07 January 2013 Americas/ Equity Research Telecommunications Equipment / MARKET WEIGHT

Handset Industry 2013 Outlook Research Analysts INDUSTRY PRIMER Kulbinder Garcha 212 325 4795 [email protected] Bigger market, Apple and win Achal Sultania 44 20 7883 6884 ■ Market size underestimated for both /handsets. Our bottom-up [email protected] analysis suggests that the market underestimates the size of low-end ‘white- Talal Khan, CFA label’ smartphones, which causes us to restate our 2012/2013 volume estimates 212 325 8603 for the market higher by 6%/15% and 3%/4% for overall handsets. [email protected] We also raise our smartphone volume estimates by 20-25% long term and now Matthew Cabral estimate 1.43bn/1.74bn smartphones to be shipped in 2015/2017. We believe 212 538 6260 that the growth of ‘white-label’ smartphone market specifically poses a threat for [email protected] vendors like , RIMM, LG and possibly Samsung, given their exposure to feature phones and low-end smartphone segments. Ray Bao 212 325 1227 ■ Raising LT smartphone units to 1.74bn – a barbell develops for price points. [email protected] We believe that the addressable market for smartphones is 4.95bn longer term, Asian Research Analysts resulting in effective penetration of only 24% currently given our estimate of 1.2bn smartphone users by end of 2012. We expect effective smartphone Randy Abrams, CFA 886 2 2715 6366 penetration to rise to ~80% long term driving smartphone volumes of [email protected] 1.43bn/1.74bn units by 2015/2017 (26%/19% CAGR over this period). By price point, we continue to see the high-end of the smartphone market rising to Keon Han unprecedented levels increasing from 190mn units in 2011 to 300/400mn units in 822 3707 3740 [email protected] 2012/2013 (>40% of smartphone volumes), but equally see the low-end (<$200 ASP) to rise from 19% of smartphone volumes in 2012 to 25%/43% by Pauline Chen 2013/2015 mainly driven by MediaTek and Spreadtrum ecosystem. 886 2 2715 6323 [email protected] ■ CS smartphone vendor scorecard – Apple and Samsung lead. We continue to rely on our proprietary smartphone vendor scorecard which is based on nine Yan Taw Boon 852 2101 7039 metrics (, services, cloud, product, brand, distribution, compute [email protected] convergence, IPR and chipset efficiency), which we think drive success in smartphones. We conclude that secular share gainers will be Samsung, Apple Thompson Wu and , while other vendors will struggle to make returns. 886 2 2715 6386 [email protected] ■ Apple – compute advantage gives it a sustainable edge, reiterate OP. Increasingly, success in smartphones will be impacted by success in PCs and tablets. The ability to compete across all segments will be driven by software, services and hardware offerings across device types, with success in one area driving increased demand in the other. In this new paradigm of the compute market, Apple remains best positioned. Even with its current price point, we expect Apple’s smartphone share to rise from 19% in 2012 to 20% in 2013, driven by expanding distribution and an innovation advantage. ■ Nokia – a challenging turnaround. With limited differentiation for 8, strong competition and slow portfolio roll out, we see Nokia’s smartphone share falling further from 5% to 2% in 2013. In addition, accelerating growth in low-end Android presents further cannibalization risks to its business. All of this means that cash burn will remain high, and we see net cash excl. NSN dropping from €2.6bn in 2012 to €0.8bn by the end of 2013. ■ RIMM – is there room for BB10? Despite excitement around upcoming new portfolio announcements, we believe it is too late with too little differentiation for BB10 to create material traction in the smartphone market. Consequently, we keep our Neutral rating.

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07 January 2013 Executive summary The smartphone market has continued to defy expectations in recent years; indeed, we note that a combination of fast innovation at the high end and lower cost handsets have made the smartphone market mainstream, systematically cannibalizing several consumer electronics (CE) products. In fact, we estimate that smartphones will account for nearly 35% of CE spend globally in 2012. At the same time, while smartphone growth is indeed strong, the spoils are not being equally shared. So where to now? In this note, our extensive review of the smartphone market arrives at three main conclusions. First, the emergence of a robust white-label market is developing in smartphone so much so that most market observers are underestimating the actual size of the smartphone market. Second, we see continued and unprecedented growth in the high end of smartphone market, i.e., at above $400 ASP. Finally, in terms of winners and losers, we believe Apple and Samsung will remain truly dominant and the rest of the industry will struggle to be even at breakeven levels in terms of handset profitability. Handset/Smartphone restatement – bottom-up analysis suggests an understatement. While trying to gauge the true size of the global handset market, we have tried to look at it from the bottom-up by analyzing handset volumes for leading branded OEMs, and then including volumes from a smaller vendors in developed markets. To this number, we then add back baseband volumes from Taiwanese vendors to arrive at the size of the handset market globally. We conclude that both the handset market and smartphone market is being meaningfully understated. Our analysis shows that aggregate device shipments in the handset market could be as high as nearly 2.0bn units in 2012 (+7% yoy), and could continue to grow to 2.1bn in 2013 (+6% yoy) (3% and 4% increase from our previous estimates). For smartphones, we have carried out a similar analysis, whereby we have looked at smartphone volumes for global vendors not using baseband chips from Taiwanese vendors. To that number, we add back volumes from these chipset vendors which cumulatively suggests global smartphone volumes of around 716mn/975mn units in 2012/2013. This is an increase of 6%/15% versus our previous estimates. We continue to believe that most industry observers are meaningfully understating size of this market.

Exhibit 1: Raising handset and smartphone estimates due to understatement Handset market size (in mn) 2009 2010 2011 2012E 2013E Nokia estimates 1,260 1,424 1,604 Gartner estimates 1,211 1,597 1,776 1,830 2,005 IDC estimates 1,341 1,595 1,716 1,745 1,841 CS estimates (OLD) 1,362 1,634 1,804 1,911 2,007 CS estimates (NEW) 1,368 1,652 1,852 1,975 2,086 % growth 21% 12% 7% 6% % change from our old estimates 0% 1% 3% 3% 4%

Smartphone market size (in mn) 2009 2010 2011 2012E 2013E Gartner estimates 172 299 473 678 ~900.0 IDC estimates 494 700 855 CS estimates (OLD) 172 299 473 674 850 CS estimates (NEW) 172 299 473 716 976 % growth 73% 58% 51% 36% % change from our old estimates 0% 0% 0% 6% 15% Source: Gartner, IDC, Company data, Credit Suisse estimates Affordability approach supports smartphone addressable market of 4.95bn by 2017 driving volumes of 1.74bn by 2017. Based on our proprietary model that takes into account the total cost of ownership (TCO) for a smartphone, income distribution, and existing penetration of the addressable market, we conclude that the addressable market for smartphones could be as high as 4.95bn by 2017. This means with 1.2bn smartphone subscribers at the end of 2012, effective penetration is only 24%. Given the significant

Handset Industry 2013 Outlook 2 07 January 2013 increase in smartphones being available at sub-$100, we see this rising to around 80% long term, reaching 3.9bn users, i.e. 79% of the 4.95bn addressable market. In turn, even assuming a moderate decline in replacement rates, smartphone volumes will grow to 1.74bn by 2017, almost 2.5x from levels in 2012, and seeing a CAGR of 19% over the next five years.

Exhibit 2: We estimate smartphone market to be 716mn/976mn units in 2012/2013, growing to 1.74bn by 2017 Global Handset Volumes 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR ‘12-‘17 Basic Phones 407 432 530 593 612 615 607 607 591 548 -2.2% Feature Phones 761 763 823 787 646 495 324 177 107 49 -40.3% Smartphones 139 172 299 473 716 976 1,219 1,425 1,577 1,737 19.4% Total (in mn) 1,307 1,368 1,652 1,852 1,975 2,086 2,149 2,209 2,275 2,334 3.4%

Global Handset Volume Mix Basic Phones 31% 32% 32% 32% 31% 30% 28% 28% 26% 24% NM Feature Phones 58% 56% 50% 42% 33% 24% 15% 8% 5% 2% NM Smartphones 11% 13% 18% 26% 36% 47% 57% 65% 69% 74% NM Total (in %) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% NM Source: Gartner, Company data, Credit Suisse estimates A barbell develops in the smartphone market as the mid-end shrinks. We believe that the smartphone market at $400+ ASP will grow over 4x in volume terms over 2010 to 2013 reaching nearly 400mn units by 2013, before seeing some moderation in growth. This combined with our view around volume growth in <$200 ASP market (driven by white-label vendors in China/India) means that smartphone volumes in the $200 to $400 ASP range will only grow from ~300mn units in 2012 to ~400mn units by 2015. Specifically, we see this low-end market (<$200 ASP) being enabled by a plethora of low-end launches (our portfolio shows 74 low-end smartphone models out of 425 models we tracked from branded vendors) as well as low cost chipset efforts from MediaTek, Spreadtrum and also . For the mid-end segment, we expect it to decline from 40% of total smartphone volumes in 2012 to ~25% by 2015. This continued shift towards high-end now combined with move towards low-end means that a number of branded OEMs including RIM, Nokia, LG, may continue to struggle given stiff competition in the high- end from Apple and Samsung driven by better smartphone offering, and then aggressive pricing from white-label vendors in the low-end. LTE at an inflection point. We expect rapid growth in LTE devices to be driven by the confluence of several factors, including the launch on an LTE iPhone, increasing handset availability (we note that there are some 75 LTE smartphones available in the market out of a total of 425 smartphones from branded OEMs). Further, we see Samsung’s robust growth in the high-end segment as another significant driver of LTE device uptake. Further, this is being supported by expanding LTE network coverage as Korea and Japan were seen as early adopters of LTE, but carriers’ network rollout plans in the US and China point to a rapid expansion of LTE network coverage over the next 2-3 years. The importance of compute. Historically we would argue that handset, PC and other CE devices were largely independent purchases by a consumer or corporation to fulfill a specific need. However, the growth of smartphones has now evolved to a degree whereby consumers and corporations demand access to their key digital content across multiple devices. In this context, smartphone success also needs to take into account the ability of the entire platform. Looked at from a hardware perspective, success in smartphones will be determined by the ability to simultaneously execute in the PCs and tablet market, and perhaps the TV market as well in the long term. In this new world, success will no longer be judged by category unit share alone, whether it be in smartphones, mobile phones, tablets or PCs, but in the combined compute segment. The importance of value share. While Android continues to enjoy its dominance in the smartphone market and indeed with a market share of 70-75% in unit terms, this cannot

Handset Industry 2013 Outlook 3 07 January 2013 be simply ignored. However, we do equally believe that scale also should be reflected by value share, and further due to the significant volume growth we expect in the low-end smartphone segment, this issue will be further exacerbated. Looking at value share in the smartphone market, we see Apple and Samsung to remain #1 and #2 vendor in terms of value share as we see Others category (non-branded OEMs) to account for 28% of volume share in 2013 but still less than 15% value share.

Exhibit 3: Apple and Samsung to remain leaders in the smartphone market Smartphone unit share (%) 2010A 2011A 2012E 2013E Smartphone value share (%) 2010A 2011A 2012E 2013E Apple 16% 19% 19% 20% Apple 30% 36% 38% 40% Samsung 9% 19% 29% 32% Samsung 8% 17% 27% 31% Nokia 34% 18% 5% 2% Nokia 21% 10% 3% 1% HTC 8% 9% 5% 5% HTC 10% 9% 4% 4% 5% 4% 3% 2% Motorola 5% 4% 3% 1% Sony 3% 4% 3% 2% Sony 4% 4% 3% 2% Huawei 0% 3% 4% 5% Huawei 0% 2% 2% 2% Research in Motion 17% 11% 5% 3% Research in Motion 16% 10% 3% 2% LG 2% 4% 4% 4% LG 1% 3% 3% 2% Others 6% 9% 24% 28% Others 5% 6% 13% 14% Total 100% 100% 100% 100% Total 100% 100% 100% 100% Source: Company data, Credit Suisse estimates Apple – compute advantage gives competitive edge Specifically in smartphones, we see Apple as continuing to gain share with its smartphone share rising to 20% in 2013 up from 19% in 2012 driven by several factors: Ranking first on our scorecard. Even 5 years after the first iPhone launch, Apple continues to rank above peers, specifically when looking at our proprietary scorecard which takes in to account 9 key factors ranging from software and services to brand and distribution, Apple ranks #1, which is a reflection of the underlying strengths of the business. We currently assume Apple will be able to consolidate its smartphone market share to 20% in 2013, up from 19% in 2012. Expanding carrier distribution can drive an extra 75mn units per year. We specifically see an opportunity for Apple to grow units through expanded carrier distribution. In fact, as Apple scales its distribution, we estimate that the next 50 largest carriers could increase iPhone units by around 75mn annually, compared to 138mn units we assume for 2012. Compute advantage gives the competitive edge. Perhaps the biggest advantage for Apple is being driven by the company’s ability to compete in the compute market, i.e., smartphones, and PC like no other vendor. Add to this, the broad range of “i- Services” that are built well beyond iTunes, to include the Apps Store, iAd services, iBooks and iCloud, the company allows consumers to seamlessly access content across multiple devices. The issue is that when considered in the context of the entire compute market in volume terms Apple has a ~18% share, which will rise given its exposure to the relatively faster growing smartphone and tablet end markets towards 22% longer term. However, this is unlikely to be dominant. Should Apple want to maximize this, we retain our view that the company may want to consider launching a lower end iPhone. Valuation. With solid product cycles in the back half of 2012 and shares trading on a P/E of 8.8x our CY13 EPS, Apple remains inexpensive in the context of 30% bottom-line growth and $128 of net cash per share. Nokia – still a challenging turnaround For Nokia, we retain our below consensus EPS estimates of €(0.28)/€(0.24), in particular the company continues to face material challenges in turning the business around over the

Handset Industry 2013 Outlook 4 07 January 2013 next 12 months. This, combined with our concerns around cash burn, leads us to reiterate our Underperform rating. Doubts around the traction for . We continue to believe that Nokia’s Windows Phone (WP) devices will struggle to gain traction given several factors. First, at the high-end, Nokia’s hardware offering surprisingly lacks competitiveness when compared with the iPhone 5 and Galaxy SIII. Second, the WP differentiation is not well understood by consumers. While Nokia launched a range of aggressively priced smartphones (Lumia 900/800/710/610 all on WP7.5) during 2012, the company was not able to transfer this into meaningful market share. This can be attributed to either a lack of consumer understanding around the Windows Phone platform or weak support from carriers globally, and we believe this may be the case with Windows Phone 8 devices. Third, the pace of WP8 rollout from Nokia either by market or product portfolio will prove slow meaning that traction through 2013 will prove a challenge. As such, we expect Nokia’s smartphone share eroding to 2% in 2013, down from 5%/18% in 2012/2011.

Exhibit 4: Nokia’s smartphone share steadily declining from 18% in 2011 to 2% in 2013E Nokia smartphone share (%) 2010 2011 2012E 2013E North America 2.3% 0.9% 1.1% 0.9% Western Europe 35.1% 17.0% 6.3% 1.0% Japan 0.0% 0.0% 0.0% 0.0% China 69.2% 28.6% 4.1% 2.0% India 72.5% 45.9% 11.0% 3.5% Korea 0.5% 0.1% 0.1% 0.1% Other APAC 48.1% 19.7% 6.0% 2.0% Brazil 47.3% 32.4% 8.3% 3.5% Mexico 32.7% 16.6% 6.0% 1.5% Other LatAm 35.3% 17.1% 8.0% 1.5% Russia 69.8% 51.8% 14.5% 6.0% Other Central & Eastern Europe 77.4% 52.8% 10.5% 5.0% Middle East & Africa 73.4% 38.9% 11.8% 2.7% Global smartphone share (%) 34.2% 17.9% 5.2% 1.9% Smartphone Units (mn) 102.2 84.6 37.3 18.5 Source: Gartner, Company data, Credit Suisse estimates An accelerated decline in feature phones. We see a material acceleration in low-end white-label smartphones powered by MediaTek and Spreadtrum, which will have an increased effect on market resulting in an accelerated decline for Nokia’s Mobile Phone business. We estimate that Mobile Phones will account for 300mn devices in volume terms in 2012, revenues of €9.5bn and €450mn in operating profit. However, we expect this to decline to 270mn units in 2013, with sales of €7.4bn and only €125mn of operating profits. Cash flow analysis suggests burn ahead. Given high level of losses and the need for increased restructuring in D&S, we see cash burn to continue with net cash for Nokia (excl. NSN) falling to €2.6bn/€0.8bn in 2013/2014, down from €5.6bn in 2011. Low likelihood of a potential breakup implies significant downside. Given our view that the likelihood of any potential breakup at Nokia seems low over the next 12 months, we see €2.35 as the upside case, which is based on our NAV. However, the downside risk is that share price may track consolidated net cash/share which we see heading down to €0.50 by 2013 (vs. €0.96 in Q312). Our SOTP based TP for Nokia remains €1.85, which assumes 0.50x EV/sales for NSN and adding back net cash/share ending 2014. RIM – is there room for BB10? Looks unlikely Although RIM’s management believes that the upcoming BB10 OS will make the company’s portfolio competitive once again, RIM faces an uphill struggle in terms of gaining smartphone market share. Our FY13/FY14 EPS estimates are $(1.11)/$(0.74).

