A Tale of Two Smartphones: US vs Rest of World compared

After I wrote my Open Letter to Microsoft (urging them to take mobile seriously) I had a lot of discussions and many were curious about why does the US market seem so opposite to the Rest Of the World (ROW), when it comes to smartphones? Blackberry, Palm, iPhone and Windows Mobile devices are the norm for smartphones in America, and their primary users are business/enterprise customers. Meanwhile the world doesn't seem to even know Palm and rejected the original iPhone but they use something called Symbian (aka "Series 60" or "S60") and the world's bestselling smartphone brand is bewilderingly Nokia and most bizarrely, it is the consumer market who buys the majority of smartphones in the rest of the world, not enterprise/business users. What is going on?

This is my blog to try to explain this strange divergence in the evolution of the cellphone. And if you look closely, the iPhone 3GS and the latest Palm Pre and Blackberry models are more "European-like" than their earlier models; and Nokia's N97 is clearly designed to be more of appeal to the US market, from touch screen to the launch of the phone with iconic rapper LL Cool J from his grammy-winning rap anthem, telling potential American buyers of Nokia phones "Don't call it a comeback.."

This is not going to be brief. It cannot be brief. A smartphone is at the top end of complexity for celluar/mobile telecoms. As a computing device, it merges all the ability of a modern laptop with far more complexity of the cellular telecoms networking. Cellphones are the most complex electronic gadgets on the planet and mobile telecoms itself the biggest interconnected system and one with the most complicated eco-system, combining not only telecoms (fixed and mobile) but also the internet, banking and advertising, etc. And all of those difficult issues come to head, most strikingly, with smartphones. And now you ask me, why US different from ROW? I will do my best to explain, but we have to do it in parts. And yes, go get a cup of coffee, this will take a while.

LETS TALK NUMBERS

So, I like to start with numbers. The global cellphone market was about 1 billion phones sold last year and out of those about one in six - actually 160 milllion units according to Informa - were smartphones. Of the total global market, Nokia's market share was about 38% and its even better in the higher-price end smartphone market, where Nokia's market share was about 43% for the year. The installed base of all mobile phones was about 3.4 billion units (compare with 1 billion PCs and 1.5 B TV sets) and Nokia has well over 1 billion of the installed base of mobile phones. Smarphones accounted for about 390 million as an installed base according to my company analysis as of January 2009. As to industry revenues, handset sales accounted for about 150 billion dollars last year and about a third of that income, in very round terms, was from smartphones.

The US total domestic cellphone market for phone sales annually is about 160 million units per year, with market shares led by Samsung, then Motorola, then RIM with Nokia as fourth biggest manufacturer. Smartphones accounted for about one in five handsets sold in the US or about 33 million units. Nearly half of those were Blackberries and Nokia does not even crack the top 5. But smartphones were a very modest segment until the advent of the iPhone, so the total installed base of smartphones in America is far less than the world average, at only about 65 million.

A little over a decade ago, half of all cellphones sold in the world were sold in the USA. Today only one in six is. If you have to make the strategic decision to control one market or another, and can't have both, obviously the market you want is the world market rather than the US market. But aren't we fundamentally the same people, with same needs, and shouldn't a mobile phone for one be as good for another? Couldn't you potentially be champion of both markets? Is there any chance for rivals who succeed in America to conquer the far larger rest of the world, and equally, if Nokia dominates the outside world, is there any hope it can ever crack the US market.

The shift is happening to smartphones. For the handset makers selling to the industrialized world, the battle you need to win is that of smartphones. If you also want to fight for world dominance, then the bigger market in units is the low-cost basic phone market for the Developing World and obviously then you need enormous scale to fight for that slice, and the battles are in China, India, Brazil, Indonesia, Pakistan, Nigeria, etc. But that market won't be significant for smartphones for at least the next five years. So for this article, I'll focus on the smartphones.

LETS START FROM THE BEGINNING

The handheld cellular mobile phone was invented in America by Motorola. Americans tend to think that therefore the mobile telecoms industry itself was invented in America. But no, that is not the case. The first "modern" cellular network for mobile telecoms on what is now called the "first generation" or 1G, was commercially launched first in Japan. And even before that first 1G network, the world's first national "zero G" "pre-modern" cellular network had been launched in Finland. The study of the evolution of the cellphone - as I call it the "Eight C's" has been driven by Finland and Japan, with only occasional American innovations thrown in for good measure.

I am a Finn, I used to work for Nokia. I do provide consulting also to and about Japan, but honestly, I know Nokia and Finland (and the Symbian operating system, used in Nokia smartphones) better than I know the smartphone market of Japan. The more relevant point is that Nokia is globally present in just about every country, whereas most of the Japanese handset makers tend to only focus on the Japanese market. I know it is a severe over-simplification, but since Symbian powers more than half of all smartphones sold today, and is inside the guts of more than half of all smartphones that have ever been manufactured; and Nokia has a lion's share of those Symbian phones, being the biggest single brand of smartphones, I will use Nokia and Symbian as proxy for the "rest of the world". My sincere apologies to Ericsson, Motorola and Psion, part of the original founders of Symbian, and Panasonic and Samsung as well. I know they have been integral parts of the Symbian story, but this is going to be a long story as it is. I will limit it to Nokia as a proxy for Symbian and the rest of the world.

A POCKET COMPUTER WITH VOICE CALLS

Then America. Here the smartphone has a very interesting history. It came from stand-alone PDAs, the tiny "palmtop" computers in the 1990s. All major PC makers had their own PDA models and one can say that Apple's Newton is the grandfather to the modern iPhone (via its immediate parent, the iPod). Stand-alone PDA sales grew all through the 1990s and reached a peak of 13 million units sold in the year 2003. Today stand-alone PDAs sell in the couple of million units per year level.

US FELL BEHIND WITH BASIC CELLULAR

Please any US based readers, don't be offended. These are facts, I am not making any accusing statements of value. These are statements of fact. And these facts are not disputed, not by the US own mobile telecoms industry body, the CTIA (Cellular Telecoms Industry Association) or the Canadian equivalent the CWTA. The US was not among the first to launch the 1G analog cellular networks (Japan, Finland and Sweden launched before the US); US was not the first to launch 2G digital cellular (Finland was first, Sweden and Japan launched before the USA); and not first to launch 3G high-speed data-capable cellular networks (Japan was first, Sweden launched before the US and Finland about the same time as the US, except that the first US network on 3G, Monet, went bankrupt and is not in operation anymore).

