Small cap companies denied entry to the market, only way in is to provide essential products to existing big wigs
The smartphone segment has, for the past several years, made front page news uncountable times. Taking the tech industry by storm, this market has indescribably changed the whole industry; in the process burying big wigs and erecting new giants. Despite the undeniably dynamic nature of the segment, one thing has remained constant in this market; it’s a no go zone for emerging growth companies. Not only does entry into this market require colossal sums of capital but the existing titans do not bear any reservations for new comers. In addition, consumers are typical of changing preferences overnight.
Some of the bigger names that demonstrate the smartphone market’s unique make-or-break ability are Research In Motion (NASDAQ: RIMM) and Apple (NASDAQ: AAPL). The former, renowned for its iconic Blackberry, has lost significant value over the years; dipping from its prime market cap of around $80 billion to its current $6 billion. In fact, Research in Motion was even kicked out of the NASDAQ 100, the index that shows that largest 100 non financial stocks on NASDAQ. This tremendous dip in value has been attributable to several factors, among them unbearable competition and changing consumer tendencies. As of now, Research in Motion is clutching on its last straw with the Blackberry 10, slated for a late January launch.
Apple on the other hand has gained notable value since the outset of the smartphone craze. The graph below couldn’t say much better.
As seen the value of Apple has been on a big upward trajectory for a better part of the prevalent smartphone craze. While Apple’s case shows the smartphone market’s ability to deliver unbelievable returns, Research in Motion’s case shows that this market, however promising, can decide to rear its ugly end from time to time. Can emerging growth companies manage to take this risk? Not quite so. Here are some of the reasons why.
Take away innovation add lawyers and cash reserves
While emerging growth companies have all the innovation to bring, big wigs in the smartphone market have a game changing trick up their sleeves, a trick that fences out small cap companies and makes sure that the big fish swim uninterrupted. Smartphone heavyweights have realized that the only way to survive is by having a lot of money and good lawyers.
Take a look at Apple. This big wig has fenced out a great number of small cap companies by using the legal system. Some of its patents touch on the fundamental functionality of smartphones while others are in all honesty absurd. For instance, the glass stair case in its retail outlets is patented. The same applies to the in-store iPad stand at its retail stores. The rounded square icons in its Graphic User Interface, which was incidentally one of the core issues in last year’s legal brawl with Samsung, is also patented. The same goes with its rounded corners, home button and music icon. Although this snapshot merely touches on some of the few patents under Apple’s belt, it shows that it’s next to impossible for a new comer to offer something that does not belong to Apple, or any other big wig for that matter.
To finance the inevitable litigation that accompanies these patents, Apple, alongside other big wigs like Google, use their large cash reserves to maintain a bulging team of lawyers. Apple for instance, reportedly owns the world’s biggest hedge fund called Braeburn. With assets valued more than $117 billion as of June last year, the cash generated from the hedge fund’s investments, coupled with lumpy profits from the big wig’s operations, prove instrumental in litigation.
With this in mind, what is the way out for emerging growth companies looking to get a go in the smartphone market?
Offer an essential service like chip making or much better; innovate with the intention of becoming an acquisition target. As we reported earlier, it is emerging growth companies like with unique innovative products like MIPS Technology (NASDAQ: MIPS), that will rake in handsomely from this harsh, yet rewarding, tech industry.