Introducing the Cliff Theory: How Handset Makers Die
4/3/2012 by: Tomi Ahonen
I think it's time to coin a new term for the smartphones and in fact all mobile phone 'handsets' industry about the biggest danger in this industry? The Cliff. The sudden comprehensive collapse of the business. Why does this happen in mobile and at rates - the speed in terms of timing of the collapse - never seen in any other industry.
A few case studies first. First, go to all phones, and ten years back. For the end of 2001, Siemens had 7% market share in mobile phone handsets. They had held a reasonably steady top 5 position for many years. It's a bit like LG has been recently. What happened? They suddenly fell off a cliff. By 2003 their market share was half, and two years later, half again, and they quit the business (the Siemens handset business was sold to BenQ of Taiwan).
Our second example is Motorola. Moto had held a steady 2nd place market share in handsets for 8 years since Nokia took their number 1 position, and Motorola's market share had been very steady, modest fluctuation only, between 15% and 20% over that 8 year period. In 2007 - they fell off a cliff. During 2006 Motorola's market share of all phones sold was 20% (similar to Samsung today). Then in just 18 months, it had fallen in half, and in another 18 months, by half again. By 2009 Motorola's global handset market share was down to 4%. They went bankrupt, were split up as a company and the handset business was recently sold to Google.
What about smartphones? Palm had held a strong second place market share behind Nokia, rather steady, at modest fluctuation only, at about 8% to 11% over many years, and had 9% market share globally of smartphones for 2006. (This would be like say HTC has been recently in smartphones). Then Palm fell off a cliff. In one year their market share fell in half to 4% and just a year later, they had lost another half by 2008 and then limped along bleeding customers and making huge losses, until they were sold to Hewlett-Packard.
For operating system i.e. platform example, let's take Windows Mobile. Microsoft's smartphone OS has been around for a decade and it had steady growth until 2007 when it reached 12% market share of smartphones and held that till 2008. Microsoft's OS had briefly taken over the second place ranking behind Nokia's Symbian, after Palm's second place and before Blackberry replaced it as second biggest OS. Then from 2008, Windows Mobile fell off a cliff. In 18 months their market share fell by half to 6% and in another 18 months, fell by another half. With the arrival of Windows Phone 7, it was Microsoft themselves killing Windows Mobile 6.x which in 2011 managed only a 1% market share. Currently, Microsoft is trying to replace it with Windows Phone 7 which had amassed a magnificently unimpressive 1% market share for itself globally for the first full year it was sold, when we remove the other Microsoft Windows Mobile smartphones, in 2011. The combined Microsoft smartphone operating systems market shares, together, for last year, was under 2%. As a side note, Microsoft earns more from royalty rights on Android phones than their whole Windows Mobile division.
I like to find patterns and I think we have one here. The historical performance of a given mobile phone handset or operating system seems to have exceptionally poor predictive power to this phenomenon I now have christened 'The Cliff'. Powerful, global Top 5 size powers in handsets, often for very long in tech, more than a decade often, have held steady shares (Siemens, Motorola, Palm) - or even they might see steady growth year after year - even be the second biggest player in this industry (Motorola, Palm, Windows Mobile) - but if they hit 'The Cliff' they can die in unprecedented speed. Let me show you this graph to give a graphical view of what it looks like. This is a kind of amalgam of the cases we've had, to illustrate the theory, but it is not the mathematical average.
Understand this doesn't happen in other industries, certainly not this fast. In cars, home electronics, even personal computers, the growth is steady and long-term, and the decay and decline for some past glorious brands, is also relatively long-term. The bestselling car makers worldwide 50 years ago included Ford, GM, Volkswagen, Toyota, etc. Yes, manufacturers die, like American Motors, but globally, even less-desirable brands manage to hang around for a very long time. How many of the 10 bestselling cars of the 1970s vanished? I don't mean that a car brand has quit some single car market like say French carmakers Peugeot and Renault left the US market (many US readers might be surprised to find out that Renault and PSA Group (Peugeot, Citroen) are both still giant car manufacturers globally. I am not talking about mergers and acquisitions (Renault-Nissan, FIAT-Chrysler), those are 'normal' in business. I mean market collapse like the four cases in handsets that I listed.
Even the bestselling PC makers a decade ago had very familiar names - HP, Dell, IBM, Compaq, Toshiba, Apple. None of them collapsed. IBM was sold to Lenovo but IBM did not collapse and sold as a corpse, Lenovo bought IBM's PC business while it was still a powerhouse, and it continues under the Lenovo brand as one of the biggest PC makers of today. HP also bought Compaq while it was one of the top 5 PC makers.
