Baruch keeps thinking about Apple and what it’s done to mobile phones. Call him obsessed if you will, but it is also his job to think about it, and there’s good money to be made if you get it right. You may recall his last post on the subject, that Apple has become wholly dominant in the mobile internet and smartphone space. What’s struck him recently is how few of the intelligent analysts and counterparties he talks to actually agree with him on what seems even to generalists utterly obvious. Lots of them still think it’s a good idea to push other smartphone stocks, like PALM or RIMM, which if Baruch is right is a very efficient way to lose money, inferior only to piling it up in big mound and setting light to it.
Why people can think this way was a mystery to Baruch, until he made the realisation that the phase transition in the handset market is not yet evident to them; they still think the handset market resides in Mediocristan, as opposed to the Extremistan regime it has most likely become. They haven’t been reading their Taleb.
It’s a forgiveable error; again, Mediocristan is a fictional place where standard distributions, bell curves, rule, where market shares are shared between players, and where tall poppies get their heads cut off. Hardware and appliance markets have traditionally exhibited these characteristics. Look at cars, or blenders; lots of players can make a decent living selling blenders. Similarly, until now, 4 or 5 names shared out the vast majority of goodies in mobile telephones. Maximum market shares seemed to be limited at 30%-40%; losing or gaining 10 points of share took years. Over long periods those gains or losses would, unless something had gone very wrong with one of the players, tend to mean revert. It seemed a fast, dynamic sector at the time, but really, it wasn’t.
Now, software or application markets show us entirely different characteristics, those of Extremistan, where rapidly evolving monopolies and duopolies are much more common. SAP and Oracle own the enterprise software space. Adobe owns documents. Google owns search. Microsoft still owns PC operating systems and office software suites. Autonomy owns unstructured data mining, etc etc. In most of these cases, market shares continue to consolidate. In fact, the example of PCs is illustrative; the hardware aspects of it are Mediocristan-like, shared between HP, Dell, Acer and a few others, while Extremistani Microsoft does almost all the software, and Google does almost all the cloudy, web based stuff.
Apple’s achievement has been to shift the focus of the high-end handset market from voice to apps and browsing. Any old hardware would do for voice and SMS. So vendors added froufrou to differentiate themselves and keep ASPs up. It was the battle of the specs: multi-megapixel cameras, thin form factors, FM radios, MP3 music players, and most uselessly, ”express yourself” multi coloured casings. That’s finished, though the Sony-Ericssons of this world pretend it hasn’t; now it is how nicely your phone can email, surf the web, and most of all, how rich and easy is the ecosystem of applications, that determines whether people buy your product or not. That’s software; precisely the type of market where monopolies or duopolies emerge.
For hardware-focused analysts, it’s hard to accept that their reliably mediocre handset market has been transferred to Extremistan. Baruch’s own thoughts on the subject over the past 2 years seem to have followed the traditional stages of grief, from denial to anger, depression, and, with this post, final acceptance*. Many of his peers are still stuck on denial. When pushed, they say things crossly to him like, “well, if you really think no-one’s going to properly compete with Apple, you shouldn’t be owning anything in the space.” Ahem.
The fact that it IS happening is the only reasonable explanation I can come up with for the otherwise obviously insane step Google just took, which was to leak to the WSJ their upcoming “Googlephone“, a Google-branded Android phone made by HTC. It’s hard to know what they’re doing here; are they trying an end run around the operators? Apple tried that with iPhone v. 1.0 and failed, and had to reset their strategy for iPhone 2.0. Are they trying to spur their ecosystem into greater efforts? Frankly demoralisation is an equally likely response by e.g. Motorola, on finding out their key software ally just became a competitor. They could lose interest in the platform. It’s like Microsoft, in 1990, deciding to make its own branded PC to compete with Compaq and HP. Would that not encourage them to, I don’t know, try Linux or something? Dust off the old Amiga OS? Or diversify into blenders?
Google is the epitome of a company used to Extremistan-like environments; compared to how things worked in the old days in handsets, Android adoption has been excellent. But in Extremistan it’s not enough. Android app catalogues are neglected, and the best ones come from Google. It’s forced to write the apps itself because independent developers have limited resources; having to tailor apps for the different hardware specifications of all the different Android phones is too annoying, the ecosystem too fragmented. Much better to write for iPhone first. Most people still don’t know what an Android is or does; the most successful Android, MOTO DROID was launched in a blizzard of marketing and sold a respectable 800k+ in a month; but Google must suspect the loyalty of Verizon to the platform, and most everyone knows a Verizon iPhone is coming down the pipe in mid-2010.
No, Google know they need to do something, and the endgame may be rapidly approaching. Last week PALM reported, and the stock tanked; they basically admitted they were embarking on a death-or-glory spending spree, which if successful might see them make a bit of money for their investors, but probably not much. The downside of course is zero; Baruch has a hard time getting his PALM model to produce a positive result.** RIM numbers came out on the same day; they did better, and are making great headway expanding distribution overseas. But their core US market was flat for them, which supposedly should be expanding 30% a year — not a good augury for when the first flush of geographic expansion ends.
2010 is looking like a crunch year for smartphones, and for many vendors “crunch” may be more than a figurative description.
* many of the commenters on this website were far ahead of Baruch on this — Cash, Comrade, Andrew, anon, Ramster and the rest of you, aren’t you clever. Grr.
** yeah go buy puts on PALM; great idea down here with like 50% of the shares shorted. Or maybe not, who knows. Whatever, please don’t use Baruch as an investment advisor. He’s just trying to look good (and mostly, not succeeding); he has no interest in making you money.