowded and therefore risky. When you realize that the communicator market is only about 12% of the population, there are probably more communicator products shipping now than the market can support. Communicators are likely to face price pressure, and some of the products will probably sink like a stone. The RIM and Palm OS products are probably a little safer here because they have more unique features and loyal customer bases, and Nokia may do okay if it can add some differentiation. But Windows Mobile communicators are likely to be a happy market only for mobile companies that can live on commodity margins.

This is not a place where I'd be looking to build new devices, but many companies are introducing new communicators because they'd rather pursue an established market than build a new one.

The iPhone is not a Blackberry killer. One of the things I like about this chart is that it shows immediately why the iPhone is not a major threat to Blackberry sales. They're in very different markets. If RIM is hoping to move into the entertainment market with devices like the Pearl, iPhone definitely interferes with that. But the immediate impact of the iPhone is on the products closest to it, meaning Microsoft Zune and the SonyEricsson music phones.

If you don't fit in one of the segments, it's very hard to sell. One of the messages of the market segmentation is that people will pay extra for great solutions to the needs they have in a particular segment. If your product doesn't solve any of those problems, there's not a market for it. Many failures in the mobile data market have been products that focused on features rather than solving specific problems. They may be beloved by technophiles, but there aren't enough of those people to drive a lot of sales. See Nokia's 770 Internet tablet for a good example.

The biggest opportunity is in information management. This market is about the same size as the communicator market, but no major player is investing in it today. This segment is out of favor because of the decline in PDA sales, but remember that people thought the MP3 market was a backwater until Apple introduced the iPod. I can tell you from personal conversations, and the market research, that there's a substantial market here, and the people in it are very frustrated. I think the ideal product for this market would be a minitablet note-taker, which I refer to as an "info pad." You can read more about it here.

What about the middle of the chart?

The other segment we haven't discussed is the center of the chart, the place where information management, communication, and entertainment all come together. Some people like to think of this as the home of the ultimate converged device, and every now and then you'll see a hardware company try to tackle it.

They all fail.

In reality, the center of the chart is a market dead zone. To use the car analogy, designing a mobile data device for all three markets simultaneously is like trying to build a sports car that doubles as a minivan and a tractor. The result is not pretty, and won't be bought by anyone except gadget enthusiasts like me. Unfortunately, there aren't enough of us to make a significant market.

That's my view of the mobile data market. I'm sure other people have different perspectives; please post a comment and share yours.

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