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2013 might well be known as the year that the race to the bottom really heated up. As in the sport of limbo, smartphone manufacturers see how low they can go with the price of their wares. Racing to the bottom is nothing new. It happens in every industry. I don't just want to note the fact that it happened, but also the reasons. And since it really is a race, we might even take a brief look at who is winning.

The race to the top

In tech, we always hear about the race to the bottom. We never hear anyone talk about the race to the top. Make no mistake about it; there is, or was, a race to the top. There is always a race to the top before the race to the bottom begins. The winner of the first race gets to skip the second. He might eventually elect to enter it, but on his own terms. The race to the bottom is always determined by the race to the top. If you want to know who won the race to the top, just look for the one who is not fighting for scraps at the bottom. 

The race to the top always comes first because of the very nature of innovation. The race begins when something new is invented. The person who invents the new thing is doing so for pride and profit. He not only wants to make a new thing, but the best thing it can be. No one sets out to create commodity junk. If the thing becomes popular enough, eventually, someone will come along and try to make another, similar thing. That person is also not trying to make junk. Usually, they are hoping to improve on the original. They want their widget to be even better. Thus, the race to the top is on.

At some point, someone wins. It is not always the first mover. Someone eventually strikes the right balance of utility, value, and popular appeal. The market votes with its money, and the losers of the race have to find another way to financially survive. One by one, competitors start dropping out of the race to the top, as it has become too expensive for them to compete at that level. They don't necessarily go out of business, they just go downmarket in search of smaller profits. 

That is the second reason why the race to the top happens first. Everyone who enters a market is always seeking maximum profits for their efforts. Maximum profits live at the top of the range. The further downmarket you go, the less disposable income your potential customers have. You want the richest customers so that you can command the greatest profits from the smallest volume of sales. At the top of the range, you might make a $100 profit on every sale. At the bottom of the range, you may only make a few pennies, requiring you to sell a much greater volume just to eek out a living. No one does that to themselves on purpose unless they have no other choice. Losing the race to the top means there is no other choice.

In the smartphone market, as in the PC market, Apple handily won the race to the top. Far and away, the iPhone is the most profitable and popular smartphone on the planet. There is no single Galaxy, Droid, Berry, or Lumia that even comes close. In the high-end market of premium phones, it's the iPhone, and the other stuff that wishes it was the iPhone. Usually, an item can be a premium product, or a mass-market product. The iPhone is the rare bird that has achieved both. That is why Apple does not participate in the race to the bottom. By profit and volume, it has won the race that matters. Apple moves downmarket at its own pace, and to the level of its choosing. 

The $100 smartphone

Apple is in a unique position, being a seller of mass-market product in the premium category. But its uniqueness doesn't end there. The most expensive, and profitable of the iPhone line is also the best selling iPhone. Right now, that is the iPhone 5s. The base model iPhone 5s retails at $649. As you can see, Apple has zero incentive to offer a $100 iPhone. Yet, all of Apple's competitors are making their living off of $100 smartphones. What gives?

There are only two reasons I can see for selling a $100 smartphone when the mass-market smartphone sells for $649: Either you cannot be profitable at that price point, meaning you have lost the race to the top, or you have won the race to the top, and want to put a dagger in the heart of your competition. In terms of Apple's competitors, it's the first reason. It is also why Apple is the only manufacturer without a $100 smartphone. With the juicy profits gobbled up by Apple. Everyone else is left to fight over the scraps. 

Windows Phone: Lumia 520

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When Windows Phone first became a platform, it was for the purpose of directly competing with the iPhone. It was to be Microsoft's answer to the iPhone. Their previous platform, Windows Mobile, became one of the early casualties of the iPhone wars. If Microsoft was to have any kind of future in mobile, they had to rethink and retool. As it happens, their rethinking and retooling amounted to something that was reminiscent of the iPhone. Microsoft was hoping to be the engine that powered new competitors in the race to the top.

They tried. They failed.

Nokia was a part of the old guard contemporary to Windows Mobile. Nokia was the undisputed handset leader. They tossed out a couple of high-end models, but mostly ignored the iPhone. Nokia's success was mostly in the low-end arena, a perfectly acceptable place to be before the iPhone came along. But the iPhone completely reset consumer expectations for what a mobile phone should be. It also redefined success in the smartphone market, which was fairly niche before the iPhone came along and transformed it into a giant, consumer market. All of a sudden, the low-end of the market was no longer enough to sustain future growth. The iPhone didn't just change the face of smartphones, but the face of the smartphone market.

Eventually, Nokia had to acknowledge that, though they had won the war of marketshare, they lost the war of profitability in the new smartphone marketplace. They sold what remained of their soul to Microsoft, who was seeing their Windows Phone efforts go down in flames. Microsoft needed volume so that it would at least look like they were surviving, while Nokia needed a modern OS so that it would at least look like they were surviving. The bastard child of those desperate needs is the Lumia 520: a $100 offering for Windows Phone.

