February 26, 2014

MWC Barcelona - Connected Devices

005930 KS, 066570 KS, 2354 TT, 992 HK, GOOG, LNVGY, MSFT, NOK, NOKIA FH
By Hartmut Leuschner
The recent acquisitions of Motorola by Lenovo and Nokia Devices by Microsoft brought connected devices back into the headlines at Mobile World Congress in Barcelona, where distributors and network operators were considering winners and losers as the show got under way.
Lenovo Expected to Buy Handset Share in 2014
Representatives from device manufacturers expect Lenovo Group Ltd. (992 HK) to keep the Motorola brand after the acquisition from Google Inc. “The Motorola brand is still strong in North America and in parts of Europe. [Lenovo] will use it to push into both markets without giving the consumer the feeling that a new Chinese vendor is approaching them,” a senior manager of a leading handset vendor said. Another device vendor source said he believes Lenovo is planning to price the Motorola branded devices aggressively and increase competition in the mid- and lower ranges of smartphones.

With the emergence of attractive, high-spec yet low-cost devices, such as Lenovo’s Motorola Moto G and Google’s Nexus 5, industry sources said the stage is set for average prices on smartphones to come down. “We are convinced that device prices will fall and that a peak has been reached; platform standardization and changes in the market mean that prices will have to come down. HTC [Corp. (2498 TT)]’s M8 is a very nice device, but it will be expensive, so I’m not sure about volumes. But LG [Electronics Inc. (066570 KS)] will get better as they are more reasonable from a price perspective,” a senior carrier executive said.

Apple Embraces Open Distribution in Europe
A large carrier source spoke about the accelerating European SIM-only trend, in which end users pay the full device cost upfront -- often buying from a retailer rather than a carrier -- and then use a cheap SIM card for airtime. According to the source, this trend has led Apple Inc. in particular to shift its focus to the open market in parts of Europe. “Distributors are gaining equal status to operators, and we are losing access to the highest-spending customers. Distribution iPhone sales are on a SIM-only basis. Apple doesn't care if we lose out; if they can substitute the operator model with another model that allows them to maintain margins, then they will be happy,” he said. A distributor source said government legislation and new device payment options are also driving Apple toward open distribution. “The carrier channel for Apple is important, but many consumers are choosing to buy SIM-free, and Apple wants to widen distribution, hence the drive to open distribution. There’s also more legislation requiring separation between device and airtime costs. For example, [Telefonica S.A.’s] O2 in the U.K. is publishing that information already. Plus I think device leasing arrangements will become more common; Apple already offers financing on their website,” he said.

LG Not Keen on More Nexus
We are hearing from MWC attendees that LG is hesitant to increase its device commitment to Google after the  sale of the Motorola division to Lenovo. Sources believe Google is in discussions with LG to increase its portfolio of Nexus-branded smartphones. Attendees believe margins are so low in LG’s supplier deals with Google, an increase in shipments of Nexus devices could hardly reap any benefits for the Korean vendor and does not create any incentive to increase volume commitments.

New Enterprise Opportunities for Samsung, Nokia
Because of weak sales of BlackBerry Ltd.’s BB10 devices as well as ongoing concerns about the company’s future, OTR Global believes carriers and distributors as well as large enterprise customers increasingly are looking at alternatives to the BlackBerry service (see also OTR Global’s Nov. 6 note). A distributor source said, “We have a large share of the B2B market and Nokia [Corp.] is interested in that. I’m also talking to Samsung [Electronics Co. Ltd. (005930 KS)] about Knox [Samsung’s enterprise mobile solution]. The demise of BlackBerry has created opportunities.”

However, he said although many customers are interested in Knox, there are concerns still about the high cost of Knox-compatible devices. “We’ve had some conversations with Samsung. A lot of our customers are nervous about the security elements of Android, and many of our conversations with Samsung are about that. My only concern is that Knox only works on higher-end Android products, and I’m not sure if my customer base will suddenly go from a [BlackBerry Curve] 9720 right up to a [Samsung Galaxy] S4. I need a range of products, and I think the cost of acquisition for Knox could be too high if it doesn't work on lower-end devices,” he said. The same source said BlackBerry has not yet communicated whether it plans to release its lower-cost devices (made by Foxconn Technology Co. Ltd. [2354 TT]) outside of emerging markets, adding his current sales are dominated by BlackBerry 7 rather than the newer BB10 platform. “We haven’t heard anything about the Foxconn BlackBerry designs. I’m literally only buying BlackBerry 7 now. I’m not really interested in BlackBerry 10; Q10, Q5 and Z30 are dead in the water.” Another distributor source added, “I’m not seeing anything from BlackBerry. I think they are in a damage-control phase. Some of the big retailers have de-ranged their devices, though they still have some enterprise brand loyalty.”