Description 8 Segments 8

Porters Five Forces

The following graph illustrates the increasing average total assets in the industry, indicating that economies of scale may exist. In the most recent five-year period, average assets have climbed 79% from 14,640 to 26,256.

Average Industry Total Assets from 2004 - 2008

The graph shown below displays that the average industry capital expenditures as a percentage of sales has stayed pretty consistant until a 65% jump in 2008. Capital spending has roughly stayed the same and if anything, has increased some in 2008. Economies of scale either do not exist here, or the industry has already achieved economies.¹³

Average Industry Capital Expenditures as Percentage of Sales from 2004 - 2008

Looking at the cost of goods sold per employee, we see that the number is decreasing which indicates that the unit costs of mobile devices are on the decline. Economies of scale do appear to exist here as it is becoming less expensive to produce each device, making this industry appear attractive and the threat of new entrants low.¹³

Average Cost of Goods Sold per Employee from 2004 – 2008

We can conclude from the analysis that economies of scale do exist and this represents a high barrier to entry. Therefore, the industry is attractive.

Working Capital Requirements

The fixed costs to sales ratio is definitely on the lower side over the past five years. This means that only a fifth of sales are contributing to fixed costs. This makes the industry unattractive, as the threat of new entrants is high as many businesses would be willing to take the risk in this industry with such low fixed costs.¹³ The annotation in the graph, ‘in millions’, is a typo.

Fixed Costs to Sales Ratio from 2004 – 2008

Mobile phone manufacturers have the ability to create and use their own proprietary software packages. This can create differences between manufacturers if one software platform is so unique that it stands out among the rest. For example, the Apple iPhone uses Apple’s proprietary software and the software is the primary selling point of that very popular phone. These types of proprietary product differences can create a high barrier to entry. This causes a low threat of new entrants and makes the industry attractive.¹⁴

Patents are abundant in the mobile device world. All key players in the industry hold various patents, and continue to invest in intellectual property to stay competitive. The Apple iPhone is a recent and a prime example of cost advantages through patent holding. Some companies have managed to work around Apple’s iPhone patents, which attempt to protect their intellectual property. However, Palm recently seems to have crossed the line with their most recent touch screen device and will most likely feel pressure from Apple in coming months.⁷ Also last year RIM and Motorola had disputes over RIM’s patent holdings, limiting Motorola’s development.⁶ These types of patents on the core technology around mobile devices constitute a high barrier to entry, causing a low threat of new entrants and making the industry attractive.

According to an employee of a major mobile device manufacturer, buyers currently offer phones from each major mobile phone manufacturer, albeit not the same model for each customer. Buyers are heavily influenced by what their customers (the end users) desire. End users tend to lean toward brand loyalty in their mobile devices. End users have migrated toward RIM’s Blackberry for business enterprise applications as an example, and have made it the standard in business phone hardware. This end user dictates a lot of what the buyer (mobile network provider) is interested in and causes them to make choices based on identity. This creates a high barrier to entry and makes the industry attractive.¹⁴

Access to industry distribution is not a deterrent in the cellular phone industry. Distribution channels include primarily shipping from the manufacturer to the mobile phone network provider, along with specific retail outlets. This would make the industry unattractive because the barrier is low and the threat is high.

The existing software operating platforms dominated by Google and Microsoft do not pose a significant retaliation as more phones utilizing those platforms would be welcome to the industry. Chipsets are developed by multiple companies which do not exclusively manufacture for a given cellular phone manufacturer. Motorola in the past did have some exclusivity in its chipset, not making an exclusive arrangement between a chipset manufacturer and cell phone manufacturer impossible. Retaliation could occur with exclusive agreements with component manufacturers; however, at present the research team has identified none. It also does not appear that the current manufacturers retaliate against newcomers to the industry in any concrete manner. The lack of retaliation makes this industry attractive.¹⁴

The industry is attractive from an analysis of threat to new entrants when given the weight of the economies of scale, proprietary product differences, absolute cost advantages, brand identify, and expected retaliation. From the other side, the working capital requirements show that fixed costs are low and this would make the industry inviting to potential competitors. However, the economies of scale and absolute cost advantages are key areas that remain attractive and predict future high barriers to entry.