Handset Industry 2013 Outlook 5 07 January 2013

Although we retain our Neutral rating given the risk of a takeout at some point, both fundamentals and NAV analysis suggest downside risks. Launch of first two BB10 smartphones to be announced in January 2013. After having seen multiple delays in launch of BB10 platform, RIM has announced that it will officially launch its new BB10 OS as well as unveil its first two BB10 smartphones in an event on January 30, 2013. So we have yet to see the specifications of the actual device. However, in order to develop an ecosystem around its new BB10 OS, RIM has already issued developers its BB10 Dev Alpha smartphone, although this is not the final product. While we acknowledge that the new OS shows marked improvement vs. previous versions, we still believe that it faces fierce competition from existing platforms such as Android and iOS, given most of the features offered by new BB10 is already being offered by rivals, which also benefit from presence of a strong ecosystem around their platforms. A high price point could be detrimental to adoption. We believe that one of the reasons for the delay in launching BB10 devices could have been RIM’s dependence on Qualcomm’s Snapdragon 8960 processor, which has seen constraints during 2012 due to 28nm capacity shortage. What this also may imply that the new BB10 smartphones could be highly spec’d devices targeting at a high price point. We simply do not believe much of a share opportunity exists in the high end of the market, given the success seen by Apple and Samsung in that segment of the market. Running out of the services revenue stream. One of the benefits that RIM had in the past was that its strong Services revenue stream had been more or less stable so far over the last few quarters. However, we believe that visibility of the services revenue stream is rapidly deteriorating given BB10 monetization of the NOC, ongoing carrier renegotiation and declining subscribers. This means that service revenue should fall, and we note the recent quarter marks the first time management has discussed its expectation that some of the base may generate no service revenue. We assume services revenue of $3.9bn/$3.3bn in FY13/14, down 4%/16% y/y, further compounding issues around profitability. In turn, this would expose the company’s high level of hardware losses which we estimate could be as high as $3.5bn/$2.7bn in FY13/FY14. NAV of $3.1bn (or $5.9/share). A combination of the late arrival of BB10 devices, as well as a fiercely competitive environment, hinders RIM’s ability to turnaround its handset business and estimate its global smartphone share declining to 3% in 2013 (vs. 5% in 2012). A break up is possible, however, we question the quality of the underlying IPR and also believe that converting its existing NOC for other OS platforms may require a high level of effort for minimal functionality improvement. Our NAV estimate for RIM is about $3.1bn, and requires the acquirer to take over the company and shut down its hardware business. At current levels, RIM does not offer meaningful upside and selling the company will prove to be a challenge, although the appointment of bankers, the relatively small size of a transaction, and ongoing positive FCF results in us maintaining our Neutral rating and $11 TP (based on applying 0.3x EV/sales multiple to our FY14 estimate). – eyes on #1 spot in China smartphones On Dec 28, 2012, CS raised its estimates and target price of Lenovo (covered by Thompson Wu), and reiterated an Outperform rating. CS analyst Thompson Wu cited positive smartphone demand in China, and improving momentum at Lenovo through select country expansion, thus raising estimates. This is driven by his view that Lenovo has the tools to build a profitable smartphone business long-term in China/Asia-Pac, and a sound strategy to do so. Thompson Wu expects Lenovo to ship 25mn/38mn smartphones in FY13/FY14, up from ~4mn in FY12. Of these, we expect the company to ship 94%/84% respectively of its overall shipments in China. These estimates would imply Lenovo’s China smartphone market share reaches around 10% in CY12/CY13. Gain a strong China foothold. We expect China to account for around 30% of global smartphone market by 2015 in volume terms. China happens to be Lenovo’s core market

Handset Industry 2013 Outlook 6 07 January 2013 generating 44%/67% of revenues/op profits YTD FY13. Lenovo can leverage its China PC position (33% PC share YTD ‘12), localized manufacturing, PC supply chain advantages (i.e. distribution), a popular China brand, and operational experience in the region as a stepping stone for its smartphone business. Selective country expansion. Lenovo is not initially building a global smartphone business. Instead, Lenovo is focused on China and expanding into select Asia-Pac/Eastern European countries with a large and fast growing smartphone market opportunity. In the Dec 2012 quarter, Lenovo has entered into India (#1 in PC share), Indonesia (#3), (#2), and Russia (#3). These are countries in which it also has top three PC market and infrastructure investments we believe it can leverage such as distribution and marketing. Lenovo plans to double its countries-addressed in FY14 to 10, from 5 in FY13. Expand and strength operator relationships, leverage China distribution advantage. Operator support is needed to deepen its penetration in China, expand into new countries, and enter the high-end smartphone market. This latter is a market we expect Lenovo will attack in FY14, and Lenovo will compete with other smartphone vendors (i.e. Apple/Samsung) for subsidies and marketing dollars. According to Lenovo, roughly half of China smartphones are sold through open-channels, which can yield 3x better gross margins vs. operator channels. To date, more than 70% of Lenovo’s smartphones sold have been through operators. Indeed, Lenovo will eventually leverage its China distribution advantage once it achieves a certain level of scale, and having developed its operator relationships. In China currently, it is deliberately choosing to distribute its popular smartphones through operators, rather than use its own distribution, in efforts to build a longer-lasting operator relationship. It is working with , , and and looks to balance distribution amongst the three operators in FY14. Valuation. Lenovo’s operational leverage is a key focal point for investors next year. We forecast its corporate operating will rise to 2.6% in FY14E (vs. 2.3% in FY13E) and for earnings to grow ~28% (CS/Consensus of US$0.74/$0.69) driven by scaling benefits in both its PC and MIDH business. Lenovo is trading at 13.2x our FY14E EPS (7.5x ex-cash). Asian beneficiaries across the ecosystem Based on bottom up analysis of smartphone chipsets for Asian built smartphones (excluding Korean handset vendors), our Asian semiconductor analyst, Randy Abrams, believes that has shown a ramp from 68mn units in 2011 to 244mn units in 2012. He projects these units expanding to 816mn units in 2015, offering growth of 83% in 2013, 40% in 2014, and 31% in 2015, a substantial unit opportunity for several suppliers to provide revenue growth even in the face of price competition. He also expects Mediatek to lead the market, ramping from 110mn units in 2012 to 220mn in 2013 and 370mn units by 2015, with Spreadtrum achieving similar 25% share to feature phones as it expands from 31mn units in 2012 to 199mn units by 2015. The upstart is RDA which is taking material share in feature phones and will sample its EDGE chipset from this quarter for 2H13 volumes. He expects Qualcomm to be the most material overseas competitor, with Marvell only having high-end TD traction and Broadcom still needing to demonstrate inroads. Looking at the beneficiaries across the smartphone ecosystem in Taiwan, Randy Abrams notes his preference to own the space through the manufacturers benefiting from unit growth (TSMC, ASE), IC design companies at reasonable valuations (Spreadtrum and RDA – note Mediatek is restricted), and Asian devices gaining share (ZTE and Lenovo). Within foundry, he downgrades UMC from Outperform to Neutral with same NT$14 target (0.85x P/B) (reduced mobile leverage as Texas Instruments exits and Mediatek shifts to 28nm) and upgrades SMIC (turnaround and China smartphone and tablet leverage) and raises his TP from HK$0.41 (0.7x P/B) to HK$0.57 (1x P/B). For details, please refer his detailed note on China smartphone sector titled ‘Global handset forecast lifted by emerging market demand’ also published concurrently.

Handset Industry 2013 Outlook 7 07 January 2013 Restating & raising smartphones Before even considering projection of smartphone volumes, it is essential to have the correct historic estimates. The issue facing the handset industry in recent years has been the size of the white-label market, and our analysis suggests both the handset and smartphone markets at least in volume terms are being meaningfully understated. Next when it comes to forecasting, most of the long-term forecasts for smartphone volumes are based on an estimate of smartphones increasing as a percentage of the overall mobile handset market. However, given that smartphones continue to be significantly more expensive than a low-end phone, we continue to believe that any long-term forecast has to be based on linking the income distribution and total cost of ownership to device affordability. As such, we have again refreshed our proprietary analysis to look at the smartphone market from an affordability perspective while taking in to account the total cost of ownership (TCO) or ASP of a smartphone which is often overlooked. The conclusion is that when we factor in the rising availability of lower end smartphones, we see an increase in the total number of globally who can afford to buy a smartphone, either with a monthly data plan, or at times even without it especially in some of the developing markets like China and India. Raising and restating the market size as both handsets and smartphones are being underestimated. A lingering issue for the global handset market over recent years, which has often been debated, is the actual size of the market in volume terms. In fact, we note there is a wide spread of handset estimates that currently exist for 2011/2012, as shown in Exhibit 5. The key issue which causes such a diversion remains around the treatment of the white-label and/or grey market handsets (we define this as either legitimate or illegitimate handsets which are being sold by non-tier I global brands). By conducting a bottom-up volume exercise, both the handset and smartphone markets are already meaningfully higher than most analysts believe.

Exhibit 5: We see a wide range of estimates for the size of global handset market Handset market size (in mn) 2009 2010 2011 2012E 2013E Nokia estimates 1,260 1,424 1,604 Gartner estimates 1,211 1,597 1,776 1,830 2,005 IDC estimates 1,341 1,595 1,716 1,745 1,841 CS estimates (OLD) 1,362 1,634 1,804 1,911 2,007 CS estimates (NEW) 1,368 1,652 1,852 1,975 2,086 Source: Gartner, IDC, Company data, Credit Suisse estimates Handset units – bottom-up analysis suggests volumes of 2bn for global handset market in 2012, but slowing growth ahead. While trying to gauge the true size of the global handset market, we have tried to look at it from a bottom-up angle by analyzing handset volumes for leading branded OEMs, and then including volumes from a bunch of smaller vendors in developed markets (both of which do not use baseband chips from Taiwanese vendors). To this, we add baseband volume numbers from MediaTek, Spreadtrum and RDA Micro in Taiwan, and our analysis shows that aggregate device shipments in the handset market could be as high as nearly 2bn units in 2012 (+5% yoy), and could continue to grow to 2.1bn in 2013 (+7% yoy). Beyond this, with the market being 72% penetrated in terms of unique subscribers, and as this rises to 85% by 2017, it results in a significant slowdown in the number of new mobile subscribers buying handsets. Simultaneously, we do not assume any pick up in handset replacement rates (we have it constant at around 27% of previous year’s subscriber base), which drives our view that volume growth for the global handset market may stall to only around 3% beyond 2013. Smartphone volumes – emergence of the white-label market. Similar to handsets, we have done a similar bottom-up analysis for smartphone vendors to estimate the true size of the global smartphone market. Our analysis here shows that the level of understatement in smartphone volumes could be material especially as Taiwanese chipset vendors continue

Handset Industry 2013 Outlook 8 07 January 2013 to ramp their smartphone chip volumes in 2H12 and 2013. We now estimate that volumes in the smartphone market could be 716mn/976mn units in 2012/2013, which are around 6%/15% higher than our earlier estimates. Note these estimates are also significantly higher than estimates from other market research firms or analysts. For example, IDC estimates 855mn smartphones to be shipped in 2013, while that number for Gartner is around 900mn, as shown in Exhibit 6.

Exhibit 6: Our smartphone estimates are significantly higher than Gartner and IDC Smartphone market size (in mn) Q112 Q212 Q312 Q412E 2011 2012E 2013E Gartner estimates 147.0 153.7 169.2 207.6 472.9 677.5 ~900.0 IDC estimates 144.9 153.9 179.7 221.1 494.4 699.6 854.6 CS estimates (OLD) 147.0 153.7 169.0 204.1 472.9 673.8 850.2 CS estimates (NEW) 151.5 160.9 181.4 222.4 472.9 716.3 975.5 Source: Gartner, IDC, Company data, Credit Suisse estimates Affordability/TCO approach supports LT addressable market of 4.95bn for smartphones... To project long term market for smartphones, we continue to rely upon our proprietary model that takes into account the total cost of ownership (TCO) for a smartphone, income distribution, and existing penetration of the addressable market. We conclude that the addressable market for smartphones could be as high as 4.95bn by the end of 2015. We define TCO as the upfront cost that a consumer pays for a smartphone (subsidised or unsubsidized depending on the region) combined with the annual service cost for a voice and data plan associated with that device where relevant. Our smartphone model suggests that by 2015/2017, the global smartphone subscriber base will rise from 1.2bn at the end of 2012 to reach 2.8bn/3.9bn, i.e. nearly 60%/80% of the 4.95bn addressable market. ….driving annual smartphone shipments to 1.74bn units by 2017. Based on this long-term estimate of an addressable market of 4.95bn and that by the end of 2012, there will be 1.2bn smartphone subscribers, effective penetration for smartphones could rise from 24% in 2012 to nearly 60%/80% by 2015/2017. This will drive smartphone volumes from 716mn in 2012 to 1.43bn/1.74bn in 2015/2017, implying a CAGR of 26%/19% over this period. Our 2012/2013/2014 volume estimates of 716mn/976mn/1.22bn (implying 51%/36%/25% yoy growth) are 6%/15%/21% higher than our earlier projections. With significant improvements in availability of lower end smartphones, this drives our smartphone volume estimate of 1.74bn units by 2017.

Handset Industry 2013 Outlook 9 07 January 2013

Handset market to be 2.09bn/2.15bn units in 2013/14 A lingering issue for the global handset market over recent years, which has often been debated, is the actual size of the market in volume terms. In fact, we note the wide spread of handset estimates that currently exist for 2011/2012. The key issue which causes such a diversion remains around the treatment of the white-label, or grey market handsets (we define this as either legitimate or illegitimate handsets which are being sold by non-tier I global brands). By conducting a bottom-up volume exercise, both the handset and smartphone markets are already meaningfully higher than most analysts believe. As a result, we are raising our 2012/2013/2014 handset estimates by 3%/4%/2% to 1.98bn/2.09bn/2.15bn respectively as shown in Exhibit 7. Similarly, the smartphone market is materially higher than expected and we are raising our volume estimates here by 6%/15%/21% to 716mn/976mn/1.22bn units for 2012/2013/2014 respectively. Specifically, our analysis takes in to account a bottom-up analysis for all vendors for both handset and smartphone markets.

Exhibit 7: Our bottom-up vendor analysis shows that global handset market could be close to 2bn units in 2012 Breakdown of global handset volumes including branded OEMs, and white-label and grey market vendors Our bottom-up analysis shows handset volumes could be close to 2bn units in 2012 1) Slight decline in unit growth for top vendors in Handset sell through (mn) 2008 2009 2010 2011 2012E 2013E 2012. Our bottom-up analysis of handset vendor units Samsung 199 236 281 315 408 459 indicate that the top 14 vendors (not using Taiwanese Nokia 472 441 461 422 335 289 chipset vendors) may ship 1.1bn units in 2012, implying Apple 11 25 47 89 138 191 1% decline in volumes. LG Electronics 103 122 114 86 56 67 HTC 7 11 25 43 32 44 2) Taiwanese chipset vendors could ship nearly Sony Ericsson / Sony Mobile 93 55 42 33 38 34 950mn baseband units in 2012. Motorola 107 58 39 40 32 29 Research In Motion 23 34 50 52 32 26  MediaTek to ship over 500mn baseband units. Kyocera / Sanyo 11 10 11 15 12 11 5 4 9 10 10 9 MediaTek’s volumes continue to show strong Sharp 11 11 9 8 7 6 growth, and we expect it to ship over 500mn/ Panasonic Communications 7 5 5 4 4 4 600mn baseband chipsets in 2012/2013 after Fujitsu 4 5 5 7 8 7 registering 7% yoy growth in 2011. NEC / / Hitachi 7 5 5 4 4 3 Top 14 vendors (mn) 1,060 1,023 1,101 1,127 1,115 1,179  Spreadtrum also expected to ship ~265mn % yoy growth 6% -4% 8% 2% -1% 6% 1 units in 2012. With Spreadtrum also likely to ship Other handsets, not based on Taiwanese chipset vendors around 265mn baseband units in 2012 and nearly Other small Japanese vendors 5 2 1 2 300mn in 2013, we believe this momentum from Other branded non Taiwanese based vendors 16 11 6 6 Taiwan based chipset vendor has continued into Non Taiwanese based handsets (Other small vendors) 9 11 35 37 2012. Total non Taiwanese based Other Vendors (mn) 29 24 42 46 48 46 % yoy growth -65% -19% 75% 10% 5% -5%  RDA – another Asian entrant in basebands. Similar to MediaTek and Spreadtrum, RDA is also Handset market excl Taiwanese based volumes (mn) 1,090 1,046 1,143 1,173 1,163 1,224 % yoy growth 0% -4% 9% 3% -1% 5% expected to ship over 80mn baseband units in 2012, and around 125mn in 2013. Combining MediaTek baseband shipments 234 355 500 540 508 621 these three vendors, we get to a total of MStar baseband shipments 10 49 76 930mn/1.04bn baseband units for 2012/2013. SpreadTrum baseband shipments 21 23 89 199 266 298 RDA baseband shipments 0 10 83 124  Assuming 15% discount rate. To account for Total Taiwanese baseband shipments 255 378 599 798 932 1,042 issues like inventory build, obsolescence and use Discount factor for obsolescence and multiple chips -15% -15% -15% -15% -15% -15% MediaTek / Spreadtrum / MStar based handsets (mn) 217 322 510 679 793 886 of multiple chips, we have assumed 15% discount 2 MediaTek / Spreadtrum / MStar market share (%) 17% 24% 31% 37% 41% 42% rate for Taiwanese baseband volumes. Even then, Total handset market (mn) (based on vendor analysis) 1,307 1,368 1,652 1,852 1,956 2,110 this shows that these vendors have captured over % yoy growth (sell in) 8% 5% 21% 12% 6% 8% 40% volume share in the handset market. Current CS estimates (sell-in as per CS handset model) 1,307 1,368 1,652 1,852 1,975 2,086 3) Bottom-up analysis shows that global handset % yoy growth (sell in) 8% 5% 21% 12% 7% 6% 3 units can be 2bn in 2012. Our bottom-up analysis Market estimates, as per Nokia (mn) 1,213 1,260 1,424 1,604 shows that the handset market in 2012 may be close to % difference between Nokia and CS estimates -7% -8% -14% -13% 2bn units, which implies mid-single digit yoy volume Market estimates, as per Gartner (mn) 1,222 1,211 1,597 1,776 1,830 2,005 growth, followed by 2.1bn units in 2013 (higher than % difference between Gartner and CS estimates -7% -11% -3% -4% -7% -4% estimates from other sources).

Source: Company data, Gartner, Credit Suisse estimates Our bottom-up analysis suggests volumes of ~2bn for global handset market in 2012. While trying to gauge the true size of the global handset market, we have tried to look at it from a bottom-up angle by analyzing handset volumes for leading branded OEMs, and then including volumes from a bunch of smaller vendors in developed markets (both of which do not use baseband chips from Taiwanese vendors). To this number, we then add back baseband volumes from Taiwanese vendors to arrive at the size of the handset market globally. As detailed in Exhibit 7, our analysis shows that aggregate device shipments in the handset market could be as high as nearly 2bn units in 2012 (+6% yoy), and could continue to grow to 2.1bn in 2013 (+8% yoy).

