Why 2014 Is The Year Of The Cheap Smartphone

2014 is the year that the rest of the world gets connected. Cheap computers and pervasive networks are reshaping the world, and the smartphone—specifically, the inexpensive smartphone—is emerging as the key to the Internet.

In the U.S. and other “mature” markets, smartphones are as ubiquitous as televisions and personal computers, and smartphone makers know that consumers are consistently willing to spend top dollar for the latest and greatest gadgets in the U.S., South Korea, Japan and Europe. But growth in these mature markets has stalled, and it’s more difficult for second- and third-tier manufacturers to compete with behemoths like Apple and Samsung.

According to research firm comScore, fully 65% of all mobile users in the U.S. already own smartphones. At 156 million consumers, that’s roughly half the U.S. population.

So to keep their engines revving, smartphone manufacturers are now engaged in a race to the bottom with inexpensive phones designed to appeal to people in the developing world. Billions of consumer pockets are at stake. China is the biggest example, but smartphone makers are also pouring into India, Asia-Pacific countries like Indonesia, the Middle East and Eastern Europe. 

In previous years, the focus of the smartphone industry was asking “what” and “when” for the newest gadgets to hit the market. What features will the new Galaxy S5 debut? When is the iPhone 6 going to launch? This year, the focus has shifted. The question now is, “who is going to ship the most in India or China?”

There’s no shortage of competitors.

Apple’s Enigma

Apple is an enigma where this trend is concerned. The iPhone maker broke with tradition last year and released two iPhone models—one of which, the less expensive and more colorful 5C, was part of Apple’s effort to appeal to more price-sensitive consumer across the world.

The problem for Apple was that the 5C wasn’t that much cheaper than its fuller-fledged cousin, the 5S. The base-version price difference between the two models was just $100—$550 for the 5C, $650 for the 5S.

Apple admitted in its last quarterly earnings call that it had miscalculated on the 5C, as more consumers than expected opted for the more technologically advanced 5S, which was only nominally more expensive. Even so, $550 for the iPhone 5C was still too high for Apple to reliably compete in the high-growth markets.

True, Apple has done moderately well in China—it sold about a million smartphones to China Mobile last quarter—and expects big growth this year with the country’s biggest carriers. Still, its phones largely appeal to China’s newly wealthy elites, and it’s far from a given that Apple will move down the volume chain to middle and lower income class Chinese consumers.

Apple did release a less expensive 8GB version of the iPhone 5C to European markets earlier this week; on its U.K. page, the 8GB model sells for £429 ($708), compared to £469 ($774) for the 16GB version. That’s probably still not low enough to make the 5C competitive for budget-minded consumers.

You can never count Apple out, but the fact that its newest devices are clearly not targeted at the average emerging-market user means that it’s not going to have as many opportunities to compete for the mass market in developing nations as its competitors are counting on.

Microsoft And Nokia Move Down Market

One of those competitors is Microsoft and its soon-to-be manufacturing arm Nokia. In February at Mobile World Congress in Barcelona, Microsoft announced a forthcoming update to Windows Phone intended to let the mobile OS work on cheaper hardware in order to help smaller regional hardware manufacturers build budget devices. Earlier this month, we also heard rumors that Microsoft might also do away with licensing fees for Windows Phone—Microsoft normally charges device makers to install Windows—for manufacturers in places such as India.

“We did some things that have enabled us to really hit some key markets. New messaging software, new language capabilities. All kinds of stuff,” Microsoft’s Greg Sullivan, a senior product manager for Windows Phone at Microsoft, said in an interview with ReadWrite.

See also: Nokia Has One Job: Drive The Growth Of Windows Phone

Nokia also has the ambiguous Nokia X, the Android smartphone that looks like a Windows Phone but which taps into Microsoft services—search, email and so forth—instead of Google’s. The basic strategy for the Nokia X seems sound (access to third-party app stores, porting and side loading of apps) and the price is right at less than €100.

Now we just have to see if people actually buy the thing—and then whether it serves as the gateway drug to Windows Phone that Microsoft hopes. “From the broader perspective of that in the mobile phones business, it gets people using our services and then we think that the natural progression is that people will want a Windows Phone,” Sullivan said.

Android Owns The Emerging Market

Any discussion of emerging markets for smartphones begins—and sometimes ends—with Android, which accounts for more than 80% of the global smartphone market. That doesn’t mean Google is coasting, though.

