Evolution to the

global device
How market trends
demand shifts in traditional
OEM device strategies
Terry Steger, Adam Hutchinson and
Cara Howieson
As mobile device OEMs seek to expand their market
shares and geographic footprints, they must adapt to the
increasingly complex 4G LTE networks across the globe.
Adoption of smartphones continues to grow, led by
new customers with higher price sensitivity in emerging
markets. Carriers are largely doing away with device
subsidies in favor of leases and installment plans. And
customers are buying smartphones in different ways,
with a growing number purchasing devices directly from
OEMs. As a result, the capabilities OEMs need to gain a
Tier 1 OEMs
face increasing
competitive advantage are changing. competition from rising
Tier 1 OEMs have led the technological advancement in smartphone development
Tier 2 and 3 OEMs.
in the past decade. They have gained a competitive edge with innovative features
and functions and captured bottom-line growth through premium smartphone
offerings. However, as growth in the premium smartphone segment slows and
turnkey solutions become available, Tier 1 OEMs face increasing competition from
rising Tier 2 and 3 OEMs. These companies are looking to expand their footprints
outside of China and boost their smartphone market shares. Tier 1 OEMs are
responding to the challenge from these hard-charging competitors by changing
their device strategy. For example, they are creating portfolios characterized by a
greater use of global devices and fewer SKUs. Such global devices enable access Market Share1:
through all network modes and frequency bands, which is critical to addressing >5% >10% >1%
changes in network complexity and market dynamics.

To continue their growth, Tier 2 OEMs must enter new markets and compete with Huawei Apple LG
Lenovo Samsung Yulong
the Tier 1s. Adopting a similar global device strategy is a key lever in this effort that Xiaomi Microsoft
can be done without adding to the total cost of ownership for the OEM. By creating ZTE
Oppo
a global device, Tier 2 and 3 OEMs can achieve cost savings and drive market upside Sony
through SKU consolidation. However, they will also need to deeply understand Vivo
HTC
shifting customer sales models and ensure that devices’ features and functions
match customer preferences.

Tier 2 and 3 OEMs have a massive opportunity and challenge before them. The
extent to which they capitalize on this opportunity depends on how well they adopt
the capabilities necessary to respond to the latest chapter in the mobile phone
industry’s ongoing evolution.

2 | Evolution to the global device

Three factors are redefining
the mobile phone market
Since its inception, the mobile phone market has been characterized by rapid change
driven by innovation and a continual drive to reduce Bill of Materials (BOM) costs.
Today is no different. The current global mobile phone landscape continues to evolve,
as numerous factors are converging to reshape what OEMs must do and provide to
be competitive.

Three factors, in particular, are having the biggest impact:

