Archive | June, 2013

Driven by Android, the Tablet Market in India is Exploding

25 Jun

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I wrote a post last week on what’s driving smartphone/Android adoption in emerging markets.  I wrote mostly about smartphones and largely ignored the tablet market.

And like clockwork, IDC just released a report on the tablet market in India.  In short:

  • The tablet market is booming as “shipments soared to 2.66 million in 2012, a mammoth 901 percent year-on-year growth from 2011…”;
  • It’s dominated by Android with Apple having <10% of the market;
  • Low-cost (<$250), 7″ tablets are vast majority of share;
  • Local players like Micromax and Karbonn and cheap Chinese imports are winning even though Samsung has the largest market share.  Note: local players still use contract manufacturing in China, but they’re Indian brands.

This article has a nice rundown of the report and quick summary from IDC here.

I wouldn’t expect any major changes to Android/non-Apple dominance in the near future.  Apple simply can’t compete on price in a market where most consumers can’t shell out hundreds of dollars for even an iPad mini.

Also, as with the smartphone market, I’d expect spending on cheap Android tablets in India to continue to grow rapidly.  Prices will continue to decline, there’s several government initiatives aimed at growing tablet access, and you have Reliance’s 4G rollout coming soon.  Expect Reliance 4G rollout to pair a cheap Android tablet with affordable data plans and bundled content/services.

The next really interesting question that needs to be answered is what killer apps and services are going to be built on top of all of these tablet and smartphone devices, especially in India.  And can they figure out a way to make money in a market where non-text, non-search mobile advertising is extremely low in $ terms and where consumers willingness to spend is low.

I think WhatsApp is the first app to really take advantage of the Android adoption trend in emerging markets like India, and it’s also showing the way in terms of how to monetize price-sensitive users at scale.  More on this soon.

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Technology Advancement: Capital Wins Over Labor?

20 Jun

In a recent post,  Paul Krugman writes about the effect of technology on workers.  He argues that until the year 2000, disruptive technology’s effect on Labor was to displace low-skilled workers.  The beneficiaries were better-educated workers with the skills to design and to use new technology.  A handful of Netflix software engineer benefit, a large number of Blockbuster store clerks lose.  And so on and so forth.

The answer from government and business has traditionally been to emphasize education.  Go back to any presidential election from the last 15 years and you’ll see discussions of “retraining workers in high growth industries” and whatnot.  But Krugman says that the education argument is a mirage.  Highly-skilled workers are also facing displacement.

One current example of this is that many of the new business intelligence software and big data processing tools that are becoming widespread can replace functions that have traditionally been performed by teams of business/data analysts.  These are skilled, college -educated professionals that are being replaced (partially) through software.  And of course it’s not a 1-to-1 trade.  The capabilities of new types of software to analyze data and extract insights is far beyond what teams of humans were capable of performing even  recently.

You are also going to continue to see examples of technology disrupting low-level labor as we’ve traditionally believed to happen.  The implications of self-driving cards and robotics in industrial manufacturing are yet to fully be seen.  It’s not out of the question to imagine a world in 10-15 years where most of the delivery drivers, truck drivers, street sweepers, etc. are replaced through automation.  You’re already seeing it in the industrial world.

Who benefits from this?  Capital and often consumers as well.  I think this story helps to partially explain the rising income equality you’ve seen over the last 40 years.  Recent research shows that 30% of income inequality in the US can be attributed to tax policy.  Perhaps the accrual of technology benefits to capital helps to explain the other 70% of the puzzle.

Technology is great.  The iPhone, Google Maps, Wikipedia, Tableau, Kiva Systems, etc. are incredible.  They are amazingly powerful tools for improving the lives of consumers and raising the efficiency of businesses.  I also think that this “displacement effect” is less pronounced in technology areas outside of pure IT.  My sense is that technology in Energy, Medicine, etc. tends to have a less deleterious effect on Labor, though I’m interested in hearing counterexamples to this.

