As Predicted: Apple Pays Less For Components and Charges More for Devices

I recently had a chance to use the Nokia Lumia 900 and at the local AT&T store here in Norwalk, CT – the device sells for just $49.99. The phone is gorgeous and powerful and is cheap. If you order the phone online in fact you pay $99 so in select stores you get a 50% discount. If you call the same AT&T store, the automated system even tells you about the Lumia 900 before you are able to speak with a live agent.

Microsoft, Nokia and AT&T seem highly invested in getting this phone and the Nokia/Microsoft brands to be competitive in the mobile space.

But there is only one problem. According to the Wall Street Journal:

Apple makes nearly twice as much on iPhone sales as Nokia does on the Lumia 900, excluding costs like manufacturing, marketing and distribution.

Part of the challenge of course for Nokia is the scale of manufacturing – Apple makes so many phones, music players and tablets and they all use the same or very similar components. Nokia on the other hand makes far fewer products and still has to price their products lower to make them attractive to consumers.

This remind me of a post I wrote in 2008 where I warned Nokia directly of this looming issue. I titled the post appropriately – How the iPhone Has Changed the Mobile Game – it should have been required reading at all mobile manufacturers at the time.

Here is the vital part of the post with bolding added in this post for emphasis:

So while other phone companies like Motorola (and analysts) think it makes sense to launch more and more devices to be like Nokia, I want to express my extreme caution at such an approach. The mobile phone world has changed and users now understand that the crap most manufacturers pass off as web surfing devices is just that. Oh and one important point… They really do want to surf on the go. I recently saw numbers pointing to a 5:1 ratio of iPhone surfing to Windows Mobile surfing. The solution to this obvious problem is not to come out with 30 different types of crap in assorted colors, shapes and smells.

For some reason this all seems strangely obvious to me and I wonder why this message isn’t being espoused more often by others.

If mobile phone companies want to compete against Apple they need to understand that cell phone design is more art than science and designers who are really good need to be involved in how they look and more importantly, function. The mobile browser is a crucial element here. Skyfire and Opera are doing a good job but I think partnerships with Mozilla might be the only way to compete effectively with mobile Safari. Germany’s Debitel partnering with Opera to install the browser software company’s “Mini” browser on their devices may be a smart model to follow but there also needs to be tight application integration.

One other point… If you can’t come up with one cell phone as useful and easy to use as the iPhone, don’t launch even more devices. Sure I understand why you might want to make a line of cheap phones for emerging economies but Apple is getting to the point where they will sell so many iPhones that their cost model will allow them to sell their iPhones at a price point close to your entry level device. Then what do you do?

It is amazing to me to see how cell phone providers and service providers have joined the touch screen frenzy. Verizon Wireless even has a touch screen category at the top of their device list and guess what — all of the phones on the list are inferior to the iPhone.

So Nokia, Motorola, Samsung, LG, SonyEricsson, etc you are forewarned. Oh and to the Microsoft Mobile team, you have done a good job until now but you have obviously just had your rear ends kicked. How will you respond? Will the Samsung Omnia help you overtake Apple’s momentum?

The scary part here is that the mobile browser issues have been resolved by Google courtesy of Android and of course Microsoft, meaning all the competitors had to do is come out with a few compelling hardware models. Obviously Samsung has figured this out but all the other manufacturers focused on a slew of devices and this complexity became the kiss of death. It is the same problem in the tablet market where consumers know “iPad” and now “Kindle Fire” thanks to existing Kindle branding but try to get a typical consumer to recall the name of another tablet model.

So the problem today in mobile is not only of managing a supply chain filled with various devices but branding each as well.

Fellow TMC blogger, Peter Radizeski and I have been engaged in an online debate on the matter and he feels that Microsoft HAS to be in the mobile and tablet space and do well in both. But the question may be how much money will Redmond have to potentially lose on each device to make them desirable enough for consumers to buy. It just has to be a very scary time for Microsoft in the endpoint space.

And as far as the rest of the mobile world goes – they are still pumping out device after device in myriad form factors which will make competing on price more difficult. But at least many of today’s devices are touchscreen-only making the manufacturing and supply chain issues less onerous than 2008 when devices had keyboards and clamshells of various sizes and shapes.

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