Even though it happened about four and a half years ago, I remember it like it was yesterday. It was the most depressing CTIA show I ever attended, March 2007 in Orlando Florida, and it definitely wasn’t the Happiest Place on Earth.
The problem was that cellular operators worldwide were seeing voice revenues start to decline, so they have spent billions of dollars deploying this thing called 3G. This was to be their savior, but their customers just weren’t biting. Everyone at the show put on a happy face, but you could feel the tension and despair.
Fast-forward six months and Apple announces their attempt at creating a smartphone, a device called the iPhone. Most reviews of the iPhone at the time were quite negative, saying that a phone without a physical keyboard wouldn’t likely succeed, and because you were locked-in to using the built-in applications, and couldn’t add other applications yourself, the phone was just too limiting. It will never fly.
In 2008, Apple introduced the App. Store and solved that small third-party application problem, and the rest is history. Verizon and AT&T both report that over 70% of new phone purchases now are smartphones. They are everywhere, and it’s hard to escape the sounds of pigs exploding in Angry Birds. They are just everywhere, iPhones, and Android and BlackBerrys and Windows Phone, smartphones are everywhere, right? Actually they aren’t.
There are almost 6 billion cellular phone connections in the world, but smartphones only make up about 11% of all these connections. If you exclude North America, Western Europe, Japan and South Korea from these numbers, the smartphone rate plummets. The reason is quite simple, the cost of a smartphone in these regions is well beyond the reach of those living there. For example, the Beijing Municipal Bureau of statistics reports that in 2010, the average income for those in Beijing in 2010 was about $7800 per year, and in rural areas of China, the average yearly income was $950 dollars.
In India, less than 6% of new mobile phones are smartphones. In a country of over a billion people, less than 2.5 million smartphones were shipped in Q2 2011. In Africa, a continent of another billion people, just a few million smartphones will ship for the entire year, and most of those will be BlackBerrys in South Africa.
There is no question that the market for low-cost smartphones is huge, and companies like Huawei and ZTE in China, and Spice Mobility in India have stepped up to the plate to create smartphones to fill the low-cost void. These smartphones run Android 2.x and typically have most of the same features as their high-priced cousins, including Wi-Fi, a camera and sometimes two, a touchscreen, Bluetooth, GPS, and in most cases 3G, all for under $150, and sometimes much less than that.
American pre-paid operators Leap and MetroPCS are getting into the act as well, since the smartphones they carry, even though they are pre-paid, have to be partially subsidized by these operators to make their smartphones affordable by their customers. Not to be outdone, in September AT&T added the Huawei produced Impulse to its post-paid lineup, and started selling it for $30 with a 2-year contract. Like pre-paid operators, post-paid operators also want to greatly reduce their subsidy costs, which have been dragging down profits.
I believe that these low-cost smartphones could have a large impact on pieces of the smartphone ecosystem. First, low-cost smartphone manufacturers, like ZTE and Huawei, will likely gain prominence and grow from small player to major smartphone manufacturers. This has already occurred in the cellular infrastructure business, and I think it will happen in smartphones as well.
Second, low-cost smartphones will allow hundreds of millions of people to upgrade from a basic feature phone to a smartphone. While many of these people may only access the Internet through Wi-Fi and not 3G, it still is the Internet, never-the-less, and this access is likely to bring profound changes to how these people view the world.
Third, low-cost smartphones will save wireless operators money if these operators subsidize their customer’s smartphones, and hopefully, this will allow them to pass on their savings in the way of cheaper service charges. This is important because current service prices in many countries like the US is much too high and must come down.
This year, low-cost smartphones will only amount to 5% of all the smartphones shipped worldwide, but by 2015, In-Stat forecasts that 339 million low-cost smartphones will ship to places like India, China, Africa, and the US.
In less than 10 years, smartphones have so permeated the developed world that most of us can hardly remember a time when we didn’t have them. While these markets are now reaching saturation, we need to turn our attention to the rest of the world for much of the future smartphone growth, and low-cost smartphones are the tools that will allow this transformation to occur.
About Allen Nogee
Mr. Nogee is a Principal Analyst for the Wireless Component Technology Service and is responsible for identifying and tracking hardware and semiconductor content in wireless communications equipment and forecasting future demand. Nogee has more than 20 years of experience in the electronics industry in hardware and software development. Before joining In-Stat, he was a Product Development Manager at Syntellect, Inc. and has held design-engineering positions at MCI, GTE, and GE. He holds a BET in Electrical Engineering from Rochester Institute of Technology and a MBA from Arizona State University.
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