Can phones sold without US carrier backing find a path to success?

use a mobile phone

Earlier this week, Andy Rubin announced the start of a new mobile device company, called Essential.  They are going to be making a number of different consumer products, but foremost among them is their PH-1 smartphone, made with premium materials and costing a cool $699 retail and off contract.  Its the off contract part that is both intriguing and potentially disappointing, as Essential will launch their device using the direct-to- consumer model that other OEMs have used before.  The question we should be asking is not about phone specs or display size or battery capacity.  Its about whether or not a phone sold direct to consumers without any carrier presence can find a measure of success.  So far, the results are a mixed bag.  Let’s explore some of the reasons why a bit further.

There are 4 major wireless carriers in the United States (duh) – most that live in the US know this already.  While there are a number of MVNOs that resell the service, all of these piggyback on the infrastructure that the 4 major carriers possess.  And if you are a company that makes smartphones, you have 2 choices, generally:  you sell direct via your own e-commerce website and/or secondary online vendors, or you make a deal with one of the carriers to get your device into their stores.  To take the 2nd path, you’d need to 1) ensure that your phone contains the proper wireless modems for the particular wireless signals (CDMA for Verizon/Sprint, and GSM for AT&T/T-Mobile) and 2) you need to be willing to pay some kind of fee to the carriers (and also generally allow their in-house apps – commonly referred to as “bloatware” or “crap-ware” onto the device too)

Payment

While this may sound a little bit like extortion, and maybe in a way it is, its a surefire way to get your device a lot of attention and quickly.  And since a large percentage of Americans will buy their phones either outright or on some kind of payment play from their carrier,  you can be sure that you’ll get a lot of eyeballs on your new product.

One of the downsides of this strategy though (aside from having to pay to play) is that if you are a new device OEM, you are in a position in stores where you are competing directly with the Apple’s and the Samsung’s of the world.  And that means even though  you are there, you start with a slight disadvantage from the jump.  These 2 companies (and with Verizon and Google’s Pixel devices, potentially a 3rd company) have the kinds of marketing budgets and sales numbers to sway even the largest wireless carrier, so that typically means that the sales people working in these stores are going to be directed to pimp an iPhone or Galaxy device first and foremost.  So while your new product may be ready to compete with the latest and greatest, you not really even in the game.

Which leaves the direct-to-consumer model.  You have those that will use just their own e-commerce website (such as OnePlus) and those from whom you can buy direct as well as other secondary retail sites like Amazon or BestBuy’s website.  This sales strategy comes without the costs of a full retail carrier presence, but is obviously at a huge disadvantage to start off.  This plan involves basically hopping for strong word of mouth, social media, and whatever kind of marketing budget you have to spend.  You have to start with a solid product, and hope that that’s enough to get people’s attention.  And, as mentioned above, there are lots of competition in the mobile phone hardware space, so sometimes even IF you have a great product, if no one hears about it, you aren’t going to sell enough of your device to turn a profit.  Ask HTC, who made solid offerings in both the HTC 10 and the U11 devices, and pretty much no one is buying them because you can only find them online, and people want to see and touch their phone before buying it.

Or ask Huawei, who is the #3 OEM of mobile phones in the world, and when launching their e-Brand of phones called “Honor” devices, found only tepid sales.  Their phones have premium design, materials, and solid specs at very affordable pricing, and yet after the Honor 8 device basically flopped, they opted not to bring the next generation of the device to US shores.  And Huawei is selling millions of quality devices overseas where a direct-to-consumer model is more realistic, and value to mid range phones are much more popular.

The most common US example of a company that has found its niche using the direct model is OnePlus.  There are not any reliable sales figures for the number of devices OnePlus has sold, but their latest generation device (in 2 variants, the OnePlus 3 and 3T) sold well enough to allow them to make a matte black limited edition which sold out within a month or so.  And as OnePlus is preparing to launch their newest generation device, the rumors are that it will be available in more colors than ever before, and with updated flagship level features such as dual cameras and water resistance ratings.  This would indicate that OnePlus is doing at least well enough to turn a profit, and that would put them in a rare minority of OEMs these days.  OnePlus devices can only be found for sale on their website, and also in small quantities via reseller sites like Swappa.  This makes them unique, in that they have found some measure of success where other much larger companies have failed to do so.  What piece of the profit puzzle has OnePlus figured out that others haven’t?

Money puzzle

Small production sizes, lower overhead, and refining their internal processes most likely play a major role in OnePlus’s success.  They went thru 2 versions of their flagship (3 if you include their attempt to produce a smaller flagship as well) before they found a formula for sales successes.  And this is the space that Andy Rubin’s Essential company hopes to occupy as well.  By making a premium phone and selling it at a premium price, maybe they can generate the kind of buzz that OnePlus has.  OnePlus’s devices are much more affordable (at least to start) and come with similar specs.  But if history has shown us anything, its that more often than not, those device that don’t secure carrier support are dooming themselves to failure from the start.  Many OEMs big and small have tried.  Perhaps Essential will make themselves so for US buyers regardless of how they are able to lay their hands on the device.

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