Sony and HTC

Sony and HTC are two brands I have embraced ever since I was a kid. I still have a Sony TFT television in my house, its 17-18 years old but still works like a charm. 

Apart from Nokia the only other smartphone manufacturer that caught my eye when I was young was HTC. I still remember how impressed I was with the fit and finish of the HTC device as well as its software. I was too young at that time and had no access to the internet so I don't know the name of the device but the HTC smartphone I saw was what made me curious about smartphones and tech.

Both Sony and HTC have had golden periods at one point of time. Sony milked money from its Trinitron TV series and Walkman whereas HTC just 4-5 years back was the most dominant Android smartphone manufacturer.

Lately however both companies have been having a rough time. Sony's mobile division has been the biggest money losing unit for few quarters now. In case of HTC the company's profits have steadily dwindled for the past few quarters on a year to year basis and for sometime the company was in a loss.

Currently the future of both these giants in the smartphone market is a big question mark.In this article I will try and explain that

1. Developed markets

Developed markets such as US, Japan, South Korea are highly profitable markets with most of the sales occuring in the high end segment. This again happens because of two reasons

1. Consumers generally have enough disposable income to afford high end handsets

2.Carriers generally subsidize the cost of a smartphone, thereby making a $600-700 seem like a $200 smartphone.

Both the above factors lead to a highly profitable scenario. For example an iPhone 6 retails for around $600-700 unlocked. The cost of making the iPhone 6 is just around $250-300. Definitely Apple has a huge margin when it comes to the iPhone 6. The millions of iPhones Apple ships every quarter makes fixed cost such as R&D, marketing etc even cheaper on a per device basis. Combine these two and the millions of shipments Apple makes every quarter and its hardly any wonder that Apple is currently one of the richest companies on earth.

But for all the money developed markets have to offer, they have their own challenges as well -

1. Marketing - Competing in developed markets requires significant investment in marketing. A particular company needs to make sure their brand reaches each and every person. Some companies like Samsung have spent millions of dollars in marketing and its widely believed that marketing played a key role in Samsung's dominance of the US market when it comes to Android

2. Carrier relationships - If any smartphone manufacturer wants to be well established in developed markets  they need to make sure their smartphone is available on at least all the national carriers.

3. Specs - Specs play a crucial role in determining the fate of a smartphone in developed markets since most smartphones are available around the $200 on contract mark or slightly higher but not substantially. Hence in such a scenario when price is more or less the same, specs prove to be the deciding factor when buying a smartphone. If a manufacturer does not have the best of specs, it needs something exclusive to convince users to buy its smartphone.

4. Design - The design of a smartphone also plays a role in determining its fate. A pleasantly redesigned smartphone can win the hearts of consumers and this has been proven by HTC One M7,LG G3 and Samsung Galaxy S6.

A manufacturer needs to fullfill all the four conditions mentioned above to be sucessful in developed countries, failing either conditions can prove to be fatal and leads to a downfall.Both Sony and HTC have lacked in either of these areas that has lead to their downfall in America and other developed markets -

HTC -

HTC as I meantioned above was at one time the most dominant Android manufacturer in the world. HTC's downfall started around 2011. The first reason for HTC's downfall was marketing and the second reason was specs. HTC's downfall can be divided into parts

Part 1 -

During 2011 HTC launched several devices. The problem was not that HTC launched several devices, rather the fact that HTC launched several variants of its flagship handsets. All the flagship variants were launched with a gap of few months between them and none were marketed in a proper manner. Sometimes HTC advertised its HTC One X, other times HTC One X Plus and so on. While HTC kept diluting its high end, Samsung grabbed the oppurtunity and marketed its Galaxy S2 and Galaxy S3 heavily. Along with this the decision of HTC to choose Nvidia's Tegra instead of Qualcomm's Snapdragon created additional problems.

Part 2 -

While during 2011-2012 HTC dealt with marketing problems and kept losing ground to Samsung and Apple. During 2013 HTC got its act together and launched just one smartphone which was the HTC One M7. The company had also truly innovated this time with a unibody aluminium build, boom sound speakers and generally speaking HTC's One M7 was the best Android smartphone in the market. HTC had also improved its marketing with the launch of HTC One M7 although it still was lower compared to Samsung or Apple.

So what lead to HTC's downfall this time ?

Firstly Samsung's Galaxy S2 and Galaxy S3 had made Galaxy the other name of Android. Samsung in general became the brand people connected with when Android was spoken of. HTC had lost quite a bit of relevance. Along with this lost relevance, the 4 MP camera that HTC decided to put behind the One M7 also to some extent caused its failure. I know many people won't agree with me on this but let me explain.

The world of specs -

Specs often time represent a glimpse into how a user's experience with a device would end up being. The Android market is one where specs matter a lot to people and often times end up being the point of differentation between smartphone manufacturers. When it comes to Android, most manufacturers at the core are running the same software/OS with modifications of their own. The most significant way an Android manufacturer can distinguish itself from another Android manufacturer is by the hardware specs. The sad part though is when it comes to hardware specs many end users end up correlating bigger to better. 

