The Cliff Effect, Why Mobile Phone Companies Collapse Quickly.

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Consider the following companies: Siemens, Motorola, Palm, Nokia, Windows Mobile and now RIM. What do they have in common?

The most notable similarity shared by most of them (if not all of them) is that, during the last decade (2000 to 2010) they all once enjoyed great success at the summit of the mobile phone food chain. Unfortunately that success brought with it an unwanted burden of keeping up with a fast changing industry. Disappointingly for most of them, the same success quickly deteriorated into something that no one could have imagined — literally falling off a cliff.

Enter the Cliff effect. According to Tomi Ahonen (the guy who coined the term) , โ€œ… The cliff effect is the sudden comprehensive collapse of a business..โ€.

Tomi Ahonen argues that in contrast with other industries, this phenomenon simply does not apply. He further illustrates it with an example from the motorcar industry.

“… If you have a bad model car, and your sales suffers because of it, you will not lose all your loyal customers in a year or two, because many of your customers have last year’s model and are happy with it, and will not even come to your car dealership until two years from now to consider the replacement model, by which time you have had plenty of time to fix the problems with your current car model.

In mobile phones we do not have that luxury. The pace is so fast. And note that the rate of the collapse due to The Cliff is actually accelerating. This also suggests the replacement cycle and The Cliff are related.

The average replacement cycle for mobile phones in year 2000 was 21 months. By year 2006 it was down to 18 months. Today it is 16 months (all handsets). For smartphones it is even faster, at 11.5 months…”

In essence, the cliff effect is a result of a number of factors, but the main ones are:

  1. The rapid change fast replacement cycle with phones,
  2. The fragile relationship with mobile phone dealers,
  3. The concentration of power among the cellular providers.

For a much more comprehensive analysis of the Cliff Effect, Click here.

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