Emerging Markets Are Incubators of Mobile Disruption
In June, when I wrote about the release of Amazon’s new smartphone, I promised a more comprehensive article about the competitive dynamics of the mobile ecosystem. While tech journalists tend to fixate on new releases from household name companies such as Amazon’s Fire Phone, it is all too easy to miss the big picture. Emerging markets pose the biggest threat to the current market leaders and promise to be incubators of disruptive innovations.
Although much of the focus in the developed world remains on the competition between Google’s Android and Apple’s iOS, a host of plucky competitors are targeting emerging markets. And for good reason. Not only is the smartphone adoption rate growing nearly twice as fast in emerging markets as it is in more established markets, certain characteristics make it easier for new platforms to establish a foothold in emerging markets, as the market research firm GSMA Intelligence stressed in a recent report:
Emerging markets represent the largest unrealised source of new mobile Internet subscribers. Given that smartphone penetration is nascent, the take-up and use of mobile data is rising, lock-in mechanisms have yet to kick in for incumbents and subsidies are less prevalent, the markets present more fertile ground for challenger platforms.
In a nutshell, the advantages held by established competitors like Google and Apple don’t necessarily carry over into emerging markets. The market structures and desired uses of mobile technology differ greatly in markets such as China, Vietnam and India than from those in the US, Europe, Japan and South Korea.
The most obvious reason for this is simply that the smartphone penetration rate is much lower in emerging markets, therefore less people are committed to a particular mobile platform. Furthermore, characteristics such as price point and unique local content and services are the more important considerations for new users in those markets where lock-in factors, such as prior purchases, subsidized contracts and large mobile app suites, don’t factor in purchasing decision to nearly the same extent they do in more advanced markets. Low price and local market customization are areas where smaller competitors can compete against industry leaders.
As Marcos Veremis, the CEO of Upstream, a company specialized in global mobile monetization, recently put it:
In a number of countries where we operate, one of our “killer apps” is actually English lessons. Simply put, mobile strategies that have worked in the West won’t work in emerging markets, but this all means that there’s a lot of additional opportunity for brands to publish apps with completely different content than that of current apps on the market.
As GSMA Intelligence points out, the vast majority of user generated content (UGC) on the Internet so far has come from North America and Europe, although this is beginning to change as the rest of the world’s Internet and mobile device penetration grows faster than the already saturated markets. Seeing as UGC is an important driver of smartphone demand, being able to tap into growing niche markets and develop tools useful to users in emerging markets holds the key for new challengers.
Furthermore, the market leaders in advanced markets have business models not well suited to emerging markets. Apple’s high-end devices are outside the realm of the affordable for most users in these markets, and Google’s advertising dependent business models don’t play well when new users don’t have the free capital or the tools (e.g. lines of credit) to conduct many online transactions.
Not surprisingly, as the result of these factors, Mr. Veremis sees emerging markets as crucial to the next wave of mobile competition:
Mobile in emerging markets will continue to be a competitive battlefield over the next few years, especially as device manufacturers like Apple and Google have to compete with Chinese handset manufacturers, who can deliver at the price point required in emerging markets. It will be interesting to see which of the leaders in the West leverages the differences in emerging markets to secure their next billion users.
Given the focus of this blog, this point would not be complete without noting that getting a foothold in emerging markets is not just useful for its own sake, but it potentially holds the key to future competition and innovation in all markets.
Many of these new customers are expected to move up the socioeconomic ladder in the coming years. As U.S. Trade Representative Michael Froman has noted, the number of middle class consumers in Asia alone is expected to grow from 525 million to 2.7 billion between now and 2030. As these new users’ spending power increases, their value as consumers increases. Therefore, establishing a foothold in emerging markets now can reap great rewards in the near future.
This also follows the classic “disruption trajectory” articulated by scholars of disruptive innovation. Entrepreneurs who use cheaper, less advanced products to focus on less profitable, niche markets overlooked or underdeveloped by market leaders often grow to displace those very same market leaders. An evolving customer base is the perfect launch pad to develop products that will challenge the major market leaders.
With this is mind, it is not surprising that both established companies like Samsung (and its new OS Tizen) and a host of new potential challengers such as Mozilla (with Firefox) and Jolla (with Sailfish) are focusing on getting a foothold in emerging markets. Couple that with the explosive growth of Chinese device manufacturers running forked versions of Android that are beyond the control of Google and don’t feature Google’s products, and the competitive makeup of the smartphone marketplace is going to look much different in just a few years time than it does now. (Ironically, Google’s biggest competitor in the upcoming years might be Android itself.)
It is also not surprising that Chinese mobile companies are emerging as true competitors to Google, Samsung, Facebook and Apple. Xiaomi, the biggest seller of smartphones in China, recently hired a high-profile Google executive to lead its aggressive global expansion, and has even hinted at targeting the U.S. market in the years to come.
Other Chinese mobile companies have aggressive international expansion plans as well. One of these companies is Tencent, which I have profiled before. It is a booming Chinese mobile applications company (with a market cap comparable to that of Facebook) that seeks to expand its mobile empire well beyond China’s borders.
But Tencent isn’t content only playing in the mobile applications space. The company has also invested big money (with the likes of U.S. venture capital giant Andreessen Horowitz) in Cyanogen, which develops a forked version of Android called CyanogenMOD that competes directly with Google’s “certified” Android devices. Cyanogen plans to use that money to hire 70 people and open an office in Shenzhen, where Tencent is based. As Business Insider notes, “that could mean we’ll see a Cyanogen-built mobile OS from Tencent in the coming years.”
With these developments in mind, it is not surprising that Mary Meeker, one the Internet’s leading market analysts, noted in her most recent Internet trends report that China is becoming a “mobile commerce innovation leader.” Expect this trend to continue in the future and expand beyond Chinese companies.
Not only are emerging markets prime territory for upstarts to challenge the current mobile industry leaders, but they also offer the right conditions to incubate disruptive competition that has the potential to scale up and take on global industry leaders. As investors, competition regulators, and industry analysts grapple with the future of mobile innovation, they should perhaps expand their field of vision.