Handset Industry 2013 Outlook 10

Handset Industry 2013 Outlook Exhibit 8: We estimate global handset volumes to continue to show 6% growth in 2013 before slowing down to 3% in outer years Detailed assumptions around global handset demand Global handset summary 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E Population ('000) 6,509,465 6,600,011 6,692,091 6,786,667 6,883,658 6,983,051 7,084,974 7,189,471 Change (%) 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5% 1.5% GDP ($ bn) 57,230 58,880 60,297 61,960 64,051 66,393 68,872 71,480 3.5% Change (%) 4.2% 2.9% 2.4% 2.8% 3.4% 3.7% 3.7% 3.8% Factory ASP ($) 135 147 159 168 167 163 154 146 -1.7% Change (%) 1% 9% 8% 6% -1% -3% -5% -5%

Mobile Subscriptions ('000) (*1) 5,157,390 5,746,901 6,225,776 6,638,735 6,999,144 7,331,280 7,670,007 8,006,611 5.2% Change (%) 14.7% 11.4% 8.3% 6.6% 5.4% 4.7% 4.6% 4.4% Reported penetration (%) 79.2% 87.1% 93.0% 97.8% 101.7% 105.0% 108.3% 111.4%

Unique Mobile Subscribers ('000) (*2) 3,965,363 4,424,247 4,799,394 5,111,788 5,384,068 5,632,304 5,883,394 6,130,982 5.0% Change (%) 15.1% 11.6% 8.5% 6.5% 5.3% 4.6% 4.5% 4.2% Real penetration (%) 60.9% 67.0% 71.7% 75.3% 78.2% 80.7% 83.0% 85.3% Subscription / Subscriber ratio 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.31 1

Handsets for new subscriptions ('000) 546,369 505,224 417,057 357,489 312,163 285,595 290,486 287,997 -7.1% Change (%) 2% -8% -17% -14% -13% -9% 2% -1% % of handset market 34% 28% 21% 17% 15% 13% 13% 12% Replacement Market ('000) 1,070,572 1,313,680 1,537,935 1,709,216 1,824,367 1,917,535 1,971,678 2,034,948 5.8% Change (%) 27% 23% 17% 11% 7% 5% 3% 3% % of handset market 66% 72% 79% 83% 85% 87% 87% 88% Replacement units as % of previous year subscription base 23.8% 25.5% 26.8% 27.5% 27.5% 27.4% 26.9% 26.5%

Sell-through handset shipments ('000) 1,616,941 1,818,904 1,954,992 2,066,705 2,136,529 2,203,130 2,262,165 2,322,945 3.5% Unit Growth (%) 17% 12% 7% 6% 3% 3% 3% 3%

Sell-through handset revenues ($ mn) 218,152 267,781 310,844 347,206 357,142 359,068 348,412 338,990 1.7% Revenue Growth (%) 18% 23% 16% 12% 3% 1% -3% -3%

Weeks of inventory 8.3 8.3 8.2 8.3 8.3 8.2 8.3 8.3 Mobile Handset Inventory units ('000) 256,926 290,325 310,118 329,083 341,845 347,417 359,989 371,001 Inventory Build / (Depletion) ('000) 35,407 33,399 19,793 18,965 12,762 5,572 12,572 11,012 Sell-in Mobile handset shipments ('000) 1,652,349 1,852,303 1,974,785 2,085,670 2,149,291 2,208,702 2,274,737 2,333,957 3.4% Unit Growth (%) 21% 12% 7% 6% 3% 3% 3% 3% Sell-in handset revenues ($ mn) 222,929 272,698 313,991 350,393 359,276 359,976 350,348 340,597 1.6% Revenue Growth (%) 21% 22% 15% 12% 3% 0% -3% -3% 2 *1) Mobile subscriptions - this is the reported subscriber base and includes double counting of subscribers due to factors like Inertia, Multiple Devices and SIM-swapping *2) Unique Mobile subscribers - this is the true subscriber base and excludes the impact of any double counting of same subscriber 1) Real penetration to reach 85% by 2017. Due to high ratio of subscription/subscriber, we estimate that the true global subs base at the end of 2012 to be 4.8bn vs. the reported 6.2bn, implying true penetration level of 72%. Going forward, we expect this penetration number to rise to 85% by 2017 leading to 6.1bn true subscribers. 2) Handset volume growth of 7%/6% in 2012/2013. We estimate the overall handset market to be 1.98bn/2.09bn for 2012/2013, up 7%/6% respectively due to strong growth in the smartphone market. Beyond that, we expect volume growth to remain around 3% as we reach towards saturation levels. January07 2013

Source: Gartner, Credit Suisse estimates

11

07 January 2013

Taiwan baseband vendors continue to gain share. For chipset vendors in Taiwan, we have looked at baseband volumes for MediaTek (which acquired MStar recently), SpreadTrum and RDA (all 3 companies covered by our analyst Randy Abrams). Cumulatively, these vendors continue to see strong volume growth and may ship around 930mn baseband chipsets in 2012 (up 17% yoy) and 1.04bn units in 2013 (up 12% yoy). Even assuming a 15% discount to their volumes to take into account impact from inventory build, obsolescence and use of multiple chips, this implies that handsets using these chips may account for over 40% of global handset shipments in 2012 (up from ~30% in 2010). Slowing volume growth in the long term. One of the key observations we would make here is that the global handset market will be around 72% penetrated in our view, as we approach around 4.8bn unique mobile subscribers by the end of 2012, out of a population base of 6.7bn. We estimate that penetration number will rise to 85% by 2017 (Exhibit 8), which means that there will be a significant slowdown in the number of new mobile subscribers buying handsets for the first time. Also in our estimates, we do not assume any pick up in handset replacement rates (we have it constant at around 27% of previous year’s subscriber base), which drives our view that volume growth beyond 2013 may stall to only around 3% for the global handset market. Smartphone volumes now also being restated higher Similar to the handset market, we carried out bottom-up analysis for smartphone vendors to estimate the true size of the global smartphone market. Our analysis here shows that the level of understatement in smartphone volumes could be material especially as Taiwanese chipset vendors continue to ramp their smartphone chip volumes in 2H12 and 2013. In summary as we detail in Exhibit 9, we estimate that volumes in the smartphone market could be 716mn/976mn units in 2012/2013, which are around 6%/15% higher than our earlier estimates. Further, these estimates are also significantly higher than estimates from other market research firms or analysts. For example, IDC expects the smartphone market to be 700mn/855mn units in 2012/2013. Bottom-up vendor analysis shows market size could be >1bn units in 2013. We have done an analysis similar to the overall handset market, whereby we have looked at smartphone volumes for global vendors not using baseband chips from Taiwanese vendors. To that number, we add back volumes from Taiwan chipset vendors, which cumulatively suggests global smartphone volumes of around 735mn/1.05bn units in 2012/2013. Growth in the tier I branded OEM category driven by Samsung and Apple. Although smartphone volumes at some of the branded OEMs remain under pressure (Nokia, RIMM and HTC), volume growth within this category to remain robust as we estimate 24%/29% unit growth in 2012/2013 driven by Samsung and Apple. Taiwanese vendors could ship close to 335mn smartphone basebands in 2013. The reason for volume numbers to be restated is because of significant volume ramp for smartphone basebands at chipset vendors in Taiwan. In fact, we estimate that MediaTek and Spreadtrum together (both covered by Credit Suisse analyst Randy Abrams) shipped only 10mn smartphone basebands in 2011, but that number will rise to nearly 150mn/335mn units in 2012/2013 (Exhibit 9). Even assuming 15% discount to these volumes, we estimate that smartphones powered by these chips will account for some 17%/30% of global smartphone volumes in 2012/2013. Significant understatement of smartphone market by analysts and market research firms. All of this means that there may be a significant level of understatement in the volume estimates for the smartphone market. As a result, we have had to restate/increase our global volume numbers for the smartphone market in 2012/2013 by 6%/15%. This is something, which could also happen to estimates from other sources including market research firms like Gartner and IDC. For example, IDC expects the smartphone market to be 700mn/855mn units in 2012/2013, but these number could again prove low based on our analysis.

Handset Industry 2013 Outlook 12

Handset Industry 2013 Outlook Exhibit 9: Bottom-up vendor analysis suggests global smartphone volumes could be around 730mn/1.05bn units in 2012/2013 Breakdown of global smartphone volumes including branded OEMs, and white-label and grey market vendors

Q112 Q212 Q312 Q412E 2011 2012E 2013E 1) Continued smartphone growth Top 8 vendors (not using Taiwan chip vendors) at tier I vendors led by Samsung 40.6 45.6 55.1 62.6 88.3 203.9 315.3 Samsung and Apple. With Apple 33.1 28.9 23.6 49.8 89.3 135.4 190.7 Nokia 13.3 11.7 7.2 5.1 84.6 37.3 18.5 robust volume growth at both HTC 7.7 9.3 8.4 7.0 43.0 32.4 44.0 Samsung and Apple, we believe Research In Motion 9.9 8.0 8.9 6.7 51.5 33.6 25.9 smartphone units at tier I branded

LG Electronics 5.0 5.8 7.0 8.3 19.0 26.0 35.0 OEMs will continue to grow at Sony Ericsson / Sony Mobile 5.4 5.3 6.6 6.1 19.6 23.5 17.5 / 4.7 4.6 5.1 5.1 17.4 19.5 15.0 around 25% per annum in Sub-total of top 8 vendors (not using Taiwan chip vendors) (A) 119.8 119.3 121.9 150.6 412.7 511.6 661.9 2012/2013. 1 Japan / Korea vendors 2) Smartphone baseband units Sub-total of top Japan / Korea vendors (B) 6.2 5.2 6.6 6.6 16.9 24.6 27.1 from Taiwan to more than double in 2013. We believe that Other vendors (using both Taiwan and international chip vendors) MediaTek and Spreadtrum ZTE 4.5 6.3 7.7 9.0 10.5 27.5 38.0 Huawei 5.3 5.4 7.8 9.0 15.6 27.5 35.0 together will ship over 325mn Lenovo 2.4 4.4 7.0 11.2 1.7 25.0 38.0 baseband units for smartphones Other key Chinese vendors 4.9 9.4 13.1 14.4 6.2 41.7 48.0 in 2013, around 2.3x unit growth Remaining vendors 3.8 3.7 5.2 5.7 9.2 18.4 21.2 vs. 2012. This will drive significant Sub-total of top China smartphone vendors (tag">C) 21.0 29.2 40.7 49.3 43.3 140.2 180.2 volume growth at the low-end of Taiwan chipset vendors the smartphone market MediaTek 10.0 20.5 38.3 47.0 10.0 115.8 243.4 particularly led by white-label and SpreadTrum 0.1 1.6 11.0 18.0 0.2 30.8 91.5 grey market vendors. Even Sub-total of Taiwan smartphone chip vendors 10.1 22.1 49.3 65.0 10.2 146.5 334.8 assuming 15% discount to their Assuming 15% discount 15% 15% 15% 15% 15% 15% 15% volumes, we estimate Sub-total of Taiwan smartphone chip vendors (assuming 15% discount) (D) 8.6 18.8 41.9 55.3 8.7 124.6 284.6 2 smartphones powered by these Other vendors' volumes using Taiwan chip vendors chips will grow from 125mn units ZTE 0.2 0.9 1.1 1.3 0.5 3.7 11.4 in 2012 to 285mn in 2013. Taiwan chip share at ZTE (%) 5% 15% 15% 15% 5% 13% 30% Huawei 0.3 0.8 1.2 1.3 0.6 3.6 10.5 3) Bottom-up analysis shows Taiwan chip share at Huawei (%) 5% 15% 15% 15% 4% 13% 30% volumes could be over 1bn in Lenovo 1.0 2.0 4.2 6.7 0.4 13.9 20.9 2013. Our analysis suggests that Taiwan chip share at Lenovo (%) 40% 45% 60% 60% 24% 55% 55% Others 5.7 9.1 15.5 17.1 7.2 47.4 58.8 global smartphone volumes could Taiwan chip share at Others (%) 65% 70% 85% 85% 47% 79% 85% be as high as 730mn units in Smartphones based on Taiwan chip vendors (E) 7.2 12.8 22.1 26.5 8.7 68.6 101.6 2012 and 1.05bn in 2013. We have taken a conservative view Total smartphone market (mn) (A + B + C + D - E) 148.5 159.6 189.0 235.2 472.9 732.4 1,052.2 and estimate 716mn/975mn Smartphone volumes - CS published estimates (mn) 151.5 160.9 181.4 222.4 472.9 716.3 975.5 units, which are 6%/15% higher 3 Smartphone volumes - Gartner estimates (mn) 147.0 153.7 169.2 207.6 472.9 677.5 ~900.0 than our previous estimates, and Smartphone volumes - IDC estimates (mn) 144.9 153.9 179.7 221.1 494.4 699.6 854.6 also higher than estimates from Smartphone volumes - CS OLD estimates (mn) 147.0 153.7 169.0 217.1 472.9 673.8 850.2

market research firms. J 07

anuary2013 Source: Company data, Gartner, IDC, Credit Suisse estimates

13

07 January 2013

Forecasting smartphones based on TCO We continue to believe that any forecast of the smartphone market needs to have at its core the affordability and total cost of ownership (TCO) of smartphones. Given subsidies in developed markets, handsets are primarily bundled with a service package which tends to mask the true cost of the device. While we acknowledge that aggressive promotions can have a significant impact on the volume ramp-up of a given product, we still believe that the TCO remains crucial for the penetration of the overall market. To arrive at our TCO estimates, we have made several important assumptions, as are detailed in Exhibit 12.

■ Smartphone ASPs of close to $45 in most emerging markets by 2017. In a number of emerging market countries like India and China, we already have low end smartphones selling at around $70. This number will decline to around $45 by 2017 driven by improvement in chipset efficiency and decline in component pricing. In developed markets, given the pricing for smartphones is still much higher compared to emerging markets, we have assumed around $100 of cumulative ASP decline for a typical lower end device over the next 5 years.

■ Normal levels of ARPU decline. We have assumed annual ARPU pressure of 6% in all markets (except for NA where we have assumed 10%) to take into account pricing pressure at mobile operators.

■ Including only device cost in TCO calculation in some of the developing markets. Given strong level of traction seen for low end smartphones (priced at around $70 to $100) in a number of emerging market countries, we have adjusted the way we calculate TCO for a smartphone. In these markets, we find that at the lower end of the market, there is an increasing trend from consumers towards buying a low-end smartphone on pre-paid plans (without any service plan included for voice and/or data). This means that the TCO for a low-end smartphone user only includes the cost of a device, which is around $70 in countries like China and India (as shown in Exhibit 10), and which we expect to fall to around $45 by 2017.

■ Smartphone affordability threshold in each region. Based on Exhibit 13, we arrive at smartphone affordability threshold in each region by looking at mobile telecoms as a percentage of GDP in each of the regions in 2011. As such, we have used a smartphone affordability threshold level of 1.3% in Western Europe, 1.4% in North America, 2.2% in Central/Eastern Europe, 2.3% in Asia-Pacific, 2.6% in Latin America and 4.1% in Africa. Based on these core assumptions, we conclude that 4.95bn people globally will be able to afford a smartphone by 2017, which is around 2x compared to our estimated addressable base of 2.4bn people in 2012. We discuss each of our assumptions in detail in the following sections. Smartphone TCO varies a lot by region. We analyzed the TCO for a low-end smartphone by vendor and for around 15 countries as listed in Exhibit 10, and this demonstrates that the ownership cost for smartphones falls in a wide range. We believe that this is owing to a number of factors such as the stage of the smartphone market in terms of nascence, competitive dynamics, and device positioning by vendor. We also note that our analysis is based on the TCO at the lower end of the market, as this sub-segment of the overall market will be key to driving adoption long term. In particular, we have looked at the lowest consistent level of cost faced by a consumer by isolating comparable terminals and reasonable levels of data usage. We note that the TCO varies significantly in subsidized versus unsubsidized markets, with the cost ranging from as low as $70 for countries like China and India (only the device cost given a number of users may use these devices on pre-paid tariff plans to further lower their TCO) to as high as $720 in the US. This is another trend in emerging markets which is likely to have a significant impact in terms of further expanding the addressable market for smartphones.

Handset Industry 2013 Outlook 14 07 January 2013

Exhibit 10: TCO for a low-end smartphone – TCO composition varies significantly by region

United States 1 720

Canada 0 632

Italy 128 451

Germany 6 466

France 1 388 BOTH DEVICE AND SERVICE COST INCLUDED Russia 69 312

Mexico 0 374

Australia 0 368

Spain 0 311

UK 0 250

Brazil 158 0

Philippines 146 0 Upfront Device ASP (US$) ONLY DEVICE COST INCLUDED China 70 0 One year Smartphone ARPU (US$) India 69 0

0 100 200 300 400 500 600 700 800 Low-end smartphone TCO in 2012 (US$)

Source: Company data, Credit Suisse research Forecasting the TCO long term. As shown in Exhibit 10, the two components of the smartphone TCO are: i) the upfront cost of the terminal (device) to the consumer, and ii) the annualized ARPU (voice and data) bundled with the device in markets where handset subsidies exist. As can be seen in subsidized markets (such as Western Europe and North America), this can be significantly different from unsubsidized markets such as Asia Pacific. Lower priced smartphones driven by BOM reductions. While we expect the smartphone market to evolve with new features, at the lower end of the market, pricing will continue to decline driven by BOM reductions. Here we would note that on a like-for-like basis, component BOM can decline by around 10% per annum. Allowing for other fixed costs in the total manufacturing expense and assuming some gross margin pressure at the manufacturer level, we estimate that the ASP for low-end smartphones can continue to decline to as low as around $45 by 2014 compared to around $70 currently. In subsidized markets where the upfront cost for the terminal is already quite low given cost of the device is bundled in the service plan, there will be around $100 of cumulative decline in ASPs for a typical smartphone in developed markets over the next five years. Expecting gradual ARPU declines. Forecasting ARPU declines is somewhat more challenging given that each carrier tends to bundle data in a different way with a range of voice minutes, texts and data. We note however, that at both the manufacturer and carrier levels, there are several initiatives to bring down costs to the consumer over time. We assume a moderate decline in the ARPU in the low-end smartphone market by 2015 based on an annualized ARPU reduction of 6% in all markets globally (except for the US where we assume 10% decline given ARPU levels are significantly higher than other regions). Longer term TCO reduction to around $100 by 2017. As shown globally, by taking into account the above assumptions for the low-end smartphone TCO (by region), we arrive at

Handset Industry 2013 Outlook 15 07 January 2013 the conclusion that the smartphone addressable market could reach 4.95bn units by 2017 in terms of affordability. We assume that at the very least, the reduction in the BOM will pass straight on to the consumer and this implies that the TCO for a low-end smartphone offering could reach as low as $103 longer term, a $90 decline or around 45% drop from the current TCO of $194, which implies a CAGR decline of 12%. Geographically, we continue to expect a variance in TCO, even in 2015 as shown in Exhibit 11.

Exhibit 11: TCO for a low-end smartphone device by 2015 in US$, unless otherwise stated United States 466

Italy 403

Canada 400

Germany 333

France 264 BOTH DEVICE AND SERVICE COST INCLUDED Mexico 251

Russia 250

Australia 246

UK 208

Spain 198

Brazil 115

Philippines 106 ONLY DEVICE COST INCLUDED China 51

India 51

0 50 100 150 200 250 300 350 400 450 500 TCO for a low-end smartphone by 2015 (US$) Source: Credit Suisse estimates

Handset Industry 2013 Outlook 16

Handset Exhibit 12: Smartphone TCO analysis – addressable market for smartphones can grow from around 2.4bn in 2012 to 4.95bn by 2017 driven by TCO declines Total cost of ownership in US$ and addressable population in millions

Industry2013 Outlook Total cost of ownership, $ Income cutoff level, Addressable population, mn % of Total population (Smartphone and/or Service plan) US$ (000s) 1) We expect the TCO for a Country Additional % CAGR smartphone to decline by nearly 2012E 2015E 2017E 2012E 2015E 2017E 2012E 2015E 2017E population 2012E 2015E 2017E (2012-2015) (2012 to 2017) $90 or 45% over the next 5 Developed countries years to $103 (from $194 in

North America United States 721 466 348 -13.5% 53 32 24 136 213 273 136 43% 66% 83% 2012). This decline will be driven Canada 632 400 295 -14.1% 50 27 20 18 30 33 15 53% 83% 90% Western Europe by a combination of lower end France 390 264 204 -12.2% 28 19 15 45 55 60 15 71% 86% 93% smartphones and falling ARPU Germany 503 333 264 -12.1% 36 25 19 54 69 74 20 66% 85% 91% Italy 579 403 316 -11.4% 42 30 23 16 32 41 25 26% 51% 66% levels. Spain 311 198 147 -13.9% 22 15 11 30 40 43 13 66% 85% 91% United Kingdom 250 208 184 -6.0% 18 15 14 51 55 59 8 81% 85% 90% Rest of WE 363 277 217 -9.8% 26 20 16 67 81 88 21 67% 84% 90% Other developed 2) Our affordability work shows that Australia 368 246 188 -12.6% 19 11 8 21 24 24 3 91% 100% 100% Hong Kong 363 242 185 -12.7% 19 10 8 6 7 7 1 81% 91% 95% an additional 275mn people will Japan 363 242 185 -12.7% 22 12 10 128 127 126 -2 100% 100% 100% Singapore 363 242 185 -12.7% 19 10 8 5 5 6 1 86% 95% 100% be able to afford a smartphone in South Korea 363 242 185 -12.7% 19 10 8 36 46 49 13 71% 91% 95% developed markets, but more Taiwan 363 242 185 -12.7% 19 10 8 16 22 23 7 2 66% 91% 93% Total Developed 457 322 253 -11.1% 31 21 17 628 805 905 277 63% 79% 88% importantly another 2.15bn in developing markets by 2017. Emerging countries China 70 51 46 -8.0% 3 2 2 948 1,236 1,248 300 70% 90% 90% The top three countries with the India 69 51 46 -8.0% 2 2 2 122 509 653 531 10% 40% 50% Indonesia 69 51 46 -8.0% 3 2 2 98 204 236 138 40% 80% 90% largest absolute growth in Brazil 158 115 94 -10.0% 6 4 3 118 121 164 46 60% 60% 80% addressable population will be 69 51 46 -8.0% 3 2 2 0 19 20 20 0% 10% 10% Nigeria 69 51 46 -8.0% 2 1 1 33 71 113 80 20% 40% 60% India, China, Indonesia and US. 69 51 46 -8.0% 3 2 2 0 15 16 16 0% 10% 10% Russia 382 250 188 -13.2% 17 12 9 38 74 100 62 27% 53% 71% Mexico 374 251 192 -12.5% 14 9 7 26 51 62 36 23% 43% 52% Philippines 146 106 96 -8.0% 6 5 4 10 10 22 12 10% 10% 20% 3) Around 4.95bn people will be Egypt 69 51 46 -8.0% 2 1 1 66 78 91 25 80% 90% 100% Turkey 347 221 164 -13.9% 14 9 6 20 41 57 37 27% 53% 72% able to afford a smartphone Thailand 95 51 46 -13.6% 4 2 2 39 53 60 21 60% 80% 90% by 2017, Other emerging 136 105 92 -7.6% 5 4 3 619 1,010 1,200 581 2 39% 58% 65% which is around 2x the Total Developing 107 78 69 -8.3% 4 3 3 1,882 3,493 4,040 2,158 34% 59% 66% current addressable population

Global Total 194 124 103 -12.0% 11 6 5 2,439 4,299 4,945 1,860 37% 62% 69% base of 2.4bn globally. 1 3

07 January07 2013

Source: Company data, IMF, Credit Suisse estimates

17

07 January 2013

Linking our TCO analysis to the addressable market As we demonstrated and summarized in Exhibit 12, the TCO for a smartphone could fall nearly 45% from the current level of $194 to $103 by 2017 as ASP and ARPU pressures drive this trend. We now analyze effects due to income distribution and population by region. How much are consumers prepared to spend on smartphones? Once we have estimated the cost of a smartphone to the consumer, the next issue is to calculate a sensible income threshold level. While a smartphone is a desirable item, there is a limit to the income level which the average consumer would be willing to spend on the combined hardware and services. Here we have approached this analysis by looking at two separate metrics.