Acceleration of 4G Greater smartphone Changing channel dynamics

network coverage
In 2015, there were more than 1 billion
global 4G LTE connections across 151
countries. This represents a doubling
from the previous year and more than
a tripling in developing markets. Such
dramatic expansion in 4G LTE has
made networks increasingly complex:
the number of frequency bands and
combinations required to support
mobile demand has skyrocketed by more
than 800% since 3G’s roll-out.2 And
complexity will only continue to grow
through 2020 and beyond as 5G is
introduced and connected experiences
driven by the Internet of Things (IoT)
dominate the mobile ecosystem.
3 | Evolution to the global device
availability and affordability
Increasing broadband connectivity,
expanding network coverage, and
growing customer data needs have
accelerated smartphone adoption.
In 2020, OEMs are predicted to ship
1.7 billion 4G smartphones. That’s
90% of the total smartphone market
and a 70% increase over the number
of smartphone units shipped today.3
But the aggregate figures don’t tell
the whole story. Premium smartphone
growth is actually slowing while mid-
range smartphone growth is on the rise,
largely driven by new smartphone
consumers in developing markets.
In fact, such markets will account
for 75% of all smartphones sales
by 2018 and will be the engine for
overall market segment growth.4
A strong OEM base across the mid-
range smartphone market is needed
to serve this growing population.
The ways in which consumers buy
mobile devices are also undergoing
dramatic change across the ecosystem.
For instance, the percentage of phones
sold directly to consumers continues to
rise. In fact, in China, over 60% of sales
are now expected to come through
open channels that do not require
consumers to be tied to a carrier
contract. Rising Tier 2 OEMs—which
enjoy 130% year-on-year revenue
growth from the open channel—are
leading the way.5 The shift to the open
channel has forced OEMs to focus more
strongly on customers, who demand
faster data speeds and more portability
across carriers.
Carriers also have recently changed how
they sell smartphones. For more than a
decade, carriers have offered substantial
subsidies on phones in exchange for
long-term customer contracts. In other
words, they’re absorbing the up-front
cost of the device to attract new
customers. However, the efficacy of
the subsidy model is waning in mature
markets. That’s why carriers in mature
markets are eliminating subsidies in
favor of a leasing or installment-plan
model, which emphasizes a smart-
phone’s longevity and residual value.
Three actions for OEMs
These market changes can create challenges OEMs must
address. But they also create significant opportunities—
particularly for those Tier 2 and 3 OEMs trying to position
themselves as Tier 1.5 players. By developing global device
solutions that enable access to both mature and developing
markets, support connectivity to all network generations
and frequency bands, and provide customer-compelling
features in a price-competitive package, OEMs can gain
competitive advantage over their peers while driving
profitable growth. Three actions will be key to OEMs’
global device solution strategy.

Consolidate SKUs to Respond to shifting Develop for features

reduce total cost of customer sales models and functions that
ownership and drive most closely meet
market upside carrier and customer
preferences

4 | Evolution to the global device

Consolidate SKUs to reduce total cost of ownership
and drive market upside
In today’s era of customer centricity, marketers’ instinct is often to create
a distinctly different version of a product for each customer segment.
That’s the opposite tack of what’s needed. Instead, smartphone OEMs should
reduce the number of SKUs across their product portfolio and consider making
one device within each target segment that meets customer demands and
can be used globally. This is the path leading OEMs have already taken.

Benefits of a consolidated SKU approach Although a single device

will incur slightly higher
Although a single device will incur slightly higher BOM costs than a lower-
utility handset, its strategic benefits and total cost of ownership savings BOM costs than a
will far outweigh the upfront costs. Six benefits, in particular, will result lower-utility handset,
from fewer SKUs: its strategic benefits and
1. Lower direct material costs. Decrease direct material costs through total cost of ownership
reduced verification testing. savings will far outweigh
2. Higher resource efficiency. Improve resource efficiencies by reducing the upfront costs.
human capital costs or strategically reallocating resources to focus on
either enhancing current-generation product features or developing the
next generation of products.

3. Lower manufacturing costs. Reduce manufacturing overhead costs by

requiring fewer line changes and spending less time on engineering change
orders.

4. Better forecasting and inventory reallocation. Improve working capital by

reducing safety stock, increase revenue by reallocating inventory to secondary
markets, and minimize product overstocks and stock-outs during launch.

5. Lower carrier global development and deployment costs. Lower carrier-

specific software development costs and carrier-mandated in-market testing
and certification costs by leveraging reference designs and re-flashing
previously developed software for a new market with no hardware changes.

6. Faster time to global market. Increase profitability by reaching more

markets faster, enabling an OEM to command a higher Average Selling Price
(ASP) and attract a larger market share.

5 | Evolution to the global device

Respond to shifting customer sales models
The ways in which key players—OEMs, carriers, consumers, and retailers—
buy and sell-back mobile devices into the ecosystem are changing rapidly.
Three shifts in the current customer sales model are especially impactful
and require OEMs to respond.