This is not somehow symptomatic of the telecoms industry either. Look at the other hardware side of telecoms. The five biggest telecoms networking infrastructure makers at the start of the past decade were Ericsson, Nokia, Lucent, Siemens and Alcatel, in that order. Yes, there have been some mergers in the industry; Alcatel owns Lucent and Nokia and Siemens have a joint venture on their infrastructure business. But if you take the market shares of the combined entities, then the three players were ranked Ericsson biggest even alone in 2000, NokiaSiemens second biggest and Alcatel-Lucent third. How is that today? Ericsson is biggest of these three; NSN is second and Alcatel-Lucent still third biggest. In reality, NSN is actually third, and Alcatel-Lucent is 4th in the world, because Chinese Huawei has climbed to 2nd place. But this is 'typical' competition in the world. The global rankings do not fluctuate wildly even on decade-length time horizons.
Same is true of television sets; while new brands emerge, the old brands fight on and if some depart the scene, they do so over lengthy periods of time. A decade ago the world sold tons of Sony TV sets and Sony is still in there today. Samsung was not as big, but they were around even two decades ago, and so forth. But in mobile, if your handset maker hits 'The Cliff' the fall is rapid and essentially seems nobody survives the Cliff. The damage is 'terminal' and the company will be bankrupt in around three years.
Furthermore, size is no protection. Motorola had one fifth of the world market to itself in 2006 (making huge profits too). That's about what Samsung does today in total handsets, and is actually more than what Apple currently has for the iPhone in smartphones. And hugely popular 'must have' devices are no guarantee you won't fall off 'The Cliff' - witness the Motorola Razr. That didn't keep Moto from going over the MotoCliff. Again, warning about the uber-desirable iPhone here too. I am not about to suggest Apple is about to fall - far from it, I strongly believe the next iPhone is going to be a huge hit as well - but please beware, nobody, not me, nobody predicted at the Razr peak, that "Hello Moto" would become the "Bye Dodo" of the handset industry before that decade was done.
THE CLIFF - WHY IS IT THERE?
Obviously one case does not prove any kind of pattern. But now with proven cases of Siemens, Motorola, Palm and Windows Mobile; combined with the current collapse of Nokia's smartphone business and possibly Blackberry as well, we have evidence of a peculiar pattern in a consumer electronics industry sector. Why is this possible to happen in mobile phones and why haven't we seen anything like it in other industries?
MEET THE THREE HORSEMEN OF MOBILOCLYPSE
There are three factors that help create The Cliff. First, there is the replacement cycle. The average replacement cycle for mobile phones in year 2000 was 21 months. By year 2006 it was down to 18 months. Today it is 16 months (all handsets). For smartphones it is even faster, at 11.5 months. A car is replaced every 3-4 years on average (12-36 month lease meets 48-72 month credit). A TV set once every 7 years. Personal computer is every 3.5 years. But mobile phones are replaced every year and a half, smartphones replaced every year (on average).
So if you have a bad model car, and your sales suffers because of it, you will not lose all your loyal customers in a year or two, because many of your customers have last year's model and are happy with it, and will not even come to your car dealership until two years from now to consider the replacement model, by which time you have had plenty of time to fix the problems with your current car model.
In mobile phones we do not have that luxury. The pace is so fast. And note that the rate of the collapse due to The Cliff is actually accelerating. This also suggests the replacement cycle and The Cliff are related.
A second point is the dealerships. Some technology is kind of 'protected' from rapid market fluctuations, because it is sold by the manufacturer's own stores (like Sony flagship stores for example) or through branded dealerships (like in new car sales) or by registered partners (like many personal computers, sold through 'VARs' - Value Add Resellers, who are authorized with given PC brands). In mobile phones, there used to be no branded shops (Apple changed that of course) and Nokia briefly tried its own Nokia branded flagship stores - most of them have been discontinued. Thus, if you have branded dealers - it helps dampen the fluctuation, even if you have a bad model year of your products, the damaging effect is not as severe.
Mobile phones are sold whether in operator/carrier stores, or independent handset retailers, with essentially all handset brands and many of their models on display side-by-side in the store. Note, that of current handset makers, only Apple is a little bit immunized but not completely - as it also operates its own Apple stores.