Exhibit 13: Mobile Telecoms as % GDP in 2011 4.5%

4.0%

3.5%

3.0%

2.5% - Avg. developing countries 2.5%

4.2% 2.0% 1.9% - Avg. global

1.5% 1.4% - Avg. developed countries 2.6% 2.4% Mobile Telecoms as % of GDP (2011) as% GDP of MobileTelecoms 2.2% 2.3% 1.0% 1.8%

1.4% 1.3% 0.5%

0.0% North Western Latin America Eastern Africa Middle East Asia-Pacific Japan America Europe Europe (ex Japan)

Source: Gartner, Credit Suisse estimates

■ Mobile spending to GDP ratio of around 1.9% globally. We see in Exhibit 13 that globally, the amount of mobile spend varies by region, with consumers spending on average some 1.9% of GDP on and services. Hence, we would argue that the TCO of a smartphone should not represent more than this level of income. If we believe, as shown in Exhibit 12, that the TCO of a smartphone will be $103 globally on a longer term basis, then a user would need a minimum income level of $5,200 to afford a smartphone assuming he/she spends the same proportion on mobile telephony. This provides our key income cut off level for different regions and can be used to determine the potential addressable market for smartphones.

■ In emerging markets, the level is higher at 2.5%. Given the 1.9% (global) and 1.4% (developed markets) threshold levels, the higher 2.5% ratio for developing markets shows the importance of data and communication for users in these markets; they are prepared to spend a higher percentage of GDP on mobile telephony. As shown, we believe that subscribers in some emerging markets like Africa are spending around 4.2% of GDP on mobile related services. Income distribution data suggests addressable market of 4.95bn longer term. We conclude that users are prepared to spend as much as 1.3% to 4.2% of their income on smartphone purchases (depending on the geographic region) and we can apply these cut-off levels to determine the minimum level of GDP per head needed to purchase a smartphone based on the TCO for a low-end smartphone in that market. Over the longer term, we then use

Handset Industry 2013 Outlook 18 07 January 2013 this estimate of required income to compute the level of population that is addressable. As shown in Exhibit 12, the addressable market for smartphones is around 4.95bn globally. Smartphone units to grow nearly 2.5x by 2017 With an addressable market of some 4.95bn by 2017, we now turn our analysis to quantifying the market opportunity in terms of units. We conclude, based on our affordability, penetration, and replacement analysis that the smartphone subscriber base longer term could be as high as 3.9bn by 2017 (around 80% penetration of the 4.95bn addressable market) and that the smartphone segment is set for a period of robust volume growth reaching volumes of 1.74bn by 2017, up from 716mn units in 2012 as shown in our summary smartphone model in Exhibit 18.

Exhibit 14: Mobile voice saw penetration gains of 40pp over five years after reaching 30% Base year 1 is taken as the year when penetration in individual region reached near 10%

80%

70% Mobile voice penetration globally grew from 28% in 60% year 5 to 70% in year-10, a 40pp absolute gain in 5 50% years.

40%

30%

20%

10%

% % subscriber penetrationprogression once penetration reaches 10% initially 0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Western Europe USA North America China India APAC CEE Africa Latin America Global Average

Source: Gartner, Credit Suisse estimates Penetration curves and the addressable market. We would note that effective smartphone penetration (from affordability point of view) will be around 24% based on our estimate of 1.2bn smartphone subscribers at the end of 2012. The next step is to determine the evolution of this penetration on a longer term basis. Here, a sensible approach is to take a look at how the mobile voice market evolved. As shown in Exhibit 14, the voice market followed a typical “S” curve for penetration, as it increased from 28% to 70% over a five- year period, an increase of over 40 percentage points. Owing to the falling cost of ownership, carrier push, and consumer pull, penetration gains will be higher in smartphones than mobile voice. We estimate that smartphone effective penetration will increase from 24% in 2012 to 79% by 2017 (Exhibit 15). This level of penetration would imply smartphone subscribers of 3.9bn by 2017. In terms of sanity check, our estimates imply that by 2017 smartphone penetration will reach i) 49% of the global mobile subscriber base (Exhibit 16); ii) 54% of the global population; and iii) 74% of overall handsets shipped.

Handset Industry 2013 Outlook 19 07 January 2013

Exhibit 15: Global smartphone penetration still low at 24% Exhibit 16: Smartphones account for 19% of mobile subs Effective smartphone penetration (based on affordability) over time Smartphone subs base as percentage of mobile subscriptions 120% 100%

100%

80% ) (as % of of % (as 80%

60% market tration 60%

subs as % of total total of % as subs 40% 40%

mobile subs base subs mobile 20% addressable 20%

Smartphone 0% Smartphone pene Smartphone 0% North Western Japan APAC (ex CEE MEA Latam Global North Western Japan APAC (ex CEE MEA Latam Global America Europe Japan) America Europe Japan) 2012E 2013E 2014E 2015E 2016E 2017E 2012E 2013E 2014E 2015E 2016E 2017E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Replacement rates will trend down but expecting only gradual declines. Given our view that bulk of the volume growth in smartphone market going forward will be driven by emerging markets, we acknowledge that replacement rates are likely to trend down. However, with smartphones still operating at the higher-end of the market (vs. the overall mobile industry), we assume that replacement rates in smartphones will continue to be higher than overall handset market. As such, we assume an average replacement rate of 38% for the global smartphone market over 2013-2017, which remains above the global replacement rate of 27% we forecast for the overall handset industry. Looking at our regional replacement forecasts as demonstrated in Exhibit 17, we expect smartphone replacement levels in North America to continue to remain highest amongst all regions with an average of 55% in the long term.

Exhibit 17: Smartphone replacement rate by region Replacement rate measured as % of previous year’s smartphone subscriber base Replacement rate (%) 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E NA 83% 69% 67% 64% 55% 55% 55% 55% 55% 55% Latam 33% 33% 35% 36% 32% 32% 32% 32% 32% 32% WE 43% 42% 44% 39% 40% 40% 40% 40% 40% 40% APAC 29% 25% 26% 32% 35% 35% 36% 36% 35% 34% Japan 44% 37% 37% 38% 38% 38% 34% 32% 29% 28% MEA 37% 28% 32% 33% 34% 33% 33% 33% 33% 33% CEE 33% 29% 34% 34% 36% 35% 34% 35% 35% 35% Global 43% 39% 41% 41% 40% 39% 38% 38% 37% 36% Source: Company data, Credit Suisse estimates

Handset Industry 2013 Outlook 20

Handset Industry Exhibit 18: We expect smartphone volumes to grow 36%/25% yoy in 2013/2014 driving CAGR unit growth of nearly 20% over 2012-2017 in millions, unless otherwise stated Smartphone volumes to grow at around 20% CAGR longer term

Smartphone model summary 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-15 CAGR 12-17

2013 Outlook Global mobile subscriptions (mn) 3,866 4,498 5,157 5,747 6,226 6,639 6,999 7,331 7,670 8,007 6% 5% Global new subscriptions (mn) 616 632 660 590 479 413 360 332 339 337 Global mobile unit sell-in shipments (mn) 1,307 1,368 1,652 1,852 1,975 2,086 2,149 2,208 2,272 2,333 4% 3%

Global smartphone subscribers (mn) 242 321 490 763 1,178 1,693 2,267 2,841 3,373 3,892 34% 27% as % of total mobile subscribers 6% 7% 9% 13% 19% 26% 32% 39% 44% 49%

Global smartphone addressable market (in mn by 2017) 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 4,945 Smartphone Effective Penetration (subs / addressable market) 5% 6% 10% 15% 24% 34% 46% 57% 68% 79% 1 Net smartphone adds (mn) 63 79 169 273 415 515 574 574 532 519 11% 5% as % of total smartphone units 45% 46% 56% 58% 58% 53% 47% 40% 34% 30%

Replacements units (mn) 76 93 130 199 302 460 645 851 1,044 1,218 41% 32% as % of last year's smartphone subs 43% 39% 41% 41% 40% 39% 38% 38% 37% 36% as % of total smartphone units 55% 54% 44% 42% 42% 47% 53% 60% 66% 70%

Global smartphone units (mn) 139 172 299 473 716 976 1,219 1,425 1,577 1,737 26% 19% % change yoy 14% 24% 73% 58% 51% 36% 25% 17% 11% 10% as % of mobile shipments 11% 13% 18% 26% 36% 47% 57% 2 65% 69% 74% Smartphone ASPs ($) 320 332 324 331 307 286 258 232 209 188 -9% -9% % change yoy 4% -2% 2% -7% -7% -10% -10% -10% -10%

Global smartphone revenues ($ mn) 44,603 57,175 96,880 156,558 219,645 279,185 313,854 330,274 328,952 326,071 15% 8% % change yoy 12% 28% 69% 62% 40% 27% 12% 5% 0% -1% % of global handset market 26% 31% 44% 58% 71% 81% 88% 92% 94% 96% 3 Source: Gartner, Credit Suisse estimates

1) Smartphone penetration still low at 24%. Given an installed base of some 1.18bn smartphone subscribers we estimate at the end of 2012 and our long-term smartphone addressable market forecast of around 4.95bn, the effective penetration at the end of 2012 is still low at 24%. Based on penetration gains driven by a falling TCO, we believe that smartphone adoption will gradually rise towards 80% over the next few years. 2) Slight moderation in volume growth but only after 2014. Driven by increasing affordability, smartphones will continue to see strong volume growth in 2012 (we estimate volumes to be up 51% yoy) resulting in revenue growth of 40% yoy as average ASPs decline only 7% in spite of growth in low end of the market helped by of higher ASP smartphones. We expect to see strong growth in 2013/2014 where we expect volumes to grow 36%/25% yoy reaching 976mn/1.22bn units respectively before seeing any moderation in volume growth. 3) Still looking for double digit growth in outer years. We believe smartphones remain one of the most attractive secular trends in technology, with volumes set to grow at a CAGR of 19% over the period 2012-2017. Even with some moderation in growth in outer years, we still expect the smartphone market to see double digit volume growth over 2015-2017, eventually reaching annual shipments of 1.74bn units in 2017.

07 January07 2013

Source: Gartner, Company data, Credit Suisse estimates

21

Handset Industry Exhibit 19: Emerging Markets to account for over 75% of global smartphone volumes long term, up from 47%/60% in 2011/2012 respectively in ‘000s, unless otherwise stated Smartphone Shipments ('000) 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E Developed Markets North America 71,986 107,267 120,829 135,686 149,168 161,396 172,038 180,403 8.3% 1) Developed markets to grow 8% long-term. % change 58% 49% 13% 12% 10% 8% 7% 5%

2013 Outlook % of global market 24% 23% 17% 14% 12% 11% 11% 10% Developed markets currently account for 40% of Western Europe 86,185 96,963 113,989 132,557 145,682 156,521 164,631 170,419 8.4% the global smartphone volumes with NA and WE % change 89% 13% 18% 16% 10% 7% 5% 4% % of global market 29% 21% 16% 14% 12% 11% 10% 10% representing 17% and 16% respectively. With

Japan 17,927 25,004 32,242 35,724 37,767 39,700 41,405 42,873 5.9% strong growth coming from EMs, we estimate that % change 3% 39% 29% 11% 6% 5% 4% 4% % of global market 6% 5% 5% 4% 3% 3% 3% 2% the contribution of developed markets may fall to Korea 7,146 20,409 20,994 23,994 25,961 26,426 27,057 28,397 6.2% % change 186% 3% 14% 8% 2% 2% 5% less than 25% of global volumes over the next few % of global market 2% 4% 3% 2% 2% 2% 2% 2% years. We expect around 8% volume CAGR growth Total Developed Markets (A) 183,244 249,643 288,054 327,961 358,578 384,044 405,131 422,092 7.9% % change 69% 36% 15% 14% 9% 7% 5% 4% out of developed markets through 2017. % of global market 61% 53% 40% 34% 29% 27% 26% 24% 1 Emerging Markets China 27,808 77,703 196,460 288,413 363,611 421,249 446,810 487,064 19.9% % change 179% 153% 47% 26% 16% 6% 9% 2) Strong growth in EMs over the next 3 years. % of global market 9% 16% 27% 30% 30% 30% 28% 28% 3 India 9,036 13,139 20,726 40,590 64,910 102,865 133,414 160,559 50.6% Driven by increasing affordability and falling TCO, % change 45% 58% 96% 60% 58% 30% 20% we believe that smartphone volumes in EMs could % of global market 3% 3% 3% 4% 5% 7% 8% 9% Rest of Asia Pacific 29,459 48,683 72,103 103,800 129,354 148,878 169,279 192,473 21.7% grow as much as 51%/33%/21% over the next 3 % change 65% 48% 44% 25% 15% 14% 14% % of global market 10% 10% 10% 11% 11% 10% 11% 11% years, following two successive years of 90%+ Brazil 5,156 9,350 17,776 27,230 46,713 53,096 57,240 65,502 29.8% volume growth. This would mean that EMs could % change 81% 90% 53% 72% 14% 8% 14% % of global market 2% 2% 2% 3% 4% 4% 4% 4% account for 75% of the global demand long term, Mexico 3,421 9,347 15,255 22,427 24,658 25,266 25,392 25,595 10.9% % change 173% 63% 47% 10% 2% 0% 1% up from 47%/60% in 2011/2012. % of global market 1% 2% 2% 2% 2% 2% 2% 1% Rest of Latin America 9,001 15,046 24,101 37,540 46,156 55,948 66,231 73,782 25.1% % change 67% 60% 56% 23% 21% 18% 11% % of global market 3% 3% 3% 4% 4% 4% 4% 4% 3) China to account for 28% of incremental Russia 3,654 8,349 15,827 21,050 24,808 30,217 34,765 38,079 19.2% % change 129% 90% 33% 18% 22% 15% 10% volumes over 2012-2017. We expect % of global market 1% 2% 2% 2% 2% 2% 2% 2% smartphone market in China to grow from 78mn Rest of Central and Eastern Europe 9,454 11,683 19,933 28,969 35,803 43,134 50,956 59,050 24.3% % change 24% 71% 45% 24% 20% 18% 16% units in 2011 (16% of total volumes) to 487mn % of global market 3% 2% 3% 3% 3% 3% 3% 3% Middle East and Africa 18,615 29,948 46,047 77,555 123,939 160,060 187,508 212,379 35.8% units by 2017 (28% of volumes). This implies that % change 61% 54% 68% 60% 29% 17% 13% % of global market 6% 6% 6% 8% 10% 11% 12% 12% China alone as a region will see an incremental

Total Emerging Markets (B) 115,603 223,248 428,229 647,573 859,951 1,040,712 1,171,595 1,314,482 25.1% 290mn smartphone units over 2012-2017, which % change 81% 93% 92% 51% 33% 21% 13% 12% 2 % of global market 39% 47% 60% 66% 71% 73% 74% 76% is around 28% of our estimate for volume increase

Global Smartphones (A+B) 298,847 472,891 716,283 975,534 1,218,529 1,424,756 1,576,727 1,736,574 19.4% at the global level. January07 2013 % change 73% 58% 51% 36% 25% 17% 11% 10% Source: Gartner, Company data, Credit Suisse estimates

22

07 January 2013 Price point work – barbell develops While we acknowledge strong volume and revenue growth potential in the smartphone market, we would equally note that all units are clearly not equal. For example, where as a $100 smartphone from Android may offer some smart functionality and access to data, the impact and value a consumer ascribes to it compared with say an Apple iPhone or SIII is remarkably different. Furthermore, the competitiveness within each segment and profitability varies widely. As part of the update to our handset estimates, we have updated our proprietary price point analysis and arrive at the following key conclusions: A barbell develops in the smartphone market as the mid end shrinks. We believe that the smartphone market at $400+ ASP will grow over 4x in volume terms over 2010 to 2013 reaching nearly 400mn units by 2013, before seeing some moderation in growth and building to 440mn long term. This combined with our view around volume growth in <$200 ASP market (driven by white-label vendors in China/India) means that smartphone volumes in the $200 to $400 ASP range will only grow from ~300mn units in 2012 to ~400mn units by 2015. As percentage of total smartphones, we expect this to decline from 40% to ~25% over this period. This continued shift towards high-end now combined with move towards low-end means that a number of branded OEMs including RIM, Nokia, LG, Sony Mobile may continue to struggle given stiff competition in the high-end from Apple and Samsung driven by better smartphone offering, and then aggressive pricing from white-label vendors in the low-end.

