The mobile and the PC market – an exploration in value

I was struck earlier on this week by apparent structural similarities between the market for smartphone devices and the historic market for PCs. If we think about the PC market, there were two main drivers (who also took the bulk of the hardware-related revenues): Intel who provided the microprocessor and Microsoft who provided the operating system.

In the smartphone arena if the market figures are to be believed it is ARM who provides the microprocessor core design and Google who provides Android. This means that Google and ARM will have tremendous market power, it also means that the margins will be hammered out of the handset business. There will be a race to the bottom on price as the Android eco-system is commoditised.

Think about the way that IBM got outpriced by the likes of Compaq, Dell and Acer in the PC market (only this time the disruptor is called Micromax Mobile). Some will try hard to survive and an expensive niche (think Sony Viao) a la Sony Ericsson and probably Motorola.  In a race to the bottom handset innovation and product design is likely to suffer.

Apple will be able to take advantage of the cheap hardware and keep the margins on its handsets high, as at the present time it doesn’t need to keep its absolute market share high – pretty much the same way it does with the current Macintosh range. Keeping the pressure up instead with product design and software derived differentiation. If Intel and Nokia wins out over ARM, Apple could just as easily move processor architecture as OSX has underpinnings that can be moved relatively easily between processors.

The commoditisation of handsets at China Mobile gives handset manufacturers a rough idea of what to expect. The power relationship between carrier and handset manufacturer will be with the carrier again. A commoditised handset product means less differentiation between carriers, so customers are more likely to be focused on the price of their plans rather than hooked on an upgrade path.

This means that things aren’t going all the right way for the carrier who are likely to have to contend with the information security risks of a homogenous computing eco-system with poorly patched security on the handsets. Remember the ILOVEYOU worm that spread throughout the internet in 2000? Now imagine a similar scenario on mobile phones and tablets. Mobile phones are more vulnerable from a social engineering point-of-view and the incentive is even greater when phones are integrated completely into payment systems.

Things won’t be optimal for Google either. Handset manufacturers will get creative in finding ways to get revenue out of their handsets (think preloaded toolbars, demo applications and other bloatware on PCs), breaking the connection between Android and Google services would be an obvious option. It has already happened to some Android handsets on Verizon having Bing search as default. I imagine that Baidu and Yahoo! Japan are likely to attempt similar deals. There is also likely to be a further fragmentation of application stores for pretty much the same reason.

Whilst all these services are likely to bring a massive democratisation of the smartphone it isn’t going to be necessarily reflected in usage patterns. Whilst we all get excited about technology, many of the services won’t be relevant to many customers. Many will be happy to get by with voice and text messages. People like my Mum and Dad for instance. The kind of people that read the Daily Mail and have an irrational fear of phone bills.