Suppliers

Mobile Phones are made up of many parts that come from many different suppliers. These parts can be grouped into three main categories: Software Platforms, Hardware Chipsets, and Mechanical Parts. Software applications are a commodity, so they will not be discussed.¹

From reading this, the inputs are commodity items. I do not see anything that really gives suppliers power. You should have jumped down to access to capital and labor.

There are only a few main software platforms available for the cell phone manufacturers to use. They can develop and use their own proprietary software, in which they would be their own supplier, thus no power struggle involved. The main non-proprietary software platforms available are Google’s Android (a free open-source platform), Nokia’s Symbian, and Microsoft’s Windows Mobile. Although limited in number, because of the recent availability of free open-source software platforms with the new Global Handset Alliance, the industry retains the power from software platform suppliers.¹⁴

Unlike software platforms, there are quite a few hardware chipset suppliers. The main ones include Broadcom, Qualcomm, Nokia, Texas Instruments, Infineon, and Ericsson. Since chipset suppliers are not concentrated, the buyers have the power.^{8 & 9}

There are many different mechanical parts that make up a mobile phone. Most of these are commodity items like metal and plastic parts and need not be discussed. There are, however, some parts that have only a few suppliers and some parts where there is only one supplier, such as the display module, camera module, or flexible printed circuits. The buyers do not have the power over these suppliers. If the parts suppliers for some reason become capacity constrained or insolvent, it could result in an interruption in mobile phone manufacturing or increased prices.¹

Presence of Substitute Inputs

There are a variety of substitute inputs for the three main mobile phone parts. Since buyers have the option of creating and using their own proprietary software, they do not have to use a software platform from a supplier. Thus the buyers have the power over software platform suppliers. The mobile phone must have a circuit board with a chipset, so there is no substitute input for the chipset. Chipset suppliers have the power here. When it comes to the main mechanical parts for which there are only one or a few suppliers (Display, Camera Module, Speaker, etc.), these are central parts that make the mobile phone what it is. Therefore, there are not substitute inputs for mobile phones that include these parts. Thus the suppliers of these parts retain the power over the buyers.¹⁴

Mobile phone software platforms, mobile phone chipsets, and mobile phone mechanical parts are all created and designed to supply pretty much all of their product to the mobile phone industry. Without this industry, these suppliers would not have substantial sales to keep them in business. Thus the industry has the power.¹⁴

Suppliers of all three main cell phone components very much affect the manufacturers’ ability to differentiate. The overall end user experience is based on the software platform used. Yes, the software can be customized to differentiate; however the “bones” of the software are the same. The chipset provides the main functionality, memory, and processor for the mobile device. The primary mechanical parts affect the look, feel, and sound quality of the device. All of these areas can reflect back on the manufacturer and affect the final product. This gives the suppliers power.¹⁴

There does not currently seem to be a threat of forward or backward integration with the suppliers in this industry. This does not put the suppliers in a position of power, making the industry attractive.

The profitability of this industry has been inconsistent from 2004 to 2008²⁷. The industry is currently contracting as customers are not purchasing or upgrading to new mobile devices. The industry had a history of profitability which peaked in 2006 and began declining in 2007. The effects of the current economic recession have not been fully captured, although the recession was declared to have started in December of 2007. Because the industry profitability is declining as inflation is increasing, debt financing is more difficult to obtain, giving power to the suppliers, and making this industry less attractive. The following chart plots the Inflation rate versus Industry Leaders Net Operating Margin.