Exhibit 20: Smartphone share shift towards the high-end Smartphone market volumes broken down by price point, and also as % of mix Price band 2010 2011 2012E 2013E 2014E 2015E 2010 2011 2012E 2013E 2014E 2015E <= $100 7 5 7 21 57 146 2% 1% 1% 2% 5% 10% $100 - $200 74 82 129 221 378 460 25% 17% 18% 23% 31% 32% $200 - $300 74 112 179 213 240 256 25% 24% 25% 22% 20% 18% $300 - $400 49 84 104 122 133 126 16% 18% 14% 13% 11% 9% $400+ 96 190 297 397 410 437 32% 40% 42% 41% 34% 31% $400 - $500 43 71 102 138 160 187 14% 15% 14% 14% 13% 13% $500+ 53 119 195 259 250 249 18% 25% 27% 27% 21% 18% Total 299 473 716 976 1,219 1,425 100% 100% 100% 100% 100% 100% Source: Company data, Credit Suisse estimates Apple/Samsung are driving the high-end to unprecedented levels… As we have seen in the past few iPhone launches, a successful device combined with increased levels of global carrier support results in growing the high-end of the mobile phone market. Further, over the past 18 months, Samsung has had a major impact on the high end of smartphone market. Indeed, we note it has already crossed 30mn unit mark for Galaxy SIII in the first week of Nov 2012 in the first five months of device launch, while also shipping over 3mn units for Note II device in just over a month (as of Nov 2012). We would argue that smartphone growth and more specifically Apple and now Samsung are increasingly changing economics and characteristics for the mobile handset, carrier and consumer electronics markets. …high end cannibalizing several industries at the same time. What is surprising is that industry growth has accelerated over the last couple of years. We believe that the explanation rests in multiple factors, but essentially that smartphones are simultaneously capturing value from multiple other industries especially at the high-end. In fact, we estimate that the high-end of the smartphone market (devices at ASP of >$400) is now close to $160bn market in revenue terms (25% of consumer electronics spend), over 5x higher than the size in 2009 (up from 7% of CE spend) making it the largest CE category globally, and we expect this to increase to 30% of total CE spend by 2015.

Handset Industry 2013 Outlook 23 07 January 2013

Low-end device availability improving more push even from branded OEMs. Out of around 425 smartphone models from tier I branded handset vendors which our database tracks, nearly 75 are now available at a price point of $150 or less, which shows that smartphones are already being offered at increasingly attractive price points. While the smartphone segment arguably has always been competitive, we believe with an aggressive push from new low cost providers such as Huawei and ZTE, there is a more meaningful desire to deliver lower end products. Similarly, in an effort to drive Windows Phone adoption, we see branded vendors such as Nokia also looking to offer smartphones at attractive price points, although pricing from these branded OEMs are still much higher than local vendors in China and India. Reference design market is enabling smartphones at the low end. Qualcomm was also not actively involved in offering reference designs to local vendors in a big way until end of 2011, which meant that local handset OEMs were not able to offer quality devices in the low-end of the smartphone market. With improvements in its QRD portfolio (7x27A – first 1GHz single core chip launched in Q411, followed by 8x25 dual core chip introduced in Q212), Qualcomm has been able to fuel the low-end of the smartphone market in China and India. Furthermore, smartphone baseband volumes for MediaTek and Spreadtrum together may grow from 10mn units in 2011 to 139mn/287mn units in 2012/2013. In the past, both these vendors were struggling to transition from 2. baseband chips towards /smartphone chips due to technology and performance issues, something which seems to have been addressed. This has resulted in aggressive plans from both these companies to target local handset OEMs in China. A specific opportunity in China. From a regional perspective, we see robust growth for smartphone market in China, which we think will account for 30% of global units by 2015. Specifically, we estimate that 32% of incremental volumes globally over the next 3 years will be driven by China. One of the issues leading to the slower uptake of 3G/smartphone services in China in the past had been related to limited availability of devices across all standards (TD-SCDMA, WCDMA and CDMA EVDO), but one of the common themes emerging out of all three carriers in China seems to be an increased level of push toward bringing down smartphone price points. High end going higher driven by Apple and Samsung

Exhibit 21: Samsung's $400+ portfolio gaining lot of traction driven by SIII and Note II Units in mn, unless otherwise stated 40 35 30 25 20

15 Units (mn) Units 10 5 0

Galaxy S Galaxy S II Galaxy S III Galaxy Note I Galaxy Note II

Source: Company data, Credit Suisse estimates New range of Galaxy devices are selling in volumes. Reviews for Galaxy SIII and Note II are amongst the most positive seen for any of the Samsung smartphones in the past.

Handset Industry 2013 Outlook 24 07 January 2013

Distribution for these device is also strong, as Galaxy SIII is shipping with over 290 carriers globally compared to 140 carriers for Galaxy SII. Samsung recently noted that it has already crossed 30mn unit mark for Galaxy SIII in the first week of Nov 2012 in the first five months of device launch. In addition, it has shipped over 3mn units for Note II device in just over a month of shipping (as of Nov 2012).

Exhibit 22: iPhone growth should accelerate with the recent launch of new iPhone 5 Units in millions, unless otherwise stated 50

40

30

20

10 iPhone iPhone units(mn)

0

F3Q10 F2Q10 F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12 F2Q12 F3Q12 F4Q12

F2Q13E F3Q13E F4Q13E F1Q13E Source: Company data, Credit Suisse estimates Apple remains the leader in the high end market. As with any Apple product cycle, we believe the key selling period for iPhone 5 with likely be calendar Q412 and Q113. As we have seen in the past few Apple launches, a successful device combined with increased levels of global carrier support results in growing the high-end of the mobile phone market.

Exhibit 23: $400+ smartphone market being dominated by Apple and Samsung Market share of different vendors in the $400+ ASP smartphone market over time 100% Others 4% 3% RIMM 80% 9% Nokia 40% 43% 60% LG 11% 22% 3% Sony 40% Motorola Mobility

47% 46% HTC 400+ ASP 400+ ASP segment (%) 20% 44% 45%

Smartphone market share in Samsung

0% Apple 2010 2011 2012E 2013E

Source: Company data, Credit Suisse estimates A two player high-end market. In the above $400 smartphone market, Apple has enjoyed a market share of around 45% over the last 2-3 years, and we expect this trend to continue with the recent launch of iPhone 5. However, what is worth noting here is that Samsung has managed to grow its market share in the high end to as high as 40% as per our

Handset Industry 2013 Outlook 25 07 January 2013 estimates in 2012, and expected to rise further to 45% in 2013. This growth in the high end for both Apple and Samsung has resulted in several other vendors being squeezed out of the market such as Nokia, RIMM and HTC, as can be seen in Exhibit 23. High end in the smartphone market to continue to expand in 2013 before seeing any slowdown. Even if the rate of smartphone adoption is surprising in terms of market growth, investors could argue that this is perhaps just another product cycle. We, on the other hand, would argue that smartphone growth and more specifically Apple and now Samsung are increasingly changing economics and characteristics for the mobile handset, carrier, and consumer electronics markets. Indeed, based upon our expectations for iPhone 5 and Galaxy SIII effect, we now believe that the above $400 smartphone market could be close to 300mn in 2012 and rise further to 400mn in 2013, which implies over 4x increase from volume levels seen in 2010.

Exhibit 24: Smartphone share shift towards the high-end Smartphone market volumes broken down by price point, and also as % of mix Price band 2010 2011 2012E 2013E 2014E 2015E 2010 2011 2012E 2013E 2014E 2015E <= $100 7 5 7 21 57 146 2% 1% 1% 2% 5% 10% $100 - $200 74 82 129 221 378 460 25% 17% 18% 23% 31% 32% $200 - $300 74 112 179 213 240 256 25% 24% 25% 22% 20% 18% $300 - $400 49 84 104 122 133 126 16% 18% 14% 13% 11% 9% $400+ 96 190 297 397 410 437 32% 40% 42% 41% 34% 31% $400 - $500 43 71 102 138 160 187 14% 15% 14% 14% 13% 13% $500+ 53 119 195 259 250 249 18% 25% 27% 27% 21% 18% Total 299 473 716 976 1,219 1,425 100% 100% 100% 100% 100% 100% Source: Company data, Credit Suisse estimates Significant growth being seen in the low end Significant low-end smartphone product launches from branded OEMs. A glance at our smartphone portfolio database in Exhibit 25 shows that out of around 425 smartphone models from tier I branded handset vendors which our database tracks, nearly 75 are now available at a price point of $150 or less. Out of these 74 models, we note that some 12 models are less than six months old, which shows that smartphones are already being offered at increasingly attractive price points.

Exhibit 25: Our portfolio database shows nearly 75 smartphone devices selling at factory ASP of <$150 Detailed feature set of lower end smartphones being sold from different manufacturers # of models # of total % of Camera Screen Processor Processor Type Touch Colour Screen Memory Factory Vendor (<$150 ASP) models total (MP) (in) Speed (MHz) Single Dual Screen Wi-Fi GPS 16M 256K 65K NA <= 2GB 4GB 8GB > 8GB ASP ($) 26 23% 3.5 3.1 700 6 0 5 3 6 6 0 0 0 5 0 1 0 127 RIMM 0 13 0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 HTC 5 54 9% 4.3 3.0 666 5 0 5 4 5 0 5 0 0 5 0 0 0 94 Apple 0 4 0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 HP/ 1 3 33% 5.0 2.6 800 1 0 1 1 1 0 1 0 0 0 0 1 0 90 Motorola 3 54 6% 3.8 3.0 733 3 0 3 3 3 1 2 0 0 3 0 0 0 111 Samsung 17 90 19% 2.9 3.1 774 17 0 17 15 17 6 11 0 3 12 2 0 0 119 Sony 3 34 9% 4.4 3.0 867 3 0 3 3 3 3 0 0 0 3 0 0 0 132 LG 10 52 19% 3.8 3.3 863 9 1 10 10 10 3 7 0 3 5 1 0 1 115 Acer 2 11 18% 4.1 3.4 800 2 0 2 2 2 1 1 0 0 1 1 0 0 119 Huawei 6 28 21% 3.3 3.1 651 6 0 6 6 6 2 4 0 3 3 0 0 0 105 ZTE 7 36 19% 3.8 3.6 720 6 1 7 6 6 1 5 1 2 3 2 0 0 113 Micromax 8 14 57% 3.0 3.4 788 8 0 8 8 8 2 5 1 1 7 0 0 0 98 Spice 6 7 86% 3.4 3.3 817 6 0 6 6 5 0 6 0 2 4 0 0 0 93 Total 74 426 17% 3.5 3.2 766 72 2 73 67 72 25 47 2 14 51 6 2 1 111 1 2 3 1) Significant launches in the low-end of 2) Supporting strong set of features. Looking at 3) Memory is one area for further smartphone market. Over the last 12- specifications of these devices, we would note: improvement. Nearly 70% of 18 months, we have seen a number of these low-end smartphones still  Average screen size is 3.2” smartphone launches targeted at the lower have less than 2GB of memory end of the smartphone market. We have  Camera quality is 3.5MP support, which is an area where we nearly 75 smartphone models priced at need to see further improvement to  Processor speed (an area where low-end smartphones factory ASP of <$150, which represents handle rising level of content stored used to lag in the past) stands at over 750MHz on an 17% of their overall smartphone portfolio. on mobile devices. average The average ASP of these devices is around $110.  Around 1/3rd of these devices have 16M color screen

Source: Company data, Credit Suisse research

Handset Industry 2013 Outlook 26

Handset Industry 2013 Outlook Exhibit 26: Both branded and non-branded OEMs have launched a range of smartphone terminals targeted at low end of the smartphone market Detailed specifications for smartphones being launched at lower end of the smartphone market from both branded and non-branded OEMs BRANDED OEMs Manufacturer Nokia Motorola Samsung LG Huawei ZTE Lenovo Micromax Model Lumia 510 Defy Mini Galaxy Pocket Optimus L3 Ascend G300 Avail A60 A80

Image Technology UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM Announced Oct-12 Jan-12 Feb-12 Jan-12 Feb-12 Oct-11 Jul-11 Aug-12 Shipping date Nov-12 Feb-12 Apr-12 Feb-12 May-12 Dec-11 Jul-11 Aug-12 WP7.5 Android Android Android Android Android Android Android Application Processor 800MHz 600MHz 832MHz 800MHz 1GHz 600MHz 650MHz 800MHz RAM 256MB 512MB NA 384MB 512MB 512MB 256MB 256MB Memory 4GB 512MB 3GB 1GB 4GB 512MB 220MB 50MB Pixels 480 x 800 320 x 480 240 x 320 240 x 320 480 x 800 320 x 480 320 x 480 480 x 800 Dimensions (w x h x d) (mm) 120.7 x 64.9 x 11.5 131.5x70.7x9.9 103.7 x 57.5 x 12 102.6 x 61.6 x 11.9 122.5 x 63 x 10.5 116 x 62 x 13 116 x 59.9 x 12.6 129.5 x 64 x 13.5 Weight (g) 129 107 97 110 140 127 135 110 Volume (cc) 81 92 72 75 81 93 88 112 Screen (inches) 4.0 3.2 2.8 3.2 4.0 3.5 3.5 3.8 Megapixel 5.0 3.2 2.0 3.2 5.0 5.0 2.0 5.0 Wi-Fi yes yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes yes Talk time (hrs) 8.5 10.0 5.7 10.0 5.0 5.0 6.0 7.0 Standby time (hrs) 653 504 500 600 350 225 200 288 Price (USD) 166 129 106 122 189 129 123 147

NON-BRANDED OEMs Chipset SC6820 MTK 6515 MTK 6515M MTK 6515 MTK 6575 MTK 6577 QCOM MSM 8255 MTK 6577 Model N9300 Mini i9300 Dex Nebula V11 Elysium 7266 W3

Image Technology GSM/EDGE GSM/EDGE GSM/EDGE GSM/EDGE UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM Operating System Android 2.3 Android 2.3 Android 2.3 Android 2.3 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Application Processor 1GHz 800MHz 1GHz 1GHz 1GHz Dual Core 1GHz Dual Core 1GHz Dual Core 1GHz RAM 256MB 256MB 256MB 256MB 512MB 512MB 512MB 1GB Memory 256MB 256MB 256MB 256MB 512MB 4GB 4GB 4GB Pixels 320 x 480 320 x 480 320 x 480 320 x 480 480 x 800 480 x 800 480 x 800 480 x 800 Dimensions (w x h x d) (mm) 116 x 61 x 10 127 x 68 x 10 115 x 61 x 11 110 x 60 x 13 120 x 65 x 10 126 x 65 x 11 124 x 65 x 10.7 125 x 65 x 13 Weight (g) 100 NA 128 115 90 120 125 150 Volume (cc) 71 86 77 86 78 90 86 106 Screen (inches) 3.5 3.5 3.5 3.5 3.5 4.3 4.0 4.5 Megapixel 3.0 3.2 8.0 0.3 5.0 5.0 5.0 8.0 Wi-Fi yes yes yes yes yes yes yes yes GPS no no no no no no yes yes Dual SIM yes yes yes yes yes yes no yes

Talk time (hrs) 4.0 NA 3.0 4.0 4.0 6.0 6.0 3.0 January07 2013 Standby time (hrs) 72 NA 90 72 90 72 80 90 Wholesale Price (USD) 65 78 70 82 130 150 185 240 Source: Company data, Credit Suisse research

27

07 January 2013

Aggressive pricing from branded vendors. While the smartphone segment arguably has always been competitive, we believe with an aggressive push from new low cost providers such as Huawei and ZTE (covered by Credit Suisse analyst Yan Taw Boon), there is a more meaningful desire to deliver lower end products. Similarly, in an effort to drive Windows Phone adoption, we see branded vendors such as Nokia also looking to offer smartphones at attractive price points, although we believe pricing from these branded OEMs are still much higher than local vendors in China and India. For example, Nokia recently launched an entry-level WP7.5 smartphone called Lumia 510, which is expected to retail at $199 excluding taxes and subsidies. Qualcomm already engaging with local vendors in China with its reference designs. Although Taiwanese chipset vendors (MediaTek and Spreadtrum) have seen a lot of traction with local handset vendors in China, up until 1H12, their success in 3G and smartphone market had been limited. In addition, Qualcomm was also not actively involved in offering reference designs to local vendors in a big way until end of 2011, which meant that local handset OEMs were not able to offer quality devices in the low-end of the smartphone market. With improvements in its QRD portfolio (7x27A – first 1GHz single core chip launched in Q411, followed by 8x25 dual core chip introduced in Q212), Qualcomm has been able to fuel the low-end of the smartphone market in China and India with its reference design partnerships with a number of local vendors including Huawei, ZTE, Lenovo, , Coolpad, , BYD, TCL-Alcatel to name a few. In fact, Qualcomm now has reference designs in over 100 smartphone devices with over 40 OEMs across 12 countries (Exhibit 27).

Exhibit 27: Qualcomm’s Reference Design (QRD) portfolio of smartphone chips Q1’13

8x30 Dual Kraits Q2’12

Q4’11 MSM 8x25Q Quad Core Q2’11 / Q3’11 8x25 Dual Core 7x27A MSM Single Quad Core 7x25 Core MSM Dual Core 7x27 First 1GHz Single Core First High Volume

40+ OEMs 100+ Launches 100+ in Design <60 days Launch Time-to-Market

Source: Company data, Credit Suisse research MediaTek and Spreadtrum fuelling low-end smartphones in China. According to our analyst Randy Abrams (who covers both MediaTek and Spreadtrum), smartphone baseband volumes for these two vendors together may grow from 10mn units in 2011 to nearly 150mn/335mn units in 2012/2013 (Exhibit 28). In the past, both these vendors were struggling to transition from 2.5G baseband chips towards 3G/smartphone chips due to technology and performance issues, something which seems to have been addressed. This has resulted in aggressive plans from both these chipset vendors to target local handset OEMs in China to fuel the low-end smartphone market. In fact, China Unicom’s recently launched devices focused on mass market dual core smartphones from branded Chinese vendors and saw an almost even split of designs based on MediaTek and Qualcomm. Qualcomm secured wins from , KTouch/Tianyu, Coolpad, and Huawei while MediaTek was designed into smartphones from Malata, Lenovo, TCL, and ZTE.

Handset Industry 2013 Outlook 28 07 January 2013

Even on quad core, MediaTek is trying to keep up pace with Qualcomm's release schedule, targeting initial samples of its Quad Core Cortex A7 chipset (MT6588) also in late 4Q12 with mass production in 1Q13 and supporting TD-SCDMA/HSPA+. For detailed specification of quad core chips, please see Exhibit 29.

Exhibit 28: Smartphone baseband volumes at MTEK/SPRD Exhibit 29: Quad core designs from QCOM and MTEK in millions, unless otherwise stated Specifications of quad core smartphone chip for China market

300 91

250 MediaTek Qualcomm MT6558 MSM 8225Q 200 Mass production 1Q13E 1Q13E Baseband HSPA+ / TD-SCDMA HSPA+ / CDMA CPU Core Quad-core ARM Cortex A7 Quad-core ARM Cortex A5 150 Clock Speed 1.X GHz 1.X GHz 31 243 Graphics PowerVR SGX544 203 100 GPU Performance 1,600M Pix/s, 55M Tri/s 294M Pix/s, 49M Tri/s Camera Support 13 MP 8 MP

Smartphone baseband units (mn) units baseband Smartphone 116 50 18 Video Playback Full HD 780p 11 2 Process 28nm 28nm 0 38 47 0 21 0 10 10 Q112 Q212 Q312 Q412E 2011 2012E 2013E SpreadTrum MediaTek Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research Mid-end of the smartphone market shrinking As discussed above in detail, given the volume growth that we expect to see in both the high and low-end of the smartphone market, it implies that the mid-end of the smartphone market will continue to represent lesser proportion of total smartphone market. Here we would make two observations:

Exhibit 30: Mid-end of smartphone market to represent only 25% of total units by 2015 Percentage of global smartphone volumes broken down by price point over time 100%

90% $500+

80% $400 - $500 70%

60% $300 - $400 50%

40% $200 - $300

30% $100 - $200 20%

10% <= $100

0% 2010 2011 2012E 2013E 2014E 2015E

Source: Company data, Credit Suisse estimates $200 to $400 ASP smartphones to account for only around 25% of volumes by 2015. As we note in above sections, we believe that the smartphone market at $400+ ASP will grow over 4x in volume terms over 2010 to 2013 reaching nearly 400mn units by 2013, before seeing some moderation in growth. This combined with our view around volume growth in less than $200 ASP market (mainly driven by white-label vendors in China and India) means that smartphone volumes in the $200 to $400 ASP range will only grow from around 300mn units in 2012 to 400mn units by 2015. But more importantly, as percentage

Handset Industry 2013 Outlook 29 07 January 2013 of total smartphone volumes, we expect this to decline from 40% in 2012 to around 25% over this period, as shown in Exhibit 30. Implications for branded smartphone vendors. This continued shift towards high-end of the smartphone market now combined with move towards low-end means that a number of branded OEMs including RIM, Nokia, LG, Sony Mobile may continue to struggle given stiff competition in the high-end from Apple and Samsung driven by better smartphone offering, and then aggressive pricing from white-label vendors in the low-end.