This product was not made from a position of strength. It was the desperate compromise of two companies that had failed in their attempts to do something better. This $100 phone is, far and away, the best-selling Windows Phone handset on the market. And that is a truly terrible thing for Windows Phone. That means the Windows Phone is the platform for the people who simply can't afford to get anything better. There are good Windows Phone handsets out there. But those are not the ones people are buying. The only ones people buy in volume, are the cheapest, lowest-end handsets available. Windows Phone is the platform for which you settle and tolerate.

As you can see from the chart, the $100 phone dominates the Windows Phone universe. What you might not know just by looking at the chart, is that all of the handsets listed on the chart are low-end by premium standards. There are Windows phone units in the higher range, but those are not what is selling worldwide in any significant numbers. The most expensive phone on the list can be purchase from Amazon for just over $300. At $329, the Lumia 920 is just a hair over half the price of the base model iPhone 5s: the single bestselling phone in the US. That phone makes up less than 10% of what sells in the Windows Phone ecosystem of devices. It goes downhill from there.

Moto G

Like Windows Phone, Android started out as an iPhone competitor for the high-end of the market. The Android ecosystem definitely has some high-end competitors to the iPhone. But none of those competitors come close to the iPhone with regard to sales and profitability. When Android was primarily relying on its ability to compete, head-to-head with the iPhone, it was a niche product that couldn't get any traction in the marketplace. Motorola was the first to offer iPhone competition in the form of the Droid. How well did it do? Motorola had to resort to threatening to sue its fellow Android partners, and getting themselves bought out by Google, the Android maker. The story is reminiscent of Nokia and Microsoft. 

Before we can fully appreciate the Moto G's place in the Android universe, we must first know something about its predecessor, the Moto X. Owned by Google for more than a year, people were getting a bit impatient to see the first Google device from its hardware wing. The Moto X was one of the most anticipated Android handsets in years. It hit the market with a bang! Make that a thud. The starting price, off-contract, was somewhere in iPhone territory. That was just a few months ago. Since then, there has been one price cut after another. Just this morning, Google has announced another reduction to $399. They seem to be desperate to unload the inventory. Apparently, that is still too expensive for the Android crowd. After the first quarter of sales, Google was only able to move about a half a million units. In search of a handset that would achieve iPhone popularity, there was only one place for Google to go; down.

Enter the Moto G.

The Moto X was a reasonably well-reviewed smartphone. Relatively speaking, however, it was a commercial failure. Google could have beefed it up to make it more competitive with the iPhone. They didn't. Instead, they decided to go for higher volume and scrap it out for pennies at the bottom of the wishing well. The Moto G started at around $199, but can now be had for $99. It is a phone destined for neither profit nor volume. It is just one more Android phone in a foaming sea of sub-$100 Android phones. 

Android's dirty little secret is that the vast majority of Android phones are not iPhone competitors that you might have heard of, but white-lable, cheap product that are a dime a dozen. Appleinsider did a piece on this a few weeks ago. Here's the link:

http://appleinsider.com/articles/13/11/12/idc-data-shows-66-of-androids-81-smartphone-share-are-junk-phones-selling-for-215

The average selling price for Android handsets is about $215 for two-thirds of the platform. In places like China and India, ultra-cheap phones abound. Samsung is the only profitable Android manufacturer. The rest make very little profits, or are just managing losses from one quarter to the next. If it wasn't for the $100 handset, Android simply would not be a going concern in the smartphone market. 

Blackberry 7

I could waste time naming the handsets pictured above, but in the end, there would be no point. They are all Blackberry phones running the previous operating system. I know it makes a lot of Blackberry fans angry when news outlets use pictures of antiquated, Blackberry devices prior to the BB10 era. But the simple fact of the matter is that BB10 is an embarrassing, commercial flop. It may represent Blackberry's ambitions, but in no way does it represent the reality of the Blackberry market. That still belongs to Blackberry 7.

All of the BB10 devices are dismal failures that have done nothing but cost the company money and customers. The only markets available to Blackberry, these days, are developing (third-world) nations with people who can't afford iPhones. The above phones can be purchased on Amazon for $100 or less. BB10 was Blackberry's long-awaited answer to the iPhone. The handsets were introduced at or near iPhone pricing. Billion of dollars in write-downs later, and Blackberry is back to fighting it out with Nokia and Android over what pennies that are left in the market. 

Conclusion

2013 was also the year that pundits sang the loudest for Apple to produce a really cheap iPhone. Investors joined in for the chorus.  They all thought that the iPhone 5c would be that phone, and pouted when they were proved to be wrong. In terms of dollars and cents, Apple has zero reason to produce such a phone, and billions of reasons to continue with their current strategy for the foreseeable future.

They are winning big in the ways that matter to businesses. They are one of the most profitable companies in the world. They are the most successful brand in the world. The produce the most popular and desirable smartphone in the world. The enjoy the highest customer satisfaction in the world. And their next phone is the most anticipated product of the year, every year. What possible incentive do they have to risk all that, to fight for pennies and inches in the competitor's trenches? None! Right now, Apple's competitors are what people settle for when they can't have what they want. Apple would much rather make the product people want, than the one for which they have no other choice. Until that changes, there will be no $100 iPhone.

David Johnson

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