OnePlus One, Redefining the Math of Smartphones
OnePlus is changing the game in the smartphone market with a "flagship killer" priced at half of its competitors’ products. The question is whether OnePlus will be able to capture enough value to ensure its long-term viability.
Never Settle. With this short slogan OnePlus, a Chinese smartphone manufacturer which was founded in December 2013, is taking the market by storm. The smartphone world has been anything but easy in the last few years. Apple’s hegemony is long gone and many old and new players are competing with Apple and Samsung for a place in customers’ pockets. Still, OnePlus, in less than two years, has successfully entered the market and created a loyal fan base. The first OnePlus phone, holding the creative name OnePlus One, sold ~1.5 million units in its first year, a modest number compared to 191 million iPhones, and over 300 million Samsung phones sold in 2014 (http://www.gartner.com/newsroom/id/2996817), but still very impressive for a brand new company with just one model in the market. With sales projections of 3-5 million units in 2015 and a new model, the OnePlus Two I believe OnePlus will continue to grow and will emerge as a digital winner in the cutthroat consumer electronics market.
The key driver behind OnePlus success is their value proposition. OnePlus has set out to build “the flagship killer,” a smartphone with specs better than any other smartphone, with a price tag of half of its competitors. At its date of release, the OnePlus One was priced at $299, compared to $649 for the iPhone5, and $649.99 for the Galaxy S5 (the newest models at the time). This aggressive pricing created a great value-for-money deal for customers – a better phone for less than half the price. OnePlus was also quite creative with its marketing strategy. To buy a OnePlus One, a customer had to get an invite, either from someone who bought a OnePlus One, or by winning an online challenge (e.g. upload a video telling what they would do to win a OnePlus One, or a video of themselves smashing their old phone). This strategy helped OnePlus build its brand and increase the desirability of the One (and thus customers’ willingness to pay) . But, in my opinion the main advantage of this strategy is on the operational side – it enabled OnePlus to control demand and match it to the level of production, which, for a new firm with no demand history, can be an extremely difficult task.
This all sounds fantastic – getting a great product at a low price is appealing to customers, but the real question is how does OnePlus plan on making money considering its thin margins? Carl Pei, Co-Founder of OnePlus answered this question in an interview last December. Pei says OnePlus sees its hardware product as a vehicle for software sales. Much like Google before it (who subsidized the price of the Nexus phones to drive software sales), OnePlus acknowledges the increasing commoditization of hardware and understands that to win in this market it will have to differentiate itself through software. So far the first step in this plan – to create a wide, loyal user base – is going better than expected (the new OnePlus Two sold 30,000 units in the first minute after its release, and more than 1 million fans have signed up to receive an invite before the Two was even launched). The multi-billion-dollar question is how well will OnePlus be able to monetize its fan base through software. While it’s too early to tell, a good indication for OnePlus’ software development abilities can be found in its newly deployed operating system, OxygenOS, which is the first OS to be developed in-house and, as far as I can tell, as a OnePlus user (and former OSX and pure Android user), works amazingly well. All these factors strongly convince me that OnePlus understands the market and its trends and is well positioned to grow and emerge as a winner in the digital age.
Thank you for the post, Erika. It’s always fascinating to hear about a new competitor to the behemoths that dominate mobile hardware. However, the real value in iPhone and Android devices come not from the hardware (impressive though they are), but from the accompanying app ecosystems. While the iPhone is certainly valuable in its own right, it would be far less coveted without Uber, Venmo, Facebook, and countless other apps that transform it from a communication device into a productivity/entertainment/financial platform. If OnePlus intends to rely on its internally developed OxygenOS, it will struggle to build the ecosystem that Apple and Google have developed. After all, the world of smartphone operating systems is a classic two-sided network – a large and growing user base attract developers and a dedicated developer base producing must-have apps attracts more users. The market has already “tipped” toward the iPhone and Android ecosystems – they each have hundreds of millions of users and mobile developers have no reason to focus on any other platforms. The only way to disrupt such a strong network effect is to develop an entirely different type of hardware with a different ecosystem. After all, the iPhone and Android ecosystems were only able to develop because they focused on the mobile devices that were disrupting PCs (where Microsoft benefitted from an incredibly strong network effect with developers). However, while OnePlus’s phones are interesting, they are nowhere near as revolutionary as the original smartphones and tablets were.
Indeed OnePlus’s strategy reminds me of Blackberry’s strategy circa 2010. At that point, many tech critics agreed that Blackberry produced superior communications devices vs. the iPhone or Android phones. Moreover, the OS was more stable, messages through Blackberry’s Network Operations Center (NOC) were more secure, and the keyboard was easier to type on than touch screens. While Blackberry produced excellent hardware and had a technically superior OS, it chose not to focus on attracting 3rd party developers. Thus, while the functionality of iPhones and Androids continuously improved and gained in popularity, Blackberry remained static – the rest is history.
Beyond the problem with OnePlus’s proprietary software approach, it seems highly unlikely that they can cost-effectively develop superior hardware than Apple and Samsung. As you point out, OnePlus shipments are miniscule compared to the behemoths. Given economies of scale and technical learning that comes from producing so many phones (even if much of the actual production is outsourced to ODMs), Apple and Samsung likely have such a cost advantage that OnePlus couldn’t compete even if it was willing to accept lower profit margins. You might argue that economies of scale diminish beyond a certain point and that OnePlus can achieve a similar cost structure even at much smaller scale. I don’t know enough about the smartphone supply chain and manufacturing process to know whether that’s the case. However, if it is, it’s tough to see how OnePlus will be building a good business. Without the brand premium commanded by Apple and Samsung (or the network effect they get from their app ecosystems), then economies of scale are the only barrier to entry. If they are tapped out at a relatively small scale, OnePlus will be vulnerable to any other upstart hardware manufacturer.
Thanks for your comment, AP. I might have not made it clear enough in my original post, but OnePlus is NOT trying to build an ecosystem and attract 3rd party developer like Blackberry and Microsoft. They use the Android platform. They are building their own version of the Android OS, similar to Samsung (with its own unique interface and pre-installed apps). The point I was trying to make is that they are not solely a hardware company and they have the capabilities to develop software, which they will later be able to monetize, through the Play Store or through other channels (e.g. subscriptions).
As for your second point about scale, this is exactly why I think they are well positioned. While scale is definitely still an advantage, as time passes and hardware becomes more and more a commodity (like we saw in the Samsung TV case), margins will shrink and competing solely on scale will not be a good strategy. OnePlus is trying to stay ahead of the curve by getting a loyal fan base in the near future, when cheap hardware is still an attractive value proposition. Once they get a significant footprint and start monetizing through software they will be in an advantage compared to players who compete only on hardware which will struggle to survive in a market with razor-thin margins.
I think it’s still too early to compare the OnePlus brand to Apple’s and Samsung’s, but I do think they are doing a great job in building it. I believe that a couple years from today the OnePlus brand will be well known, and they will be able to create the brand premium you referred to in your comment.
In any case, as OnePlus is still a young company, we can only make predictions and many things can still go wrong for them. The point I was trying to make in my post is that they are doing a good job at reading into digital trends, which, in my opinion, makes them well positioned to adapt to these trends and emerge as winners.