Numbers and Quantity matter more to people in terms of hardware specs. This has been pretty evident with the move from quad core to octa core processors. From the move of Full HD to Quad HD displays and the ever increasing camera resolutions.

If you ask the tech geek sitting next to you, he will tell you that Quad HD displays provide very little added clarity compared to Full HD displays and in fact strain the GPU and battery more. The same tech geek will also tell you how a properly optimized dual core smartphone is enough and octa core smartphones are a nuisance. However tech geeks like these represent less than 5% of earth's population and for most people bigger specs are simply better specs.

The only manufacturer that doesn't involve in such specs war is Apple and the reason for that is Apple's exclsuivity of ios (As I said in point 3 above that a manufacturer needs to compete in terms of specs and if they aren't ready to do that they need something exclusive).  The fact that iPhone runs ios "exclusively" are enough of a reason for people to buy the iPhone and is the only reason the cupertino firm saves itself from meaningless specs wars. Its only Apple which can sell a "flagship" smartphone in today's age with a dual core processor and yet be sure people will line up for days to get their hands on it. If an Android manufacturer tries to sell a smartphone with a dual core processor in today's age people will laught at its face.

The same bigger is better mentality is what affected HTC's One M7. People simply saw the 4 marking next to the mega pixel count and thought its a bad camera. Only few took the efforts to dive deeper and learn more. In fact I even saw certain tech authors criticize the HTC One M7 for sporting a 4MP camera. On the overall I agree the camera on HTC One M7 wasn't so great but it wasn't so bad either. Yet in the tech world, specs are specs and bigger is better. The 4MP marking simply wasn't big enough to classify as good enough.

In 2014 with the launch of HTC One M8, HTC still maintained the 4MP camera. Its only now with the HTC One M9 that HTC has opted for a 20MP camera but unfortunately this year with the S6, Samsung has fixed the single most biggest complaint with the S series and that is the design thereby ending HTC's biggest leverage over Samsung. This time again despite having a higher mega pixel count, HTC's One M9 falls short compared to the Galaxy S6 and iPhone 6 when it comes to camera. 

Only thing is if HTC had a bigger mega pixel count with the M7/M8 despite not having an equally good camera, its design leverage over Samsung could help it win. With the Galaxy S6 Samsung has reduced the design leverage.

Sony -

Sony was never big in developed markets to start with. Until recently Sony never partnered with US carriers to sell their devices on contract. Only from last year has Sony started parterning with Verizon and T-Mobile. 

The only two developed markets where Sony made an impact was Western Europe and Japan. Sony's impact in Western Europe had also started declining as consumers flocked to cheaper devices made by Huawei. The only developed market where Sony still has a considerable influence is Japan and a large part of that is because of Japan being Sony's hometown and the general sense of patriotism amongst Japanese for Sony.

On a side if you notice device makers like LG that have executed all the four points properly have found great success. For example with the launch of LG G3, LG executed all the four points mentioned above properly. LG marketed the G3 extensively. They had provided the device on all major US carriers. They had brought one of the best specs to the table like being the first global manufacturer to bring a Full HD display to their smartphone. Also they had a innovative design which felt like metal and the display to body ratio was amongst the highest in the industry. This in turn helped LG fit a 5.5 inch screen in a body that measured shorter than the HTC One M8 that sported a 5 inch display.
These efforts paid off immediately and LG was able to increase its share of US smartphone shipments dramatically.

Most developed smartphone markets are reaching saturation very fast. Within 3-4 years many developed markets will start facing negative growth,this will make it all the more difficult for HTC and Sony to break in.

Emerging countries -

Emerging countries are the future of smartphone markets right now. Smartphone prices are dropping at rapid rates. In fact rapid will be an understatement to describe the decline in price of smartphones. During 2011 a smartphone such as Samsung Galaxy S2 costed $800 or so unlocked in the Indian market. Today smartphones of comparable specifications such as Redmi 2 can be bought for 100$.

From the images above its clear that both Samsung Galaxy S2 and Redmi 2 have more or less the same specs. Of course probably the display of S2 is better claibrated, processor of S2 might be a little more powerful and camera of S2 might be better. But more or less the specs are similar and so is the overall performace. The S2 maybe slighly better than Redmi 2 but still what's more fascinating is the price drop from $800 to $100. This is a staggering 87.5% drop in price in just a matter of 4 years which equates to a 20% price drop every year. Unless and until drastic changes are made to Android such that it becomes a resource hogger specs of smartphones like S2 and Redmi 2 along with proper optimisation should provide a decent user experience for a first time smartphone buyer.

The reason why I made the comparison above is to show the rapid rate of decline in smartphone prices. At this rate its not hard to imagine a smartphone like Redmi 2 costing less than $40 in 3-4 years. Couple the $30-40 price tag with the low smartphone penetration in emerging countries and its not difficult to imagine these countries would face record growth in smartphone shipments for the years to come. Developing countries have a lot of untapped market which any manufacturer can capitalize upon.

