An Engineer

Turns out that RIM and Apple collect 35% of the profits in the cell phone industry with only 3% of the cell phone unit volume according to a research report by Deutsche Bank analyst Brian Modoff, reported today in the Wall Street Journal (pay wall). The other big winner is Nokia with 55% of the revenue and 46% of the profits.

To understand what is going on, read Competetive Strategy by Michael Porter. He makes the argument that there are two generic strategies for making money in an industry: to be the differentiated provider (Apple & RIM) and to be the low cost provider (Nokia). The differentiated provider has pricing control because their product is unique in the market place. The low-cost provider can sell for less than any competitor through its low cost position, which often comes with scale.

Usually the differentiated provider has a small fraction of the overall market but is highly profitable. The low-cost guy has the majority market share and is also profitable. Everyone else is stuck in the middle, unable to lower prices enough to compete on price or effectively compete against the player at the high end who is perceived as having a higher quality product.

It’s not hard to find good examples of differentiated providers out there: Apple, Lexus, Whole Foods. Nor is it hard to think of players that protect their position by being cheaper: Walmart, McDonalds.

RIM was the differentiated provider in the smart phone market before Apple entered. In the corporate world, RIM still dominates. With consumers, Apple is quickly displacing RIM. RIM should know how crucially important it is to retain their strategic position. If Apple phones are universally considered to be better, RIM will lose all pricing power and start to watch their margins erode.

You can get taken out on the low end as well. Microsoft was the low cost provider of operating system and application software compared to main frame manufacturers and work station manufacturers. Then free software showed up, ad-supported and based on open source projects, and Microsoft found that suddenly they didn’t own the low cost position. Ouch.

But back to my own world. Most of the photo and video sharing companies out there are going to fail. They are completely stuck in the middle, providing neither the best, most highly differentiated product with the best ingredients, nor the cheapest alternative. The low cost position is probably held by facebook, which throws away 90% of the image through compression.

The industry players most guaranteed to fail long term are the companies that take unlimited fullsize images from consumers for free and don’t compress them. That puts them in the unique position of having both the lowest price and the highest cost position all at the same time. I won’t name names. You know who you are.

Phanfare is completely focused on the high end of the market, people who care about archiving fullsize original images and high def videos and are willing to pay more for it. That doesn’t mean we don’t deliver value. For the suite of features and the service we offer, we are competitively priced.

Like Apple and RIM, we are not going to get a majority of the market share, but by providing a differentiated product, we can earn money in the industry and protect our position by offering features and functionality that the guys who are stuck in the middle can’t afford to offer and the low cost guys would never dream of offering.