When Google released its latest version of Android, one of the most significant changes was an overhaul specifically intended to ensure that Android’s newest features and functions would work on lower-end hardware. In Android 4.4 KitKat, Google made the profile of the operating system fit into smartphones work on devices that run on as little as 512MB of RAM.

Google’s motivation was partly just to persuade manufacturers to stop using old versions of Android (namely version 2.3 Gingerbread) in cheap new smartphone models. The manufacturing cycle has not yet caught up with KitKat—it was only running on 2.5% of Android devices that touch Google servers as of March 3—so the jury is still out on whether Google’s strategy will pay off. 

“Particularly at the low end but what we were seeing is that there were new versions of phones coming out with old versions of Android,” said Google’s head Android engineer Dave Burke in an interview with ReadWrite last year. “We put a lot of effort into reducing the raw footprint of Android so that KitKat could run on those entry-level smartphones,” Burke said.

Any and all comers to high-growth markets are trying to take market share from Android. This is easier said than done as Google has strong partnerships not only with the top of the heap smartphone makers like LG, Samsung, HTC and Sony, but also the mid-to-low level and white market (unbranded manufacturers) device builders like Huawei and ZTE that are shipping lots of phones to markets like China and India.

And Then … The Also-Rans

Outside of the power three in Apple, Google and Microsoft, a number of smaller (and sometimes scrappier) companies and organizations are also targeting the fast-growing developing world. Mozilla is foremost among these competitors, and so far is one of the only ones to actually ship a device in any meaningful volume.

Mozilla created Firefox OS with the express purpose of targeting emerging markets. Mozilla’s manufacturing partners are the likes of Alcatel and KDDI, companies that don’t sell phones in the U.S. yet still have large global footprints.

“I spent a lot of time traveling in South America when we launched. And, just to pick a country like Venezuela, we had community members come to Venezuela and train the local retail sales staff and design highly localized, relevant marketing campaigns,” Mozilla chief operating officer Jay Sullivan said in an interview with ReadWrite at Mobile World Congress in Barcelona. “The idea about Mozilla is scaling with people who really love what we do. So that’s how we kind of punch above our weight.”

Sullivan said analysts estimate that between 500,00 and 750,000 Firefox OS smartphones shipped in the first six months following the operating system’s debut. Mozilla announced that it was expanding to 12 new markets this year (up to a total of 27) with seven new devices during Mobile World Congress. The killer may be a $25 smartphone called SC6821 that Mozilla is making with chip manufacturer Spreadtrum this year.

After Mozilla, the competitive picture is considerably murkier. The mobile OS Tizen—the Linux-based bastard offspring of MeeGo—has been in development for years, but hasn’t officially shipped on any smartphones; in fact, at this point the only products using Tizen are one Samsung-made camera and three smartwatches—the new Gear family of wearables from Samsung. So far, there’s no firm indication that any manufacturer plans to ship a Tizen-based smartphone, much less any sense of where such a beast might be available, or at what price.

Raising The Floor

In 2013, the top of the line computer processing unit to be placed in smartphones what the Qualcomm Snapdragon 600. It made its way into the Samsung Galaxy S4 and other flagship smartphones. This year, the Snapdragon 600 is a middle-tier component for middle-tier smartphones. This is the nature of consumer electronics; what was hot yesterday is in today’s budget bin.

What has made this explosion of lower tier devices possible the is ubiquity and prevalence of highly functional but ultimately cheaper hardware. Companies like Google, Samsung, HTC, Apple and Microsoft built their smartphones and operating systems in order to run the best and most demanding new applications. Hardware makers like Qualcomm had to keep up with the demand for new functionality. Now all those lessons learned are shaping the next generation of budget smartphones.

“We scale our CPUs, we scale our GPUs to fit in the low-end parts,” said Raj Talluri, senior vice president of product management for Qualcomm, in an interview with ReadWrite at Mobile World Congress. “Now, when you do that one of the interesting things is that it lets the application, it lets the user experience that everybody has gone to that everybody expects from the high end to work at the low end.”

How this works in mobile realm is that component makers and smartphone manufacturers start off building high-end features like a great camera, fast, high-resolution displays, long battery life and great data connections into their best smartphones. Over time, you will see those features migrate to midrange and even budget phones. 

“So for a while there the trend was really that more is better. You start with low resolution displays, qHD displays, full HD displays, 2K displays and now we are talking about 4K displays. Then the cameras went from 2-megapixels cameras, 4-megapixel cameras and so on,” Talluri said. “That is what we are really finding are that companies like Microsoft, companies like Nokia are saying we can now deploy at the low end and make good products.”

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