Mobile handsets are durable goods, necessary in order to access a mobile network, and are characterised by a high rate of product innovation. Owing to this innovation it is
customary that users of mobile phones tend to replace their handset periodically; this is closely linked to the fixed term nature of subscriptions to mobile networks and the subsidy of handsets for new subscribers.
The manufacture of mobile telephone handsets is an industry dominated by a small number of firms, most of which are large electronics manufacturers with interests in a range of fields such as televisions, computers, or communications infrastructure. Al- though there are regional variations, the same handset manufacturers compete against each other in almost all countries. The largest market participants in handeset manu- facturing are also persistent over time as indicated in figure 2.414 which indicates that Nokia, Samsung, and LG have consistently been amongst the largest manufacturers in terms of handset sale volumes.
Figure 2.4.: Share of quarterly global handset sales by volume (Q3 20001, Q4 20042, Q1 20103, Q4 20124)
Source: 1BBC News,2cellular-news,3E-week Europe,4Gartner
The firms that manufacture mobile handsets compete in a number of ways including price, patenting activity, handset proliferation, and through the creation of horizontally differentiated ecosystems such as application stores; this latter area is discussed in the relation to network effects and switching in section 2.6.
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In figure 2.4 Sony-Ericsson was known as Ericsson prior to a joint venture in 2001, and is now Sony, following the Sony purchase of Ericsson’s stake in 2011. Furthermore, where a manufacturer is shown as having a 0% market share it may have had a very small market share and be included within the ‘Others’ category.
There are a number of papers which have studied pricing of mobile handsets; Barros [2006] does so from the perspective of final prices to consumers and the use of subsidies by mobile operators to incentivise consumers to lock themselves into fixed term con- tracts - this is discussed further with respect to the strategies of operators in section 2.5. More relevant evidence from the perspective of manufacturers is provided by Costello [2010] and Valletti [2000] who respectively indicate that manufacturers are making slim or negative profits in their handset divisions, and that there is evidence that prices are declining at both wholesale and retail level.
The high speed of innovation and technological advancement in mobile telecoms (which was discussed in relation to the competing standards in section 2.2) presents the opportunity for firms to engage in patenting; both in terms of essential patents - those required for the operation of a mobile network, and also patenting of features on handsets which appeal to consumers.
The number of high profile patent cases involving manufacturers of mobile telephone handsets, typified by Apple Inc. v. Samsung Electronics Co. Ltd. et al. at the Northern District Court of California (C 11-1846 and C 12-0630), is an indication of the investment that firms have made in using patenting in order to gain a competitive advantage over rivals. In a number of cases this has resulted in a ban on sales of par- ticular handsets or equipment in particular territories following a finding that a patent has been violated. The importance of patents in gaining competitive advantages is also manifested in the investment decisions of firms with patent stockpiling being credited for a number of high-profile horizontal mergers.15
There is evidence that the patenting activities of firms has been a determinant of the historical market shares held by different firms. Both Bekkers et al. [2002] and Koski and Kretschmer [2007] highlight the parallels between the early market shares of Nokia, Ericsson and Siemens, and the firms’ investment in patenting activities surrounding the GSM standard; this is particularly relevant for pre-1997 ‘essential’ patents - those that are mandatory for the operation of handset. To this effect Koski and Kretschmer [2007] also highlight that the advance in technology from 2G GSM to 3G created a water- shed moment where new technological opportunities presented the opportunity for new
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Notably the acquisition of Motorola by Google, and also the full merger of Sony and Ericsson’s mobile divisions in 2012.
Figure 2.5.: Handet varieties by leading manufacturers January 2007 - February 2011)
Source: GSM Arena (February 2011)
innovative entrants to gain a foothold in the market; highlighted in figure 2.4 by the aggressive entry of Samsung and LG between 2000 and 2004, and the decline of many of those firms which had previously held significant market shares.
In addition to patenting activities which protect innovation, mobile handset manufac- turers also engage in product proliferation - producing large numbers of handsets with minimal differentiation; Schmalensee [1978] states that, in producing large numbers of varieties, incumbents can stifle entry by making it difficult for potential rivals to reach a minimum efficient scale. This type of behaviour is shown in figure 2.5 which shows the large numbers of individual handsets which were marketed by the manufacturers.
Further to the above, Koski and Kretschmer [2007] discuss the emergence of dominant designs which are introduced by a single firm, become imitated, and finally become the norm for phone designs; specifically, the authors state that since the late-1990s man- ufacturers sought to differentiate themselves not just through size and weight, but increasingly through innovation in features. The authors also state that these features which were innovative in the 1990s (such as alarm clock or games) became standardised across handsets by 2002.
Until 2007 mobile telephone handsets had maintained a broadly uniform design fea- turing a small screen and a physical keypad with buttons which had to be pressed in
Figure 2.6.: Proportion of handsets featuring large screens (%)
Source: GSM Arena (June 2013)
order to operate the phone. Toward the end of this period manufacturers began to include large screens on their phones which replaced buttons; this style of handset soon overtook the previous approach. Figure 2.6 indicates that, while the total number of handsets released annually increased over the period 2005 to 2011, the proportion of these featuring a larger screen (greater than three inches diagonally) also increased16
The significance of figure 2.6 is two-fold; it highlights the incentives for patenting through the potential for the extraction of royalties in mobile handset design, and it indicates that advantages gained through innovation can be transient and that substi- tute products will rapidly adopt innovations.