In the US, the cell phone manufacturing industry does not have unions. That is good for the industry, as it keeps the power in the manufacturers’ hands. Research and development of the mobile devices requires highly skilled engineers. If there were a shortage of skilled labor, this would make the industry unattractive. However since the recent downturn of the economy, labor of any kind appears to be plentiful to obtain since unemployment rates are so high. Most, if not all, of the manufacturing is outsourced to third parties. These third parties use mostly unskilled workers in assembly plants, and turnover is not a concern since new employees can be quickly trained to work on the assembly line. The industry is attractive when it comes to access to labor.¹⁴

The industry overall is attractive because the suppliers are not concentrated, the inputs cannot be differentiated, the industry makes up the majority of the suppliers’ volume, there is no threat of forward or backward integration, and there is easy access to labor.

Buyers

Buyers in the mobile devices industry fall into two categories: Mobile carriers which account for the large portion of purchasing, and third-party distributors and retailers.¹

Buyer Concentration

The amount of buyers in the US is smaller than the amount of mobile device manufacturers in the industry. Mobile carriers such as AT&T and Verizon Wireless are some of the largest buyers followed by Sprint and T-Mobile. Retailers such as Best Buy, Wal-Mart, and independent mobile device stores also sell these devices and represent a much smaller portion of the industry’s distribution. US buyers are more concentrated than manufacturers and therefore hold the power as almost all global mobile device manufacturers’ products are available to US buyers. This makes the industry in fact seem unattractive due to this weakness.^{11, 12, and 13} A bit of waffle here.

Buyers such as mobile carriers do not normally experience large switching costs when moving between manufacturers. The exception would be a situation such as the iPhone which is exclusively available through the buyer AT&T. If AT&T were to drop the iPhone they would most likely have a mass exodus of customers who would follow the iPhone to its new home, creating revenue losses from mobile device purchases and wireless service purchases to utilize their device. However, there are very few reasons this situation would normally happen as AT&T would most likely do anything Apple asked, for example when they waived their technical requirements for the iPhone in order to carry it. According to an employee with a major mobile device manufacturer, buyers definitely are in a better position in most cases. Aside from a breakout hit like the iPhone, devices that popular are few and far between. Since many phones experience medium or low levels of popularity, buyers can at any time decide not to purchase the phones if they are not selling well or if the manufacturer will not meet the buyer’s technical requests. The industry does not have power over the buyers regarding switching costs making it unattractive.¹⁴

Buyers of mobile devices know what it takes to make a mobile device. The prices of key components such as the chipset, software, and camera lens could be obtained within the industry. Additionally, given that there are so many manufacturers of devices, it is possible to compare phones with similar characteristics and use benchmarking to determine what it costs to make a good phone. Buyers do have power over the industry in this regard as the knowledge of the costs associated with mobile device production can be determined. This makes the industry unattractive.

Backward integration does not appear to be popular among mobile device buyers or retailers and has not been attempted by any of the major companies such as Verizon or AT&T successfully at this point. This does not put the buyers in a position of power, making the industry attractive.

Pull through is definitely a part of this industry. Since brand identity is key to mobile devices, pull through is quite evident. For example the Blackberry line by RIM Inc. has essentially become a status symbol of the business executive and they would not want to be seen on a LG Chocolate phone (marketed towards youth) typing emails. A large amount of marketing expenses occur in most manufacturers such as the 13.5% that RIM spent in the past year pushing their smart phones to the corporate world. Overall in the industry, mobile device advertising is growing at about 45% per year and is currently at $3.1 billion annually.²⁵ There is pull through, and the industry has the power making it attractive.² Ok, but you should have given a graph of the trend over 5 years for the industry, and don’t talk raw numbers.

Brand identity does impact the buyers of mobile devices. Buyers are looking for devices that appeal to all of the different segments of the population and for devices that will be considered by the retail customers as desirable to be seen with and to utilize. The Apple iPhone is not only trendy but the symbol of a young, tech-savvy, and even artistic generation. The industry has the power making it attractive. .

