Any meaningful feature gap between high end and low end smartphones has been obliterated

Consumer markets for smartphones no longer present any gap, whatsoever, between high end and low end entrants as regard high value features. With this gap obliterated, industry players will do well to implement product marketing strategies with a proven effectiveness in pure commodity markets or else risk extinction. This means product marketers should emphasize methods of lowering the cost of manufacture, and secondary markets to prop up revenue expectations while closely scrutinizing new model planning.

Here’s a case in point. We just purchased, outright, an LG Optimus L90 Smartphone from our wireless data provider, T-Mobile. Our total cost to acquire this device amounted to a one-time charge of $99.99. We should also note we maintain 2 Nokia Lumia 925s, which we purchased from T-Mobile at a cost of approximately $600.00, each. We are still paying, monthly, for each of the Lumias and will likely continue to do so for at least another few months.

But with an Android KitKat O/S, and a very extensive set of app options, we can’t find anything we’ve given away by opting to purchase the LG-D415 instead of a new Lumia, or even an iPhone 6. Sure the Lumia and the iPhone 6 offer many more powerful features than our LG Optimus L90, but we have no need for them. In this writer’s opinion, when features reach a usefulness plateau as they have in the smartphone market, consumers have zero incentive to migrate up the ladder to more expensive versions of the same commodity.

Leading manufacturers of smartphones are already exhibiting a set of strategic moves befitting general agreement about the nature of the market as, in late 2014, entirely commodity driven. Accordingly, Apple is talking about producing a gold version of its iPhone 6, which is already available for custom monogramming. This move makes sense for a manufacturer with a leading product whose principal attractiveness is its position as a status symbol for a highly concentrated set of consumers habituated on only buying the leading product in the category.

At the low end manufacturers like Samsung are feeling the pain as competitors with a substantially lower cost of manufacturing, for example, Xiaomi, seize market share. For this segment of the market, app stores look to be an oasis in a profit desert. No wonder Microsoft is racing to win a place on the radar of app developers as its best hope to capitalize on the smartphone market.

Look for further consolidation in this market as manufacturers either drop out, or consumer rivals.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Nokia’s Announcement of an Android Phone Could Be A Game Changer

On February 10, 2014, the Wall Street Journal published an article by Sven Grundberg and Shira Ovide, “Nokia Releasing First Android Phone”. Nokia has sold its handset business to Microsoft®. So this new phone, which will be sold by Microsoft, will mark a radical departure in product marketing strategy for the business.

What’s radically different here, is the expression of a new pragmatism on the part of Microsoft. If most consumers of smart phones (from the remaining markets promising dramatic sales growth, meaning emerging markets) are buying the Android O/S, then why shouldn’t they buy them from Microsoft? Any success Microsoft may realize from an effort to compete at the low end of the market will, of course, enhancing Nokia’s ability to justify its existence as a revenue contributor to the company.

In fact, this decision positions Microsoft as a curiously powerful player in the small, smart mobile device market. Not only does Nokia bring valuable patents to Microsoft, for which Google is presently paying royalties, but this press release points to a new opportunity for the business to earn revenue as an OEM of someone else’s operating system. Neither Google, nor Apple has demonstrated this openness, so this effort is definitely leading edge.

In some ways this positioning runs parallel to Intel®‘s decision to open its foundries to any business interested in exploiting additional capacity. Both Intel and Microsoft, one can argue, still represent the epitome of delivery capabilities, given their extensive, long-term relationships with the biggest companies and organizations in the United States, if not the world. Perhaps governments and very large organizations in emerging markets would rather acquire the smart phones they need from Microsoft, than a set of smaller vendors, with whom they do not enjoy the same trusted relationships.

This announcement, coming so soon after the announcement of Satya Nadella’s ascension to the position of CEO of Microsoft, is sure to be seen as an indicator of the business adopting a new way of thinking about very strategic opportunities.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Additional Comments on Microsoft’s Q2 2014 Earnings Report

Three other topics included in Microsoft’s Q2 2014 Earnings Report may benefit from comments. The three of interest to me are the quarter’s Cost of Goods Sold (COGS), sales of Windows Phone licenses to OEMs, and sales of commercial cloud products.


Chris Suh noted a substantial, 46%, increase in COGS for the quarter. This topic comes up elsewhere in this presentation and impacts on margin considerations for the business. I think Microsoft is uniquely capable of absorbing this increase, with subdued impact on the broad product margin discussion for the overall business.

The COGS jump can be directly attributed to the Device and Consumer Hardware (D&C Hardware) business. Q2 2014 saw the commercial release of the new XboxOne and Surface 2 products. But the strength of traditionally much higher margin businesses (approaching the 83% “Nirvana” number, Amy Hood mentions early in the presentation); specifically, the combination of satisfactory growth in their Commercial Licensing Business (7%, year over year, but SQL Server business grew over 25% over the same time period), and rapid growth in the “Commercial Other” segment, which includes Azure, Office 365 and Dynamics CRM (doubling year over year, albeit with substantially smaller impact on the bottom line), will, in my opinion, pay for a lot of this front-end hardware hit to COGS.

Windows Phone Sales to Oems

Windows Phone Sales to OEMs are included in the Devices and Consumer Licensing (DCL) business segment section of Microsoft’s Earnings Release FY14 Q2. Year over year, revenues from this segment were down 6%, from $5.703 Billion to $5.384 Billion. Chris Suh commented on this number noting the revenue decline reflected prevalent ” . . . PC and device market trends . . . “. I need to note, while Chris Suh specifically mentioned a 3% decline in Windows sales to OEMs, he doesn’t mention the specifics about the decline in sales of Windows Phone to OEMs. At the start of her forward looking comments, Amy Hood, CFO remarked about Nokia: “All guidance here assumes no impact from Nokia.”

But I think the drop in sales of Windows Phone licenses to OEMs, perhaps, correlates to Nokia’s announcement, a day in advance of this earnings report of a 29% drop in handset sales. In my opinion this drop is attributable to much more competition at the high end of the smart phone market. A quick look at Samsung’s report for the same calendar quarter reveals a 9% drop in year over year sales for its IM/Mobile business segment.

In fact, I think the Google Moto G, together with a robust effort by Lenovo to become a major manufacturer in this product category, has resulted in a broad drop in market share for each of the traditional major players in the market. It will be very interesting to study Apple’s report for the same calendar period. I would attribute any subdued forward looking comments about iPhone sales, once again, to these two new developments in the high end smart phone market.

Commercial Cloud Products

Microsoft reported Q2 2014 sales of $1.78 Billion, which amounts to a year over year 28% increase, in its sales of “Commercial Other” product segment offers, including Office 365, Azure and Dynamics CRM. In contrast, Google reported $1.23 Billion in “Other” (I presume this segment includes Google Apps) revenue for the 3 months ending September 30, 2013, and Amazon appears (I find it very difficult to breakout the actual cumulative sales figure for Amazon AWS for the quarter) to have reported $1.011 Billion in “Other” sales (which includes AWS) for the calendar quarter ending September 30, 2013.

I leave it to the reader to draw conclusions from the above figures as to the comparative rank of each of these companies in the broad cloud computing services category. Certainly, anyone reviewing the statistics must at least acknowledge Microsoft’s ascendance to one of the leadership positions in this category in a very short period of time.

It’s important to note Microsoft’s report of a substantial 24% drop in consumer licensing for its Office products elsewhere in the quarterly report. Chris Suh provides further detail on this number, estimating 16% of the total as directly attributable to consumers abandoning on premise Office for Office 365, consumer. The next few quarters will provide important indication of how the ongoing erosion of this product segment is progressing.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved