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Friday, December 05, 2008

2009 is going to be painful for device vendors

I'm still bemused by the assertions of many people that 2009 will be a banner year for mobile devices. Pointing to the uptake of the iPhone, many observers are imagining a sudden glorious transition of the population to "superphones", especially in the US.

I've seen breathless commentary about the entry of a new "manufacturer" of Android phones, the Australian company Kogan. "Kogan simply designed a device, had it manufactured in China, and loaded Android onto it". Hmm, a small company importing LCD TVs and other electronics "designed" a device? They did interoperability testing against all the HSPA network hardware variants? They designed the antenna? Given their own price went up by Aus$100 over initial expectations because of currency movements, who'd want to guess their margins a year out?

Well, one thing's for sure, they announced it the same week that Nokia said that the global handset market is falling off a cliff.

It's tempting to say "Oh, well, it's still a billion+ devices a year, I'm sure new entrants can make money".

Same deal with all the new cool MID (mobile Internet devices) coming onto the market with shiny Intel Atom or TI OMAP or Qualcomm Snapdragon chipsets. Surely everyone wants a portable web device?

But think through the other ramifications:

  • Nokia & Samsung will presumably take the opportunity to lower prices, benefit from scale economies, gain market share and squeeze/kill the less fortunate. Ditto the larger notebook vendors.
  • Consumers will sign up for longer contracts as operators try to extend upgrade cycles
  • Consumers buying unlocked phones are going to think very carefully before parting with their hard-earned cash (or they hard-crunched credit)
  • Enterprise buyers will defer upgrades and replacements of anything. Especially if they expect to fire 20% of their employees next year. And where they do buy stuff, they'll know that they can get great deals out of existing suppliers who have friendly and trusted salespeople desperate to keep their jobs.
  • Suppliers are going to want cash upfront, especially from startups.
  • Distributors and retailers will want to cut risk and costs. Putting large marketing budgets towards "cool new stuff" from "cool new companies" will be less likely.
  • Nobody is going to want to tie up capital in large inventories of anything - components, finished devices etc.
  • Various companies in the value chain will go bust, leaving holes in supply chains, distribution channels.
  • Any operator giving a subsidy for anything will be doing doubly-diligent credit checks.
  • It's anyones guess what happens to currency movements. Bigger companies can hedge better than smaller ones. (OK, unless they're investment banks, it seems....)
  • Any capacity-crunched networks are likely to stay crunched for a bit longer, unless a CTO physically forces the chequebook out of the CFO's hands.

Sorry to sound like a doom-monger on this, but really, I think some of the unbridled enthusiasm around high-end smartphones, MIDs, network deployments like LTE and broadband-enabled notebooks and netbooks is going to come down to earth with hard bump.

Frankly, I hope I am wrong on this. It doesn't do my business any good either - not many companies tend to spend money on pessimistic advice. And there will certainly be bright spots - Apple, for instance, as long as iPhone revenues offset any weakness in iPods, and its operators don't start playing hardball in negotiations. Nokia's new N97 (and its scale and reach in low-end devices) should help it weather the storm better than most.

Overall, I'd rather start 2009 with the glass half-empty, and then hope to get a top-up. Too many people are going for half-full, without spotting the cracks.

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