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Sunday, 29 November 2015

Why the smartphone is more like a car than an MP3 player

Clayton Christensen is one of the most celebrated business thinkers and writers. His seminal writings on the subject of “Disruptive Innovation” helped to explain the forces of commoditisation. In this, he argued that most companies focus on the top of their market, where the profit comes from. This makes them vulnerable to cheaper, but “good enough”, upstarts innovating at the bottom of the market. This is a good thesis to explain the consumer electronics market, where it has been proven true again and again. But I don’t think it helps explain the nature of the smartphone market.

Superficially, Christensen’s explanation seems to neatly define why a company like Apple is vulnerable. After all, Apple is the very definition of a successful company focussing on the top of the market. They are therefore doomed, as the narrative goes. But I don’t think this is the case - and the easiest way to explain why, is to look not at consumer electronics but at cars.

For if Christensen were universally right, a company like BMW shouldn’t exist. Toyota, Skoda and Nissan long ago proved there are cheaper, reliable, and functional alternatives at half the cost of a BMW. So why is BMW not just still here, but thriving?

I believe that BMW exists because its product exhibits a number of attributes that make it immune to the forces of commoditisation:

  1. Innovation means the product is continuously being reinvented, not just refined. Electric drivetrains, safety changes, self-driving and entertainment innovations all mean the car of tomorrow is nothing like the car of today. As a result, consumer expectations of “good enough” are constantly advancing.
  2. Consumers highly value the fashion, brand and aspirational social status of the products. These things ensure “good enough” isn’t good enough for anyone who can afford to pay a little more.
  3. The product is essential to consumer’s lives and is used on a constant basis - meaning it’s easier for consumers to justify an upgrade or investment, because of the critical nature of the product.

Once an MP3 player has enough storage capacity, it’s hard to imagine how it can be “better”. But a car isn’t an MP3 player. So we always want the next innovation because it improves our lives. Or sometimes we don’t need it, but we’ll still buy it because that new metalwork looks “oh, so stylish”. In these ways BMW ensures its continued place as an innovator at the top of the market.

Despite its position in the consumer electronics industry, the smartphone is more like a car than an MP3 player. The definition of a modern smartphone is continuously changing, manufacturers have successfully worked out how to exploit fashion and brand and the product is at the centre of how we live our lives.

Continuous product redefinition

Some have fallen into the trap of thinking a smartphone is a phone - and is already “good enough”. Like an MP3 player, it’s hard to imagine how different or better a telephone needs to be. But the last thing a smartphone is, is a telephone.

My teenage daughter has removed the phone app from the home-screen of her iPhone. Where I see a phone icon in the bottom-left corner, she has a messaging app. When I questioned her, she very logically protested that “nobody my age uses a phone”. Her iPhone is a computer, not a telephone. Notice how the original iPhone press release talks about the iPhone being a “Breakthrough Internet Communications Device”.

Whilst the power of the original iPhone seemed adequate for the time, the processor of today’s is 50x the performance of that device. It is hard to imagine using that original iPhone today - it would be far too limiting and slow for anything remotely serious. But more significantly, that processor innovation has enabled entirely new uses for the smartphone - some of the things we now use it for weren’t even conceived in 2007.

When we judge the level of innovation in the smartphone market, we shouldn’t look at individual product releases. That’s like saying “is the 2015 BMW 520i sufficiently different from the 2014 520i to make people upgrade?” (which of course it isn’t). Rather like the car market, we can only see the true level of innovation across product cycles. So “is the iPhone 6s sufficiently better then the iPhone 4 to tempt upgraders?” is perhaps a better question to judge the level of innovation.

One data point for how the definition of a good smartphone is changing is that people now talk seriously of the smartphone replacing the camera. Indeed, the compact camera market is already succumbing to this threat. The camera on the original iPhone was just a toy, but the latest models can be considered serious cameras in their own right.

We can now edit videos, play high-end games, compose music, write documents, edit images and many other tasks on our smartphones. Product innovation is changing what a smartphone is, not just refining its capabilities.

And there is much yet to come - who wouldn’t pay for a smartphone with a week-long battery life, a screen that’s as easy to read as a book in sun-light, or that provides dynamic haptic feedback that makes the on-screen keyboard feel “real”? The smartphone of tomorrow will be radically different to that of today - and we’ll almost certainly find we need those innovations.

Fashion, brand and social status

We value the design, style and quality of our cars, and we do the same with our smartphones. For an essential item we use all the time, many are willing to spend the money to get a better model. Or to trade-up when our current model starts to look a little tatty around the edges.

Many upgrade their cars every few years. We don’t have to - for although the seats may be a little dirty and the paintwork not as shiny as it once was, our old car is frequently still perfectly functional. But “perfectly functional” isn’t good enough when we can afford something better. The same is true with smartphones. We change our smartphone for often similar reasons that we change our car. The new model looks nicer, is faster, has more features. We might not need it, but we want it.

Whilst some who don’t see the appeal of a “premium” product, that attitude is a relatively niche one. Whatever the rights and wrongs, there’s undeniably a healthy market associated with aspiration and style.

But aspirational brands and products shouldn’t be mistaken as purely superficial. If that were the case, consumers would soon catch-on. A BMW is a genuinely good car and very well engineered. The fit-and-finish is excellent and it drives superlatively. That quality allows the brand to have a consistent appeal over many years.

An iPhone’s engineering is similarly great. Like a BMW’s engine, it’s processor design is industry leading and the physical engineering of it’s case is top class. Even if you value other attributes of competing products, it’s hard to ignore the quality and engineering inherent in the design. And so there’s a substance to its position as a “premium” product that allows it to hold that position consistently.

There may be cheaper products that are perfectly functional. But “perfectly functional” isn’t the aspiration for many. Like cars, smartphone brands and products have become aspirational.

Critical role

Our smartphones are how we communicate with both loved ones and colleagues, they are how we navigate, they entertain us with games, we listen to our music collection on them and they are how we consume the day’s news events. Without a smartphone, most of us would be lost in the modern world.

If you’re one of those modern city-dwellers who’s calculated that a combination of public transport and Uber are more cost efficient than car ownership, I bet I couldn’t prize your smartphone from you hand? And if I did, how would you know the times of the trains or how to book an Uber?

We have only to watch the human misery of mass migration on the news to notice one common and consistent theme. Those who have left their homes in hope of a better life carry one thing with them: their smartphone. The smartphone is their link to reality amongst a sea of misery. It helps people keep in contact with loved ones in the most trying of circumstances and helps them navigate treacherous routes to safety. If you’re going to leave a war-torn country and travel half-way around the globe, your smartphone (and it’s charger) is your most prized possession.

The smartphone isn’t just a critical communication device for the chattering classes, it’s become essential to people of all backgrounds.

But…

There’s one enormous difference between a new BMW and a new iPhone. The finance payments on a new BMW are hundreds of pounds every month, but a new iPhone can be purchased outright for just one of those monthly payments. As such, the iPhone becomes the “affordable luxury” for not just the elite, but the masses.

Much like the car, we have a product in the smartphone that is essential to people’s lives, is constantly being redefined through innovation and appeals to the sensibilities of fashion and style. I think it’s reasonable to consider the smartphone market much more like the car market than the consumer electronics one. That’s why premium smartphones continue to exist and why people continue to buy them. The smartphone is much more like a car than an MP3 player.

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