The same holds true for all major measures of leadership in cellular telecoms. Every measure. The US cellular penetration rate at the end of 2008 was about 85%. Finland achieved that level of cellphone penetration nine years ago. Today I read on Twitter of a current US youth statistic of cellphones, that half of 13-16 year old teenagers in America now have their own personal cellphone. Yes, an interesting statistic for sure. But in Britain, back in 2004, the age of the first-time customer for cellphones had dropped down to age 7. Today when US parents ponder whether to get their 12 year old a cellphone, the UK parents routinely buy them for their 8 year olds.

SMS text messages? After American Idol and the Obama campaign last year, for 2008 the American average of SMS use had climbed to 4 SMS sent per day. That is only the same level as the European average. The world leaders, in the Philippines, send 26 SMS text messages per day, on average. And as to SMS use by the President or a national leader? Britain's previous Prime Minister Tony Blair used SMS regularly; and Slovenia's Prime Minister was using SMS for his government agendas etc back in 2001.

Yes, the changes to the cellular industry in America have been great and breathtaking recently, but the rest of the world has actually discovered these benefits years ago and is on most measures well ahead of the US. Seriously, readers please do understand, in this industry the US is playing catch-up and the global leaders tend to be Japan, South Korea, Finland and Sweden (among a few others like Italy, Israel, Austria, Singapore, UK and Taiwan). I have provided a deeper facts facts facts and more facts analysis of this matter, if you still doubt me, read my blog "who is ahead and who is behind in mobile"

BUT NOT IN SMARTPHONES

Here is the weird part. In smartphones the US (and please Canadians don't be offended, I count Canada and in particular RIM/Blackberry as part of the US for the purposes of this story) was and continues to be a leader. Not the leader, but certainly a leader. That was because of that legacy of the PDA makers.

US based PDA makers saw the stand-alone PDA as primarily an executive tool, to help the busy exec have access to his or her calendar and personal info management and utility tools like calculators and note-takers, in meetings where a laptop might not be practical (or the exec didn't want to lug around one - or be seen to lug one around, ha-ha). Most US PDAs evolved soon into devices with stylus data entry options and thus also touch-screens.

With touch screens, the US PDA-oriented smartphone market also had large screens, no need to "waste" space on the tiny device for the keys needed for a keyboard. The devices used the exisiting PDA operating systems like Palm and thus had a large pool of applications and services to offer, which also tended to be focused on the business/enterprise user.

The smartphone in the US market tended to be synonymous with PDA, where the cellular network connectivity was just one "feature" of a PDA, just as one might have WiFi connectivity etc. With large screens and styluses, the phones had dimilar distinctive appearance, just like PDAs and clearly looked more like a modern iPhone than say a modern Motorola Razr.

MEANWHILE ACROSS THE POND

Finland, home of Nokia, was mostly by accident of timing, the country experiencing the biggest growth in mobile, and with that came a disproportionate amount of the early innovation. The first digital network, the first competitive national cellular carrier/rival; the first person-to-person SMS text message, the first banking service onto cellphones, first cellphone with the real internet on the phone (think iPhone), the first cellphone with full email on the phone (think Blackberry), the first cellphone operated vending machine, first downloaded paid content to phones (ie the birth of the mobile internet) - and all this was more than ten years ago in Finland.

Finland also launched the world's first ads on cellphones, the first news services on cellphones, the first airline check-in for cellphones, first lottery on the phone, first taxi service booked via SMS etc. Today more than half of all public transport single tickets sold to the Helsinki underground trains and trams are sold through the cellphone. President Obama and his Blackberry? The Finnish Prime Minister in 2007 already had on his voice mail - don't leave me a message, send me an SMS text message instead. There would be no argument in Finland whether the President or the Prime Minister should have something like the Blackberry for continuous contact.

So Nokia was lucky, by accident, to be headquartered in that country where the big innovations were most happening around mobile about a decade ago (today most innovation in mobile is in South Korea and Japan). Nokia executives could study their home market, and make educated guesses of how the rest of the world might evolve, as they would get as familiar with mobile, as the Finnish market was becoming.

SMS AND STYLUS

So, we get the addiction to SMS text messaging. Now proven in university studies that SMS is addictive, the first published document to suggest a possible addiction to SMS was by who? Nokia of course, in their global messaging survey of over 6,000 consumers on four continents, which Nokia made public in 2001. So Nokia execs have known from actual study, that SMS is addictive. Today this is not that unbelievable to US executives. But trust me, just a few years ago I heard regularly in my seminars and workshops held on the North American continent - that "Tomi, I gotta disagree with you on one point, I think you're totally wrong on SMS. Americans don't do SMS - and never will. We'll go the Blackberry wireless email route before we do SMS" Seriously, this is what I heard all the time and no amount of independent SMS user research from France to Australia would convince American audiences. Luckily in a Post-Obama-election world, that all is finally behind us and today all major US brands and companies are rushing to discover what they can do with the world's most widely used data application.. In 2008 the "dam broke" in America, and SMS was accepted. But note, if the American industry accepted SMS in 2008, Nokia HQ knew it eight years.

But yes, Nokia HQ got this fact first. Not that they were particularly smart about it, they just were hungry to understand their market. Nokia has demonstrated consistently a hunger to understand this new world where they are headed. And they had that bit of extra insights from their backyard, the Finnish domestic market where SMS had taken off years earlier (remember it was a Nokia employee, after all, who sent the world's first person-to-person SMS back in 1993). The whole concept of SMS was a Finnish invention of Matti Makkonen the grand old man of Finnish mobile telecoms and also at one point my mentor when we both were employed at Nokia.

Why is this relevant to smartphones? American business-oriented PDA style smartphones were stylus-oriented. Ok for the quick note or comment or checking a box on an application, but not for typing dozens of Twitter-style messages every day. For that you needed a good keypad interface (or later, as Apple proved, a touch-screen finger-operated virtual keyboard would also do).

