Tuesday, November 17, 2009

Is a Smartphone Bubble Building Up?

The signs are getting clear by the day. What started off as a category created by a blockbuster product, is today being heralded as the savior of the mobile handset industry. Correction, the mobile industry in itself. Smartphones, and I am referring to the genre that has unleashed itself post the advent of the iPhone, have seen a smart uptick in sales in recent years. Driven by significant carrier subsidies in the US and elsewhere, and a renewed focus on mobile applications, this category has rapidly gained, both in user acceptance, and in industry attention.

Indeed, for the first time in years, smartphones, coupled with an open mobile ecosystem where customers are not bound by walled gardens, are helping in creating an industry of their own with stakeholders as varied as advertisers, ad networks, mobile developers, and others. Of course, the carriers and the handset vendors still figure in the equation, however, they appear to be increasingly dis-intermediated by either large Internet players such as Google or by innovative device entrants such as Apple, who have successfully recreated walled gardens of a different type. While all of this portends great for the consumer, however, the manner in which the hype is building up in the smartphone space, dominated by discussions over mobile applications, makes one wonder if there is indeed a bubble that's building up, across two of the important elements of this value chain, applications and devices.

The mobile applications space refuses to show signs of any letdown in activity. First it was the spate of announcements over mobile application store launches, and now the focus appears to be on other enablers of the value chain such as ad networks. Apple's App Store sure has seen a couple of billion downloads and a catalog of over 100,000 applications, however, the marginal utility of an ever-increasing number of apps is highly debatable. And not to be outdone, Google's Android marketplace has over 10,000 applications already. Which begs the question, how much is enough? For the consumers, discoverability becomes a huge hurdle, while for the developers, the ecosystem is beginning to act as a strong black hole. Sure there are AAA app developers who've struck it rich, but then, like in the case of any other content businesses, it is only a few apps that hit the jackpot. However, the mobile apps business sure is showing no signs of acknowledging this fact. To add to the overall confusion, multiple versions (Android 1, 1.5 and now 2.0!) of OS platforms are currently out in the market simultaneously, which has significant potential to alientate customers that can't figure out why a specific app is working on their friend's Android phone and not theirs. Yet, device vendors continue to create platforms to attract developers, Samsung's Bada being the latest to join the bandwagon. And with increasing apps, comes the realization of the need for monetization. And this is where ad networks like Admob hit paydirt. Their acquisition for $750 Mn is indeed seen as a validation of the potential of the mobile advertising space, and of course, without underplaying any of the value that in-app usage data that Google gets along.

On the device side, Apple continues to see rising sales. Forecasts are now coming in on how smartphones will likely make up for the bulk of handset sales 18 months from now! Players like Sony Ericsson and Motorola have kind of decided to go away from their low-cost handset focus and invest more on high-end smartphones. And we have even more new entrants in to the smartphone space. Dell, which has been on the fence for quite a while, has finally decided to take the plunge and is launching its smartphone in two of the world's largest emerging markets of Brazil and China. Android is now in to V2, with the Motorola Droid appearing to get early traction.

Rapid growth in any industry segment is always welcome. It indicates that there is significant previously unmet customer demand that newer products are meeting. However, the risk of such rapid growth lies in the possibility of over-the-top exuberance when it comes to estimating future growth. As a wise man once said, most forecasts are over-estimated in the short-term and under-estimated in the long term. Smartphones and mobile applications appear to fit this bill. One can only hope that the current hyper-growth phase is also likely to act as a natural shakeup with the result being fewer smartphone platforms, more open standards for mobile application development, an ecosystem that offers genuine revenue prospects for developers, ad networks, and advertisers, and most importantly, a top-notch customer experience, rather than morph itself in to an uncontrollable bubble.

Update 1: It didn't take long for the next major announcement in smartphones. Techcrunch's quoting unnamed sources that claim Google is close to launching its own smartphone ! Highly doubtful why they want to do that, given manufacturers are already making a beeline to adopt Android. Would Google want to compete with its partners? And more importantly, can Google ensure rapid adoption of its services through its own phone, as opposed to collaborating through the Android ecosystem. Nevertheless, up goes the hype curve !
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