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Cell Phones Becoming Profitless
saccade.com writes "EE Times has a fascinating article
on how electronics companies are being sucked into a profitless
spiral by the cell phone market. More and more of the small consumer
gadgets are being folded into the phone: camera, music player,
PDA, GPS, etc. So the market for non-phone gadgets is slowly
going away as the phone picks up more functions. However, consumers
don't buy most phones; they are given away (or sold very cheap)
by the service providers as hooks to get people to sign up for
mobile service. So the service providers are demanding (and getting)
rock-bottom prices for fancy phones they can give away, and the
micro chip companies are forced into brutal competition for a
market that is shrinking into a single commodity gadget, the
phone."
In the article, it was suggested that disk-based media players like the iPod aren't immediately threatened by this "death spiral" (unlike flash-based players which could rapidly become toast as phones eclipse their abilities) and that got me thinking about the root problem of customer expectations. The cell phone companies clearly blew an opportunity when they initially treated the hardware as a loss leader. It's hard to get that genie back in the bottle. People today will pay for a crap flash MP3 player or low-to-medium-end digital camera, but balk at paying a premium for a mobile phone with loads of features.
Perhaps a marketer like Apple can break through with an enhanced phone product that will create a demand that outweighs the current expectation on the part of consumers that phone hardware is free (as in beer) or nearly free. This is right up Apple's alley.
The Motorola deal may be a trial balloon for Apple. Imagine the full capacity and function of the mini iPod married to a full-featured phone. Add to this the stylish design that Apple would strive to achieve and I think you have something that can break this "death spiral."
"...all the labours of the ages, all the devotion, all the inspiration, all the noonday brightness..." yada yada
A PDA on my phone just makes my phone bigger/bulkier..no thanks.
I can fit my phone in my pocket, I dont want to have a huge slab of metal in my pocket, just a small thing that is portable and unobtrusive.
If I wantd a PDA I would have bought one..same w/ digicam and music player.
Anyway integrated devices are usually inferior to their standalone counterparts.
Who's with me? Keep those devices separate!
Remember when you had to BUY a sound card for your PC? What about paying $200 for modem card? NIC? Video card. Now you get the kitchen sink on most motherboards. And the components are pretty decent.
This seems to be par for the course. If the process can be put on a chip then function consolidation will surely follow.It's not that the market is "shrinking", it's that the low end devices that aren't very good and only sold because of their price can be easily replaced. It will be at least a few years before people's cellphones replace their digital cameras on vacations or give up their iPod minis.
And note that no one is claiming that the GBA is going to die because of cell phones. They may have games and such, but the GBA is a whole other calibar. Well made devices have nothing to fear. The portable games that are going to suffer are the little Tiger handhelds and such.
Consumers, by and large, only stand to gain from this. Survival of the fittest garuntees that most of these devices will be around for a while, and the substandard stuff will fall off the market. Which consumers lose?
And to those of you that say "I just want a phone that's a phone, dang it", we're in the gadget phase right now. It's all new. Wow, I can get a cell phone that can do THAT? As novelty wares off and people see that the extra features aren't that great by and large, you'll start to see simpler phones. Just because I might be able to get phone/camera/MP3 player/PDA/etc for free with my contract doesn't mean I want the thing around. Bulk and interface often suffer. The "cell-phone-only" will come.
Comment forecast: Bits of genius surrounded by a sea of mediocrity.
Remember that one? When everyone would use e-mail exclusively (since it was FREE!) and the post office, fedex, and ups would be out of business in 5 years. I don't have stats to back it up, but I suspect the Internet has actually helped the postal industry a ton. Okay, maybe people write and send fewer snail letters, but mail-order shopping and e-bay resulting shipments (more shipping $$$) have gone through the roof!
I can't predict how the gadget consolidation will play out, but I suspect there will be wonderful surprises in store down the road. Shouldn't all of these portable technical gadgets glob into one utility-pod anyways? Why should I be forced to fumble with seperate gadgets? What if they could get to a point where they build stackable phones with interchangeable camera modules, MP3 modules, holo-projection modules, etc... You could click 3-6 of these lego-like bricks togeather and have your own custom utility-pod that best suits YOUR needs.
Besides, once they get all the gadgets figured out and have nothing left to worry about, maybe they can finally provide unbroken signal coverage between my house and my office: A 15 mile commute in a frickin Atlanta suburb with a county population of 2.4 MILLION people. Incompetant bastards.
This one gang kept wanting me to join cause I'm pretty good with a bo staff.
The cell phone companies clearly blew an opportunity when they initially treated the hardware as a loss leader.
An opportunity for what? Remember, it is the service providers that treat phones as loss leaders. They do it to ensure customer lock-in. If phone are sold instead of given away, the profit will go to the retailers. The service providers still won't make money on phones and their customers won't be willing to sign up for a 2 year contract.
The current situation is bad for manufacturers because bargaining power is concentrated in a handful of service providers. If they sold to consumers, there would be more room for product differentiation, marketing, and profit.
. . unless the phone manufacturers allow themselves to be shot in the proverbial foot by the major telcos by crippling the functionality of their devices with draconian DRM restrictions.
You better believe that ALL of the telcos are very keen to make you pay for every music file you load onto your phone, regardless of whether you already legally own the song on a CD or not.
You can see the marketing opportunities now, can't you? Just wait and you will see them advertising this "great new service" to their long suffering customer base.