First, the number of smartphone handsets that are sold directly to consum-
ers through open channels—OEMs or retailers—continues to rise. In highly
fragmented markets like China, the shift is even more pronounced:
over 60% of consumers in that country purchase smartphones through
the open channel. This increase in open channel sales makes device pricing Over 60%
and features even more important, which means Tier 1.5 OEMs can grab of consumers in China
a greater share of that business by pricing devices aggressively and
“up-featuring” phones to compete with Tier 1 OEMs. In certain countries purchase smartphones
(e.g., Brazil), retailers reign supreme: they often choose the carrier to push, through the open channel.
and subsequently the handset to sell, based on the cost of the activation
fee and the promotional kickback for that specific day. Any device that
would allow a retailer to stock one SKU that can be sold with any carrier’s
plan would offer a tremendous value proposition to the retailer.

Second, the shift in the carrier sales model toward leasing and installments
has increased the focus on device longevity and residual value. This has
directly affected how carriers procure smartphones from OEMs. Carriers are
paying close attention to a smartphone’s depreciation and resulting resale
value in the auction markets. Additionally, carrier’s shift away from the
subsidy model creates more erratic device purchasing behavior among
consumers—and, often, a longer lifecycle—because there is no contract
or upgrade program forcing a turnover. That’s why “future-ready,” carrier-
agnostic devices are so important. They will enable OEMs and carriers to
either re-lease or re-sell refurbished phones for a higher residual value—
especially to consumers in a highly complex mobile market.6

Finally, with 120 million refurbished units expected to be sold in 2017,

refurbished smartphones play an increasingly important role across both
120 million
mature and developing markets.7 The demand for premium refurbished refurbished smartphones
smartphones is especially high in emerging markets, as such devices attract are expected to be sold
users who normally could not afford them brand new given the high price in 2017.
point. The implication for Tier 2 and 3 OEMs is clear: they will have to
improve the quality and features of their smartphone handsets to compete.

6 | Evolution to the global device

Develop for features and functions that most closely
meet carrier and consumer preferences
Mobile devices and the supporting network infrastructure have become
increasingly complex in the past decade and there’s no end in sight.
Complexity will continue to grow in concert with consumers’ demands
for greater speed, power, portability, mobility, and connectivity. While techno-
logical and consumer demands are increasing overall device complexity,
improvements in smartphone technology have resulted in little more than
incremental enhancements in the past few years. And that has had a
dampening effect on new purchases: unconvinced these enhancements
are critical, consumers replace their device less frequently.8 To change this
mindset, OEMs and carriers have to do a better job of demonstrating the
new technology’s value and tangible benefits for the consumer.

One way for OEMs to demonstrate the value of a global device to carriers is
Data traffic is expected
to focus on potential cost savings from improved roaming rate negotiations. to grow by a CAGR of
Unlike 2G and 3G roaming, which presented few challenges for carriers to
match to many other carriers both domestically and internationally, the 49% from 2015
increased complexity of 4G makes global roaming a very difficult and to 2020.
expensive proposition.9 A global device that can access all types and
combinations of frequency bands would enable a carrier to match to more
roaming partners and, therefore, offer more options and increase leverage
during roaming agreement negotiations. With global roaming revenue
projected to reach US $90 billion in 2018 compared to nearly US $60 billion
in 2014, and leading carriers with roughly 50 million subscribers paying
US $100 million to US $300 million each per year to their roaming partners,
the improved roaming agreements could represent a huge financial upside
for carriers.10

For Tier 2 and 3 OEMs, competing head to head on premium smartphones

requires striking the right balance between competitive pricing and
differentiated features and functions. One way to do so is to leverage
integrated mobile phone solutions. Such solutions take advantage of chipset
reference designs and qualify other components to optimize a mobile phone’s
Global roaming revenue
overall design and function. This allows OEMs to drive down BOM cost
and reallocate R&D resource time to focus on developing next-generation is projected to reach
features and functionality. If an OEM can increase customer appeal by
providing improved smartphone features and functions such as improved
US $90 billion in 2018.
battery life, IoT connectivity support, and cross-carrier portability, it may be
able to boost sales and ASP from the customer or carrier. This is especially
true in highly fragmented markets such as China, where consumers are
willing to pay for enhanced geographic support and increased carrier
flexibility.

