Although smartphones have seen explosive growth within developed markets, smartphones as a whole only represent about 25% of all mobile phones worldwide. With the prospect of $100 unsubsidized smartphones on the horizon, the industry is nearing its next growth phase, which will be largely driven by increasing rates of adoption within emerging markets. The Times of India is reporting that Samsung has partnered up with Indian mobile carrier Reliance Industries to bring a $100 4G-powered smartphone to the Indian market later this year. Not only are the implications of $100 smartphone tremendous for the world, the race to the bottom among device makers has officially begun.
Over the years, the price gap between the feature phone and the smartphone has become increasingly narrowed, and we're nearing the point where the feature phone loses almost all of its credibility. Nokia (NYSE:NOK), which has one foot stuck in the feature phone past, is about to face increased pressure from the prospect of a $100 smartphone. Last quarter, feature phones proved to be more profitable for Nokia on a gross margin basis than its smartphone business. During the period, feature phone shipments declined by 15% year over year, forcing the company to adopt an aggressive pricing approach within its smartphone business. Until now, it appeared that Nokia was muscling the smartphone competition on price relative to features with its Lumia 620 Google (NASDAQ:GOOGL) Android-killer. Now that Samsung has thrown a rather large wrench into the mix, Nokia's growth efforts may be met with stronger resistance.
As smartphone manufacturers continue to battle it out by offering more technology for a better price, the clear victor to this battle is the ecosystem. At this time, it's unclear if Samsung will be using Google Android for its $100 smartphone or its homegrown Tizen ecosystem, and for the time being, it doesn't necessarily matter. In the grand scheme of things, the ecosystem that gets adopted the most over the long term will win, since it's the ecosystem that has the opportunity to capitalize on recurring revenues over the life of the device. Not to mention, it's little, if any skin off an ecosystem's back if smartphone OEMs battle it out in a race-to-the-bottom showdown. Considering Android's 70.1% global market share at the end of 2012, it's clear that Android's OEM-driven model has given Google Search and its app store a tremendous business opportunity.
In a world where average selling pricings of smartphones continue their precipitous decline and OEMs are largely responsible for driving worldwide smartphone adoption rates, one must wonder if Apple (NASDAQ:AAPL) has really missed the mark. Save for a slight adjustment in strategy in emerging markets, Team Cupertino has yet to announce a meaningful product to address this gargantuan opportunity. Apple has on many occasions made clear that it doesn't fear cannibalization, so what's the hold up? It's almost a given that releasing a lower-cost iPhone would do wonders for share sentiment because it would signal to investors that Apple is in the business of capitalizing on tremendous growth opportunities. In other words, it's not going to take a revolutionary product for the Apple bears to get discouraged.
The clock is ticking
Over the next three to five years, the majority of the next 2 billion Internet users will experience the Internet for the first time on a mobile device. To say this whole "smartphone revolution" thing is huge would be an understatement. The ultimate driver for stoking new smartphone growth will be when the price gap between the feature phone and the smartphone disappears. With the upcoming introduction of a $100 smartphone, Samsung will have effectively closed the gap against higher-end feature phones like the $85 Nokia 301. This development is extremely likely to begin the next phase of worldwide smartphone domination. Whenever there's a gold rush, it's the picks and axes that tend to make off like bandits. In the context of smartphones, the ecosystems are shaping up to be the proverbial picks and axes. If I had to choose just one, my money is on Android as the best fit to continue its ecosystem domination.