However all this untapped market comes at the cost of margins. The dynamics of emerging markets are different, I will state some of them -

1. Consumers generally have very low disposable income. This makes them extremely price conscious. Even a $10 difference in the pricing of smartphones can alter a cosumer's buying decision.

2. Unlinke developed countries, carriers in developing countries don't involve in subsidizing smartphone prices. This means users have to pay the full price of the smartphone upfront.

The above two mentioned points effect sales in emerging countries vastly.

1. As explained in point one, people in emerging countries simply lack enough disposable income to afford high end smartphones, hence more often than not people end up buying low end and mid range smartphones in the range of $100-$300. Now obviously a manufacturer selling a $200 smartphone can't expect the same kind of margins as that of a $800 smartphone.

2. As explained in point 2 the lack of subsidies makes buying high end smartphones difficult, apart from this when smartphones like One Plus One deliver the same specs as something like the Galaxy S5 or HTC One M8 for just $350, the pricier $700-$800 smartphones again get a fair share of competition.

Couple points one and two mentioned above with the always increasing competition in emerging countries and its no wonder that margins are always decreasing when it comes to emerging countries. Even if HTC or Sony come up with a smartphone with good specs at $200, its just a matter of weeks before some Chinese manufacturer undercuts them.

Emerging markets despite all their potential for growth are markets with very low margins for every smartphone sold. Emerging markets are a race to bottom that has no end.

To give you an illustration of how low margins are when it comes to emerging markets, take this rough example into consideration. This Forbes article gives a good image of how much Xiaomi earns. 

Xiaomi's profit from its "smartphone" sales alone was $56 million in 2013. Xiaomi sold around 18.7 million smartphones in 2013. If you do the math, this means Xiaomi earned an average profit of $3 on every smartphone sold during 2013.

In case you're thinking Xiaomi is a small company and thereby has low profits then let me clear this right away. Xiaomi as of the time of writing this article is the largest smartphone manufacturer in China and China is the largest smartphone market. So Xiaomi operates on a big scale, in fact much bigger than Sony and HTC yet its profits from smartphones alone are extremely low so when I say margins are very low I mean very very low.

A $3 margin per smartphone isn't something HTC and Sony can work upon. HTC and Sony have to spend on marketing, distribution, R&D etc. Most of these costs are bypassed by Xiaomi as I detailed in yet another article.

Even if I were to assume that HTC and Sony make their business operations similar to Xiaomi and operate on thin margins it still wouldn't make sense. The reason why Xiaomi sell its smartphones at such a low cost is because in future they want to build a ecosystem of services /electronics around their handsets and capitalize on it. HTC and Sony as far as I know don't have any such plans.

So the dilemma of emerging countries is that even though they are poised for an explosion in terms of shipments, margins are awfully low.

Are Sony and HTC giving up ?

To some extent the answer is yes.

Consolidation in the smartphone market has already started. First has been the consolidation of OS segment. Android and ios have effectively pushed out Windows Phone, BlackBerry,Web OS. and Symbian.

With the growing dominance of Android and ios and a change in CEO's, Nokia effectively eradicated Symbian and chose Microsoft's Windows Phone. But Nokia and Microsoft along with Windows Phone weren't able to compete with Android and ios. Thereby Nokia exited the smartphone market and sold its mobile division to Microsoft which keeps making Windows Phone. Although the fact that Microsoft has started making apps such as Office cross-platform is a clear indication that Microsoft themselves understand that in the long run Windows Phone is not gonna survive. Similarly Blackberry now represent less than 1% of the smartphone market worldwide. WebOS has changed hands from HP to LG and now is used in Televisions.

ios and Android are poised to dominate the smartphone market unless and until some ground breaking OS emerges out of the blue.

What's gonna happen now is consolidation within the Android market.

The Android market has too many players and as this market saturates some inevitably have to go out of business. Sony and HTC seem two such manufacturers and there are signs of the same.

In case of Sony, the mobile division has been the biggest drag on the company's financials. Sony has already closed its mobile operations in China. The company even announced that they will produe lesser mid range and low end handsets. Also several times company's CEO had indicated that a sale of smartphone division maybe considered if financials don't improve. The recent launch of the Z4 only through a press release also shows the company's lack of interest in the smartphone market.

In case of HTC the company has started diversifying its product portfolio thereby diversifying its revenue streams. From being a smartphone only mnaufacturer the company now has a GoPro competitor in the form of HTC Re camera. The company also has a VR headset called HTC Vive. Last year the company also created a new division called HTC creative labs which would work to make apps for Android in general and even ported its famous Zoe app for other devices.

Conclusion -

Although I can't predict the future, most signs indicate that HTC and Sony are going to find it increasingly difficult to remain competitive in the smartphone market. Unless and until either companies come out with a radically innovative product or change their business strategies extensively they will face a tough time competing with others. As I mentioned in the beginning of the article HTC and Sony have been some of my most favourite companies and their contribution ot tech in general has been priceless. I would love either companies to stick around in the smartphone market and keep increasing the bar of what a flagship handset is year after year.