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The smartphone market’s next move: Low-end budget handsets for emerging markets

There was a lot of great news that came out of Barcelona's Mobile World Congress last week, including a rather important new phone from Nokia that uses Android as the base OS, but is tied to services from Microsoft, not Google.

I wrote a more detailed perspective on the ramifications of this in a Time column recently, but the short version is that Google's AOSP (Android Open System Platform) is being used more and more by smartphone makers around the world to "fork" Android and tie more localised services to the OS for use in emerging markets.

Most people believe that if Android is on a smartphone, that means it has to include Google services, so Google can mine the device for ad revenue. While that is very true for smartphones that need Google Android certification, especially for use in the US, UK and other European territories, big smartphone vendors like Xiaomi in China have used AOSP and added their own local Chinese services to it, cutting Google out of any ad or services revenue. Of course, the big news with the Nokia X phone was that Microsoft is embracing Android in order to secure a place in emerging markets for Windows Phone.

Google's AOSP is a fully formed mobile OS that has cornerstone functionality such as the launcher, contacts app, dialler and phone app, calendar app, camera, gallery and other functions expected to be in a core mobile OS. But since it is an open platform at heart, that means that others can create their own services on top of it. It still runs Android apps even if there are services on top of it that are not from Google. This is quite important to understand because it will enable the next big push for growth in smartphones around the world.

If one looks at all the news that came out of Barcelona, there was an important theme from Nokia and Microsoft: Making sub-£100 phones for emerging markets. This underscores the fact that the smartphone market is at a major crossroads. Since 2007, when Apple introduced the iPhone, the overall market for smartphones has skyrocketed. However, the real thing that the iPhone launched was the high end of the smartphone market and to date, this has been where most of the money has been made. All major smartphone vendors have created devices in the £500 and above price points, and this has buoyed the market to huge profitability for Apple, Google, Samsung, and others. During this period we also saw a lot of lower-priced copycats that went for market share instead of profits.

However, the market for high-end smartphones has levelled out and while there is still a lot of money to be made in at the top-end, the news out of Barcelona was that the industry is at a major crossroads, and it needs to change direction. Last year the industry sold 1 billion smartphones, although the total amount of cell phones sold was 1.8 billion. But the tech industry now realises that if they want to bring the next 1 billion users into the computing age, they can only do this with super-cheap smartphones. For example, in Brazil, should a person want to buy an iPhone or a high-end phone, it would cost them an entire month's wage. In other emerging markets a high-end phone could cost as much as half a year's wage. These folks will never join the ranks of the connected at these prices.

That is why one of the hotter phones which was on show at MWC in Barcelona was a $35 (£20) smartphone from a non-branded Chinese manufacturer (see the picture below), and Mozilla's $25 (£15) Firefox OS reference designs. Nokia's X phones range from €89 to €109 (around £70 to £90), and there were well over 100 smartphones unveiled in this sort of bracket at MWC.

Clearly the smartphone vendors have seen this trend for some time, but this is the first year that we are seeing a concentrated effort by most of these vendors to acknowledge a change in direction, with them starting to target those markets where the next 1 billion potential users exist.

This shift in direction is a really big deal. At Creative Strategies we have been looking at this "next billion" user question for about three years. We know that today there are about 2.7 billion people connected in one form or another worldwide. That includes everything from owning a PC, tablet, or smartphone to just having access to a PC in school or through an Internet cafe. This is important because of those 2.7 billion connected, only about 1.7 billion actually own a PC, tablet, or smartphone. So in a sense, there is a real opportunity to try and bring that other 1 billion into actual device ownership. Since most of those potential buyers are in emerging markets, the most likely device they will buy will be a smartphone, and the only way they will do so is if the prices of these are pretty low.

There is another big reason the tech industry would want these next billion people to actually own a device. Our research has shown that smartphones are kind of like training wheels that are used to introduce people to the world of personal computing. Overall research shows that once someone starts using a smartphone they see what they can do and over time actually want to do more. This path could lead them to then buy a cheap tablet or even a cheap PC if it fits their need. Unfortunately, the operative word here is cheap. In emerging markets we have actually seen some people who have an inexpensive smartphone already buying a super-cheap tablet if they can afford it.

For the tech industry, getting a device in another billion people's hands is the new mantra. Most vendors have accepted the fact that the device is the price of entry in terms of gaining a foothold with these customers and then providing services to them, which is where any actual profits can be made. This is the biggest shift in the tech industry when it comes to emerging markets because it will be difficult to make any serious profits in hardware in these markets.

This push towards emerging markets may be where we could see a lot of innovation soon. Even though these smartphones are cheaper, they still need to attract new users, and the types of OS, services, and bells and whistles that come with them will be needed to draw them into one vendor's device versus another. I think we will look back at the recent Mobile World Congress and realise that this year's show set the tech industry in a new direction, one that is committed to bringing more people into the world of personal computing than ever before.