The next wave of growth in smartphones and tablets will be driven by emerging economies, and that opens the way for a shift in the device makers” balance of power. We have often reflected on the risks for Apple, and the opportunities for Nokia and for a host of tier two vendors. But, while it is hard to imagine Samsung, on current form, failing to ride the wave, the more interesting development will be the rise of a new ecosystem. Like the current market for low end phones, Wi-Fi access points and a host of other non-premium gadgets, this will center on the Taiwanese ODMs and on non-vendor brands, not on the big consumer electronics makers. But it will have two key differences ‘C it will reach right up to the top end of the space, giving retail or operator brands a chance to rise up from the featurephone level; and it will see the manufacturers not just turning out cheap hardware, but investing in the software experience too.
The dawning of this new ecosystem at the higher end of the device market will finally justify Google”s decision to make Android open source, with all the fragmentation and conflicts of interest that has brought. It may, on one hand, want to compete head-on with Apple, with a carefully controlled Android user experience optimized on its own hardware. But in terms of world uptake of its web services, it will profit more from the host of low end and white label device makers, and designers of non-phone gadgets from set-top boxes to car keys, which have adopted Android and extended to a wide array of products. Many of these, treated as niches by Google, will come into their own along with the internet of things.
But while Google”s platform may carry it along without the need for difficult Apple-style decisions about low cost brand extensions, it will certainly not go unchallenged. A new set of players is jostling to grab the helm of the mobile experience ‘C carriers, over-the-top players, retailers and manufacturers all want to be the brand which controls the relationship with the mobile user. Cellcos have long tried to create their own software platform, to emulate Google and provide a strong foundation for their own mobile user experiences. So far, various efforts have failed, but they ‘C along with other elements like ODMs and web providers ‘C will have a new opportunity with the wave of emerging new mobile operating systems. Firefox Mobile, Ubuntu Mobile, Jolla, Baidu OS, Alibaba Amos and others have many things in common ‘C they are slimline, browser-oriented and optimized for entry level smartphones and cloud-connected gadgets. And unlike Google with Android, they are not seeking to win over the major device makers (though some are signing up, at least half-heartedly, possibly as a hedge against Android over-reliance). Their primary strategy is to form close ties with ODMs and carriers, effectively squeezing out the high end device maker and its greedy margins.
This is a model already familiar in the featurephone space and in markets like India, where carriers often brand and customize white label handsets. But developments at Mozilla indicate how that model could reach up to Apple”s territory, as it announced an alliance with giant ODM (and Apple manufacturer) Hon Hai of Taiwan, to add to its various carrier relationships.
The browser organization focused heavily on cellcos to give momentum to its upcoming launch of Firefox Mobile, and announced 18 of them at Mobile World Congress, including premier partner Telefonica, which will launch handsets this summer, running the HTML5-based platform, initially in Brazil, Mexico, Colombia and Venezuela (all high growth mobile economies) as well as Spain. Other backers include America Movil, Deutsche Telekom, Sprint, Telstra, China Unicom, Etisalat, Hutchison 3, KDDI, KT, MegaFon, Qtel, SingTel, Smart, Telecom Italia, Telenor, TMN and VimpelCom.
Mozilla”s aim is to enable operators to go a step beyond the current common practice, in which cellcos create a mobile web experience around a browser optimized for one of their branded, midrange handsets ‘C Opera Mobile has a multitude of alliances of this kind, delivering browser-based services to fairly low end devices with its highly efficient browser; a strategy Nokia has emulated with Asha and its Xpress browser (Nokia”s lower end software platform could be a contender in the new mobile world itself, though the Finnish firm, like Samsung with its Tizen OS, will be unable to resist trying to impose its own brand and experience). By contrast, Mozilla is all about providing an HTML5 framework for partners” experiences.
Its next move seems to be a partnership with Hon Hai/Foxconn, the largest Taiwanese handset ODM, which would see Firefox providing an interface between manufacturer and carriers, potentially leading to an integrated hardware/software platform, optimized like Apple”s, but white label. That would not only improve the economies of scale and drive attractive pricing, but put Hon Hai in more direct control of a platform, rather than primarily making devices to order.
Reports that Hon Hai would come out of the shadows and launch a Firefox product directly – in partnership with Mozilla but targeting carrier or retailer brands – surfaced when the two companies invited journalists to the press launch of a new device on June 3. There are reports that the launch, to be held in Taiwan, will be of a tablet, joining the first Firefox smartphones, unveiled by small Spanish firm Geeksphone last month and aimed at developers. A strategic alliance with Hon Hai could find Mozilla”s manufacturer supporters, such as ZTE and LG, battling for favors, and the carriers taking the deciding role for once.
It is important for a new OS to create new ecosystems and economics, not just new software ‘C as Google did with open source Android. A sector as large and well established as the mobile device space is not easily disrupted, but the shift towards the emerging markets certainly throws up opportunities to look at the value chain in a new way. This will be important for Mozilla to gain scale, but is also significant for Hon Hai and fellow ODMs. With the smartphone market currently concentrated in so few hands, there are fewer and fewer large-scale customers in this sector. Hon Hai has been reported for some time to be trying to diversify away from making devices for Apple. The iPhone maker accounts for 40% of its production, leaving it vulnerable to the much-predicted slowdown in iDevice sales, and to Apple”s own efforts to introduce more competition into its supply chain. Apple is reported to want to divide its favors about equally between Hon Hai and rival Pegatron, which makes some iPhones and the iPad mini, but has taken a junior role so far. Hon Hai has added significant capacity in recent years to service Apple and will need to find alternative uses for that if its iDevice business declines, especially as Pegatron is reported to have won the deal to make a future low cost iPhone.
On May 14, Hon Hai reported first quarter net income of NT$16.35bn, which was well below estimates, on sales of NT$809bn. Macquarie Capital analyst Daniel Chang responded in a research note: ”We continue to believe Hon Hai needs a major restructuring to make it a more efficient company. Apple accounts for 40-50% of sales while Apple is diversifying its high growth products to Pegatron. The rest of Hon Hai’s businesses are all struggling. Hence, we believe Hon Hai will remain challenged to grow its large revenue base.”
So while, in the short term, Hon Hai will be chasing more business from other clients such as Nokia or Sony, the attractions of having greater control over key product lines is clear. It has recently been seen hiring software engineers so it can create or integrate applications and user experiences with the products it manufactures, and it now seems likely that these activities will be centered on Firefox.
The ecosystem shift will be slow to become visible and there will be sectors of every market where nothing substitutes for a ”magic” brand like Apple or Samsung. But a Mozilla/Hon Hai/Telefonica alliance will be just one of many such partnerships, and that is not to mention the activity of retailers like Amazon and Alibaba. A shake-up of the current norms would drive innovation in mobile devices and experiences, and help tomorrow”s consumers break out of the remarkably homogeneous look and feel of the current smartphone/tablet world. As Mozilla CEO Gary Kovacs said at the firm”s MWC event, the mobile landscape is being ”unnaturally controlled by a few parties”, and Telefonica CEO Cesar Alierta joined him, saying: ”Firefox operating system is the answer. Duopolies are not beneficial for any industry.” Qualcomm, for now the exclusive provider of chips for Firefox phones, acknowledged that this could drive a whole new set of relationships. CEO Paul Jacobs commented: ”It’s going to provide a lot of flexibility for the operators. This is going to provide a very, very large ecosystem.”