Tag Archives: China

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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Where is the iconic Indian internet company?

9 May

China has multiple large internet companies.  Baidu, Alibaba, and Tencent lead the pack.  There are multiple others – Sina, Sohu, Youku/Tudou, 51job, etc.  Russia has two huge successes as well in Yandex and Mail.ru.  India on the other hand has yet to see any internet companies emerge with the scale and valuation of any of these companies.

There have been a few notable Indian IPOs, but they are relatively small companies that face major challenges.  InfoEdge/Naukri, the leading Indian job board (think Monster or CareerBuilder), IPO’d in 2006.  The business faces competitive pressure (Linkedin) and issues around growth (despite a huge population, India’s organized labor segment is small).  Similarly, MakeMyTrip is the leading Indian OTA and debuted on the NASDAQ in 2010.  It’s now trading at half the valuation at which it ended its IPO debut.

So where is the proverbial “Indian Baidu” or “Indian Yandex?”  Why hasn’t it emerged?

The easiest explanation is that India is far behind other emerging markets in terms of economic development.  India started its economic reforms later than China and has grown less steadily.  GDP per capita is lower, and the enablers for a vibrant internet economy lag other emerging markets.  Broadband penetration, internet usage, smartphone penetration, etc. all lag behind China, for example.  Whether it’s digital ad spending or e-commerce, market sizes in India are small, albeit growing quickly off a small base.  Without key enablers and larger markets in place, there hasn’t been the raw material for a Baidu or Alibaba to emerge.

I think a second factor that is often ignored is language.  For instance, doing Google style search indexing of Chinese and Russian language sites is hard.  Despite Google’s overall dominance, Baidu and Yandex have been able to take a focused approach to their respective languages and carve out dominant search businesses in their countries.  The Indian internet, in contrast, is primarily English-speaking.  There is less rationale for local competitors to try to challenge the dominant international search players.  And keyword search is a huge and powerful business model.

There has also been more protectionism/favoritism of local internet companies in some markets than there has been in India.  This is especially true of China.  Witness Google’s struggles in China around censorship rules and rumors of “government protection” of Baidu.

Finally, India’s nascent internet market has emerged later than China’s.  This has meant leading US internet companies like Google and eBay have been able to learn from their mistakes in other markets and apply them to India, making it harder for local alternatives to emerge.  Witness eBay’s failed efforts and JV in China, and contrast that to their strong position in India.  The leading internet companies lost China, they weren’t going to let that happen in India.

While India lags other emerging markets in creating iconic internet companies, there’s no question that this could change in the coming decade given strong fundamentals.  I certainly wouldn’t bet against it.  The growing availability of cheap broadband and explosion in smartphone penetration driven by cheap Android devices will be key.  Already a new crop of Indian internet companies are getting ready to IPO – JustDial (local search), BharatMatrimony (dating/matrimonials), and HomeShop18 (e-commerce) and rumors of others.

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