Buyers representing cell phone carriers are not extremely price sensitive to fluctuations in the industry. Buyers’ ultimate goal is to make the $50 to $100 per month from the mobile customer that they will pay for the network service, not so much the profit from the initial purchase of the phone. These buyers are most likely going to eat the increased costs from a manufacturer if they know a popular new phone will be coming out and it will increase their cellular service customer base. This makes the buyer not very sensitive to changes and gives the power to the industry, making it attractive.

For mobile providers, mobile device purchases represent a large portion of their inventory. This is because without these devices getting to their customers, there would be nothing to utilize the national networks they have setup for communications. Given that buyers depend on the industry so heavily to keep it in business, the industry has power and is attractive.

Overall, buyers would not hold power over the industry. Therefore, the industry would be attractive.

Threat of Substitutes

Technology currently exists which performs each independent function of a mobile phone; however, a handheld netbook computer (Acer Asus) or notebook computer (multiple brands) is currently the only device capable of performing all functions currently available on a mobile phone.  The devices are very similar except for size.  Functionality and capacity of a netbook or notebook is generally higher whereas portability of a mobile phone is generally greater¹⁰.  Streaming data access improvements to online or on network storage has made the capacity issue less problematic for mobile phones.

 GPS positioning is available in a single device (e.g. Garmin, TomTom, etc…), which can be utilized without dependence on a cellular carrier network.  If the end user only desires GPS functionality then this could have an adverse affect on sales.

  Scheduling and organizing software currently exists on many handheld devices (e.g. Palm, HP iPaq) which are independent of a wireless carrier. This also could adversely affect sales. 

Radio devices exist for communication, which operate independently of wireless carriers for local limited communications.  The range consideration defines this substitute.

All in all, the threat of substitutes does not seem great enough to make the industry unattractive. The majority of people are moving toward one device that can do it all, so the existing substitutes are posing less of a threat as this move is made.

Rivalry

Degree of Concentration and Balance among Competitors

The mobile device industry in the US currently has six major firms that total 88% of the market share. Five or less of these firms represent 82% of the market which surpasses the 60% mark and indicates that concentration exists. Both Samsung and Motorola have market shares within 10 percentage points of each other which results in a balanced industry, as these are the two largest players currently. The industry is balanced and concentrated with a high level of rivalry and is therefore unattractive.¹⁵

While all firms have decided to focus on either traditional mobile phones and/or smart phones, the one strategy that is evident across all firms is the development of the smart phone. A quick trip to the web store of any of the five largest firms in the industry will show that each offers some type of smart phone with internet and email capability. Firms such as RIM and Apple have decided to strictly focus on smart phones that require data plans with most mobile carriers. Samsung, LG, Nokia and Motorola continue to offer devices marketed towards both arenas as more of the population can’t afford a $30-$50 additional data charge to their monthly bill at this point. The bottom line is that each firm has a flagship smart phone that is leading the way as well as requiring heavy R&D financial commitments, as the traditional mobile device will slowly become less popular in the coming decade. All of the largest firms also market towards the mobile providers as well as third-party retail outlets as there is currently no benefit to staying out of these distribution lines.^{1 & 16}

Since all firms are following very similar strategies and no large niches exist, the level of rivalry is high as they fight for the same markets. This makes the industry unattractive in its current state.