The US PDA and Stylus oriented smartphone concept was poor for SMS, but the US market did not care about it earlier in this decade. The Nokia/Symbian style input was much better for SMS and of great appeal to the European (and Asian) market.

SMS IS PROFIT ENGINE

So European smartphone makers were very reluctant to abandon the keypad, because of SMS. SMS accounts for 25% of the revenues - and over 50% of the profits - of the European mobile telecoms industry. And the European mobile market is obviously far larger than that of the US. So the idea to launch a stylus-operated, and "bad for SMS texting" style smartphone would have been a non-starter in Europe. European major carriers have as a rule been more profitable this whole decade than the US and Canadian ones - and this has been mostly due to the profits out of SMS, the most profitable mass market service or product in the economic history of mankind. (You can read the facts here - understanding SMS).

The European (and Asian, Australian) carriers/operators would safeguard their SMS profits. They would always give preference to phone models that promoted SMS usage and discourage phone models bad at SMS. Makes very basic business sense. This is your most profitable service, what is the best phone for it. But it also meant, that essentially all non-US non-PDA style phones and yes, smartphones, used to be operated by keypad. The keypad (or better yet, a full QWERTY keyboard) was a necessity for SMS. Thus the design focus with Symbian to use the numeric keypad to select your applications from the icon menu etc. The keypad was "a given" and expected to be always there on the phone. Even look at the N97, a Nokia touch screen phone - yet it has a real QWERTY keyboard. This is what the SMS generation expects. But with most mid-range phones it meant one screen and keypad on the same small device. This meant the screen was a compromise in size, nowhere near as big as the PDA style US smartphones (and now the iPhone)

What it meant was that what US business/enterprise customers demanded in a smartphone - large screen, stylus, lots of business-oriented apps - the Nokia and Symbian group would not offer. Meanwhile the US PDA-style smartphones died out of the rest of the world, ever more as the stylus format became incompatible with increased use of SMS.

TESTBED TO EVOLVE THE SMARTPHONE

For Nokia R&D engineers, the domestic Finnish mobile telecoms market has been an ideal testbed and incredibly rich in teaching facts, rather than "conventional wisdom" and forcing executives to break long-held views when evidence by their own kids, wives and husbands, parents, cousins, uncles and aunts, nephews and nieces, all provide evidence to the contrary.

Please indulge me with a story, this is going to be good and so typical of how weird our industry is. The Nokia Communicator, the world's best-selling PDA and smartphone series of all time. The original Nokia 9000 Communicator was a monster heavy "brick" phone, the result of the collaboration between Hewlett Packard (and its LX 200) and the Nokia top model 2110 at the time.

It was also a ground-breaking phone on just about every level. It had all office suite apps, word processing, spreadsheets, etc, and it had full email (5 years before the Blackberry), it had the full internet - yes, full internet even if very slow on those early networks - this was years before WAP - and it was the first phone with a full QWERTY keyboard. And it had fax (at that time this was a popular service and big selling point to the phone) and it had.. a speakerphone.

Today most mobile phones have the speakerphone feature as standard. But in 1996 when the 9000 Communicator launched, it was the first phone to feature a speakerphone. Many questioned the need of it. The Nokia execs wanted it to be the ultimate business phone and obsessed with cramming everything in it to make it the ultimate "communciator" to live up to its name, and yes, you could place it on the table in the conference room and 3 or 4 people huddling around it could speak to it, and carry on a speakerphone conversation. It very quickly became one of its most loved features and of course all subsequent Communicators had the speakerphone and now the feature spread to essentially all phones.

This was the most expensive phone on the planet. Twice as expensive as the next most expensive mobile phone by any maker. And it was only targeted at business users. And obviously, only a few really high-end executives could justify that enormous expense (I gotta have a Communicator) and it became quite the status symbol of high position in management.

So then comes Finland and the society adjusting to mass market phones. The replacement cycles for phones kept shrinking. The age of the first-time cellphone owner was also declining Teenagers, soon pre-teens had their own phones. And what happened. The parents would give their old phone to the kids, when they upgraded to the next new phone. The 9000 model Communicator gave way to the 9110 Communicator, and the really important VIP boss did not want to show up with the old model phone.

So those previous generation of "most expensive" business phones, Nokia 9000 Communicators, started to show up with teenagers as their first phones. Yes, 2 or 3 years old phones by then, but still superbly stuffed with features and abilities, including that wonderful QWERTY keyboard for SMS text entry. (this will happen with your iPhone 3GS and Palm Pre and Blackberry Storm and Nokia N97 too - in three years your nine year old will have it as their first phone... as a TOY)

And yes, the speakerphone...

What do kids do? They play. And yes, around year 2000 or so, we started to have stories in the Finnish industry, that teenagers are now playing with the speakerphone feature of their (used) cellphones. Playing with it? And yes, 3 boys would get together at Kimi's house and would call the 3 girls at Jaana's house, and both groups would use the speakerphone to have group discussions. The three boys knew that their friend Mika was attracted to one of the girls, Tiina, who was at the other end. By the 3 boys talking together, they could let their friend Mika be clever and flirt with Tiina, without being embarrassed or getting into those awkward moments with nothing to say, etc, and suddenly ending the phone call. You could call it group flirting.

Kids in groups started to do homework assignments together, via group calls. I saw an early study of speakerphone use early in this decade from Finland, which said that even though it was popular among business users in Finland, the biggest user group for the speakerphone feature was teenagers. I can promise you this is not what ANYONE at Nokia HQ ever imagined possible, when insisting to include the speakerphone feature to the first Nokia 9000 Communciator. Speakerphone was a "business" need, not a childrens' toy. Yet it turned into a kids toy and teenager group plaything. Amazing.

THE LIGHTBULB GOES ON

Suddenly an epiphany moment (in Finland..). There is a bigger market opportunity for "smarphones" in residential/consumer markets than with the business/enterprise market. Even though this is totally counter-intuitive (smartphones are too expensive for consumers) the evidence from every market, from Finland to the Philippines, bears witness to this fact today. Every market except North America - but now luckily the iPhone is finally destroying that myth also in America. Yes, today we can see it and believe it, that smartphones can be sold to mass market consumer customers. But again, Finland got there first and Nokia was very smart to believe the facts, rather than the conventional wisdom.