The third point is the carrier relationship. The operator/carrier has exceptional influence in the mobile phone handset business. If the carrier/operator decides to push a given phone, it can help it succeed, yes, but that is not dramatic gains. But if the carrier/operator community decides to punish a given brand, it rapidly dies. We heard just now from Finland (of all places) that a survey of major handset stores in the biggest cities of Finland by the commercial TV broadcaster MTV3 - found that in most handset stores (both operator stores and independent stores) - even if the consumer asked for the Nokia Lumia by name - most sales representatives would not show the Nokia Lumia to the customer, and showed Samsung Android handsets instead. This even as the stores had Lumia in stock and the biggest in-store displays were featuring Lumia. That is something Nokia has to work on, and is preparing a major push in the U.S. markets with unprecedented marketing campaign - starting this Friday (April 6th).
In television sales, the television broadcasters (BBC, CBS, RTL etc.) do not have any influence on what brand of television you buy. The internet brands like Google, Yahoo, eBay, YouTube, Facebook have no real influence on what brand PC or tablet you buy to access the Internet. But in mobile, the carrier/operator has a profound effect on which handset brand is welcome to that market, and which is not.
The carrier community is also tiny - the 10 largest carrier groups control the subscriptions of 2.7 Billion people - strongly influencing 46% of the global handsets - that could theoretically be down to yes, 10 CEO's (or a little bit more in reality, their handset bosses and their management teams). So like just now today, those 10 CEOs could decide (or might have decided) that Blackberry survives or Blackberry dies. But yes, imagine if an operating system manufacturer (just hypothetically, let's say Microsoft manages to piss off the carrier community) or say a handset manufacturer (again, hypothetically a giant like Nokia suddenly annoys the carriers) were to become the object of - perhaps boycott is too strong a word here at this level - but let's say 'undesirability' - their fate would be doomed. Witness the birth and death of the Kin youth phones. Microsoft Kin went from launch to death in 6 weeks. WEEKS. But obviously the Kin phones cannot be used as example of falling off a Cliff, as they never climbed up to the hill in the first place. I am just saying it here as evidence of the incredible power of the carriers in deciding who wins and who loses in the handset business.
WHAT IS NOT THE CAUSE
Some will jump in here and say Tomi, the obvious disruptor was Apple's iPhone. And I agree, the iPhone has been the most important handset model ever, and we now measure time in the era before the iPhone and the era after the iPhone (as I correctly predicted before the iPhone was first sold in 2007). But this pattern existed before the iPhone (Siemens, Motorola), it coincided with the iPhone (Palm, Windows Mobile), and it happened after the iPhone stopped grabbing tons of market share (Nokia, Blackberry).
Yes, for those who didn't pay attention back in 2007, 2008 and 2009; the biggest growth in the iPhone market share, from zero to 17% - happened from the summer of 2007 to the summer of 2009. Since then Apple's iPhone market share has been essentially flat picking up only a few market share points to 19% for 2011. In the big iPhone growth years, Nokia mostly held flat and Blackberry actually grew market share in smartphones. So it is absolutely factually untrue to claim that Apple stole customers from Blackberry. And to a lesser degree same is true of the iPhone and early Nokia smartphones in 2007 and 2008. (Few remember that after the original iPhone 2G was launched in 2007, Nokia's contemporary smartphone, the N95 handily outsold all iPhones globally.)
After the iPhone big growth period ended and the iPhone was flat, only then Blackberry suddenly collapsed and so did Nokia. So the losses to RIM and Nokia did not go to gains to Apple's iPhone. Their losses were to the gain of the Android family, so while you can argue that the iPhone killed Palm and Windows Mobile, the evidence does not support the theory that the iPhone killed Nokia or Blackberry, on the contrary, those were relatively immune to the iPhone, it was Android which killed Nokia smartphones and Blackberries. I recognize that the widely-held myth keeps repeating the ignorant rant that the iPhone killed Nokia or Blackberry. We deal with the facts here, not myths.
To anyone who wants to comment on this thread - this pattern can be observed BEFORE the iPhone existed, so it cannot (solely) be caused by the iPhone. Yes, the iPhone may have boosted the damage, but then I would argue, its simply 'any' new and highly desirable phone can help boost the effect. The Razr for example caused Nokia's 2006 market share to fall. Thus, iPhone did not cause The Cliff. Period.
LONG LEAD TIMES
As the name of this section goes, long lead time is a very, very important point. The typical development cycle for a completely new mobile phone is about 18 months from a clean table to in the stores. In the case of a newcomer company it can be longer - with Apple it was reportedly 30 months, because Steve Jobs looked at the intended 'iPod Phone' of late 2006 - and gossip says it looked like a Nokia candybar phone with regular buttons and a medium size screen - and Jobs said no, that is not good enough, and forced a total redesign, which then gave us the radical look of the iPhone with the massive screen and one button.