7 | Evolution to the global device

Unlocking the potential
Although the premium smartphone segment is no longer red-hot in mature
markets, the overall global mobile phone market continues to grow. In fact,
the expansion in 4G and 4G roaming, coupled with the growth of emerging
markets, has contributed to a substantial increase in the total addressable
market. This market growth, coupled along with the changing power
dynamics within the carrier, open market, and retail sales channels, has
created an opening for OEMs to grow revenue and gain market share.

But to unlock the potential of this strategic opportunity, OEMs need to view
competitiveness differently, shifting their focus from BOM cost to value
generation. New technologies that address device and network complexity
make this possible. Although these technologies will increase BOM costs on
a per-handset basis, the value added from a global device with maximum
frequency band support and connectivity will far outweigh those costs. In
addition to generating top-line growth, a global device will drive cost savings
in the form of fewer required SKUs in an OEM’s portfolio. In fact, when a
mid-tier OEM uses a global all-band modem to shift from a market-centric,
many-SKU approach to a product portfolio with a global device and fewer
SKUs, the company typically will experience a 2.5x return on investment.11
And in a hyper-competitive, highly dynamic market where OEMs are always
looking for an edge, that figure is hard to ignore.

8 | Evolution to the global device

Join the conversation About Accenture
Accenture is a leading global professional services
@AccentureStrat company, providing a broad range of services and
solutions in strategy, consulting, digital, technology
.com/company/accenture-strategy and operations. Combining unmatched experience and
specialized skills across more than 40 industries and all
Contact the Authors business functions—underpinned by the world’s largest
delivery network—Accenture works at the intersection
Terry Steger
of business and technology to help clients improve
Dallas, Texas
their performance and create sustainable value for their
terry.w.steger@accenture.com
stakeholders. With approximately 373,000 people serving
Adam Hutchinson clients in more than 120 countries, Accenture drives
Chicago, Illinois innovation to improve the way the world works and lives.
adam.b.hutchinson@accenture.com Visit us at www.accenture.com.
Cara Howieson
Seattle, Washington About Accenture Strategy
cara.e.howieson@accenture.com
Accenture Strategy operates at the intersection of
Other Contributors business and technology. We bring together our
Syed Alam capabilities in business, technology, operations and
Austin, Texas function strategy to help our clients envision and
syed.f.alam@accenture.com execute industry-specific strategies that support
enterprise-wide transformation. Our focus on issues
Ryan Genkin
related to digital disruption, competitiveness, global
Minneapolis, Minnesota
operating models, talent and leadership helps drive both
ryan.genkin@accenture.com
efficiencies and growth. For more information, follow
@AccentureStrat or visit www.accenture.com/strategy.
Notes
1 Euromonitor International: Consumer Electronics—World Smartphone Company
Shares (2010-2015), 2016.
2 GSMA: The Mobile Economy 2016
3 IDC: Worldwide Smartphone Forecast Update, 2015-2019
4 Gartner, Forecast Overview: Mobile Phone Production and Semiconductors,
Worldwide, 2015, Published: 21 October 2015
5 Huawei Annual Report 2015
6 Accenture Strategy Analysis
7 Gartner: “Apple’s iPhone Upgrade Program Impacts the Market for Secondhand
Phones” (2016)
8 Gartner: “Top 10 Smartphone Technologies and Capabilities in 2016 and 2017”
(2016)
9 Accenture Strategy Analysis
10 Informa Telecoms & Media: “LTE Roaming: Global Market Status and Drivers for
Growth” (2013); Juniper Research: “Mobile Roaming to Represent 8% of Global
Operator Billed Service Revenues by 2018” (2014); Accenture Strategy Analysis
11 Accenture Strategy Analysis

Copyright © 2016 Accenture.

All rights reserved. This document makes descriptive reference to trademarks that may be owned by
Accenture, its logo, and others. The use of such trademarks herein is not an assertion of ownership of such
High Performance Delivered trademarks by Accenture and is not intended to represent or imply the existence of
are trademarks of Accenture. an association between Accenture and the lawful owners of such trademarks.