So Nokia re-organized and launched a new unit to sell the N-Series. And it moved the Communicator into another new unit to sell business/enterprise phones under the E-Series. Guess which series sells better in America? E-Series obviously. And the rest of the world? N-Series many times over. But lets not get ahead of ourselves. Lets now look at Nokia attempts to invade America.

CAN'T CRACK AMERICA

And its one of those perennial mysteries. Why did Swedish pop band Abba be so beloved and the best-selling band of the decade of the 1970s in Britain, in Australia, in Japan, in Mexico, in Canada even; in just about every country - except the USA? Abba, which utterly dominated the charts of all major music markets for that decade, had I believe only one number 1 hit in the USA. The only market which they did not succeed in. What is it about the US market that makes it so hard?

How can Nokia be twice the size of its nearest rival - for a decade - in Britain, in Italy, in South Africa, in Australia, in India, in Brazil, in Mexico, just about everywhere, but not number 1, not number 2, not even number 3 in the USA? What is it about that market?

I can't explain Abba (although those babes Angeta and Annfrid were hot, and the guys, boy were they ugly..). But I think I can explain at least part of Nokia..

WEIRD LOOKING

The US networks are notoriously lousy in quality (trust me on this, Russia, China and Brazil today have better quality cellular networks than the US and Canada). The American consumer mistakenly thought that an antenna that is a bit visible, ie it protrudes from the phone handset, is "better" at reception than a phone with an internal antenna not protruding at all. Where in the rest of the world the networks are better, the consumer is not paranoid about losing coverage and doesnt' even think of the antenna. Of course the phone connects.. Then design can move on, and hide the antenna so it doesn't get stuck in your pocket. Nokia was the first phone maker with curvy, pebble-like elliptical designs, smoothed out corners to make the phones very easy to put into your pocket etc. And they didn't display the stub for the antenna. ROW didn't care. US customers thought that Nokia phones therefore were bad at reception. Can't have that..

SMS NO IMPACT

Through most of this decade, and through most of its phone models, Nokia has been head and shoulders above the rest of the phone makers in one category - best at SMS text messaging. The simple T9 keypad, and turning the predictive text entry method off, the youth of the world loved Nokia phones as the fastest way to text if you didn't have a full QWERTY keyboard at your disposal. Some kids have been measured faster on their T9 phone than using the full computer keybaord and comfortable large scale keys in QWERTY.

So in all ROW markets, as SMS took off, the mobile operators/carriers observed the profits in SMS. Then they measured users. The noticed Nokia branded phone owners in their networks contributed more than the average to the total traffic in SMS - ie contributed more to profits - and fell in love with Nokia as the preferred phones for the next campaign and next upgrade to their customer base. Nokia in turn helped operators understand SMS more and how to utilize this to their advantage (such as the global messaging study I mentioned). This in turn caused some handset makers - most obviously Samsung - to emulate Nokia and strive to be as good as (or better) in SMS. Equally others (Motorola most notoriously) failed to get the message no matter how many times the operators complained, and did not try to become good at SMS. I would argue that for this decade, all major handset brands, there is a clear correlation with being good at SMS, and growing market share, and being bad at SMS and declining market share. Siemens, very good at high-end advanced feature phones and very crammed with tech, were lousy at SMS (they sold out to BenQ). Motorola also in a death-spiral. But Nokia, Samsung and Blackberry, all solid growth.

Motorola was receiving conflicting messages. Its domestic US customers (carriers/operators) loved the phones, didn't want changes, and didn't seem to care for SMS. This was also why all other US based phone makers - and both iPhone and Blackberry - were not optimized for SMS to begin with, but at least RIM and Apple were listening to their customers (carriers/operators) and both quickly improved their SMS abilities.

But it came back to Nokia. They were dumbfounded. In all other markets, operators undertood SMS and loved Nokia for being the device that brought the most profitable traffic to their networks. Meanwhile in America, the carriers/operators seemed to be oblivious and even hostile to SMS no matter how many profitablity and loyalty studies Nokia showed. SMS was arguably Nokia's strongest asset in the past 15 years in gaining market share and holding onto loyalty. It applied in all markets, except North America. If customers didn't care about SMS, suddenly Nokia's strongest asset was neutralized.

NO FLIP PHONE

And then was that Motorola style flip phone format, now best known through the Razr. The American consumer had learned that a celln phone flipped. You knew when it was open and when shut. Nokia never had the format as its main type of phone and used a keyboard sequence to lock and unlock the phone. Something strange to learn and did not seem easy enough. The Nokia candybar format was alien to Americans. As this was Motorola's home field, the Motorola marketing effort and strong contacts with all carriers/operators was also a strong factor in maintaining that perception. A cellular phone needed to be "flippable" in some way, closed to open and back.

SMARTPHONES OPPOSITE

So then with the first Nokia business-oriented phones, in particular the early Communicator models, they were totally wrong. The business PDA phone needed to be stylus-operated (no stylus option on any Communicator ever) and touch screen (never had it in 13 years). But it needed to be wide and flat and slender. The Communicator was bulky, with its hinged clamshell style, narrower, longer - and heavier as it carried the full QWERTY keyboard plus about twice the total connectivity and power of the much cheaper American PDA-oriented phones.

The Communcator was too much like a cellphone in some ways and not enough like a PDA-style US oriented smartphone in other ways. Obviously the early Symbian applications were very few in number and had often European issues such as European measures and British spelling etc, while Palm, Windows Mobile, and the others had many apps from their developer community, and always with strong US focus. And business apps focus. Nokia and Symbian had started on the path to consumer oriented apps and this also confounded US customers. Why is there a camera on a smartphone? Aren't you just subsidising a free digital camera to a business executive? My corporate customer purchasing department isn't going to approve a cameraphone as an authorized cell phone.

ENTER THE BLACKBERRY

So we get the Canadian pager messaging company, Research In Motion (RIM) who decide to expand to cellphones. They release the iconic Blackberry smartphone in 2001. It is "enough" like a US PDA-style phone with flat wide format, but it is actually a candybar form factor and has a narrow-keys QWERTY keypad. It is initially sold as the optimal email device that happens also to be a phone. It soon gains the reputation of being the "crackberry" as it has such strong addiction by its users, and takes North America by storm.