Today's Nokia Lumia 'shortened' development time is totally an illusion, as the outwardly look and feel was taken from an existing Nokia product, the N9, and the guts of the phone came from Compal, not Nokia's own process. Even then it took nine months to take existing parts and reorient them into 'Lumia' - but the first Nokia-designed and Nokia-manufactured Lumia phones that are not a rebadge will start with the Lumia 900 which launches this week, 15 months after Elop announced his Microsoft strategy…
Have you wondered why Nokia's CEO said Symbian is dead, yet 12 months after that announcement - Nokia launched Symbian-powered 808 PureView as their key phone? Answer: long lead times.
Thus, if you have disappointing smartphone, in order to perform a total redesign would take your company about 18 months, but by that time 3 out of every 4 customers you had, will have bought a new smartphone and if they really rejected your current phone, this is essentially a problem you cannot recover from.
NEEDS MORE STUDY
Naturally this analysis is not a massive peer-reviewed scientific survey. I am here to argue, for the first time in the public domain, that there is this phenomenon 'The Cliff' and it is peculiar to the handsets industry. It has already claimed several victims and it may well collect several more. The main point is that the rate of decline, if any handset maker goes over The Cliff, is catastrophic - essentially today, it means you lose half your customer base in less than 18 months, and another half again - or even faster. With Nokia when they went over The Cliff in 2011, they lost half of their market share in 9 months!
And then if any handset maker goes over 'The Cliff' - the total company is in utter chaos and panic. The normally sensible management moves will not work and can be severely counterproductive, such as mass layoffs. If your sales fall by half in a year or 18 months, no matter how profitable you had been, you will be plunged into loss-making (witness Siemens, Motorola, Palm, Nokia and RIM). And if you combine that with massive layoffs, you then can't market, can't sell, and can't develop newer models fast enough to help save you (witness Siemens, Motorola, Palm, Nokia and RIM).
I just wanted to spread the story, and to ask for comments, have you, respected readers and fellow thought-leaders in mobile consider 'The Cliff theory' and see if they see the pattern too. Are there other handset related brands engulfed in the same pattern? I only looked at the global numbers, are there regional patterns too. And I haven't seen this speed of decline in other industries, can you think of some? Is this phenomenon unique to mobile? And can we perhaps find a way for any company to be saved if it falls off 'The Cliff' - is there perhaps a strategy that worked for some player that saved it.
Please those of my regular readers who have mobile related blogs and publications, feel free to spread this story and give it your spin and opinion. Let me know what you think, and I'll post updates on this and include surveys of other thought-leaders on what they said about The Cliff.
I'd really like to hear if this makes sense, but it may be very valuable for us in the industry to consider now for example with Nokia and RIM so much in trouble, and as we consider the 'invincibility' of an Apple or Samsung for example (or Android). Five years ago, we had the same 'invincibility' around Nokia, Motorola and Blackberry. Do you see 'The Cliff' and do you agree it is an effect that stalks the players in this handset industry only?
I have been convinced to refine the name. I think the follow-up article will be called 'Walking Blind by The Cliff' theory which describes even more accurately how brittle any lead in this industry can be. Imagine being blind, and walking on a hill with a deadly cliff. And not being able to detect when stepping into The Cliff. But anyone has stepped into it, the fall is irreversible. I will return with more articles about this, and include thoughts from the discussion thread. Oh, and Bruce Sterling at Wired and its Beyond the Beyond has covered this story already (thanks Bruce!).
ABOUT THE AUTHOR
For those who feel they cannot have enough facts and numbers about the handset industry, I wrote a statistical handbook about the handset industry in 2010. The ebook is called the TomiAhonen Phone Book 2010 and runs 171 pages and has 98 charts and tables including just about anything you could ask for, including sales numbers, installed bases, market shares, features, form factors, etc. The eBook costs only 9.99 Euros so if you need the numbers, that is the place to go. And now a special offer - I will be doing the totally updated edition for release in the summer of 2012. If you buy the 2010 edition between now and when the 2012 edition is released, I will give you both for the price of one. So if you order the TomiAhonen Phone Book 2010 now, you will get the 2010 edition now, and for no extra cost, the 2012 edition this summer when it is released. Is that a good value? To see more, please see TomiAhonen Phone Book 2010.
Cliff Theory, Tomi Ahonen, Tomi T. Ahonen, The Cliff, Mobile Phones, Mobile Platforms, Mobile Platform, Mobile Phone, Cell Phone, Mobile Companies, Collapse, Siemens, Motorola, Palm, Nokia, Blackberry, Windows Mobile, LG, LGE, LG Electronics, LG Mobile, HP, Hewlett Packard, Microsoft, MSFT, NOK, HP Palm, Wired
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