Exhibit 31: Vendors like RIM, Nokia, LG and Sony have significant exposure to lower end of smartphone market Smartphone volumes by price band 2010 2011 2012E 2013E 2014E 2015E CAGR 12-15E <= $100 7 5 7 21 56 146 173% $100 - $200 74 82 129 221 378 460 53% $200 - $300 74 112 179 213 240 256 13% $300 - $400 49 84 104 122 133 126 7% $400+ 96 190 297 397 411 437 14% $400 - $500 43 71 102 138 160 187 22% $500+ 53 119 195 259 251 249 8% Total (mn) 299 473 716 976 1,219 1,425 26% Volumes breakdown by price band <= $100 2% 1% 1% 2% 5% 10% $100 - $200 25% 17% 18% 23% 31% 32% $200 - $300 25% 24% 25% 22% 20% 18% $300 - $400 16% 18% 14% 13% 11% 9% $400+ 32% 40% 42% 41% 34% 31% $400 - $500 14% 15% 14% 14% 13% 13% $500+ 18% 25% 27% 27% 21% 18% Total (%) 100% 100% 100% 100% 100% 100%

Smartphone volume exposure in 2012 (%) Apple Samsung Nokia RIM HTC LG MMI Sony <= $100 0% 1% 2% 0% 0% 1% 1% 0% $100 - $200 0% 14% 28% 6% 0% 19% 19% 4% $200 - $300 0% 17% 37% 48% 30% 33% 33% 36% $300 - $400 3% 11% 16% 34% 38% 25% 25% 25% $400+ 97% 57% 17% 13% 32% 22% 22% 35% $400 - $500 10% 27% 9% 10% 23% 18% 18% 21% $500+ 87% 30% 8% 3% 8% 4% 4% 14% Total 100% 100% 100% 100% 100% 100% 100% 100% Source: Company data, Credit Suisse estimates A specific growth opportunity within China Specifically from a regional perspective, we see robust growth for smartphone market in China, which we think will account for 30% of global units by 2015. Interestingly, we estimate that 32% of incremental volumes globally over the next 3 years will be driven by China as shown in Exhibit 32. There are several drivers at work here: 3G device availability has improved significantly. One of the issues leading to the slower uptake of 3G services in China in the past had been related to limited availability of 3G terminals across all standards (TD-SCDMA at China Mobile, WCDMA at China Unicom and CDMA EVDO at China Telecom, all covered by Credit Suisse analyst Colin McCallum). However, 3G terminal availability has seen significant improvements, which was clearly evident from carriers’ commentary as mentioned below.

■ China Mobile has noted that device supply chain for TD-SCDMA technology continues to mature. Here the carrier is focusing on bringing down price points for TD-SCDMA handsets, and it had an offering of 60 different models of TD smartphones in March

Handset Industry 2013 Outlook 30 07 January 2013

2012. Total number of smartphone models offered by carrier was around 166 in Aug 2012, of which 126 devices were priced at around Rmb1,000.

■ China Unicom noted that it has already launched a series of Rmb1,000 smartphones to accelerate WCDMA penetration.

■ China Telecom now has an offering of around 580 models for CDMA EVDO handsets, compared to 300/500 models in 2010/2011, as it continues to focus on adoption of 3G handsets. Of these, 240 devices are smartphones. In fact, it sold 16mn smartphone units in 1H12, which was up 2x yoy.

Exhibit 32: We think China will account for >30% of volume growth in smartphones in millions, unless otherwise stated ∆ (2012 to 2015) Smartphone units (mn) 2010 2011 2012E 2013E 2014E 2015E Units % NA 72 107 121 136 149 161 41 6% WE 86 97 114 133 146 157 43 6% Japan 18 25 32 36 38 40 7 1% Korea 7 20 21 24 26 26 5 1% China 28 78 196 288 364 421 225 32% India 9 13 21 41 65 103 82 12% Rest of APAC 29 49 72 104 129 149 77 11% Brazil 5 9 18 27 47 53 35 5% Mexico 3 9 15 22 25 25 10 1% Rest of Latam 9 15 24 38 46 56 32 4% Russia 4 8 16 21 25 30 14 2% Rest of CEE 9 12 20 29 36 43 23 3% MEA 19 30 46 78 124 160 114 16% Total 299 473 716 976 1,219 1,425 708 100% Source: Gartner, Company data, Credit Suisse estimates Increased push towards lower end smartphones. One of the common themes emerging out of all three carriers in China is the increased push toward bringing down smartphone price points. During 2011, the focus had been on launching smartphones priced at around Rmb1,000 with a number of product introductions in that price range. For 2012, the target seems to be to further price point reductions.

■ China Mobile noted that out of 166 smartphone models it offered during mid-2012, 126 of them are being sold at a price point of around Rmb1,000 (or US$150), with the company already working towards launching smartphones priced at Rmb500.

■ China Unicom highlighted that after having successfully launched a series of Rmb1,000 smartphones in 2011, it has been working on to introduce smartphones priced at Rmb700 (US$ 100) or below during 2012.

■ China Telecom had an offering of around 240 models for smartphones in mid-2012, compared to only 100/200 models at the end of 2010/2011. Further, the carrier sold 16mn smartphone devices in 1H12 compared to 17mn in 2011 (up 2x yoy). Simultaneous cannibalization of several industries What is surprising is that industry growth has accelerated over the last couple of years when perceptions would be that the mobile phone industry has reached level of maturity with close to 2.0bn unit shipments per year and 6.2bn mobile subscriptions. We believe that the explanation rests in multiple factors, but essentially that smartphones are simultaneously capturing value from multiple other industries especially at the high-end. In fact, as shown in Exhibit 33, high end of the smartphone market (devices at ASP of over $400) is now close to $160bn market in revenue terms, over 5x higher than the size in 2009.

Handset Industry 2013 Outlook 31 07 January 2013

■ Wireless carriers. We have discussed the economics of smartphone growth in an earlier section in the note, but it would hard to argue that some value has not shifted from wireless carriers whose margins have seen pressure at a time when mobile handset industry profits have shifted upwards, even if causation cannot be proved.

■ Portable Media Players. The portable media player market is dominated by the iPod, however it is hard to see this standalone segment not being impacted especially with the sheer range of stores now available for access via smartphones (especially with DRM-free music). We assume that 100% of MP3 player market can be potentially cannibalized by smartphones in a best case scenario.

■ Personal Navigation Devices. Here we believe that a large portion of the PND market can be potentially cannibalized by smartphones in the long term; especially with the quality of GPS and mapping technologies on the latest smartphones being of comparable quality.

■ Digital Still Cameras. We assume that a smartphone with a robust enough camera (both in terms of quality and memory capacity) will be able to successfully replace a significant percentage of point-and-shoot digital still cameras over time. Here we would note that majority of all DSCs with camera quality less than 15MP can be potentially cannibalized by smartphones.

■ Portable Gaming Devices. With the onset of applications stores, and a particular focus on leveraging smartphones as gaming platforms, we believe much of the portable gaming market can be cannibalized.

■ Mid-end Feature Phones. We assume mid-end of the handset market (which we usually refer to as feature phones selling at a price point of $100-200) have already seen significant level of cannibalization by smartphones, a trend which will continue over the next few years.

Handset Industry 2013 Outlook 32

Handset Industry 2013 Exhibit 33: Mobile Compute to drive and dominate consumer electronic market – high-end smartphone market is now the largest portion of the CE market 900 Global consumer electronic consumption (in $bn) 1) Consumer Electronics growth decent. The global consumer electronic industry is a $645bn market and 800 Others achieved around 10% CAGR from 2005 to 2012. Going forward, we forecast the market to maintain a 700 8% CAGR Camera 7% growth rate and reach $760bn in 2015.

Outlook 600 TV

135 Feature Phones 500 2) Mobile computing (smartphones & tablets) 134 growth outpaces the CE industry. Smartphones Basic Phones 129 400 123 and tablets together are expected to have a CAGR of 98 68% during 09-12E, which is significantly higher 119 PC (Consumer) 300 73 than the rest of industry (which declined 2% during 94 99 Consumer spend US$ in bn 116 51 70 Tablets the same period). We expect this category to be the 200 61 primary driver of the CE industry and reach close to 117 34 Low & Mid-end $450bn by 2015. 54 231 smartphone 100 101 102 10 209 220 91 46 159 74 77 High-end 27 103 smartphone 36 19 51 0 21 29 4 26 30 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 3) Within CE, high-end smartphones will be the biggest category in 2012. The high-end Global consumer electronic consumption breakdown (as % of total) smartphone market will become a $160bn market in 2012 from $4bn in 2007. This explosive growth 100% 9% 7% 6% 6% 5% 5% Others trajectory will make the high-end smartphone the 13% 11% 3% 2% 14% 15% 14% 3% 3% 3% largest category within the CE industry. Going 90% 4% 4% 12% 5% 14% 13% Camera forward, we forecast the market size to expand to 6% 6% 5% 16% 80% 19% 2% $230bn in 2015 driven by the strength of Apple and 22% 4% 2% 21% 7% 3% TV Samsung’s product portfolios. The two companies 23% by segment by 70% 19% 20% 23% 11% 3% 18% together will get ~90% of market share in the $400+ 15% 18% 4% Feature Phones ASP market. 60% 18% 19% 5% 23% 18% 16% Basic Phones 50% 13% 27% 22% 4) Mobile computing cannibalizes other markets. 26% 22% 5% 10% 20% 40% PC (Consumer) With considerable advancement in hardware 5% 8% 13% 6% 10% 13% components, software integration, and eco-system 5% 30% 5% 5% 22% 6% 9% Tablets development, we believe smartphones and tablets 23% are the future of computing and will significantly Consumer spend breakdown 9% 20% 21% 22% 2% 22% 20% Low & Mid-end cannibalize other markets such as PC, TV, camera, 9% 30% 30% 30% 25% smartphone and DVD, etc. Going forward, we expect 10% 6% 4% 17% smartphones and tablets together will account for 8% 8% 10% High-end 6% 6% 7% smartphone 0% 1% nearly 60% of CE industry in 2015 compared to 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 32% in 2011. January07 2013 Source: IDC, Gartner, Credit Suisse estimates

33

07 January 2013 LTE at an inflection point When looking at the handset market by technology, we observe that there are several drivers at play now which will drive not only strong adoption of LTE devices but also ramp up uptake of 3G devices driven by increased device affordability. LTE volumes at an inflection point. We believe that the significant leap in network speeds on LTE will push use of new applications which in turn could drive incremental growth in the smartphone market, as we expect LTE handsets to grow from 85mn in 2012 to around 450mn in 2015, accounting for 20% of global handset market (Exhibit 35). This strong growth is being driven by a confluence of factors. First, we see a rapid expansion of network coverage (globally to increase from 5% in 2011 to around 7% in mid-2012 (455mn people) and then to 50% by 2017). Second, we see LTE handset availability improving and specifically Apple and Samsung being key enablers of this in 2013. Third, we believe that faster speeds for LTE (over 300Mbps downlink and 86Mbps uplink) are likely to create consumer demand in many ways that other networking technologies did not. WCDMA low-end growth is ramping. We believe that 3G handset market will continue to see robust growth driven by emerging markets. This will be driven by ongoing expansion in the coverage of WCDMA, which we see rising from 45% of population in 2011 to 85% by 2017, and lower priced devices as chipset availability and quality improves especially given recent success of Taiwanese chipset vendors.

■ WCDMA/HSPA to account for over 40% of handset market by 2015. In 2012, we estimate that there would be close to 550mn WCDMA/HSPA enabled handsets shipped globally, accounting for 27% of global handset volumes. Although we expect a significant shift in the higher end of 3G market towards LTE especially in developed markets (US, Japan, Korea and WE), we still believe there will be significant growth in 3G adoption in emerging markets. As such, we assume WCDMA handsets to represent slightly over 40% of total market by 2015.

■ 3G device availability much improved driven by 3G chipset portfolio at MTEK/SPRD. In addition to Qualcomm, which remains focused on reference designs for the Chinese white-label handset manufacturers, we would note that both MediaTek and Spreadtrum have already made a lot of strides when it comes to improving the quality of their 3G chipsets, while RDA also has WCDMA chip on its roadmap for 2013. This improvement in 3G chipset offering will continue to drive significant technology shift especially at white-label vendors in China as they move from GSM/EDGE based phones to 3G devices.

Exhibit 34: LTE to account for 4% of handsets in 2012… Exhibit 35: …but expect this to increase to ~20% by 2015 Breakdown of handset shipments by technology (2012) Breakdown of handset shipments by technology (2017) iDEN iDEN LTE CDMA CDMA 0% 0% 4% 10% 7% TD-SCDMA LTE 3% 21%

GSM / GPRS / WCDMA / EDGE HSPA 26% 28% TD-SCDMA 4%

GSM / GPRS / WCDMA / EDGE HSPA 55% 42% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Handset Industry 2013 Outlook 34

Handset Exhibit 36: Global handset market by technology: LTE handsets to rise from 85mn in 2012 (4% of all handsets) to over 450mn by 2015 (~20% of volumes) in millions, unless otherwise stated

Industry2013 Outlook Handset units (mn) 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E Analog/other 0 0 0 0 0 0 0 0 NM iDEN 15 11 4 2 1 1 0 0 -47.6% 1) CDMA on a gradual decline. With fast- CDMA 218 216 198 183 173 154 140 113 -10.7% TDMA 0 0 0 0 0 0 0 0 NM paced rollout of LTE in the US, we believe GSM/GPRS/EDGE 1,027 1,092 1,069 942 797 575 403 293 -22.8% PDC 0 0 0 0 0 0 0 0 NM that global CDMA volumes will continue on WCDMA/HSDPA 342 457 537 623 771 933 1,033 1,044 14.2% TD-SCDMA 15 36 61 98 96 80 82 84 6.7% a gradual decline in spite of EV-DO LTE 0 7 86 219 298 460 604 789 55.8%

Total 1,617 1,819 1,955 2,067 2,137 2,203 2,262 2,323 3.5% adoption in China driven by China Telecom.

CDMA handsets (mn) 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E We expect CDMA to decline from 10% of Asia Pacific 108 110 117 120 122 109 104 80 -7.3% North America 93 91 70 56 45 41 31 28 -16.6% global handsets in 2012 to 7% by 2015. Western Europe 0 0 0 0 0 0 0 0 NM Africa 4 4 4 3 3 2 2 1 -25.8% CEE 3 3 2 1 1 1 1 1 -10.5% Latin America 8 6 2 2 1 1 1 1 -17.4% Middle East 2 2 2 1 1 1 1 1 -15.7% Total CDMA handsets 218 216 198 183 173 154 140 113 -10.7% % of the handset market 13% 12% 10% 9% 8% 7% 6% 5% Others (inventory addition/depletion and modems) 20 19 9 6 2 (1) (1) (2) 2) WCDMA to rise to >40% of handsets Total CDMA Devices 238 235 207 189 176 153 139 111 -11.8% 1 by 2015. Given strong adoption trends in WCDMA/HSDPA handsets 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E Asia Pacific 101 143 181 254 342 478 518 549 24.8% emerging markets helped by white-label North America 57 76 61 49 61 57 72 62 0.4% Western Europe 107 125 132 117 120 114 99 82 -8.9% vendors, we expect WCDMA to rise from Africa 20 30 40 52 70 86 113 116 23.9% CEE 33 42 51 59 68 73 81 84 10.5% 27% of handset market in 2012 to 42% Latin America 11 24 43 56 68 80 104 106 19.8% Middle East 14 17 30 35 42 46 45 45 8.7% by 2015. This is despite a strong shift in Total WCDMA/HSDPA handsets 342 457 537 623 771 933 1,033 1,044 14.2% the high-end of smartphone market % of the handset market 21% 25% 27% 30% 36% 42% 46% 45% Others (inventory, modems and tablets) 46 79 77 72 69 72 67 63 towards embracing LTE standard. Total WCDMA Devices 389 536 614 695 840 1,005 2 1,100 1,107 12.5% TD-SCDMA devices 28 52 80 118 116 97 98 99 4.4%

LTE handsets 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E Asia Pacific 0 2 31 71 117 215 308 388 65.4% North America 0 5 42 81 87 106 104 123 24.1% Western Europe 0 0 10 41 49 67 86 107 60.3% Africa 0 0 0 0 2 8 17 37 NM 3) LTE – 2012 is the takeoff year. For LTE CEE 0 0 0 6 9 17 24 36 NM Latin America 0 0 2 13 23 34 46 71 101.1% devices, we see 2012 as the takeoff year, Middle East 0 0 1 7 10 13 18 28 107.4% Total LTE handsets 0 7 86 219 298 460 604 789 55.8% with LTE enabled handsets rising from % of the handset market 0% 0% 4% 11% 14% 21% 27% 34% Others (incl tablets) 1 11 47 88 125 152 180 202 only 4% of global volumes in 2012 to Total LTE devices 1 17 133 307 423 612 3 784 991 49.4% ~20% by 2015, reaching over 450mn 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E CAGR 12-17E handset units. CDMA 238 235 207 189 176 153 139 111 -11.8% WCDMA 389 536 614 695 840 1,005 1,100 1,107 NM TD-SCDMA 28 52 80 118 116 97 98 99 4.4% LTE 1 17 133 307 423 612 784 991 49.4% Total CDMA/WCDMA/HSDPA/TD-SCDMA/LTE sell-in 655 841 1,035 1,309 1,554 1,867 2,121 2,308 17.4% % change 28.9% 28.4% 23.0% 26.5% 18.8% 20.2% 13.6% 8.8% Jan 07

Source: Gartner, Company data, Credit Suisse estimates uary2013

35

07 January 2013

LTE could be a game changer We would argue that historically faster network speeds have not really been the driver for the smartphone market. In fact, though 3G networks have been in existence since 2002, it was really the introduction of touch-screen technology, and perhaps the iPhone itself, that accelerated 3G adoption. However, we believe that with LTE, the significant leap in network speeds will push use of new applications which in turn could drive incremental growth in the smartphone market. As shown below, we expect LTE handsets to grow from some 86mn in 2012 to over 450mn in 2015.