The Blackberry opens a door for the simpler models of the Nokia E-Series (which look like the Blackberry, similar form factor, similar narrow QWERTY keypad etc). While the rest of the world fall in love with early Nokia N-series consumer smartphones, the US market sees E-Series outselling the N-Series. And still, Nokia is far behind the major phone makers in general (Motorola, LG etc) and in smarpthones far far behind Blackberry and various Windows Mobile devices.

American executives love the Blackberry. RIM think this is the best thing since sliced bread and make bold plans to spread to the rest of the world. And they find very astonishingly, that the Blackberry does not take the European and Asian business customer community by storm. So RIM are very smart about it, they study the markets and consumers and try to figure out why. They do observe three vital factors not visible in the North American market at the middle of this decade: 1 - business excecutives in all other markets use SMS text messaging for business, far faster form of communication than email. When business execs in Europe or Asia get a Blackberry, they use it mostly for SMS. A very important insight a few years before the Obama campaign.

2 - RIM observe that the youth are obsessive about SMS. That ten percent of British teenagers send out 100 SMS per day - that means those kids also receive about 100 per day. It means that for the 16 hours they are awake they interact - and bear in mind, only counting the use of SMS on their phones, ignoring all other features like music, games and voice calls, every 5 minutes either sending or receiving a message. Every 5 minutes they interact with SMS, every single day, every waking hour. And in South Korea its so bad, that one in three teenagers send out 100 SMS per day. If American execs loved the Blackberry email, and European execs already used it for SMS, wouldn't teenagers, the heavy users also fall in love with it?

Which meant 3 - the smartphone market outside of the US is a consumer market, not a business/enterprise market. Again, no matter how much this went against all the conventional wisdom they heard and all the brilliant US based IT/telecoms consulting advice they got from the biggest name management consultancies; RIM were honest with the facts and adjusted. They noticed Nokia the biggest smartphone maker sells more N-Series than E-Series. The N-Series is more a rival of the iPhone while the E-Series is more a rival of the Blackberry. And RIM were not content with only the North American market.

So they adjusted. They expanded their product range to consumer phones, adding cameras, media players and started to focus for youth SMS markets. Today the Blackberry is the most-desired gadget for the youth the world over. Not because of wanting to access the "real internet" which you can do with the Blackberry. Not because of the camera or music player. But because they can't live without SMS text messaging. SMS is the killer app for mobile and Blackberry is noe riding a tsunami wave to their success on the back of SMS, not on the back of their first wave of corporate email.

We see the "American model" of the smartphone starting to crack and how a US-focused maker can adjust to the bigger opportunity beyond the seas. Blackberry is the fastest growing phone maker in the world and if current trends hold, they'll overtake Motorola sometime next year in total phones shipped. Not smartphones mind you, counting all phones by MotoMoto. Yet observe: Blackberry phones are about twice as expensive as Motorolas.

ENTER THE I-PHONE

So then we get the most important mobile phone in history, the original iPhone. Not a perfect phone by any means, but more influential both within the mobile telecoms industry and beyond it, than any phone before or since. Again, I could write several books about the iPhone, lets focus just on the smartphone related matters.

The first really important change brought about by the iPhone was the touch screen. Remember we've had touch screens with US PDA-oriented smartphones for a decade before the iPhone. But they were stylus-based. The iPhone was finger based touch screen. Three years ago the world's bestselling phone models by Nokia, Samsung, Motorola, SonyEricsson and LG, were almost all operated by keypads. Not touch-screen phones. What touch-screen phones existed, were almost all stylus-operated, and were total failures in consumer mass-market uses. Now suddenly the iPhone came and showed you can have a great touch-screen user interface without a stylus. Yeah, it would take Apple to make that possible ha-ha, they did revolutionize the PC too with teh original Macintosh in 1984.

So the iPhone changed what consumers were willing to accept in a smartphone user interface, and in so doing, also allowed the large-screen no-keypad layout to evolve beyond the stylus. The iPhone also expanded the perception of what is deemed acceptable as the largest reasonable size of the pocketable unit - by its glorious 3.5 inch screen. We all wanted that. Suddenly the phone was not too wide at all. Not if we in return had a big 3.5 inch screen in our pocket. Suddenly nobody is talking of credit-card sized wafer-thin phones. Now they wall want bigger screens. What was previously a form factor for only business phones became acceptable for consumer phones.

This brought lots of clones and copycats obviously from LG to HTC and in some ways for example the current Nokia N97 - a Nokia phone with a touch screen - would not have been possible were it not for the success of the Apple iPhone.

The one other important contribution that the iPhone made to specifically to the US market was the sudden consumer appeal for smartphones. The previous business/enterprise oriented PDA-format smartphones were not desirable for consumers (US or ROW). But the first price of 499 and 599 dollars of the iPhone, both shocked the US market but also helped adjust it. Today when the N97 sells for 700 dollars, the sticker shock is not nearly as bad as it would have been before anyone heard of the iPhone. Also please reader do note, that the real price you pay for an iPhone 3GS in America today, is not 199 dollars. It is about 700 dollars, ie the unsubsidised price, which AT&T will charge you if you don't qualify for the 199 dollar price and 2 year deal. So the real price of the iPhone 3GS today is actually essentially identical to the Nokia N97, only if you have the 199 dollar deal, AT&T is letting you pay the remaining 500 dollars on a monthly payment plan for 2 years..

Let me explain this a bit. In America the iPhone is subsidised but the N97 is not. In reality both phones cost 700 dollars. One is sold with a huge discount for bundling. Does not make a fair comparison. Imagine if it were reversed. In Britain today, for real, the iPhone costs about the same, about 100 UK pounds on the O2 network, but the Nokia N97 is free on Orange and Vodafone ! Now suddenly the game is very different. Yeah, maybe the iPhone has a better touch-screen but the Nokia is "free" (and in reality its not free, its a subsidised phone and you sign a 2 year contract for it). Or then consider all the countries where there are no subsidies, like Belgium, Italy, South Korea and Israel - then the price of both phones is 700 dollars (in local currency equivalents obviously).

