Slashdot Mirror
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!
Cell phones are in the process of crossing the chasm between phones and replacements for your PC. Until this job is complete, margins will be way down.
In three years, I will bet anything that you will be able to connect a bluetooth mouse, keyboard and some sort of monitor to your cell phone (probably via it's charging cradle). For most users, these devices will be powerful enough to toss their PCs for good.
But to get there, the industry is running uphill at a breakneck rate - features and technology are going nutz - it is EXPENSIVE to make this transition.
It is your personal duty to fight for what is right on a daily basis. Ignoring injustice is identical to approving
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.
My thoughts exactly. I did rtfa and I don't buy it. Much like the all-in-one printer/scanner/copier/phone/fax/kitchen sink devices out there, I'd much rather have a few gadgets which do their job excellently than one which does several jobs in a slip-shod manner. I don't like camera phones. They're slow and have horrible resolution. The PDA/phone hybrids are much too large to carry comfortably in my pocket. I'm completely happy with paying $150 for my small cell phone which gives excellent reception in most locations, a couple more hundred for my digital camera, and some more hundreds for my Neuros MP3 player. And, most of my friends feel the same way. Some day when miniaturization and overall quality of such products improves, then I'll reconsider.
I also reply below your current threshold.
Of course cell phones are profitable - if they were not profitable, the cell phone manufacturers would create more profitable products.
And in fact, that's what they do.
Of course, for tax purposes, it is best if they show on the books that they lose money. As we've seen in many industries (manufacturing, healthcare, defense, MLB, etc) it's rather easy to show enough loss to avoid paying taxes. It is fact that corporations (at least in the USA) pay many fewer taxes as they did 5 years ago. The primary reason? Tax avoidance through "magic" accounting techniques.
If there was no money in the business, the shareholders would put a stop to it - after all, most cell phone manufacturers make many other products. But amazingly, looking at the past 5 years, share prices remain fairly stable compared to the overall tech sector.
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!"
Unless, of course, someone like Canon start making those integrated cameras which come with the phones.
It doesn't matter who makes it. There are physical limitations of optics at work here. Correcting for aberrations takes a lot of glass, and glass isn't particularly light. There are currently limitations in the sensors such that larger sensors give better quality than smaller sensors. This will probably always be true to some degree or another (large format film camera give better results than 35mm, but for most of the market, who cares?). Sure, phone cams could potentially someday be enough for a lot of people, but they will NEVER take over the camera market as a whole. Just imagine holding a phone w/ attached 5 pound telephoto lens up to your ear.
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!
Actualy Australia has this really nifty store called Dick Smith Electronics, this store is very cool because they have a mobile phone recycling bin inside. The idea being that customers put their old mobiles in the bin and Dick Smith recycles it and saves the envronment from harmful chemicals. However this bin serves another great purpose, its a constant source of free phones for me! Every time my phone breaks its another trip to Dick Smith for a rummage through the bin. A new battery later and I've got a new phone.
As a side note if you do decide to go through the phone bin make sure you smell the phone you want to take... you would be shocked at how many times the vibrate function is flagrantly abused on old phones.
No I am not joking.
After I posted, I did a quick search on google and found this:
Driving distractions:
Outside person, object or event: 29.4%
Adjusting radio/cassette/CD: 11.4%.
Other occupant: 10.9%.
Moving object in vehicle: 4.3%
Other device/object: 2.9%
Adjusting vehicle controls: 2.8%
Eating and/or drinking: 1.7%
Using/dialing cell phone: 1.5%
Smoking: 0.9 %
Other distractions: 25.6%
Unknown: 8.6%
Source: University of North Carolina Highway Safety Research Center
My memory was a little off about the items (and order on the list).