Industry Growth Rate (Past & Projected)

The graph below shows the industry growth of mobile device users from 1985 to 2008, and then uses projections based on industry analysis for the coming years through 2013.¹⁷

Industry Growth of Mobile Device Users from 1985 to 2013

2009 will most likely mark the first year of a decline in the need of mobile devices with a 10% drop in consumption. This has been attributed to the current economic crisis as well as the saturation of the market as the 76% of the population now own a mobile device. Once we enter 2010, growth is expected to pick back up again in the mid-single digits with an average of 5% growth per year through 2013. With the current inflation rate averaging around 3%, this indicates that the industry growth rate will be higher and firms will continue to increase market share without taking it away from other firms in the industry. Because of this, rivalry is reduced and the industry becomes attractive.^{1 & 18}

Fixed Costs / Value Added

When considering fixed costs and EBITDA, it is evident that the fixed costs have generally followed the same trend as EBITDA when we examined a five year average of the industry. Fixed costs are starting to get higher which points towards the conclusion that economies of scale may exist (see Threat of New Entrants section – economies of scale). An EBITDA that is positive means that a profit is being made within the industry.¹³

The following data shows that the ratios of EBITDA and the fixed costs ratios appear to be somewhat similar but have started to take a different turn in the last two years. Fixed costs have stayed the same while EBITDA has plummeted and only represents 7.43% of the total sales. After the industry’s first year of decline expected in 2009, it will pick back up and increase a minimum of 5% in the foreseeable future. The fixed cost ratio will decrease since sales will increase, while the EBITDA will increase due to sales as well.¹³ (see New Entrants Section for more detail)

EBITDA and Fixed Costs Margin Trend from 2004 to 2008

While fixed costs are increasing along with value added, this most likely means that economies of scale are possible within the industry. Since value added is not particularly low and the positive future projections will help its ratio to sales, the data agrees with the known fact that mobile devices are not commodities yet. Rivalry does not increase and is moderate, making the industry attractive.¹³
Intermittent Overcapacity

The following chart shows the current capacity utilization for Communications Equipment (ref):

Capacity Utilization: January 1996 – June 2009

The current trend is toward lower capacity utilization which is seen by the 2009 rate of 65%. The lower utilization which does not meet the 80% normal range means that the industry is susceptible to intermittent overcapacity. This increases rivalry and makes the industry unattractive.¹⁹

As the table below shows, only two of the top six global market share leaders in the mobile phone industry are US based companies (Apple and Motorola). This clearly shows that foreign firms can easily penetrate the US market. These two US firms hold 5.7% and 21.10% of the global market share, indicating that US firms are competitive in the global marketplace. However, global firms hold four of the six top spots in total US market share for a combined total of 62%. Time will tell if the US companies will gain significant market share to be top competitors but this will not happen anytime soon. Global firms appear to easily penetrate the US market and rivalry is increasing making the industry unattractive.²⁶

The firms in the industry are not universal in their dependence on a single industry segment for their revenue. Nokia, the largest global retailer of cellular phones is not diversified and depends entirely on sales of cellular phones for revenue. Motorola is more diversified in providing other types of communications equipment to enterprises. Research in Motion, the maker of Blackberry is entirely dependent on cellular phone sales. Palm is split into two divisions for its revenue: handheld devices and cellular phones. Apple is the most diversified and involved in computers, handheld electronics, and cellular phones just to name a few areas. The aggregate conclusion is the revenue is highly dependent on the mobile device industry for each firm. This creates an increase in rivalry and makes the industry unattractive.

Mergers are not common among the top players in the mobile phone manufacturing industry that serves the US; however, that does not mean it wouldn’t ever happen. In 2008, Motorola considered selling off its mobile phone division, but the sale was never finalized.²⁰ Also, Japanese firms Casio, Hitachi, and NEC recently merged in order to cut costs and become more competitive.²¹ However, no mergers have taken place in the US and there is currently no indication that one will.

Converting operations to another product/service seems unlikely due to the technical nature of this industry and how specific it is to one main product. Exit barriers appear somewhat high based on the high costs involved with getting out of this industry. This increases rivalry and makes the industry unattractive.

Decision Matrix

The industry is unattractive mainly because of the concentration and balance among competitors, the diversity among competitors, overcapacity, the growth of foreign competition, corporate stakes, and exit barriers. Even though many more categories are unattractive than attractive, the weights are only separated by 10% meaning that it was a close race.