NO CDMA VERSION

While US smartphone makers were struggling to understand why the appeal of their models, very popular in America were becoming undesirable in Europe, Asia and Australia; the Symbian models were also struggling ever more in America. One factor is the CDMA network technology. Nokia and most of Symbian handset makers tend to focus on the GSM market (which is over 75% of all mobile subscriptions on the planet). North America is very rare, in that CDMA is the predominant standard, and GSM is the minor standard. Verizon and Sprint are on CDMA, AT&T and T-Mobile are on GSM. The CDMA evolution to 3G is called EV-DO, and the 3G evolution for GSM is called WCDMA (also known as UMTS). A higher speed variant of this is HSPA also known as HSDPA. Sorry about the alphabet soup, there is a lot of it in mobile..

What most GSM phone makers would do, including Nokia smartphones, was to be selective in which models to bother to port to CDMA do to its far smaller market size, and even then, often releasing a CDMA version 6 months after the GSM version. Meanwhile the major suppliers of the CDMA market, Motorola obviously but also RIM, Samsung, LG, Palm etc, would often release - depending on which caririer/operator would be the launch customer - a CDMA version before the GSM version. Apple was very brave to launch only GSM and not a CDMA version, as their home country had more CDMA users than GSM users. Very brave, very smart

CARRIERS AND RELATIONSHIPS

This all leads to the carrier relationships. It does not matter much at all, how great your phone is, if the mobile operators/carriers don't support it. The need is far more acute in North America where the carriers lag so much in terms of the customer-oriented service (such archaic concepts as charging for incoming calls and SMS text messages; forcing customers into the world's highest monthly tariffs that are pitched with unbelievable buckets of free minutes that then go unused and worse, get stuck in the perennial network congestion problems and coverage outages, which in turn mean that when you want to use your calls, you often can't; etc..).

The US carriers not only lock their phones to their customers, the CDMA carriers don't use SIM cards (even Chinese and South Korean CDMA users have SIM cards) and the US GSM operators tend to lock their phones to the SIM card. Most markets do not lock phones, so you can take your SIM card from one operator/carrier, and swap it for antoher SIM card, and use your same phone but switch carriers/operators. This is normal in most advanced markets. Samsung was the first major phone maker to offer dual SIM card phones, so users dont' need to swap out the existing SIM, to make this even easier. But very few Americans even know of the SIM card and wouldn't know how to switch networks even if you gave them an alternate SIM card (for a GSM phone obviously)

Until recently, there were almost no prepaid (pay-as-you-go) subscriptions in America. The world has moved to more than 2/3 of all subscriibers now on prepaid. That means again SIM cards. So if the carrier/operator does not "support" your new cool phone model, and you try to sell it independently through say an electronics chain or in your own stores, then you have the problem of how can the customer get connected to his or her carrier/operator network. No SIM cards as a rule. Calling up the call center, likely will not help you get an unsupported phone to be connected to the network. Very difficult.

The US carriers/operators were not impressed by Nokia's track record in their home market. The customers were not falling head-over-heels about the Nokia brand. The phones looked wrong, had weird behavior things and wrong form factors etc. And the CDMA operators/carriers were regularly feeling slighted that Nokia didn't bring their newest hottest GSM phones to the CDMA side fast enough. Net result, very few Nokia models, mostly at the low end of the price range, and poor marketing push by the sales teams in the stores of the carriers/operators. So if you were a customer, walked into the store, hoping to buy a Nokia phone, the salesguy would go by his sales incentives and try to sell you a Motorola or Samsung or whatever was flavor of the month..

There is much more to this, actually on the side of the carrier-relationships ranging from who supplies the network infrastructure (Nokia's networking division hasnt' had major success in North America) to petty issues about the GSM-CDMA battle which pitted Nokia against Qualcomm and had US carriers often taking sides. Nokia was painted as "anti-US" and this again hurt in the carrier relationships.

And there is the crippling of phones. American carriers routinely do this, stripping features and abilities from premium phones. So the website and brochure says the phone has WiFi. Then you buy it and the WiFi does not work except on that carrier's own WiFi network. etc. This then at Nokia's end is seen as annoying the customer. American carriers/operators are still so immature in the customer service side of mobile telecoms, that they punish customers and try to cage them in as prisoners of their networks (trust me, American readers, if you lived in any other market, including Russia, you'd get better service on your cellular phone account than you get currently by the big four carriers in the USA).

Nokia tries to delight its customers to build loyalty, not punish them. So in many cases, the negotiations with Nokia and a given carrier have broken down for a given phone model, when the carrier has wanted to cripple it (too much). Nokia feels its better to have a smaller market share of satisfied customers than a larger share of unsatisfied ones. In the long run, the loyalty pays off.

But the point is, that the carriers themselves in North America are quite underwhelmed by the Nokia brand. They don't believe in it, they dont' bother to market it and thus the American consumer is not particularly exposed to it. Then it means that for almost all premium phones - Nokia has sold countless millions of phones costing 1,000 dollars and more in the world - that Nokia has produced, the US market has not seen them. The American consumer thinks of Nokia more like a Fiat or phones than a BMW. Makes it that much easier for the Windows Mobile, Blackberry, Apple and Palm (and now Android) based smartphones to capture sales in the US and Canada when their big global rival can't get their top end phones even into the US market.

SOFTWARE

So we come down to the applications. Tomi, its a smartphone. By definition, a phone that can accept applications? Why aren't you talking about the Apple iPhone Apps Store. Yeah, sure, its important for us nerds and geeks, the early adopters of new technology, who have been envisioning a pocketable PC that could be perfect for the gadget freak. Yes, the Apps store is wonderful. A billion downloads, yeah. Except that the mass market consumer, your mother, your father, your sister and your brother, are not like you and me at this blog. They will not madly download tons of apps to any smartphone. The theory of "Crossing the Chasm" has been explained by Geoffrey Moore a decade ago and is not disputed. Techie-geeky appeal of ultra high tech does not translate to the mass markets, in fact in most cases what geeks want and mass markets want are diametrically opposed.

No matter what stats you see for Apple iPhone Apps Store success, whatever the stats, the total market share of Apple is 1% of the phone market. It is exactly at the pointed end of that Crossing the Chasm theory that Moore talked about. This is NOT a mass market, and CANNOT BECOME one if the same model is repeated. Understand what I say. Even if you are able to make a success out of your app in the Apps Store today, it CANNOT translate to a mass market success, using that same model. its not my theory, Moore's theory holds near unanimous agreement by all technology marketing gurus. Do not kid yourself.

