2013 Smartphone Sales Decreased in Japan

MM Research Institute (MMRI) recently published a couple of reports (1), stating that in Japan in 2013, smartphone shipments decreased by 3.7%. This was due to a combination of the following factors;

  1. Total mobile phone shipments decrease by 10.2%.
  2. Smartphone penetration is nearing saturation at roughly 45% of total mobile phone subscriptions.

Smartphone saturation

Observer the following graph from MMRI. This shows the number of subscribers. Blue is for smartphones and pink is for feature phones. The last bar is for Dec. 2013.

You can see how smartphone penetration is saturating. The current smartphone penetration is 44.5% and it looks like it might stop at 50%.

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Additional information from the report;

  1. 52.4% of feature phone owners answered that their next purchase would be a feature phone. Only 34.4% said that their next purchase would be a smartphone.
  2. Reasons for not purchasing a smartphone include a) pricey data plans, b) no need for the additional features, c) difficulty of use.
  3. Smartphone users average 6,826 JPY per month whereas feature phone users average 3,746 JPY per month.

In interpreting this data, you have to understand that Japanese feature phones are pretty capable. They can do email (even email to/from PCs), surf mobile web sites (and there are many of these in Japan), play music, watch TV, take photos, play games and make NFC enabled purchases. You can even use LINE, the explosively popular messaging app although features are limited.

Also, virtually all smartphone data plans in Japan are unlimited data. There are some pay-as-you-go schemes but you quickly reach the ceiling after which your plan actually becomes the same as an unlimited data plan. Pre-paid plans are rare.

On the other hand, feature phone typically do not need data plans to access email or watch TV. A cheap voice plan is sufficient. You can subscribe to a data plan if you want to surf the mobile web or do more complex stuff, but I suspect that most of these users are now using smartphones.

Smartphone sales decline

MMRI data for 2013.

  1. Total mobile phone sales decreased by 10.2%.
  2. Smartphone sales decreased by 3.7%
  3. Apple garnered 32.5% (+9.2 points vs. 2012) mobile phone share, or 43.6% of smartphone share.
  4. Other vendors are Sharp (14.6% share), Sony (12.6% share), Fujitsu (9.7% share), Kyocera (8.8% share), Samsung (5.9% share)
  5. Percent of smartphones sold vs. total mobile was 74.1%.

Combining the subscriber base (44.5% on smartphones) to the annual sales (74.1% smartphones), it is clear that feature phone users are clinging on to their old models. This is probably because R&D on feature phones has ceased and no new features are being added. Additionally, carriers are not promoting feature phones.

Implications for countries outside of Japan

What this data means is that around 50% of Japanese mobile phone subscribers do not need the high-end features of smartphones, and would be satisfied with email and voice. They don’t need Facebook or LINE on their phones (although they could if they paid for a data plan). They just need a convenient way to communicate.

Now assuming that we can apply this 50% number to other countries. Since these countries do not have the feature-rich feature phones that the Japanese have enjoyed for more than a decade, we can assume that low-end Android phones on pre-paid plans are being purchased instead.

What I am trying to say is that although U.S. smartphone penetration is now at 64%, which is significantly higher than the Japanese 44.5%, a large proportion of this number probably includes subscribers on cheap pay-as-you-go or pre-paid plans. These subscribers may be using their smartphones in a manner that is similar to Japanese feature phone users, hence including them in smartphone market share is potentially misleading.

In other words, U.S. smartphone penetration may be significantly higher than Japan but the way that people are using mobile phones in general might be much more similar.

Smartphone penetration is not the right metric

Instead of looking at smartphone penetration, I propose that we should be looking at data consumption. We should be looking at what percentage of the subscribers use their smartphones to use services over the Internet thereby consuming lots of data, and what percentage use it only for voice and simple messaging. Instead of looking at the hardware, we should be looking at how people use them. If data consumption data is hard to obtain, we should be using their data-plan (unlimited, postpaid, prepaid) as a proxy.

Similarly, we should be looking at how many iPhone users consumer lots of data and how many Android users consume lots of data.

In other words, at the low-end, Android is not a smartphone platform. It is a platform upon which vendors build a feature phone.

Notes About Mobile App Ecosystems

Some short notes on how I view the mobile app ecosystem situation.

What business models are working?

There are three business models for earning money on mobile apps.

  1. Prepaid: The user pays upfront for the app.
  2. In-app-purchase: The user pays inside the app for additional features.
  3. Advertising: The advertiser pays for displaying or clicks on an ad shown inside the app.

