January 9, 2014 7:00 pm JST

Our prediction: $50 smartphones will disrupt tech ecosystem

HIROTO KANEKO, Nikkei staff writer

China's Xiaomi announced new low-priced smartphones in September 2013 in Beijing. Such supercheap smartphones look destined to arrive in Japan soon.

TOKYO -- Super-cheap smartphones are poised to bring big changes to the global technology industry.

    Apple sparked the smartphone revolution with the release of the iPhone in 2007. As much more affordable handsets become available, this year could mark the revolution's second phase. Smartphones now cost much less to make because their advanced electronic components have become commodities.

     Less expensive gadgets will broaden the wireless communications market, with giant retailers offering their own smartphones. There will be a shift in market among parts makers. And "wearable computers" will be a common sight.

     Our crystal ball here in the capital's Otemachi business district shows smartphones costing as little as $50 coming to Japan, with retail and e-commerce giants offering customers more choice and affordability than ever. These companies will use their buying power to purchase handsets in large volumes directly from manufacturers. By teaming up with so-called virtual network operators, which lease bandwidth from incumbent wireless carriers, the retailers will be able to communicate with their customers in new ways.

     The companies making this new generation of wireless devices, including China's Xiaomi and Coolpad, and Micromax of India, are not exactly household names. But they are making waves in emerging markets. Japan's three main wireless carriers appear to have taken little notice of them so far, but with handsets that rival the iPhone in terms of performance and design, they have caught the eye of big retailers.

     Xiaomi is often called "the Apple of China," and CEO Lei Jun says his company's newest smartphones are the fastest in the world. They cost about one-third as much as the newest iPhone and that aggressive pricing has vaulted the company into the top 10 smartphone makers in China in just four years.

Look who's talking

Retailers, ever on the lookout for ways to get closer to their customers, see private-label handsets as a way to do that, which should increase their revenues.

    It is easy to see why retailers would want to sell their own smartphones, and the statements of business leaders suggest that they are in fact gearing up for just that.

     When supermarket operator Aeon opened its flagship Aeon Mall Makuhari New City store at the end of December in Chiba prefecture, east of Tokyo, President Motoya Okada highlighted the fact that this was the company's first outlet to support omnichannel retailing, which combines online selling with the brick-and-mortar kind. At the new Aeon store, shoppers can snap pictures of products on the shelves and have them delivered to their homes. The store is experimenting with information technology in hopes of getting customers to spend. It has 40 tablets in the store for shoppers to use, for example.

      Rival Seven & i Holdings, which runs the Seven-Eleven convenience store chain, also plans to spend big on omnichannel retailing.

     The ultimate weapon in this new battle for shoppers may be branded smartphones that create a fat pipeline between stores and e-commerce sites. Retailers such as Aeon and Seven & i are already experts in marketing private-label products, so it would not be a stretch to do the same with a smartphone.

Enter the upstarts

For smartphone manufacturers in China and India, turning out branded handsets would be a godsend. They are eager for a foothold in Japan and other developed markets. Tying up with retailers could give them a quick way to raise their shares.

     As for Japan's wireless carriers, the widespread availability of cut-price smartphones will speed their transformation into mere utilities that provide the physical networks for virtual carriers. If retailers and e-commerce companies start offering their own handsets and new online services, the carriers could find themselves squeezed out of the higher-margin business of delivering content.

     The smartphone market is maturing, says Tomoaki Nakamura, a vice president at market research company IDC Japan. In a mature market, where handsets offer broadly similar features, buyers will become increasingly price-sensitive, opening the door for ultralow-cost manufacturers.

Power shift

Much cheaper handsets also mean big changes for those who supply the chips, displays and other components that go into them. One rumor making the rounds among chipmakers is that Google will design its own processor for its next smartphone and contract out production to Intel, the world's top maker of PC chips.

     Being a mere subcontractor to an IT company might be a tough pill for Intel to swallow. But over the past few years, the U.S. chip giant has struggled to deal with the rise of smartphones and others have pulled ahead. Topping the list is Qualcomm, whose aggressive investment in smartphone processors has paid off big. In the year to September of 2013 it posted sales of $24.8 billion, half that of the much larger Intel, and a 140% jump from its sales in 2009, before the smartphone boom got underway.

     If the PC sector continues to decline, Qualcomm could overtake Intel in sales, an executive at a semiconductor maker says. Intel has responded by offering to make chips for other companies on a contract basis, in addition to making its own processors. Its reign of supremacy among parts makers appears to be ending. Other up-and-comers include Taiwanese chipmaker MediaTek, and LCD panel manufacturer Himax Display, also from Taiwan.

     With high-performance components available at extremely low prices, the upstart handset makers may get stronger still. Apple and Samsung have ruled the roost in smartphones by being fastest to market with the slickest hardware, but they may be checking their rear-view mirrors in 2014.

Hey, smartypants

Lower prices are likely to bring radically different gadget designs that are less handset and more wearable computer. Samsung's Galaxy Gear smartwatch and Google Glass eyewear are early indicators of the trend. Increasingly these gadgets will be integrated into clothing. Startups such as Rest Devices of the U.S. are developing clothes with sensors, batteries and transmitters.

     Whereas gadgets like Galaxy Gear and Google Glass have raised concerns about people surreptitiously taking photos of others, "smart clothing" is designed to collect data on the wearer, using sensors to monitor heart rate, breathing and calorie consumption, for example.

     Cheap accelerometers, gyro sensors and other devices developed during the smartphone era are ushering in the changes. But with the advent of much cheaper high-performance components such as processors, the clothes we wear may take over many of the functions of our handsets.

     Uniqlo, a popular Japanese discount clothing brand, has had great success with its HeatTech line of winter undergarments, which it calls "smart underwear." That sounds like marketing hype but before long, Fast Retailing, which owns the Uniqlo brand, may team up with textile and high-tech companies to develop truly smart underwear, replete with sensors. 

     As smartphones link people ever more closely with the power of online computing, and companies such as Apple and Google refine their speech recognition technologies. You might find yourself in a conversation with your clothing: "You're heating up," your underwear tells you. "OK," you answer, "have my smartphone play some cooling music."