The mobile hardware industry has evolved  from the then elephant in the room and vertically integrated Nokia’s dominance in the 2000 decade to rise of other fully vertically integrated Apple which has dominated the industry revenues and profits for the next five years and probably this entire decade (2010-2020).  Vertically Integrated players have a large part of the full hardware or software stack on the device. On the other hand, rise of Samsung was mostly at the expense of Nokia’s downturn, sticking to Google’s Android platform as well as leveraging in-house integration of components (silicon content) in Samsung’s portfolio. These giants have excelled at the traditional model with cost & scale strategy reaping even double digit profit margins  from hardware rather than anything else. For Apple the software, services, platform revenues and profits might be greater than many other traditional hardware only players but is still minuscule compared to what it generates from its core hardware. Microsoft while is more like Google, just a platform player generating revenues from software and services but since the big Nokia acquisition it instantly became closer to Apple. However, it remains to be seen if it pivots as recent executive shakeup by Satya Nadella might not follow-up the business model which we earlier hypothesized.

Then we have a long tail of pure “Hardware Only” brands which can be split into tier-1 & tier-2 brands competing purely on product, pricing, place and promotions out of which some are very successful in their home markets but not so outside. These OEMs have no direct control over OS or component development and have their top-line and bottom-line tightly tied to hardware they sell rather than software, services or any other way of making money or locking-in users. These brands which lack core competencies have been struggling to compete with likes of Apple, Samsung and others with unique business models. Though there is enough room for many brands to grow as mobile devices penetration is not saturated and the market is also huge, but with this “hardware only business model these OEMs are just surviving now on turnover and cash flow but mid- to long-term position is very vulnerable. We see most of this companies either consolidating or exiting in next five years or so.

However, as we pass through the internet powered  apps economy era to cloud services economy era we are seeing many of the OTT players leading in this space are entering the hardware space with an “Anti-Apple” business model – Counterpoint terms it as Hardware as a Distribution model. Players in this category look to subsidize the hardware costs by using revenue generated from content, cloud services, transaction or advertising fees and see it as locking the users into their ecosystems. We can club them into different fundamental clouds/platforms they bank on to generate revenues as below:

So players such as Google, Baidu get into hardware game to tighten their ecosystem and generate revenue through advertising. Whereas, companies like Amazon, Alibaba, Tesco are launching own-branded hardware to lock-in the user into their retail platform. Similarly, players such as LeTV wants to subsidize hardware and generate revenues through content, Microsoft through consumer or enterprise cloud services, Xiaomi through an entire ecosystem of devices, apps and consumer services. Social cloud players such as Facebook, Tencent and Line are ramping up their ecosystem and eventually in future build hardware experiences to tightly weave the consumers’ social graph. Open platforms such as Cyanogen and Jolla are actually working with these horizontal services players and “hardware only” model OEMs to form an entire new ecosystem of content, services and hardware. As more of these OTT companies normally referred to as “Internet Companies” goes HaaD model, the next decade will all be about entering and surviving in the Big Information era.

Looking at the potential of these HaaD companies and greater chance to take a larger pie of the smart devices market, these brands are investing, partnering with the “hardware only” model OEMs as highlighted above symbiotically work to build a competitive product offering. Some of the latest investments, partnerships we have seen are:

• Alibaba-Meizu
• Coolpad-Qihoo
• Lenovo-Baidu
• Facebook-Oculus
• LeTV- Foxconn
• Amazon-Foxconn
• and expect much more in future

Source: Counterpoint’s Ecosystem Research