There has recently been a lot of discussion on the success of the in-app-purchase model, and how the prepaid model is becoming less popular. In contrast, there has not been much discussion on how well the advertising models works.

In AppAnnie’s report, “The Future of Mobile & Portable Gaming” (you need to download the report for free), they clearly show that advertising does not generate much revenue. Prepaid is 44% of revenue while in-app-purchases are 51%. Advertising is only 5% of revenue.

The answer is, prepaid and in-app-purchase are working. Advertising is not.

In which countries are apps generating revenue?

AppAnnie has the answer for Q313.

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What is immediately evident is that in the case of iOS, the rankings for “downloads” and “revenue” are similar. The countries listed are simply the countries with high GDP. This is totally expected.

The rankings for Google Play tell us a very different story. In downloads, the BRIC countries (countries with large, fast-growing economies) are making a strong showing with the exception of China which blocks Google sites. In revenue, the ranking is very different with Japan/South Korea dominating the scene. We also do not see the BRIC countries in revenue rankings.

My reasoning is as follows;

  1. The number of downloads is strongly correlated to the number of devices which are sold in that region. Hence iOS App Store downloads are high in the countries where iOS is popular, which are the countries which have high GDP. On the other hand, due to the availability of low-cost devices, Android is very popular in BRIC countries. Hence Google Play downloads are high in these countries.
  2. To rank high in revenue rankings, a country has to have high GDP-per-capita. This is because there is no such thing as low-end software. Software is the same everywhere and the prices are also the same. Most people in BRIC countries are hesitant to pay the same price as high GDP-per-capita countries for software.

Google Play Revenue Growth May Be Slowing

In mid-2013, I wrote (in Japanese) about the unhealthy dependency of Google Play revenue growth on Asia.

Google Play growth is dependent on APAC whereas iOS App Store is more balanced.

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Google Play is dominated by Japanese/Korean titles

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Google Play APAC revenue is dominated by Japan/Korea

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In fact, Japan revenue is so strong that AppAnnie released a report with the title “Japan Spotlight: Hey Big Spender! Japan Outspends US, Continues Its Meteoric Growth”. In this report, AppAnnie tells us that Japanese Google Play revenues are disproportionately high (twice normal levels in comparison to iOS);

In the last year, Google Play app revenue has caught up with iOS in Japan, compared to the rest of the world where iOS app revenue is well over double that of Google Play on an aggregate basis.

From these data points, I predicted the following;

  1. If DoCoMo started selling the iPhone, then worldwide Google Play revenue would stagnate and maybe even start decreasing.
  2. At the time when the above data points were taken, DoCoMo sold only Android smartphones and no iPhones. Since DoCoMo is Japan’s largest carrier, the vast majority of Android devices in Japan were sold to DoCoMo subscribers. Many of these people actually preferred an iPhone, but were bound to DoCoMo because of the breadth of their network.
  3. If DoCoMo started selling iPhones, it was obvious that the market share of Android in Japan would decrease for 24-months (the duration of a contract).
  4. A decrease in Android market share would mean that Google Play revenue from Japan would stagnate or decrease. Since Japan is Google Play’s largest market by far, this would significantly impact Google Play sales worldwide.

We may be starting to see this happening.

On January 8th, 2014, Distimo released an analysis of December 2013. In that report, they mentioned the following (bold styles added by me);

The month of December, including the holiday business, led to a revenue growth of 18 percent for the combined revenue from the Apple App Store and Google Play compared to November. Relative to July 2013, the combined revenue grew by 38 percent. Looking at the app store level, both graphs show a clearly steeper slope. This increase translates into a growth in revenue of 17 percent for Google Play and an even stronger 18 percent for the Apple App Store from November to December 2013.

Although it is irrational to draw conclusions from a single month’s worth of data, if we see this trend continuing, then yes, we might be seeing the effects of my prediction. Ideally, we would also like to see market growth broken down by country, data which AppAnnie may soon provide.

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Google-Motorola Confusion

I’ve been trying unsuccessfully to find any indication of how the Moto G, the low-cost smartphone from Motorola is selling. I’m interested in how well their strategy, that is selling mid-spec smartphones at low-end prices by foregoing profits, is working. I strongly suspect that it is not, but I need data to verify that.

In the meantime, I found this funny article by Rolfe Winker for the Wall Street Journal. It describes very well the almost comical confusion and utter lack of coherent strategy at Google-Motorola. I’ve quoted some parts of it below.