So yes, the Apps store and all the other smartphone app initiatives from Google Android to Nokia Ovi, and the tens of thousands of apps to the Palm and Windows Mobile and Linux Mobile operating systems are very relevant... to application developers - millions of accessable devices yes and countless millions of dollars will be made on those; but they are not going to be relevant to the mass market for consumers. 160 million smartphones sold last year. By far the most of those 160 million buyers did not for one second consider "what operating system does this have, what apps can I download to it". You and I may have done so. You and I care. The mass market is not like you and me. And the Apple iPhone customer today is not a typical mass market customer. Do not kid yourself. Those who bought an average smartphone last year wanted a certain high-end phone with certain abilities and that given smartphone happened to match that need. Its operating system and any applications had ZERO bearing on the decision. Not for mass market consumers.

This is difficult for application developers to hear. The smartphone total market will never translate to an accessable market for their apps. The iPhone is an anomaly, for many good reasons (which would produce another monster blog story, lets leave that to another time). But even with the iPhone, after the first truly passionate Apple loyalists got theirs, when we look at the rest, it is not that everybody is downloading apps to their iPhones.

Bear in mind that of the billion apps delivered via Apps Store, 80% of those were free. And of the remaining 200 million downloads, the vast majority were games. So yes, the iPhone in the last year, has fulfilled the promise of what a Playstation Portable phone by SonyEricsson could have been; what the Nokia N-Gage failed to be (ha-ha, Nokia was a bit too early on that, eh? another smartphone move by Nokia into mass markets by the way).

Yes there is a big opportunity for apps to be sold to smartphones. Yes, it is a very significant market, when viewed from the angle of the software applications industry. But it will always be - always be - only a niche. Do not allow yourself to be delusional about this. We do not buy - and the mass market will not ever buy - smartphones so that they could install some apps to it. The vast majority of users will be contented with the apps that come pre-loaded, and then they go to web based services to get their additional benefits.

Please do understand what I say. Not buying apps to the phone. But web-based services for the mobile industry - and for smartphones

WEB BASED SERVICES, NOT APPS

That is where the big opportunity is. Not apps that we install onto a smartphone, but the services that we deliver via the network. Mobile premium services, what could be called "mobile internet" and by this I mean a superior, better, money-making internet than the old legacy dumb internet we have on the PCs. So I explicitly do not mean "the real internet" onto the phones. That is as dumb as putting a real horse to power your car! We have a BETTER engine in the car. And now, yes, please understand, the "mobile internet" is the far better internet than that horrid old creaky stupid cheap "advertising-led" "get-me-more-eyeballs" internet which we all use today. The internet is for good reason called the 6th mass media channel and obviously mobile is the newer, 7th mass medium.

No, while that will be there, and yes, there will be millions and millions of users on "the real internet" on our smartphones, that is peanuts. PEANUTS. The far bigger opportunity in mobile is in the 7th mass media type of mobile internet, the better, smarter and richer money-making and magical mobile internet. That is where the opportunity is. To see how vibrant and lucrative it can be, one need not look further than this decade and Japan and South Korea, where the mobile internet really thrives already. Application developers have a hard time making money selling 1 dollar apps on the Apple iPhone Apps Store. You have to be very lucky to make the top 100 apps listing to have any chance of recovering your development costs. A very risky development path.

But in Japan, they offer the service on the mobile internet, take a subscription of one dollar per month (100 yen) and pay 10% to the carriers/operators and the service provider gets to keep 90%. Rather than one dollar from one customer once, the customer is charged 12 months, 12 times per year. 12 dollars, and the content owner gets to keep 10 dollars and 80 cents of it. Which is better? A dollar or ten? I rest my case, milad.

DATA USE

So the big reason to get a fancy smartphone is mobile data use. Yes, that can be a downloaded app. Yes that can be a native application on the phone which perhaps is updated via the network like a map. Yes, it can be services we access online on the mobile internet, mostly using quite simple interfaces like WAP. But the biggest data application on the planet is SMS, and all of the addicted mobile data use starts with that, tap tap tap.

Look at RIM. Their firsr five years they sold the iconic Blackberry smarpthones, with the business/enterprise oriented full solution, email client, the enterprise server, and business-oriented phones. After five years of patiently building the market and having the strongest customer loyalty of any phone brand, they had only achieved a total 8 million cumulative customers worldwide, and three out of every four were in North America. Then they shifted to the bigger consumer market. SMS is the biggest app, so they started there. Today the funky Blackberry is the must-have gadget that every teenager hungers. RIM sold 8 million of their phones in the last quarter of 2008 alone. This is understanding your market and your positioning and your advantage. And adjusting to the market beyond your home.

This is incidentially the strategy I advocated to save Motorola, to make them the best phones at SMS text messaging.

POCKET COMPUTER OR INTERNET PHONE OR SMART MOBILE

So its been another long Tomi Ahonen article. Thanks for sticking through with me. I hope this was of use. Now, the end. Will it be a pocket computer, or internet phone or smart mobile or what.


First, please don't misunderstand me. The PC and its old dumb weak poor internet will not die. They will keep growing into the next decade. The growth rates have slowed to a crawl but they are still growing. The internet is still struggling to discover ways to make money (Twitter anyone?) and the most successful internet money-making ideas come of course from making the money on the mobile side, witness Cyworld of South Korea, Flirtomatic of the UK, Mobage Town of Japan and Habbo Hotel of Finland etc. Ironic, eh? Can't make money on the 6th media? Gotta launch a 7th media variant to be able to pay your way. But yes, the PC and the internet will continue to grow. Or to spell it out - Tomi says, the smartphone will not kill the PC, laptop and legacy internet opportunty.

But then, pocket computer? The PDA was the natural evolution of the shrinking computer. From the 5 ton stand-alone monster systems of the 1950s to the modular one ton "mainframe" computers of the 1960s to the five components of a desktop PC of the 1970s to the integrated unit of laptop of the 1980s and then the palmtop in the 1990s. The PDA concept was like that of a modern laptop, you get a functional unit with very basic abilities only (operating system and some utilites) but you install your applications or apps suite to get your functionality. it is a multi-purpose device which the user should customize before starting to use.

