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Summary:

Research in Motion, the maker of the BlackBerry, and Apple are sucking up two-thirds of the industry’s profits, while selling only 10 percent of devices, according to Deutsche Bank. As a result of that and subsidies, the U.S. handset market is changing.

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Research in Motion, the maker of BlackBerry smartphones, may be losing market share, but it still has a large share of the profits, according to a research note issued last night from Deutsche Bank. The bank took a look at profits for the major smartphone makers and concluded that Apple and RIM were still sucking up two-thirds of the industry’s profits while selling only 10 percent of the overall handsets — the same stats it came up with six months ago, when it first ran this analysis.

Its conclusions have only been reinforced since then, as Samsung and LG reported lackluster results from their handset divisions, leading Deutsche Bank analysts to conclude that interest in phones with mid-tier features is rapidly shrinking. Folks either want a smartphone that doubles as a mobile computer of sorts or a low-end, cheap handset for phone calls and texting.

All of this leads us to make a few conclusions from the latest quarter’s results. We think the change that Apple has forced on the industry continues to play out. Hardware has become a commodity with heavy pressure on margins. Software is the only way for vendors to differentiate their products and as a result those with the best software platforms are pulling ahead. … . We increasingly see the handset space “barbelling”, with strong volumes at the low end and the high end, but little demand for products in the middle. Those mid-range feature phones used to be Samsung’s and LG’s bread and butter products upon which they built their operations. Those kinds of phones are vanishing from the shelves in the US, increasingly replaced by high-end smartphones subsidized down to mainstream prices.

The willingness of U.S. consumers to lock themselves into a two-year contract in order to pay $200 for a $400 or $500 handset creates a market dynamic that will help the country achieve a smartphone penetration rate of over 50 percent by the third quarter of next year, according to estimates from Nielsen. However, it also means that the largest carriers still have a huge say in what phones succeed in the U.S. market, a lesson Google learned when it tried a new retail model for selling its Nexus One. It was a great handset, but because Google sold it through its online store, it was difficult to get it in the hands of consumers, even with a subsidized price tag of $179, as opposed to $529 through T-Mobile.

The odd U.S. market has big implications for handset makers as it’s one of the larger markets for high-end devices — the right tie-up, such as the one between Verizon and Motorola — can revive an aging handset maker, but carrier interference such as AT&T’s lock down of the Android platform may turn off users to not only a device, but also an entire platform. The system also tends to reinforce the power of the two dominant carriers because they will continue to get the best handsets and thus keep attracting more customers — in spite of poor network performance or some of the highest prices in the industry.

Related GigaOM Pro research (sub req’d): What Happens When Data-Friendly Phones Come to Pre-Paid?

By Stacey Higginbotham

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  1. [...] Apple and RIM Still Sucking Profits from the Smartphone Industry [...]

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  2. Stacey – I am not a fan of AT&T but I have to disagree with your characterization of tie-down of Android phones by AT&T and that it is going to rile a lot of users.

    With security threats in mind, AT&T is taking a reasonable precaution for many average users who can still buy apps from Google App Marketplace but can’t load apps from any wild place.

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  3. What most people do not get about the ballyhoo over Android is that it DOES NOT directly compete with Apple and iOS. That is why Google says ‘activations’ and not sales because 50% of Androids are buy one and get one free and some are even buy 1-ish and get two more free. There are three markets – the high end consumer smartphone market which Apple will get 70% of the market share and where most of the profits of the industry is. RIM will hold a slight lead over Apple in the enterprise smartphone market and where there is plenty of profit also … Android and symbian will duke it out over the under $49 smartphone market (after rebate and get one free offers). this is the market Apple could care less about but will keep their toe in with a $99 phone – mostly so if the family has two “new” iphones, the kids can get the last gen one … so whiel Android will sell a few full price phones just as nokia can nove a few hundred thousand at full price, after a few weeks, all android phones fall into the BOGO bucket. Bottom line, 60% of the profits in the smartphone market will go to Apple, 25% to RIM and the rest will duke it out for 15%. market share means NOTHING without profits and Apple has nothing to worry about the android market in terms of apps creating a direct competitor – UNLESS Android telcos and makers decide on ONE OS and ONE OS look and feel, there is NO COMPETITION. That is why Android satisfaction is around 20% – Android means you have to relearn the OS when buying another phone.

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    1. As far as I’m aware, only Verizon periodically offers bogo offers and its not just on their “Droid” line of Android phones but they’ve offered it on Blackberries and feature phones as well. Sprint has never offered bogo offers on Android phones, nor to my knowledge has AT&T and T-Mobile.
      Additionally, the Android phones that have been coming out as of late have been much higher end than previous models leading to higher device prices.

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    2. Most people sign up for a plan with the carriers, whether Andriod or iPhone, they don’t pay full price of the phones.

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  4. Handsets have gone from an appliance — making/receiving phone calls to mobile computers. This in large part is do to a young but robust mobile ecosystem. This environment is comprised of hardware, software, operating systems, mobile search, mobile Internet, OEMs, MNOs and content providers. Each of these parts of the greater whole are maturing at an alarming rate.

    Arguably subsidies can be attributed to the success of the smartphone. Subsidies can turn a $500 handset into a $200 handset. This type of pricing can make handsets an attractive option.

    I do not completely agree with Privat’s claim that customer loyalty is high. Is it customer loyalty when ETFs are $375 per line?

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  5. [...] Even as it still takes in a large share of industry profits, RIM is attempting to fight off declining market share with a new operating system and flagship device, but it doesn’t look like enough of a disruption. My hands-on with the BlackBerry Torch shows an underpowered handset that tries to bring some appealing new features — such as a touch screen, WebKit browser and social networking integration — without getting away from the core competency of a traditional BlackBerry. Early sales estimates of 150,000 devices along with online half-priced deals less than a week after the Torch’s debut indicate that RIM needs further disruption to maintain the same level of relevance it has enjoyed for several years. It’s a war on two fronts, however. [...]

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