Exhibit 37: 2012 could be the take-off year for LTE handsets – we expect 86mn/219mn LTE handsets in 2012/2013 in millions, unless otherwise stated LTE handsets 2011 2012E 2013E 2014E 2015E Asia Pacific 2 31 71 117 215 North America 5 42 81 87 106 Western Europe 0 10 41 49 67 Africa 0 0 0 2 8 CEE 0 0 6 9 17 Latin America 0 2 13 23 34 Middle East 0 1 7 10 13 Total LTE handset units (mn) 7 86 219 298 460 % growth 1203% 154% 36% 54% % of the handset market 0% 4% 11% 14% 21% Source: Gartner, Company data, Credit Suisse estimates LTE coverage to expand to 50% by 2017 While South Korea and Japan have been the early adopters of LTE, carriers network rollout plans in two key markets (US and potentially China) point to a rapid expansion of LTE network coverage over the next 2-3 years. In fact, Ericsson in its recent Mobility Report in Nov 2012 noted that there are around 100 LTE networks in commercial operation today, and expects LTE population coverage globally to increase from 5% in 2011 to around 7% in mid-2012 (455mn people) and then to 50% by 2017. Below we highlight the LTE rollout plans for carriers in the US and China.

Exhibit 38: LTE coverage to expand to 50% of global population by 2017 Global population coverage for different wireless standards 100% 92% 85% 86% 85%

75%

53% 53% 55% 50% 50% 46%

35%

25% Population coverage (%) coverage Population

5% 2% 0% GSM/EDGE WCDMA/HSPA CDMA LTE 2010 2011 2017

Source: Ericsson Mobility Report (Nov 2012)

Handset Industry 2013 Outlook 36 07 January 2013

Strong focus on LTE rollouts in the US In terms of LTE network rollouts, we note that US remains the key market with all the top 4 carriers expected to aggressively roll out nationwide LTE networks. Even Tier II carriers such as MetroPCS and Leap have aggressive plans for LTE coverage. In fact, both Verizon and AT&T aim to cover majority of their customer base on LTE networks over the next 12-18 months as can be seen below.

Exhibit 39: All carriers in the US already have aggressive plans for LTE rollouts

LTE Deployment in US (Network Launch Schedule) 2010 2011 2012 2013 38 Markets launched 200MM POPs Nearly 300MM POPs Build comple te Verizon by YE 2010 by YE 2011 by YE 2012 by mid 2013

74MM POPs 170MM POPs 250MM POPs Build complete AT&T by YE 2011 by YE 2012 by YE 2013 during 2014

123MM POPs 250MM POPs Build complete Sprint by YE 2012 by YE 2013 by early 2014

133MM POPs 200MM POPs T-Mobile by YE 2012 by YE 2013

5 Markets launched Build complete MetroPCS Mid 2010 by YE 2011

Trial Markets launched 25MM POPs "Expect to deploy 2/3 of our network LEAP by YE 2011 by YE 2012 footprint (66MM POPs) over next 2-3 years"

Source:LightSquared Company data, Credit Suisse research Verizon leading the way in LTE coverage. At its Q312 results, Verizon had LTE services in 419 markets covering 250mn POPs (nearly 80% of US population), and also noted its plans to continue to build out its LTE network to a similar footprint as its existing 3G network by middle of 2013. Further, the carrier highlighted that 35% of total data traffic on its mobile network is already going through its LTE network. AT&T planning to extend LTE build to 300mn POP by 2014 end. As of Q312, AT&T had LTE population coverage of 135mn with plans to increase this to 250mn by end of 2013. However, at its Analyst Day in Nov 2012, the carrier noted that it is now targeting to cover 300mn people in the US with LTE network by end of 2014. T-Mobile US also has ambitious plans. Following bigger rivals, T-Mobile USA also announced in Feb 2012 that the carrier plans to spend $4bn over time for network modernisation and LTE deployment, and this represents around $1.4bn of incremental network investment over the next two years. This would result in LTE service being launched in the vast majority of the top 50 markets across the US during 2013. Ambitious LTE plans from China Mobile We note that China Mobile has ambitious plans with respect to transitioning towards the TD-LTE () standard. The company sees its mobile network evolving in three distinct elements. The GSM network will be used primarily for carrying voice traffic and maintaining a leading voice experience, TD-SCDMA (its existing 3G standard) for carrying data on handsets for the mass market and TD-LTE for high quality wireless broadband experience. For TD-LTE, it expects the rollout to progress in 3 phases (Exhibit 40).

■ Phase 1 – This phase has now been completed with China Mobile having launched scale-trials in 6 cities using over 900 base stations.

■ Phase 2 – This part will be implemented during 2012 with plans to construct over 20,000 TD-LTE base stations for scale-trials in 9 cities. The company has noted that there is ongoing upgrade of base stations in major cities in Zhejiang and Guangdong, with Hangzhou and Shenzhen expected to start pre-commercial trials. In addition, China Mobile expects the launch of multi-mode smartphones (which will support TD- LTE, LTE FDD, 3G and standards) during 2012.

Handset Industry 2013 Outlook 37 07 January 2013

■ Phase 3 – For 2013, the company is targeting the number of TD-LTE base stations to exceed 200,000 either through new-builds or upgrades of existing 2G/3G base stations. As a frame of reference, China Mobile currently has around 700,000 GSM base stations and close to 220,000 TD-SCDMA base stations.

Exhibit 40: China Mobile has accelerated its plans for TD-LTE large scale deployment

TD-LTE Scale Deployment Accelerated

Phase 3: Number of base stations will reach 200,000 Phase 1: Scale-trials in 6 cities, constructed over 900 through new-builds or smooth upgrade to extend scale of base stations pre-commercial trials

2011 2012 2013

Phase 2 (1H 2012): Successfully Phase 2 (2H 2012): Base stations will completed scale-trials in "6+1" reach 20,000 with extended coverage cities , commenced expanded to 13 cities. Over 90% effective build-out coverage in key areas of Hangzhou, Shenzhen and Guangzhou

Source: China Mobile (FY11 results in Mar 2012) At the global level, China Mobile expects TD-LTE technology to cover over 2 billion people across countries by 2014 with more than 500,000 base stations installed and over 100 models of mobile terminals available, as it continues to see commercial large scale deployments from international carriers. LTE handset availability improving all the time In the early days of WCDMA handset availability, device size/weight and battery life were gating factors to rapid 3G uptake. In contrast, this is not the case with LTE. Although we expect Apple and Samsung to dominate the LTE smartphone/tablet market in the intermediate term, we note that there has been a lot of focus from tier I vendors around the launch of new LTE devices. In addition, most devices sport sleek form factors and battery lives that are at par with 3G devices, ensuring that these factors do not constrict uptake. Increasing focus on LTE launches from tier I vendors. Driven by expanding LTE coverage in the US, Japan, Korea and parts of Europe, we have seen a significant level of interest in LTE device launches from a number of handset vendors. For example, apart from iPhone 5, we have already seen a range of LTE smartphones being introduced by Samsung, Motorola, LG, HTC and Nokia. In fact, our analysis on Exhibit 41 shows that there are around 75 LTE smartphone models selling in the market, which represent nearly 20% of their overall smartphone portfolio.

Handset Industry 2013 Outlook 38 07 January 2013

Exhibit 41: Around 75 LTE smartphones selling in the market (up from around 25 in middle of 2012) Detailed feature set of lower end smartphones being sold from different manufacturers # of total % of Camera Screen Processor Processor Type HSPA speed Touch Colour Screen Memory Factory Vendor LTE models total (MP) (in) Speed (MHz) Single Dual (Mbps) Screen Wi-Fi GPS 16M 256K 65K NA <= 2GB 4GB 8GB > 8GB ASP ($) Nokia 4 26 15% 8.0 4.4 1475 1 3 37 4 4 4 4 0 0 0 0 0 1 3 486 RIMM 0 13 0% - - - 0 0 - 0 0 0 0 0 0 0 0 0 0 0 - HTC 11 54 20% 7.9 4.5 1391 2 9 37 11 11 11 10 1 0 1 0 0 4 6 370 Apple 1 4 25% 8.0 4.0 1200 0 1 42 1 1 1 1 0 0 0 1 0 0 0 649 HP/Palm 0 3 0% - - - 0 0 - 0 0 0 0 0 0 0 0 0 0 0 - Motorola 10 54 19% 8.0 4.4 1440 0 10 21 10 10 10 10 0 0 0 2 0 5 3 394 Samsung 19 90 21% 6.7 4.3 1306 10 9 23 19 19 19 18 1 0 3 3 3 3 7 344 Sony 5 34 15% 11.8 4.3 1500 0 5 27 5 5 5 5 0 0 0 1 0 2 2 416 LG 16 52 31% 7.2 4.5 1388 1 15 21 16 16 16 16 0 0 3 2 5 1 5 393 Acer 0 11 0% - - - 0 0 - 0 0 0 0 0 0 0 0 0 0 0 - Huawei 2 28 7% 8.0 4.3 1500 0 2 21 2 2 2 2 0 0 0 0 2 0 0 480 ZTE 5 36 14% 7.7 4.4 1380 1 4 - 5 5 5 5 0 0 3 0 1 1 0 252 Micromax 0 14 0% - - - 0 0 - 0 0 0 0 0 0 0 0 0 0 0 - Spice 0 7 0% - - - 0 0 - 0 0 0 0 0 0 0 0 0 0 0 - Total 73 426 17% 7.7 4.4 1387 15 58 25.9 73 73 73 71 2 0 10 9 11 17 26 380 1 2 3

1) A number of LTE device launches in 2) Devices supporting faster processor 3) Devices across a range of price the last few months. Over the last 12 speeds. Apart from faster network speeds, points. Apart from strong feature set, months, we have seen a number of these LTE devices are also supporting faster these LTE smartphones address a smartphone launches supporting LTE processors, which result in better user range of price points. For example, technology. We see nearly 75 models in experience. Average processor speed for LTE average ASP of LTE portfolio is around the market (up from 27 in mid 2012), devices in the market are 1.4GHz, with a $380. which accounts for around 17% of total number of smartphones having dual core portfolio from different vendors. processors.

Source: Company data, Credit Suisse research Supporting strong feature set, but also addressing a varied range of price points. Apart from faster network speeds driven by LTE technology, a number of these devices also support dual core processors with average processor speed of around 1.4GHz. Further, they support high resolution on screen, and also are equipped with a range of memory options. In terms of price point, we see that the LTE portfolio has an average price of $380. Apple – key driver for LTE device uptake in 2012 Although Apple was not the first to launch LTE devices, in our view, the company’s latest iPad and iPhone launches have been the most significant catalysts for LTE market growth in 2012. Indeed, we estimate that Apple LTE devices will account for 70% of all LTE smartphones and tablets to be sold in the market in 2013, as we show in Exhibit 42.

Exhibit 42: Apple devices will comprise 68% of the LTE smartphone/tablet market in 2013 2012E 2013E 2014E 2015E LTE handset units 86 219 298 460 LTE tablet units 30 51 69 84 Total LTE handsets + tablets (mn) 116 269 367 544

LTE 51 153 206 250 LTE enabled iPads 24 38 51 60 Total Apple LTE devices (mn) 75 190 257 310

Apple as % LTE smartphones + tablets 65% 71% 70% 57% Source: Company data, Credit Suisse estimates Samsung’s growth in high-end of smartphone market also driving LTE Further, Samsung’s robust growth in high-end of the smartphone market (as evidenced in the company’s Q2 and Q312 results, also see our note titled ‘Smartphones – High-end going higher’ dated 4th Sep 2012) is another significant driver of LTE device volumes as its new range of high-end Galaxy devices are selling in volumes. Reviews for Galaxy SIII and Note II are amongst the most positive seen for any of the Samsung smartphones in the past. Distribution for these device is also strong, as Galaxy SIII is shipping with over 290 carriers globally compared to 140 carriers for Galaxy SII. Samsung recently noted that it

Handset Industry 2013 Outlook 39 07 January 2013 has already crossed 30mn unit mark for Galaxy SIII in the first week of Nov 2012 in the first five months of device launch. In addition, it has shipped over 3mn units for Note II device in just over a month of shipping (as of Nov 2012). Both these devices have support for LTE technology although it has been designed to work depending on regional/carrier support.

Exhibit 43: Samsung's $400+ portfolio gaining lot of traction driven by S III and Note II Units in mn, unless otherwise stated 40 35 30 25 20

15 Units (mn) Units 10 5 0

Galaxy S Galaxy S II Galaxy S III Galaxy Note I Galaxy Note II

Source: Company data, Credit Suisse estimates LTE speeds to drive devices, including tablets While the promise of faster network speeds did not drive 3G uptake until smartphone penetration hit an inflection, we believe the faster speeds for LTE (over 300Mbps downlink and 85Mbps uplink) are likely to create consumer demand in many ways that other networking technologies did not.

Exhibit 44: Relative LTE speeds should drive uptake

350.0

300.0

250.0

200.0

Mbit/s 150.0

100.0

50.0

0.0

LTE

802.16e

WiMAX:

Rev. 0 Class 10

Rev. B Rev. A

Evolution

UMTS-TDD

GSM EDGE GSM GPRS

UMTS W-

UMTS W- UMTS W-

iBurst: iBurst

CDMA EV-DO CDMA EV-DO CDMA EV-DO

CDMA RTT 1x

CDMA HSPA+

CDMA HSUPA CDMA HSDPA

Peak Downlink Peak Uplink

Source: Company data, Credit Suisse research In addition, we expect wireless enabled tablets and data cards to be incremental drivers for LTE going forward. For example, we estimate that the majority of wireless enabled tablets will leverage LTE technology and we forecast 85mn LTE tablets by 2015. In

Handset Industry 2013 Outlook 40 07 January 2013 addition, we expect nearly 50% of the data card/dongle market to be based on LTE by 2015 driving nearly 70mn units by 2015. Combining this with our view around robust growth in LTE handsets, we believe that LTE devices in total (handsets, tablets and data cards) will grow from 135mn units in 2012 to over 600mn units by 2015 (Exhibit 45).

Exhibit 45: We expect strong growth in LTE devices – handsets, tablets and data cards LTE devices (mn) 2011 2012E 2013E 2014E 2015E LTE handsets 7 86 219 298 460 as % of total handsets 0% 4% 11% 14% 21% LTE tablets 0 30 51 69 84 as % of total tablets 0% 27% 30% 29% 26% LTE data cards 11 17 38 56 68 as % of total data cards 10% 13% 28% 40% 47% Total LTE devices 17 133 307 423 612 Source: Gartner, Company data, Credit Suisse estimates Low-end 3G market develops as high-end moves to 4G Although we expect that the high-end of the 3G market will see strong migration to LTE, 3G handset market will continue to see robust growth driven by emerging markets. This will be driven by ongoing expansion in the coverage of WCDMA, which we see rising from 45% of population in 2011 to 85% by 2017, and lower priced devices as chipset availability and quality improves especially given recent success of Taiwanese chipset vendors. WCDMA/HSPA to account for over 40% of handset market by 2015. In 2012, we estimate that there would be close to 550mn WCDMA/HSPA enabled handsets shipped globally, accounting for 27% of global handset volumes. Although we expect a significant shift in the higher end of 3G market towards LTE especially in developed markets (US, Japan, Korea and WE), we still believe there will be significant growth in 3G adoption in emerging markets. As such, we assume WCDMA handsets to represent slightly over 40% of total market by 2015.

Exhibit 46: WCDMA to continue to grow reaching 40% of all handsets by 2015 in millions, unless otherwise stated WCDMA/HSDPA handsets 2009 2010 2011 2012E 2013E 2014E 2015E Asia Pacific 92 101 143 181 254 342 478 North America 32 57 76 61 49 61 57 Western Europe 99 107 125 132 117 120 114 Africa 15 20 30 40 52 70 86 CEE 26 33 42 51 59 68 73 Latin America 7 11 24 43 56 68 80 Middle East 11 14 17 30 35 42 46 Total WCDMA/HSDPA handsets 282 342 457 537 623 771 933 % of the handset market 20% 21% 25% 27% 30% 36% 42% Source: Gartner, Company data, Credit Suisse estimates 3G device availability has improved significantly in developing markets. One of the issues leading to the slower uptake of 3G services in a number of emerging markets in the past had been limited availability of 3G terminals. For example, in China, consumers did not have a lot of choice when it came to picking 3G enabled phones across different technologies (TD-SCDMA at China Mobile, WCDMA at China Unicom and CDMA EVDO at China Telecom, all covered by Credit Suisse analyst Colin McCallum). However, driven by improvement in chipset roadmap at a number of chipset vendors, 3G terminal availability has seen significant improvements. Some of the recent commentary from carriers in China clearly prove this point.

■ China Mobile has noted that device supply chain for its 3G technology (TD-SCDMA) continues to mature. Here the carrier is focusing on bringing down price points for TD-

Handset Industry 2013 Outlook 41 07 January 2013

SCDMA handsets, and it had an offering of 60 different models of TD smartphones in March 2012. Total number of smartphone models offered by carrier was around 166 in Aug 2012, of which 126 devices were priced at around Rmb1,000.

■ China Unicom noted that it has already launched a series of Rmb1,000 smartphones to accelerate WCDMA penetration.

■ China Telecom had an offering of around 580 models for CDMA EVDO handsets around mid-2012, compared to 300/500 models in 2010/2011, as it continues to focus on adoption of 3G handsets. Of these, 240 devices are smartphones. In fact, it sold 16mn smartphone units in 1H12, which was up 2x yoy. Low end 3G growth driven by improvement in 3G chipset portfolio at MTEK/SPRD. One of the most notable change in WCDMA landscape over the last year has been the rise of Asian chipset vendors. In fact, MediaTek and Spreadtrum have already made a lot of strides when it comes to improving the quality of their 3G chipsets, while RDA also has WCDMA chip on its roadmap for 2013. In addition, Qualcomm continues to focus on reference designs for the Chinese white-label manufacturers. This improvement in 3G chipset offering will continue to drive significant technology shift at white-label vendors in China as they move from GSM/EDGE based phones to 3G devices.

