World Crisis Online

Image via CrunchBase

Written by David van Oss and Huw Andrews

The mobile handset market is in turmoil–again. In 2007, Android looked like an experiment as well as a great and cheap way to challenge the extraordinary success of Apple and its iOS-iPhone-iTunes combination. But the success of the venture has unleashed a tiger, and now the handset companies are starting to look like its lunch.

Trust Steve Jobs‘ instinct. He usually only attacks technologies he is most concerned about. In October he called Google’s creation, “very, very fragmented,” saying it presents developers with a “daunting challenge.” That’s a fair assessment, but major handset companies like HTC, Motorola, Sony Ericsson, ZTE, LG and Samsung–plus new entrants like Huawei, Acer and Dell–are quickly rising to the challenge.

To get some facts into the debate, PRTM recently benchmarked 57 Android-based handsets from 12 companies. We looked at the formal Android release date, the launch date of the phone and the chipset platform. Android is indeed a game changer.  Here are three highlights:

• The average cycle time for handsets first sold in 2008 based on Qualcomm’s QSD8250 chipset and Android’s Donut 1.6 release was a brisk eight months. By late 2009, the average cycle time for handsets based on Qualcomm’s MSM7227 chipset and Android’s Eclair 2.1 release had nearly halved, down to 4.5 months. This is warp speed for smartphones.
• Next, Android has removed speed as a source of advantage. In the past, fast to market vendors could gain six to nine months of highly profitable advantage. But now, when Google fires the starting pistol with its next Android release, all vendors can deliver handsets within 16 to 20 weeks.
• Third, most of the handsets–77% of the sample–are based on Qualcomm chip sets. Seasoned observers may find this ominous. Over the years, Microsoft and Intel have captured far more value than the makers of the PCs. Will “Quadroid” become the new Wintel?

PRTM’s perspective on what could happen next goes like this:

• The levelling of the time-to-market playing field, the rush of new market entrants and the emerging of “Quadroid” as the dominant offering will drive down gross margins for handset companies to dramatic new lows – close to the 8-10% range endured by major PC manufacturers like Acer or Lenovo. As a result, some handset companies may not survive.
• Handset developers must urgently seek new sources of differentiation to offset the huge pressure on margins. Their search will need to consider their industrial designs, user experience, the richness of available applications and new business models. In short, they’ll need to act more like Apple while staying different from Apple.
• Handset vendors that do not want to be entirely subordinated to Google will have to decide which other OS’ could be their best dual-source alternative.  OS platforms are expensive, and the market will only sustain a few. So, making the right choice is critical.
• Consumer demand will become more volatile. Faced with many similar products based on the same core technologies, fashion and viral enthusiasms will drive volume highs for successful products. Meanwhile, good-but-not-great products will languish. This means that vendors’ manufacturing and supply chains will need to be both lean and agile.

So, Android is setting the pace, and not just with smartphones. Android-based tablets and Sony’s Android TV are already with us. Can anything derail this momentum?

We see two strategic challenges.

Challenge #1: Brand Loyalty

Media and retail vendors are already starting to refer to whole swathes of phones as ”Android phones.”  With this simple explanation to the consumer, the Android brand is placed paramount, subordinating the brand of the handset maker. Google may also try to exert more control over the User Interface (UI) in response to the charge of fragmentation. But handset companies all seek brand loyalty based on a great user experience. They will dislike and resist any moves by the Android team to threaten that brand loyalty.

Challenge #2: Licensing

The second big unknown is how long Google will stay true to the open-source model. If the “Quadroid” model succeeds, many in the investor community will call for the company to monetize its OS dominance through charging for licenses. After all, that’s how Bill Gates became the world’s richest man. The faintest hint of any move towards licensing could cause handset vendors to revolt.

Overall, the changes wrought by Android promise great things for consumers. The momentum will continue, and we will see a myriad of innovative applications designed to run across different mobile and display platforms. Watch this space!

The Android benchmark was led by David van Oss and Huw Andrews at PRTM, a global management consulting firm.