The credit crunch is shaking all businesses – even Venture Capital, which is not directly dependent on loan instruments. Financial turmoil and following downturn has a strong impact on M&A and IPO activity, weakening at least the short-term exit scenarios. The market instability has also slowed down the venture capital fundraising.
Start-ups are certainly feeling it as well. Recently, Sequoia Capital hosted a portfolio CEO All-Hands Meeting, where the message was to be prepared for the worst; this could be as bad as the 1930’s recession. Companies must turn their cash flow to positive and make sure they have money in the bank for at least one year.
The outlook in the Mobile & Wireless space is somewhat brighter but it is by no means immune to the market conditions. Continued growth, albeit slower, is forecasted driven by adoption in emerging markets and new applications and services in the established markets.
Looking at the bright side of the turmoil, it also generates opportunities. Cash is King and VCs with dry powder can make good investments with relatively low valuations to build strong portfolios. With the new mobile and wireless focused fund raised Nexit is actively looking new investment opportunities. The Smartphone segment, as one example, is currently in a strong growth phase, as elaborated below.
Smartphones dominating handset business
Despite representing only 12% of units shipped, Smartphones generate almost half of
the handset revenue this year. The annual growth is estimated to remain high – as high
as 40% in 3Q2008. However, in an early estimation Nokia’s share of that market has
dropped from 50% to 35% within that period. Even worse, the number of Nokia Smart-
phones shipped declined year over year.
The winners were Nokia rivals such as Apple and Research In Motion (RIM developing
BlackBerry devices). During the 3Q2008, Apple sold 6.9 million iPhones making Apple
the world’s third largest handset manufacturer in terms of revenue.
This growth market is attracting also new players to the game. The first phone using
Google’s Android operating system has been released (G1 by HTC/T-Mobile) and was
rumored to have over 1.5 million preordered units.
Mobile as a Platform
The significant development here is the role of the Smartphone - it is not just a phone with fancy features anymore, but a platform for applications and services. Consumers are spending more money on applications and are using data services at an accelerating pace.
The situation is similar to the early days of the PC, when the combination of MS-DOS and IBM compatible PC’s created the platform to attract the critical mass for applications and left the non-compatible competition far behind. Ultimately the software business became much larger than the hardware side.
Apple has the first mover advantage
the number of applications sold in its App Store. Piper Jaffray analyst Gene Munster predicted that if 91% of iPhone and iPod Touch users purchased $10 worth of applications a year, the App Store would generate as much as $1.2 billion in revenue in 2009. After two months since the store’s launch, the App Store already generated $1 million a day, indicating potential annual sales of $365 million. By adding the highly successful iTunes store (world largest music retailer) Apple has created a clear edge compared to the competition.
The rest of the pack is fighting back
Google has opened the Android Market with a similar service, including a 70/30 revenue split just like Apple. But unlike App Store, the Android Market does not have any approval process for applications. This open-minded approach combined with the wide selection of heterogeneous hardware certainly supports agility and creativity but at the same time can create some serious problems.
RIM plans to launch their application storefront in March 2009 and developers will retain 80% of the revenue. Unlike most of the manufacturers, RIM has developed an integrated corporate centric architecture to deploy and manage enterprise applications and services.
With the tremendous installed base of 250 millon phones one could see Symbian as a clear winner, but there are some serious challenges to overcome. Firstly, the wide selection of different versions of Symbian developers claim that software development is far more challenging for Symbian. Thirdly, there has not been a simple and easily accessible way to purchase and install software or transfer old application licenses to a new handset. Nokia has opened the Nokia Download Store and OVI services, but the user experience is not as smooth as with iPhone and Android.
Who will win and who will lose?
Is there enough market demand for five different platforms? Who will lose? Will RIM be acquired? Will Symbian continue to lose market share? Can Android deliver and claim to fame? Can Apple enter also the lower end of the market with cheaper iPhones? The winners in all of this are clearly the software developers and end users. It wasn’t too long ago that developers were making only 30% of every dollar spent in applications. If you have a potential winner to invest in let us know!