I would never argue that we shouldn’t pursue technological advancement.  But if workers across the spectrum are suffering short-term displacement, it only exacerbates inequality and all of the attendant problems.  I’m not sure what the solution is, but the first step is to at least to recognize the challenge.

Smartphone Adoption, Emerging Markets, & the Android Effect

17 Jun
There’s a huge explosion happening in smartphone usage.  Growth in penetration rates in developed markets has started to slow, but in emerging markets like China and especially places like India and Indonesia, smartphone ownership rates are still relatively low as a percentage of subscribers (see slide 40 of Mary Meeker’s latest Internet Trends report).

The main factor driving growth in emerging markets has been the decline in device prices being driven by cheap, local handset brands running pretty generic versions of Android, as well as the rise of Samsung as the premier Android handset maker.  In terms of local competitors, you have companies like Xiaomi and ZTE in China and Micromax and Karbonn in India.

Hardware prices are declining quickly and hardware is being commoditized by the use of low-cost contract manufacturers in China.  Also, the quality of the low-end Android devices being produced today is dramatically better than it was even 18 months ago.  They’re not iPhones or Samsung Galaxy level, but they’re quite good.  And for people using internet on their phone for the first time or having any internet access period, it’s more than adequate.

Most of the smartphone growth in emerging markets is going to Android.  In Q4 2012, ~70% of smartphones sold globally were running Android compared with 30% for iOS.  This is a significant increase in share over 2011.  Many of the market share losses from RIM, Nokia, etc. are accruing to Android.  The big point, though, is that most people in emerging markets cannot afford an expensive device and lower-end Androids are orders of magnitude cheaper than iPhones.

In addition to wealthier populations, the rise of the cheap Android device is less notable in the US because carriers subsidize a large portion of the handset price.  In the US, Android has ~52% of the market according to comScore and iPhone has 35% for the 3 months ending Nov 2012.  In India, an entry-level iPhone 5 retails for ~$800.  That same phone is $199 with a voice and data plan from a US carrier.  Of course wireless rates in the US are higher and you’re locked into a single plan for a fixed amount of time, but nonetheless the upfront investment in the device is relatively low.  At $199 or $299, it’s harder for Android to have as pronounced cost advantage over iPhone.

A couple of takeaways from all of this:
  1. Despite their impressive growth, I would be leery of investing in local handset brands.  They are producing a good whose price is consistently falling.  They’re also benefitting from the open runway that low smartphone penetration provides, but as ownership broadens, new purchases will be driven by the replacement cycle and their growth rate will fall.  Replacement cycles in emerging markets are longer as well, which exacerbates the problem.  Finally, I expect Apple to introduce a lower cost iPhone and also expect the cost advantage between “budget brand” Android handsets and “premium brand” handsets (i.e., Samsung) to narrow as the latter gets more aggressive on price.  We are on the upward part of a hardware cycle for these companies and I wouldn’t want to get caught on the tail end.  This isn’t to say that these aren’t great companies with impressive growth over the last few years, but just a reflection on their investment potential at this point.
  2. Hardware is hard.  This reminds me of the PC market.  You have punishing downward pressure on prices driven by ever declining component price declines and manufacturing efficiencies.  This isn’t the case in software and services.  Yes, as Apple and Samsung have shown, software can help differentiate your device and drive consumer preference, but it’s not an adequate bulwark against price erosion.  As Apple shows, margins still erode.
  3. Despite #1-2, there’s an opportunity for local players to build durable brands in their home country and region.  Clever marketing, pricing schemes, proprietary apps (thinks Messaging and Games), etc. can all help these players differentiate.  I wonder though if these become the Compaqs, Gateways, and Dells of their market.
  4. As many people are expecting it to do, Apple needs to introduce a lower cost iPhone.  It’s margins will decrease further if it does, but pure profit dollars should surge.
  5. Open source — in this case, Android — helps to commoditize hardware and to lower the cost of new technology adoption.
  6. The sheer number of Android users in markets like India and China (iPhone too) will be staggering.  Even if ARPU is low, there’s a huge opportunity for apps targeting these users.  WhatsApp and other mobile messaging apps might be the first examples of this.
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