The mobile phone oriented path to the smartphone, epitomized by Symbian and Nokia, is that everything is preloaded. The thing works "fully" out of the box. Consider the iPhone. It came with the camera. But the camera could not record video. But you, the consumer, could download an app, to turn the camera into a video recorder. This is exactly the PC mindset. This is a platform, that users are expected to customize further, ie to "finish" its design, for their own particular needs. If you want video recording, the iPhone can give it, but you have to load an app..

How user-friendly is that? Compare to any Nokia Symbian cameraphone - they all have always done video recording straight out of the box. The user does not need to - is not expected to - install any parts that should be there to begin with? (Obviously Apple has listened and learned and today the 3GS ships with the video recording ability pre-loaded. iPhone becoming more and more like a "European" smartphone)

So the "pocket PC" metaphor to me is a niche. There are lots of us geeks who want the special Twitter app to let us manage our Twitter feeds better, and then want the Facebook app to do the same with FB, and then need the special mapping solution above and beyond Google maps, etc. But that is not mass markets. Mass market customers need devices that function straight out of the box.

Understand what I say. The "US model" of the PDA-style, pocket PC concept, that is much of where the iPhone also came from, is not the big market opportunity. And now, finally, as the smartphone is becoming also the must-have gadget in America, the mass market US consumers will increasingly be like the world customers, not like the IT/techie-geeky nerds who play with apps all day and resolve device conflicts all night.

The traditional Symbian concept of everything out of the box, on a total increasingly cumbersome and bloated operating system, is equally not the way. As the device becomes more capable, not everything can be preloaded. Some customization has to start to happen. More and more of the users will want to add to the functionality of their phones. Google Android, Apple Apps Store and Nokia Ovi concepts all push the industry into this direction. A murky "mid ground" of apps, applets, widgets (and lotsa games) fuelled increasingly by advertising - advergaming - and branded apps; combined with the powers of mobile as the 7th media channel. The seven unique abilites of mobile that you can't do on a PC. So it means networked services and also hybrids of these, where part of the app comes to the phone and part of the service is delivered over the air. The idle screen stats from Spain are a perfect example of this. Telefonica reports that idle screen advertising on the phone delivers 82% response rates. Compare that with internet click-through rates of about a percent or two if you're lucky. Blyk of the UK reported over 1,000 ad campaigns run over two years and sustained average response rate of over 25%. This is night-and-day compared to the old tired dumb and poor internet.

The new opportunties sit here, in the middle ground. And that is shfiting and changing. Two years ago Nokia had no touch screen phones. Now they offer several models. Two years ago Blackberries were the emailing device, now they are the SMS device. Two years ago the iPhone didn't do MMS, now it does. The clever players adjust and are quick and nimble to take advantage of where the market leads them. And very importantly, they listen to the market.

Personally, I don't understand why SonyEricsson don't release a PSP-phone. Why not. Meanwhile I do like it that the N-Gage platform was ported to the N-Series and did not die (obviously the N-Gage was too early). And that Apple has listened to its customers and evolved a good but not perfect iPhone into a very complete premium smartphone now in the 3GS. I think the most impressive story is however RIM. They were not locked in a strategy that only got them America. They adjusted and last year they grew market share, they grew sales volume, they grew dollar sales - and they raised their price, all at the same time (meaning, they apparently also increased their profit margins). They are no doubt having the best loyalty in the industry and firing on all cylinders. It is a delight to see someone execute perfectly in this industry, rather than some other companies who toss away half of their market share in five years such as Microsoft, or indeed in only one year such as Motorola.

IN SUM

I want to be clear about this. A decade ago, when the smartphone emerged, the US makers, and those foreign brands strong in America like Samsung, LG and HTC, did the right thing by focusing on hte enterprise/busimess customer. Nothing wrong with this. The US residential market was not mature enough, they did honestly believe (the top execs, the pundits and experts) that now disproven myth, that the pirmary use of a cellular phones is for voice calls. In America it did seem that way. Thus the only customers willing to buy expensive smartphones were corporate/enterprise customers.

Nokia and the other Symbian based makers did try to enter the market to poor success. Should they have split their resources and try to make "US market specific" phones with large screen stylus-operated touch screens - no. That would have been to the detriment of their global competitiveness, stripped resources away; and the US market would not have received significantly different devices, if Nokia, Ericsson (now SonyEricsson) etc had only provided clones of Palms, Motorolas, LGs and Blackberries.

The big game-changer event was the iPhone. Now "very expensive" premium phones like say the Nokia N95 became commercially viable in America. And as the US consumers finally started to do more with phones than just to call, NOW is the right time to bring high-end consumer smartphones to the US market. For Symbian in general and Nokia in particular, this is the time to try to grow share in the US and Canada. The Nokia 5800 xpressmusic is exactly the right "tool" to fight this battle, using the premium N97 as the brand leader.

Meanwhile the US-focused smartphone makers either learn their lessons or don't. The total market for smatphones worldwide has grown far beyond enterprise/business customers. The US market itsef is now doing the same. It does not spell the end of business-oriented phones and enterprise-oriented solutions and applications. But the fight will become more tough in America, as Blackberries and iPhones become more acceptable as all-around devices, and suddenly that "sleeping giant" Nokia is paying attention to North America (wouldn't YOU want to be the marketing VP of Verizon or Sprint or T-Mobile and now pick the N97 as the "response" to the iPhone on AT&T? especially if Nokia is willing to put fist-bumps and gansta rap lyrics into the launch video? I would love to be able to sign Nokia as my handset now ha-ha)

But the big opportuntiy for Windows Mobile, Palm, Android etc is to expand beyond American shores. And the number one lesson is SMS. Follow RIM and the Blackberry and their pattern.

So yeah, the future? It is not the Symbian/Nokia extreme and its not the PDA/US extreme for smartphones. The future is in the midground and some hungry players from both sides are rushing to capture that. It will be an interesting time to monitor how the smartphone evolves.

Thats it. My few thoughts on why America is different to the rest of the world in smartphones, and perhaps some thoughts of how this might evolve into the future.

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