But the real competition in the low-end mobile space likely won’t come from Motorola so much as a slew of smaller, lesser-known handset manufacturers such as Xiaomi and Huawei in China, which have been developing multiple Android-powered phones with price tags around $150. Those handsets may not make a dent in the lucrative North American market, but they are becoming increasingly popular in fast-growing regions such as Africa and Asia.
The low-price market strategy has been used to some success in recent memory. During the height of the video game console wars last decade, when Sony Corp. and Microsoft saw gaming systems as an entryway to the entire living room digital entertainment market, Microsoft was widely believed to be losing money every time it sold an Xbox gaming console. Still, the company kept pushing the system, hoping that by establishing the Xbox as the hub of living room entertainment, it could later generate revenue through a variety of other means. Today, Microsoft offers everything from movie rentals to Web search through the Xbox.
In fact, the low-cost approach has previously helped topple Apple itself. In the late 1980s and early 1990s, Microsoft managed to undercut Apple’s high profit-margin computer sales business by offering Windows as a cheap alternative. The strategy worked so well that, during the following decade, Windows came to dominate the PC operating system business, while Apple went through one of the worst funks in its history.
But there’s no guarantee such an approach would work nearly as well today. Unlike the Apple of 25 years ago, today the company dominates the mobile landscape, has enough free cash on hand to buy many of the companies it competes against, and is in the running with Exxon Mobile for the title of world’s most valuable company. For the past two years, Apple has made more money every time it sells a smart phone or tablet than any of its competitors. Of the top eight handset manufacturers in the world, Apple sells about 5.4 per cent of mobile phones, yet it generates 57 per cent of industry profits, according to a recent Canaccord Genuity survey.
Additionally, under the leadership of chief operating officer (and now CEO) Tim Cook, Apple has managed to maintain a surprisingly low cost structure for its mobile devices. As a result, competitors have had a hard time undercutting the iPad and iPhone on price without delivering a significantly lower-quality product.
“They’ve actually priced their competitors out of the market because their supply chain is so tight,” said Neil Bearse, manager of Web-based marketing at the Queen’s School of Business. That means other companies will have a very hard time buying the raw components for their devices at a lower price than what Apple has managed to negotiate.
But there’s another reason Apple’s competitors will have a hard time beating Apple to the low-cost end of the market – Apple is taking aim at the very same market.
As customers wait for the fifth version of the iPhone to launch later this year, many expect further price cuts on existing iPhone models. The soon-to-be-dated iPhone 4 already sells for close to $100 (Canadian) through multi-year contracts with carriers. The further those prices drop, the smaller the window for competitors to exploit.
Still, with Apple’s wide lead in mobile applications and popularity, price may be the best battleground for competitors. Mr. Pavlik of Banyan partners estimates Apple still has at least a year of solid growth based on its existing product lines alone, before the company starts to feel any potential impact of Steve Jobs’ departure from the CEO’s office. In those coming years, Android’s myriad developers and manufacturers have a chance to turn the mobile operating system into the new Windows – a piece of commodity software that eventually found itself on the vast majority of the world’s personal computers.
“That’s how Windows won,” said Mr. Cheung of ShapeCollage. “It wasn’t that Windows was better, it was that all these other manufacturers were developing for it. It reached a lot more people.”
THE BATTLES AHEAD
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