The price cut on the Moto X extends a strategy laid out by Motorola Chief Executive Dennis Woodside to undercut rivals. Motorola’s lower-end Moto G phone, released in November, starts at $179 without a contract in the U.S., compared with $250 for a comparable Samsung device at Verizon. VZ -0.48%

OK. So the strategy is to undercut rivals on price.

Analysts say that low off-contract pricing is likely to have a bigger impact outside the U.S., where a larger share of smartphone users buy their phones directly, rather than by signing wireless contracts.

Now such a strategy will work best outside of the U.S. It won’t make much difference in the U.S.

The Moto X is sold only in North and South America, and the new lower price is only available in the U.S. for now.

Uh oh. But the lower price is only going to be available for the U.S.

Nice.

P.S.
In the last part of this article, there is a quote from an analyst;

Brand, distribution and product breadth are critical to sales volumes, and here Moto falls desperately behind [Samsung] still.

If this is true and I suspect that it is, we can also expect the sales of the Moto G to also be rather insignificant, adding to the long list of Google branded products that saw major hype, but failed to sell well.

PC and Tablets Sales to U.S. K-12

The Wall Street Journal published an article titled “Chromebooks Take Other Mobile PCs to School” which cited estimates of laptop and tablet sales to U.S. K-12 schools.

This compares to data that was released from the NPD group late last year. The NPD group data was for PC (desktop and laptop) and tablet sales through “U.S. commercial channels” (sales through VAR that are mostly targeted towards education, government and corporations). I have previously commented on the NPD data on this blog (1, 2, 3).

The NPD Group data and following discussions pointed to the following;

  1. Chromebooks are mostly selling to education.
  2. Chromebooks are competing with iPads or expanding the market. They are not taking the market from Windows.
  3. The NPD data is for computers sold to schools through VARs, not to students. The computers are strictly the property of the schools and hence purchase is not an end-user decision. In Steve Jobs’ words, these are sales through “orifices”.

Here I would like to take a look at the FutureSource data that the WSJ cites to better understand the picture.

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The FutureSource data seems to confirm the following;

  1. Chromebooks are indeed selling well to education.
  2. iPads are currently extremely strong in education. Much more so than Windows. It is understandable that the main battleground is iPad vs. Chromebooks and not Windows vs. Chromebooks.

Additionally, it seems that Android tablets are non-existent in schools.

As for the comments in the WSJ article that are in favor of the Chromebooks, they are interestingly from the school IT departments: the “orifices”.

One fan is Kyle Laauser, the information technology director at Saint Joseph Academy,

Explaining the purchase, Mr. Laauser pointed to the devices’ low price, $279 each including a $30 setup fee paid to Google, as well as the ease with which he could set them up for the entire student body.

All in all, the WSJ article seems to be in good agreement with the NPD data and the ensuing discussions.

Why Distribution Channels Matter

Distribution channels matter a lot in selling most kind of products.

This is why Google Nexus products fail to sell well, Samsung is so strong in Android smartphones, and why the Moto G is doomed to failure.

Micheal Fisher wrote a great article a while ago about this.

“Should I Trust My Phone Salesman?”

in the United States, manufacturer brands succeed or fail on the backs of the salespeople. And a salesperson who knows nothing about a platform isn’t going to recommend it.

In the US, at least, a phone lives or dies by the retail staff in the carrier stores. Nothing else matters. Not price. Not features. Not apps. If the retail staff doesn’t like you… you die.

I think people are worried that the iPhone is getting ‘sold against’ in stores – that we’re talking people out of the iPhone. And that is true.

Brands that are Strong in Developing Countries

In some previous posts (1, 2 in Japanese), I argued that it is very unlikely that the low-price Moto G smartphone will succeed in developing countries, despite being priced below $200 and having relatively high specs.

My argument was based on basic marketing principles, the 4Ps of the marketing mix. In essence, successfully selling a product requires the following to be considered;

  1. Product: Does the product satisfy the demands of the customer?
  2. Price: Is the price right?
  3. Promotion: Is promotion sufficient? Are customers aware of the product?
  4. Distribution (Place): Is the product available at convenient locations?

The Moto G has the Product and Price right. Although the price is a little bit on the high end for developing countries, the high specifications should be able to offset that. The problem lies in Promotion and Distribution. My understanding was that the Motorola brand and the distribution channel was weak in developing countries due to historically having put little effort in these regions.

