The quarterly results season began in traditional style last week, in the handset space at least, with strong preliminary figures from Samsung and terrible ones from HTC. By 2014, however, the pattern could have changed considerably, considering the round of M&A that is currently shaking up the smartphone market.
By Q314, Apple may finally have come up with a new idea as CEO Tim Cook hires new blood to help restore the firm’s old magic (see separate item). Nokia’s device business will have had a couple of quarters under Microsoft’s wing, and if the Windows giant has any sense, it will have integrated the main product lines and rolled out a broad device line under the Surface brand, ranging from cloudbook to handset and tapping heavily into Nokia strengths such as imaging. If the company has also followed its old ‘third times a charm’ policy and fixed Windows 8’s problems, while converging Windows Phone and Windows RT, and integrating more Xbox functionality and user experience, it could even have a hit on its hands.
By then, Google and Amazon should also have expanded their hardware ranges at the top and bottom ends. Currently, Amazon is weak in product breadth, though it scores on its uniform user experience and brand. It is rumored to be working with HTC to fill the handset gap (see separate item) and certainly has the edge in ability to monetize, via its various stores and payment mechanisms.
By contrast, Google has almost too many hardware offerings, especially for a firm which really should stick to web platforms rather than trying to be a poor man’s Apple with a hardware/software effort. However, that’s the way it has decided to go, but by Q314 it badly needs to have worked out ‘ and communicated ‘ exactly how it aims to harness its Motorola assets, and how that company’s products and brand will coexist with Nexus. And like Microsoft, it will have had one or two operating system refreshes, and will have made some important decisions about a user experience which is more consistent, and better adapted to the rise of cloud-based usage.
Of course, BlackBerry will have disappeared, though sadly the impact of that on the overall smartphone landscape will be trivial in sales terms. The same may well go for HTC, which has been linked to various suitors. Some of the likely M&A activity of the coming months will be driven by the expansion plans of the more international Chinese players ‘ Huawei, ZTE and Lenovo. The last of these, in particular, is being linked to bids for a whole range of firms whose hardware businesses are floundering, but which could help it expand its non-PC activities. IBM, the original owner of that PC business, could sell its server business to Lenovo in order to focus entirely on services, say some reports. More likely, perhaps, is a mobile-focused purchase as Lenovo looks to replicate its smartphone success in China in other markets. Last week, HTC was in the frame, and a few days later, old BlackBerry speculation has resurfaced.
Various Asian reports have indicated that Lenovo, which is building up its mobile business rapidly, is interested in acquiring HTC, and that talks have been ongoing since August. HTC claims publicly that it is not interested in selling itself, but if its decline in revenues, profits and market share continues, as well as its recent exodus of key executives, it may think again if the price is right.
HTC would bring Lenovo strong mobile design capabilities ‘ the Chinese firm has broken into the top three in its homeland but is a minor brand in more established smartphone markets despite its PC success. In return, HTC would gain far broader distribution capabilities and a parent with an ongoing business that can fund mobile expansion, something the Taiwanese firm lacks with its reliance entirely on mobile gadgets.
Similar pros and cons would go for BlackBerry, though the Canadian firm has recently had far weaker product impact than HTC, partly because it has stuck to its own software platform rather than embracing Android. For most potential acquirers, its back end enterprise platforms would be a bigger attraction, but The Wall Street Journal believes Lenovo may still see value in the smarpthone technologies and brand, and particularly the relationships it still has with carriers and enterprises worldwide ‘ a significant weakness for the Chinese company.
Lenovo is said to have signed a non-disclosure agreement to look at BlackBerry’s books. Back in March, Lenovo CEO Yang Yuanqing said he could be open to a BlackBerry deal, but like others, may have waited for the near-inevitable fall in the firm’s value. This week, CFO Wong Wai Ming cautioned that Lenovo would only make deals at the right price. ‘We will not buy for the sake of buying,’ he said. ‘Even when an opportunity, on the face of it, makes perfect sense for us to do it, it may not happen.’
However, HTC might be an easier choice in regulatory terms – tensions between China and Taiwan have been easing, in the telecoms space at least, and many companies, such as Hon Hai, cross the border, while Canadian regulatory attitudes to Chinese suppliers have hardened in line with those of the US.
Amid all this change, one firm which has completed its change of ownership and has communicated a clear and focused mobile strategy is ‘ against the odds ‘ Sony. The Japanese giant put mobile devices at the center of its turnaround plan when it bought out former partner Ericsson, and has unleashed several well-received products in its Xperia range. However, while its strategy may be less confused than those of most other majors, it is taking significant risks of its own ‘ notably by defocusing on the world’s two largest smartphone markets, the US and China.
CEO Kazuo Hirai told reporters last week that Sony aims to become the world’s third biggest smartphone provider. But he believes this will be possible without significant activity in the US or China. While other markets may easier to penetrate ‘given the strength of Apple in the US, local vendors in China, and Samsung in both ‘ the arithmetic does not really make sense if Sony really thinks it can move convincingly ahead of LG, while fending off Huawei, ZTE and Google/Motorola.
