Life for smartphone users has become a lot more confusing over the last year or two. The efforts of Research in Motion – the creator of the BlackBerry – to venture forward into new kinds of smartphone designs and the world of the app have met with very little success so far. What may be its last hope, the BlackBerry 10, will become available to consumers on Wednesday, and marketing plans for the new devices and their operating system include the company’s first-ever SuperBowl ads.
Then there is the massive rivalry between Apple and Samsung Electronics. As recently as August, Apple appeared to be preparing to celebrate a triumph, especially after winning a much-watched patent-infringement lawsuit against its Korean competitor. But since then, Apple seems to lost momentum, with Samsung and its Android-based Galaxy family of devices advancing by leaps and bounds, seizing market share from the iPhone.
Now even Samsung is warning that the outlook isn’t as rosy as it was for the company even a few months ago; the time at the top, it seems, is getting shorter and shorter. True, according to Strategy Analytics, Samsung dominated the smartphone market last year, shipping a record 213 devices in 2012 thanks in part to its ability to serve not only the high end (the part of the market targeted by Apple) but also to offer lower-priced devices, such as the Galaxy Y, to capture a different demographic. Still, Samsung is fretting about competition, warning investors that this may hamper its future growth in sales and that price competition and a wave of new products may limit growth in profitability.
Enter Huawei Technologies. The privately owned Shenzen-based company may not quite be a household name in the U.S. yet, but it shipped some 10.8 million smartphones worldwide in the fourth quarter, enough to capture 4.9 percent of the market according to International Data Corp. In the ongoing battle for market share, Huawei overtook Nokia (the once-venerable giant of the pre-smartphone mobile phone era, whose Lumia devices have struggled to break through) and Research in Motion. The Chinese company remains far behind Samsung, which shipped 63.7 million smartphones, and Apple, with 47.8 million shipped, but it is making inroads. Huawei also drew attention at this month’s Consumer Electronics Show in Las Vegas for its huge 6.1-inch Ascent Mate phablet (or phone-tablet hybrid).
Huawei’s market edge is price. While Samsung built its success on the lower-cost handsets, it has migrated up the food chain and now rivals Apple’s ability to woo those willing to drop somewhere north of $500 (at least when subsidized by wireless carriers) on the bleeding-edge smartphone offering the widest possible array of apps and features.
As Samsung itself admitted in its most recent earnings statement, though, this segment of the market isn’t where the biggest growth lies for smartphones. Rather, the company acknowledged, demand for smartphones in the United States, Europe and other developed markets may flag because many of those who want and can afford one already possess one, and only a fraction of those consumers choose to upgrade every six to 12 months. In contrast, the greatest level of absolute growth potential lies in the emerging markets, where price and not bells and whistles may well prove decisive.
That is precisely why Huawei has recorded big gains in sales to Latin America and Eastern Europe, as well as to buyers who don’t want to sign up for the kind of costly contract that is required in order to obtain an Apple iPhone.
The buzz surrounding Huawei in recent days in the wake of Samsung’s comments and the release of the latest IDC market data is a reminder of the risks that exist as the smartphone comes of age. The device hasn’t been overtaken by rival technologies (as is happening to the personal computer), nor has it become a commodity – as has the standard mobile phone, once itself a mark of status. But in some regions and among some demographics, it is in the early stages of encountering the latter fate. Only another extraordinary leap forward in terms of technology or design will halt that process and stop margins on the devices contracting still further.
What does this mean for investors? Be very, very cautious, and keep a close eye not just on current sales results or even future prognostications, but on what all of these companies are doing with respect to R&D. Huawei’s overtaking of the BlackBerry shows that former market leaders can become laggards – but BlackBerry’s brand name could still enable it to stage a comeback, if the technology is there to support it. Finding the perfect mix of innovation and brand name is the Holy Grail for investors and technology companies alike.