A recent report by Jana (“Watch out Android: Windows Phone could become the world’s 2nd most popular OS”), although focused on Windows phone, also confirms that Motorola’s brand is weak in developing countries.

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With this in mind, I continue to believe that the Moto G will struggle in developing countries.

Some analysts comment that the low price of the Moto G phone, [made possible only by Google’s willingness to forego profit in exchange for unit sales](http://online.wsj.com/news/articles/SB10001424052702303497804579242511374858016), will put pressure on Samsung to lower its margins. I expect that this will not be the case, and the Moto G will be a non-issue.

Interestingly, Nokia continues to be very strong which is a good sign for Windows Phone.

Microsoft’s Record Quarter

Microsoft reported record revenue for 4Q13. Tim Anderson has a good summary on his blog.

The overall trend is;

  1. Sales to corporates is doing very well.
  2. Cloud services are also doing well, although the size is still very small.
  3. Consumer side software is not doing well.
  4. Devices (Xbox and Surface) are growing.

If we look at Microsoft’s traditional strengths which are software for both consumers and corporations, we see that they are going in different directions; consumer software is declining whereas corporate software sales are strong. Corporate software sales are their largest segment, so its a good thing that that is growing.

Many people would say that their weakening consumer sales are a cause for concern and that eventually corporate sales will also start to fall. However, evidence for this is weak. With the limited information that we have, especially about the corporate market and how this will evolve, I don’t think we can reasonably know what will happen to Microsoft in the future.

I would like to take a bit of time to summarize how Microsoft came to be this strong in corporates, and gain some perspective as to how things might pan out.

Microsoft serially disrupted corporate IT

Microsoft can best be seen as a serial disruptor. In many times of their history, you can see how they created a simpler software product that ran on low-end hardware. This enabled them to enter an existing market from the low-end, and from there, Microsoft relentlessly improved their product to eventually capture the high-end.

  1. BASIC: The BASIC interpreter was what got Microsoft started. It was a low-end derivative of FORTRAN that ran on the emerging personal computers of that time. As Windows became prevalent in PCs, BASIC evolved to become Virtual Basic, an easy-to-learn programming language, which was used even by non-professional programmers to create simple corporate IT solutions.
  2. MS-DOS: Because IBM did not initially consider personal computers to be very important, the IBM-PC used off-the-shelf components and out-sourced its operating system to Microsoft. MS-DOS itself was a low-end operating system. It was initially based on QDOS, the “Quick and Dirty Operating System” written by Tim Paterson. Microsoft improved MS-DOS so that although it was still very simple compared to sophisticated UNIX operating systems, it was good enough for the personal computers of that time. Eventually Microsoft create Windows which evolved to gain multi-processing and memory management, and this enabled Windows to even move up-market to snatch away the workstation market and the server market from UNIX.
  3. Server Products: At the time Microsoft introduced server products, their main competitor was UNIX. UNIX was difficult to administer and required familiarity with the command line. Windows server products could be managed from the GUI and were much simpler. Hence people with basic training could now administer servers for which there was huge demand due to the exploding popularity of the Internet.

Because of this history or starting out at the low-end and then moving up-market, Microsoft has managed to capture multiple key footholds in the corporate IT value chain.

Corporate IT software takes a long time to switch platforms

Corporate software solutions can live for a very long time. Consider how long COBOL systems are still being used.

The rapid take-up of Windows was not because Windows replaced legacy systems. It was because there was a sudden need to put computers on the desks of every office worker and to provide email and Intranet services. Windows was competing with non-consumption.

Now that Windows is so dominant in the workplace, there is little possibility of any non-consumption remaining. The only other way an entrant could penetrate corporate IT is to attack from the low-end hoping that Microsoft would retreat up-market. This cannot succeed primarily because corporations are generally reluctant to switch their current platforms, and secondly because Microsoft’s culture is to defend the low-end.

Summary

Even though mobile platforms are gaining in popularity, I see little reason to predict that this will encourage corporate IT to change their platforms. The more likely scenario is the inverse; that mobile platforms will have to adapt to the requirements of legacy corporate IT solutions.

If so, the end result is that corporate IT will have to support more devices, not less. This would mean more servers, more licenses, more corporate IT solutions. Microsoft’s record quarter is no fluke. I expect them to continue to have strong corporate revenue.

Of course Microsoft would like to own the mobile market as well so that they could provide and end-to-end solution. However, they would still remain in a strong position even if they couldn’t.