"Dial 013013 followed by your selected song number from our extensive* catalog and your song will be delivered to your phone instantly!" (and billed to your phone account accordingly of course)
New phone? Well just dial 013013 again to re-order! It's that easy, and you'd better believe it baby!
From the perspective of your major Telco, there is no money in it for them when their customers can transfer mp3s from their PC's to their phones, and seeing that the phone manufacturers sell their phones to the Telco's (and not end users) the Telco's have significantly more control over the functionality (and therefore dysfunctionality) of phone devices than Microsoft will ever have in the PC world.
"You can't fight in here, this is the war room!"
I got a job at Nextel right out of the Air Force, and enjoyed learning the technology. Nextel had a great niche with the wireless 2-way, and a lead on the competition. However, I worked for an overbearing boss and they didn't do diddly squat for training.
Sprint PCS wooed me away with training. I finished my MBA while working at Sprint, and they started sending me to classes. I learned all about wireless, packet data, network admin, etc. But the more I looked into the business itself, the more strongly I believed there is no way they couldn't fall into becoming a commodity. For the uninitiated, a commodity means consumers really don't recognize a brand as distinguishing. Walk down a toothpaste aisle, and you'll see a market kicking and screaming to NOT become a commodity (when after all, it's all just PASTE).
The words were there and the media hype came out in droves during 2.5 G (circuit switched data, 56k max) and 3 G (packet data, games, cameras, etc). However, I knew from my days at Nextel, that consumers were fickle and really just looked at the bottom line. I had a VP at Nextel explain it this way, 80% of the market are consumers, yet they're 20% of the revenue. If you hike the price they jump to a competitor. The business niche will not jump because of the costs of switching, plus they're 80% of the revenue.
If you look at Revenue per User (RPU), Nextel has been leading every year, without exception, since wireless started taking off. So what does that leave the competition with? Consumers who drive up costs by: Switching, calling customer service, wanting new phones, etc etc.. My source of prices are quite old, but I'll approximate the costs from the late 90s. The cell phone cost the original manufacturer about $800 to build (R&D, manufacturing, etc). The sell it to the carriers for about $500. The carrier in turn sells it to you for $250. So the carrier and manufacturer are banking $550 of goodwill.
From the consumer's standpoint, they really don't care who their service provider is. They just want to dial 7/9/10 digits (don't dial 1, the switch just strips it off...dial using 7 or 9 digits) and hear a human voice at the other end. More importantly, they want the call to stay up. So the phone doesn't matter, nor the service. This is a receipe for a commodity. Now factor in there are 5 or 6 players in the market. Each has identical networks that costs billions to manage. Imagine if you had 5 runs of twisted pair, from 5 local telephone companies, running into your house. One will make money, while the other 4 lie dormant. It's not a straight analogy, but my point is that the market can't bear these many providers.
This is why you saw the mergers around 1999/2000. I really think we need one or two more for efficiency reasons. However, even with a merger, it's still becoming a commodity with intense pressure to keep costs down. In my opinion, wireless is heading down the dead end which the wirelines are already going down....
[/police]
On the whole, this trend is a GOOD thing. Consider:
;)
First of all, the ultimate result of this process is going to be a device about the size of a current PDA that is simultaneously a cell phone, music player, camera, and hyper-powerful PDA. It'll do just about everything and it'll run on whiskey (remember those fuel cells?). That's almost as good as magic, folks. And I can thank my phone company for being ruthless and forcing the cell phone suppliers to drop their skirts and spread their legs. It's about TIME the phone company did something for me.
Second, the people who are taking it in the shorts are a bunch of suits who don't care one little iota about me. You can't claim this is going to hurt my fellow programmers; the suits already outsourced us. You can't claim it's going to hurt secretaries or clerks, because they'll find plenty of work elsewhere. The ONLY people getting hurt here are the suits -- the managers in charge who can't make their companies profitable under the phone companies' terms. So who cares if they stay rich? Who cares if their profits drop? Who cares if they live or die?
All this means to me is, a bunch of rich, arrogant SOBs who never did anything for me are going to take it right in the shorts while I watch and revel in the action. And, I get a new, fancy cell phone in a couple of years that does everything but get naked for me.
Sounds like a winner! Hoist a pint, boys!
Farewell! It's been a fine buncha years!
I carry both a PDA and a Cell Phone. While combining them might mean I have to carry less junk in my pockets, I'd rather have them as seperate devices. They are different devices and have mutually incompatible design constraints.
A phone should be as small and light as possible while still being ergonomically suited to it's intended use. It can get by with a minimalistic display -- enough for maybe two or three lines of text, tops. All of it's battery power should go to driving the signal -- it shouldn't have any parasitic crap which reduces it's talk and standby time.
A PDA on the other hand should be big enough to fit comfortably in the palm of your hand and have a display big enough to show a paragraph of text in a non-eyestrain-causing font. It should give you a writing/drawing surface roughly equivilent to a post-it note. And it should have a battery life measured in weeks, not hours. A few extra bells and whistles (like games, MP3s, and email) might be nice as long as they don't detract from the primary purpose of keeping all the information I need organized and handy, and reminding me when I need to go to a meeting.
The problem with the combination devices is that if it's small enough to make a good phone, it's too small to make a good PDA; and if it's big enough to make a good PDA it's too clunky to make a practical phone.
Why is it that the proponents of "one nation under God" are so eager to get rid of "liberty and justice for all"?