Hirai said: ‘It’s not realistic to try to do everything at once. In the US we’ll start gradually.’ The company will look for most of its mobile growth in 2013-2014 from its home market, where its old homegrown competitors are falling away, and from Europe, where it has always had strong recognition thanks to its roots in the Ericsson handset business. Sony bought out its Swedish partner last year and has been consolidating its various device brands more effectively to create a broad multiscreen platform, also tapping into its TV and content resources.
Europe and Japan currently account for 60% of the company’s smartphone sales and Hirai believes it can build on its position there, rather than spreading resources too thinly by taking on the big two in their strongholds. ‘Those two are the most important areas for us and we’ll put substantial resources there. But not yet for the US and China,’ he said. But of course, by leaving the largest territories until a future date, Sony risks being sidelined, and missing out on the huge growth that is still expected in China, which is very much at the start of its 3G/4G curve.
Sony’s recent Xperia models, especially the Z and Z1, have attracted good reviews and have been heavily marketed in its selected markets. However, the Xperia Z was only launched in the US via T-Mobile and the Z1 does not yet have a carrier there. Sony, like Nokia, always struggled to make an impact in the US, even after replacing Symbian with Android.
In Q213, Sony announced a return to profit and the Mobile Communications unit enjoyed a 30% year-on-year leap in smartphone shipments.
Sony is not in the top five smartphone brands in the US or China, according to research from IDC, and the firm commanded only 2.2% of the global smartphone market in the second quarter, according to Gartner, falling behind LG and Lenovo. Sony is targeting 42m smartphone sales in its fiscal year to April 1 2014, which would be a 27% increase on fiscal 2013’s figure of 33m.
By staying out of the US and China, Sony will minimize the risk of going head-to-head with Motorola, perhaps its most comparable rival, and one which also pulled back to its regional comfort zones a few years ago. Although that may change under Google, the US is its primary focus, though its traditional bases in China have been eroded by competition from local vendors and Samsung. However, Motorola has very different decisions ahead of it than any other rivals because of its parentage. Google is still strengthening Nexus, but has not included its own subsidiary in that effort, perhaps to reassure key partners like Samsung. That leaves Motorola’s own brands in limbo, without the full benefit of the Google marketing machine, and that is showing in the results. At some point, the search giant needs to decide whether Motorola needs to be a full contributor to its profits, and make more serious efforts to turn it around as an autonomous business; or whether it will fold it into its broader Android, Nexus and Google Play efforts, mainly using it as an R&D and innovation center.
As a business, Motorola is not working out yet. Its third quarter losses have widened ‘ like HTC, it managed to launch a high impact smartphone, the Moto X, restoring confidence in its design capabilities, but a good flagship device is not enough to dent the Android dominance of Samsung, as BlackBerry well knows. Motorola Mobility posted a Q3 operating loss of $248m, up from last year’s figure of $192m, though better than the Q213 loss of $342m. Revenue fell by 33% year-on-year to $1.18bn.
While Google’s overall results were strong, investors will not welcome a continuing drag on its profits from its ill-considered leap into hardware, unless they can see a clear strategy. For now, Motorola remains over-reliant on Verizon ‘ it is now the exclusive provider of the carrier’s Droid-branded smartphones, and released attractive new models this quarter, but acting like a cellco’s inhouse device house has no part in the Google strategy of getting not just Android, but its own user experience, services and Play store, out to the whole world.
That is achieved far more effectively by maintaining strong ties with firms like Samsung which can really move the market, and encouraging them to support the Google Android UE rather than their own. Of course, universality is a forlorn hope now ‘ Samsung and others seek differentiation through their own interfaces and content, and the Korean giant is investing heavily in software and in web start-ups. However, it also sells devices running Google’s UE, and branded that way, as does HTC ‘ giving the search leader the hope that, if users prefer that option, it will start to convince the world that its own implementation of Android is the superior one.
That will be an important objective for the next release of the OS, 4.4 or KitKat, which Google says will ‘make an amazing Android experience available for everybody’, implying it will focus more directly on a common and consistent user experience. Google says that is necessary for quality control and to avoid fragmentation, though of course its own interpretation of its OS comes with its revenue generating services deeply embedded.
It is certain that KitKat will be an important indicator of Google’s future strategy ‘ and so may offer some clues about hardware and Motorola too. It is the first major named release since Jelly Bean in mid-2012, though there have been two smaller updates (4.2 and 4.3) since. And it is expected to come with Google’s boldest attempt since the controversial release of the Honeycomb tablet version to reassert control of the Android look and feel ‘ the rumored Google Experience Launcher . This would be a skin, or a launcher for Google apps and widgets. It would integrate Google features like Search and Google Now so they would be hard to escape, say sources, and would also control app folders and homescreens. It would effectively provide a front end UI for all Google Play services on Android, and an integrated platform that would be far harder for OEMs to modify or work around, without limiting customers’ ability to access key Play applications.
In such an environment, where Google ties all the elements of its user experience together tightly in the same way as Amazon, Apple and Microsoft, some of Android’s free-for-all nature would be lost (though of course the OS itself remains open source). Like Microsoft, Google would then have the challenge of converting partners to its platform, at the same time as winning over consumers, and of deciding how to balance that broad reach with ownership of its own device maker. How the two giants solve that riddle will be even more important than the current M&A swirl in redefining the smartphone landscape over the coming year.