Software will eat the Smartphone

The last decade has seen incredible developments in the smartphone hardware industry. We have seen smartphone displays reaching levels comparable to your television screens. We have seen camera’s improving from VGA camera’s to 4k cameras. Keypads have moved onto touch screens which are more sensitive than your own skin. Memory has improved by leaps and bounds along with capabilities of processors installed in these devices. We have seen a complete transformation from the briefcase phone to the phones we use today. 

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Easy access to scale at an economical rate is exactly what threatens the smartphone industry. This is a business where the incumbents have differentiated their products largely on their hardware specifications. And due to the same ecosystem they have helped developed and use, everybody else can use it too. Eg if Samsung comes up with a new smartphone with a 5 inc display screen, a 4k camera, 8GB RAM, some Snapdragon chipset, 64 GB memory, this same phone can be replicated and released by other brands. The time-frames can be as low as a week to 15 days. A smartphone manufacturer cannot differentiate their product on hardware alone, anymore.

However, a major reason all this has been possible is not a secret anymore. It’s China, or more specifically, a particular province called Guangdong which is situated in Southern China. This province single-handedly produces 70% of all smartphones sold in the world. There is this corridor between Guangzhou, leading to Shenzhen and spills out from Hong Kong to the rest of the world. It is said that a simple traffic jam here could lead to a global increase smartphone prices. This particular area is filled with factories spewing out not just Smartphones, but tablets, laptops, drones, hoverboards etc. Whatever new electronic device catches the world’s fancy, is being manufactured in these factories. You are a huge corporation with a new product line, a parts manufacturer/seller, a small time entrepreneur with a product idea, this is where you go to make your dreams come true, economically and at scale. And everyone knows this!

In mid 2000’s, smartphone manufacturers like Apple, Samsung or Sony had the scale and the skill to get their products manufactured here. This led to the development and flourishing of a whole manufacturing ecosystem. We have factories sharing production capacity, supplying parts to each other, and working together to produce components or complete products or both. And this ecosystem became very capable of taking on smaller projects, smaller scales and even multiple products being churned out on the same day. It is Disneyland for any Hardware professional or enthusiast. And it is not limited to those who want their prototype to be turned into a mass consumer good. You want the schematics for the latest smartphone in the market. You probably will find it there. You want to understand something specific about a product but a patent won’t give you access to that information, you will find it here.

The first one’s to understand that the Hardware playground is already tapped out were the Chinese brands themselves. A lot of major Chinese smartphone brands bought Android licenses and started creating their own forks. You have Cyanogen, Xiaomi creating their MIUI fork, Meizu with Flyme. All these Android forks have now become a major threat to Android, the open source platform they were built and derived from. A well known but not popular Korean example is Tizen from Samsung along with Amazon’s Fire OS which did not do well either. Software became the differentiator among Chine these smartphone manufacturers. This led to another rather unexpected development in the market. Since software became more and more important and sourcing hardware easier and easier, we had software companies entering the smartphone market. Software is not easy to replicate and takes effort to create, test and deploy in the market. Also software can be updated regularly with new services and features being added to the same smartphone. Thus rather than software development depending on the hardware, hardware is being manufactured according to the software. The most successful example is Xiaomi which was a. e-commerce portal with good software skills.

Along with software being the key differentiator and offering from smartphone brands, it became a source of revenue. OTT services developed into the main revenue generator from an add-on service. And the Chinese have perfected the art so well, that many smartphone models are sold at a price which is lower than what it took to manufacture them. Every brand thus develops an ecosystem around them of content producers and sellers, e-commerce players, app ecosystem etc.

Indian players like Micromax and Intex started out with an existing infrastructure of distributors and re-sellers across India. Cheap hardware was not the winner here either but rather distribution network which helped them take a chunk of the smartphone market in India. The same was replicated though partners in other countries and it was successful. We have Micromax recently taking the 3rd position in the Russia market. Intex already has a huge reach with presence in South Asia, Middle East and Europe. But Indian smartphone players have started taking a beating in their home market from Chinese brands selling at less than cost. Thus further proving the point that hardware is not platform of differentiation for smartphones anymore The situation has now has crossed the debate or margins but how big of a loss can the seller take on their product.

Hardware is easy to get, cheap and accessible for the newest entrant in the market. However software on the other hand takes years of development, a qualified and experienced team of engineers and a legal team to fend off copycats. The times of hardware differentiation seem to be coming to an end.

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