Handset Industry 2013 Outlook 42

Handset Industry 2013 Outlook Exhibit 47: WCDMA chipset roadmap for key vendors – significant improvement being seen at Asian vendors (MediaTek and Spreadtrum) 2010 2011 2012 2013

8260, 45nm, 1.2- 8660, 45nm, 1.2- 1.7GHz, 2 Scorpion, 1.7GHz, 2 Scorpion, Adreno220, HSPA+ Adreno220, SPA+ 7227, 65nm, 600- 7630, 45nm, 800MHz, 7227A, 45nm, 0.8- 7227T, 45nm, 1GHz, 8225, 45nm, 1-1.2GHz 8225Q, 28nm, 1 GHz, 8226, 28nm, 800MHz, 1 Arm11, 1 Scorpion, Adreno 1GHz, 1 Cortex-A5, 1 Cortex-A5, Adreno 2 Cortex-A5, Adreno 4 Cortex-A5, HSPA+ 1.5GHz, 4 Cortex A7, Qualcomm Adreno 200, HSPA 205, HSP Adreno 200, HSPA 200, HSPA 203, HSPA HSPA+ 8227/8230, 28nm, 1- 1.2GHz, 2 Krait,

Adreno 305, HSPA+

U8500, 45nm, 1GHz, 2 U9500, 45nm, 1GHz, 2 ST-Ericsson Cortex A9, ARM Mali Cortex A9, ARM Mali 400, HSPA 400, HSPA+ U6715, 65nm, 460 MHz, 1 Arm 9, HSPA modem

PXA28145/PXA281554 PXA28150, 40nm, Broadcom 40nm, 1.3GHz, 2 1.1GHz, 1 Cortex A9, CortexA9, VC4, HSPA+ Video Core 4, HSPA+ BCM2153, 65nm, 312 BCM2157, 65nm, 500 BCM21553, 65nm, 1 BCM21654, 40nm, MHz, 1 Arm11, MHz, 1 Arm11, GHz, 1 Arm11, 1GHz, 1 Cortex A9, VideoCore 3, HSDPA VideoCore 3, HSDPA VideoCore 3, HSDPA VideoCore 4, HSPA

XMM6260, 65nm, Z2000, 32nm, 1.2GHz, HSPA+ XMM6265, HSPA+

PXA968, 40nm, PXA978, 40nm, Marvell 1GHz, 1 Armv7, 1.2GHz, 1 Cortex A9, Vivante, TD, HSPA Vivante, TD, HSPA+ PXA910, 65nm, 806MHz, 1 Arm9, Vivante, HSDPA

MediaTek MT6588, 28nm, 1 MT8326, 28nm, 1.5 GHz, 4 Cortex A7, GHz, 4 Cortex A9, Power VR, HSPA+ Power VR, HSPA+ MT6575, 40nm, 1 MT6577, 40nm, 1 MT8320, 28nm, 1.5 GHz, 1 Cortex A9. GHz, 2 Cortex A9. GHz, 2 Cortex A9. Power VR5, HSPA Power VR5, HSPA Power VR5, WCDMA

SC7710 (WCDMA), SC77xx (WCDMA), Spreadtrum 40nm, 1 GHz, 1 Cortex 40nm, 1.5GHz, 2 A5, ARM Mali Cortex A7, ARM Mali, HSPA+ RDA RDA 8850, WCDMA, RDA 8860 TD

Smartphone January07 2013

Source: Company data, Credit Suisse research

43

07 January 2013 The importance of compute Historically we would argue that handset, PC and other CE devices were largely independent purchases by a consumer or corporation to fulfill a specific need. However, the growth of smartphones has now evolved to a degree whereby consumers and corporations demand access to their key digital content across multiple devices. In this context, smartphone success also needs to take into account the ability of the entire platform. Looked at from a hardware perspective, success in smartphones will be determined by the ability to simultaneously execute in the PCs and tablet market, and perhaps the TV market as well in the long term. In this new world, success will no longer be judged by category unit share alone, whether it be in smartphones, mobile phones, tablets or PCs, but in the combined compute segment. Given the increasing level of mobile connectivity, the traditional computing and mobile phone markets have collided and both industries are unlikely to ever quite be the same again. In addition, the actual business model to address the growing needs for consumers and corporates is evolving. There is the whole debate on closed versus open standards and as well vertical versus horizontal business models. Apple is clearly a pioneer on the vertically integrated model and operating on a much more closed basis than say either Android/Google and/or /Windows. Success in this market will of course ultimately be measured by the platform market share in the end markets of PCs, smartphones and tablets, all put together.

Exhibit 48: Overall compute units to grow at 22% CAGR... Exhibit 49: …while revenues to grow at CAGR of 9% 2,500 800,000

700,000 2,000 600,000

1,500 500,000

400,000

1,000 $ in in $ milions

Units in millions 300,000

200,000 500

100,000

0 0 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Smartphones Tablets PCs Smartphones Tablets PCs Source: Gartner, Company data, Credit Suisse estimates Source: Gartner, Company data, Credit Suisse estimates At stake is a significant opportunity, which we estimate could be worth $680bn in the long term (by 2015) as consumers and corporates spend this amount on buying PCs, smartphones and tablets, as shown in Exhibit 49. Further, this does not include the outlay for applications or additional software and accessories. When looked at from a platform perspective, we arrive at 4 main conclusions: Simultaneous execution across multiple product lines will be key. Historically, vendors have been able to report success by focusing on a specific feature, or product line. For example, in the mobile phone market it can be argued that Nokia and RIM enjoyed success in various capacities in the earlier days of the smartphone market. However, as compute devices (which we define as PCs, tablets, and smartphones) increasingly converge, the use case of one versus another, and potential for cannibalization exists. This is not to say that we think tablets can replace PCs or smartphones can replace any of the other two, but there is a clear recognition emerging within the industry that consumers and enterprise workers demand simultaneous access to data, applications, services and content across multiple platforms. The key differentiators across all of these will most likely be on the software side.

Handset Industry 2013 Outlook 44 07 January 2013

Apple – mastering all, but for what share? If success is to be judged in this compute market across multiple devices, the challenges facing vendors focused on a single device are significant. For now at least, Apple is materially advantaged, principally because the company’s vertically integrated structure allowing it to simultaneously address all three markets i.e. PCs, tablets, and smartphones effectively. Moreover, much of the innovation comes in software. Add to this, the broad range of “i-Services” that are built well beyond iTunes, to include the Apps Store, iAd services, iBooks and now iCloud, the company allows consumers to seamlessly access content across multiple devices. The issue is that when considered in the context of the entire compute market in volume terms Apple have a ~18% share, this will rise given their exposure to the relatively faster growing smartphone and tablet end markets towards 22% longer term. However, this is unlikely to be dominant. Should Apple want to maximize this, we retain our view that the company may want to consider launching a lower end iPhone.

Exhibit 50: Overall compute experience to revolve around iOS, Android and Windows longer term 100%

90%

80% 1 70%

60%

50%

40%

30%

20%

10% 3

0% 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Other Symbian Blackberry Windows (PCs) Windows (SP / Tablets) Android Mac OS iOS (iPad/iPhone) Source: Company data, Credit Suisse estimates 1 Apple mastering all, but for what share? For now we 2 Google/Android, monetizing growth, need to expand beyond 3 Microsoft traditional strength, can it all change with believe that Apple is materially advantaged, principally smartphone. Google is aiming to address the compute market ? Historically this platform has dominated because the company’s vertically integrated structure as well as protect and grow its search revenues through multiple the market, however with the higher exposure of allows it to simultaneously address all three markets i.e. strategies. To date Android has collectively captured significant Windows to the PC market, limited success in PCs, tablets and smartphones effectively. Moreover much volume share within smartphones – close to 70% share, smartphones and tablets this has been eroded. The of the innovation comes in software. Add to this the broad however, its share within tablets remains weak at 25%. good news is that we believe the company is range of “i-Services” that are built well beyond iTunes; to Furthermore it has seen limited traction with its Chrome OS. strategically targeting the move towards a common include an apps store, iAd service, iBooks and now Longer term it will without doubt have a robust level of share in UI, with Windows 8, which will support the new Metro iCloud; the company allows consumers to seamlessly the market based upon its smartphone exposure of the compute UI. In addition given the alliance with Nokia and level access content across multiple devices. The issue is that market. share could rise to ~50% longer term from 43% of support on the smartphone side, not to mention when considered in the context of the entire compute currently. However we believe its execution outside of Microsoft’s traditional strong hold in the corporate market in volume terms Apple have a ~18% share, this smartphones remains to be seen. In particular, the ongoing market; we believe that long term share will decline to will rise given their exposure to the relatively faster growth continuous complaints against the headaches of Android 25% compared to 30% currently. smartphone and tablet end markets to 22% longer term. fragmentation, risk alienating either consumers or developers, which are two main stakeholders in this new compute world. Source: Gartner, Company data, Credit Suisse estimates Google/Android – monetizing growth, need to expand beyond smartphones. When judging success by considering the entire compute market, Google/Android’s fortunes have been somewhat mixed. Clearly, Google is aiming to address the compute market as well as protect and grow its search revenues through multiple strategies. While Android has collectively captured significant volume share within smartphones – 67% share in 2012, much of this is low-quality share, i.e. not necessarily a loyal user base with significantly lower end phones. In addition, its share within tablets remains relatively weak at around 25% given the rapid growth seen in this market as well as Apple’s dominant share of ~65%. In addition, it has seen limited traction with its Chrome OS. Longer term, it will without doubt have a robust level of share in the overall compute market based upon its smartphone exposure, as we think its overall compute share could rise to 43% in 2012 from 27% in 2011, and towards 50% long term. However, we believe its execution outside

Handset Industry 2013 Outlook 45 07 January 2013 of smartphones remains to be seen. In particular, the ongoing complaints against the headaches of Android fragmentation means that there is a potential risk of alienating consumers and/or developers, which are two main stakeholders in this new compute world. Microsoft – traditional strength, can it all change with Windows 8? As shown in Exhibit 50, historically this platform has dominated the market, however with the higher exposure of Windows to the PC market, limited success in smartphones and tablets, this position of strength in the compute world continues to erode. The good news is that we believe the company is strategically targeting the move towards a common (UI), with Windows 8, which will support the new Metro UI. In addition, given the alliance with Nokia and level of support on the smartphone side, not to mention Microsoft’s traditional strong hold in the corporate market, we believe that long term share will decline to 30% in 2012 compared to 39% in 2011, and towards 25% long term.

Handset Industry 2013 Outlook 46

Handset Industry Exhibit 51: Apple's entry into the handset market has been a game changer, driving industry revenues and ASPs while taking incremental profits

$400 12% 1) Apple and now Samsung driving handset market growth. Handset industry revenues grew from $150bn in 2007 to $300bn $350 in 2012. Within this, Apple has accounted for nearly 60% of

10% 2013 Outlook incremental growth. Interestingly, between 2000 and 2007, the $300 market grew at a CAGR of 7%, but Apple’s entry it has grown at 1 8% $250 almost double the pace (CAGR of 14%). For 2013, we believe

that the growth will be driven by both Apple and Samsung. $200 6% 2) Industry profits moving to a new high. While overall industry $150 margins are at a new high (around 15% in 2012), the industry 4% excluding Apple and Samsung has been at a slight loss. While $100

Handset industry bn) industry ($ revenues Handset Apple and Samsung make 55% of industry revenues, we estimate

2% (%) growthrevenue Y/Y industry Handset they account for slightly over 100% of profits. $50 3) Handset ASPs continuing to rise. Given Apple’s rising share $0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E and higher ASPs, it has actually led to industry ASPs rising in 2011, a trend which has continued in 2012 and likely to continue Other Nokia Motorola HTC RIM LG Mediatek/Spreadtrum Samsung Apple in 2013.

$65 19% $250 0%

$55 2 15% 3 -1% $45

11% $200 $35 -1%

$25 7%

Handset ASP ($) ASP Handset -2%

$15 (%) growth ASP Y/Y Handset $150

Handsetoperating ($ profit bn) 3% Handset industry industry (%) OM Handset

$5 -2% -1% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E ($5)

Nokia Samsung $100 -3% ($15) HTC RIM -5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E LG Motorola Others Apple Industry margins (incl Apple & Samsung) Industry margins (excl Apple & Samsung)

07 January07 2013

Source: Company data, Gartner, Credit Suisse estimates

47

07 January 2013

Apple – the iOS and Mac ecosystem Software – leading the way with its iOS platform Few would doubt that Apple’s simultaneous success in the smartphone, tablet and higher end of the PC market is driven by products, but also by software competence. iOS when initially introduced was an innovative touch based OS. It has clearly evolved since then, with significant improvements as shown in Exhibit 52. For example, whether it was the addition of simple cut, copy and paste in iOS3, or the integration of and PC free messaging in iOS5 or recent integration and Passbook features in iOS6, we would argue that Apple has delivered consistent improvements. Continuous improvements in iOS. As shown in Exhibit 52, we have seen continuous improvements in software functionality of Apple’s iOS ranging from the introduction of the , to copy-paste, to multitasking, to cloud-based offering. iOS was already seen as a leading software platform in its own right and the one to emulate in terms of intuitive navigation of menus, ease of set up, and integration of applications, which is largely assisted by its easy synchronization with iTunes.

Exhibit 52: Continuous evolution of Apple's iOS platform since June 2007 means it has held on to its leading position Jun-07 Sep-07 Dec-07 Jul-08 Sep-08 v1.0 v1.1 v1.1.3 v2.0 v2.1 u Cover flow for Albums/Songs u iTunes Wi-Fi Music store available u "Locate Me" u Support for Microsoft Exchange ActiveSync u Genius playlist creation u Photos u Custom ring tones for $0.99 u Multiple SM Messaging and Cisco IPsec VPN u Improved iPod functionality u Calendar u Starbucks and Apple iTunes Wi-Fi iTunes u Web Clips features u functionality u Improved Podcast functionality u SMS Messaging partnership u Re-arrangeable widgets and icons u App Store u Safari web browser u Home button double-click shortcut u Customizable homepages (up to nine) u Support for MobileMe u Support for TV out u Further content management support u Multiple Calendar support u Rich HTML email u Software Development Kit (SDK) u Video orientation expanded u Google Maps u Free for iPhone users u YouTube plug-in for Safari u Widgets (Stock, Weather, Calculator, Calendar) u Wi-Fi + EDGE NetworkingNov-08 Jun-09 Apr-10 Jun-10 Sep-10 v2.2 v3.0 v3.2 v4.0 v4.1 u Enhancements to Google Maps u Cut, copy and paste u Introduced with iPad u Introduced with iPad u Game center u Several App Store changes u Multimedia messaging including pictures, u Support for landscape home screen u iPhone 4 with over 100 new features u TV show rentals ($0.99) u Enhancements to Safari audio, video u 720p HD videos available in YouTube App u Multitasking u iTunes Ping u iTunes over EDGE and 3G u MobileMe offers "Find My iPhone" option u iBook u Folders u HDR camera on iPhone 4 u Improved iPod functionality u Shake to shuffle during play in iPod u iAds u Mail - unified inbox and threading u HD video uploads to YouTube and u Apple push notification services u Enhanced camera and & photo apps MobileMe on iPhone 4 u Peer-to-peer connectivity (location) landscape mode u FaceTime calling from favorites u Expanded search capabilities u Deeper enterprise support u iBooks u UI customization u 5x digital zoom u Bing support

Nov-10 Mar-11 Jun-11 Mar-12 Jun-12 v4.2 v4.3 v5.0 v5.1 v6.0 u Mainly iPad update u New Javascript engine for Safari u Notification aggregation u support for Siri u Updated Siri- Sports, Yelp/ OpenTable u Printing u iTunes Home Sharing u iMessage between all iOS devices u Ability to delete from photo stream integration, eyes free (auto integration) u AirPlay (stream audio, video & photo over u Enhancements to AirPlay u Newsstand for aggregation of u Improved camera face detection u Facebook integration Wi-Fi) u Personal hotspot support publications u New camera app for iPad u Increased incoming call options u Multitasking u Using iPad side switch to either lock the u Camera updates (enhanced) u Genius Mixes and Genius playlists for u FaceTime over cellular screen or mute the audio u Reminders across dates and locations iTunes Match subscribers u New Maps, turn by turn, traffic, 3D u Split keyboard u Fixes issues with battery life and call presentation u Safari Reader and Reading List quality u Safari update u Twitter (single sign on) u Chinese market features (, Todoku, u PC Free (wireless sync and OTA updates) Youku etc) u PhotoStream sharing u Passbook- QR and membership center

Source: Company data, Credit Suisse research iCloud conveys strategic advantages. With the launch of iCloud in iOS5 during 2011, which allows automated wireless synchronization of the main types of digital data (excluding video) across a user’s multiple iOS and Mac devices, we believe Apple continues to lead the competition in terms of innovation and differentiation. Notable features in iOS 6 include Facebook integration, Passbook, improved browser and Siri functionality and facetime over cellular to name a few. These evolutionary improvements, with more to come, will continue to hold Apple’s operating system in the leading position. Apple demonstrates that not all browsing experiences are created equal. The statistics speak for themselves regarding Apple’s Safari browser as shown below in Exhibit 53. In fact, although Apple held only around 20% smartphone share in 2012, the vendor has consistently managed to have over 60% browsing share, way ahead of all other mobile

Handset Industry 2013 Outlook 48 07 January 2013 platforms. This proves the point that Apple’s WebKit-based Safari browser has almost become the smartphone standard for mobile Internet browsing, followed by Android.

Exhibit 53: usage share by OS is dominated by Safari

Nov 2012

Oct 2012

Sep 2012

Aug 2012

Jul 2012

Jun 2012

May 2012

Apr 2012

Mar 2012

Feb 2012

Jan 2012

Dec 2011

Nov 2011

Oct 2011

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Safari Android Opera Mini BlackBerry Other Source: NetApplications, Credit Suisse research The “i-Services” portfolio is by far the most advanced Under the services heading, we consider any aspect that a smartphone can deliver which allows some sort of differentiation. This, in itself, can become a key competitive advantage, creating a degree of stickiness for the platform. As we have reviewed Apple’s portfolio of “i-Services”, we have arrived at the following conclusions: App Store – over 700K apps, 35bn downloads and counting. With over 700,000 available apps for mobile devices (this includes over 275K apps for iPad), Apple seems to be the clear leader in terms of mobile applications content, closely followed by Android also at around 700,000 apps. The success of its apps store is also evidenced by the fact that total downloads on its store crossed the 35bn mark in October 2012 (compared with 10bn in March 2011 and 25bn in March 2012). In addition, Apple has paid over $6.5bn in cumulative payments to developers since the launch of App Store in 2008.

Exhibit 54: Total apps on Apple store has crossed 700K… Exhibit 55: …with iPad specific apps at over 275K 800,000 300,000 Within 2.5 years of launch, iPad 700,000 specific apps have already 250,000 reached over 275,000 in total on 600,000 Apple's App Store

200,000 500,000

400,000 150,000

300,000 apps of Number Total numberapps of Total 100,000

200,000

50,000 100,000

0 0

Jul-11 Jul-12 Jul-10

Oct-10 Oct-11 Oct-12 Oct-10 Oct-11

Apr-10 Apr-11 Apr-12 Apr-11

Jan-11 Jan-12 Jan-11

Jun-12 Feb-11 Mar-11 Jun-11 Feb-12 Mar-12 Jun-12 Jun-10 Feb-11 Mar-11 Mar-12

Dec-11 Dec-10 Sep-11 Sep-12 Sep-10 Dec-10 Sep-12

Nov-10 Nov-11 Nov-10

Aug-11 Aug-12 Aug-10

May-12 May-10 May-11 May-11 Source: 148apps.biz, Credit Suisse research Source: 148apps.biz, Company data, Credit Suisse research Music/Video/Books – again one of the leaders on content side. Looking at the number of songs available on the store, we see that the iTunes has over 28mn songs from major record labels such as EMI, Universal, Warner, and Sony BMG, and over 2,000

Handset Industry 2013 Outlook 49 07 January 2013 independent labels. This 28mn number is way ahead of , Google and RIM, as shown Exhibit 56. The impact of this strong music catalogue is evident from the fact that Apple reached the 8bn mark for downloaded songs in July 2009, making it the largest legal music retailer worldwide, and the number of downloads have now increased to 20bn currently. In addition, the company has been partnering with a number of film studios for movie and TV show content, and also a number of book publishers for its iBookstore; this is facilitating its global expansion.

Exhibit 56: Apple’s services offering well beyond primary competitors Feature/Metric Apple Google RIM Microsoft Amazon Application content App Store Android Market BlackBerry App World Number of apps >700,000 >700,000 >105,000 >120,000 >50,000 Book Store iBookstore r r Kindle eBooks

Music / Video content iTunes Google Music BBM Music/Video Music Amazon MP3 Store Music catalogue size (mn) >28mn >15mn >10mn >30mn >20mn Movie catalogue size ('000s) >45K a a a a TV Show catalogue size ('000s) >55K a >10K a a

Developer community Number of downloads (mn) >35,000 (as of Oct 2012) >25,000 (as of Sep 2012) >3,000 a a Revenue sharing with developers 70% 70% 70% 80% 70%

Others Advertising Strategy iAd r r r Revenue sharing with developers 70% - - - - Billing system iTunes (CC) (CC) PayPal / CC / Carrier billing CC / Carrier billing CC Source: Company data, Credit Suisse research iAd service – seeking advertising revenue. With this service, Apple allows advertisers to effectively place ads that function as fully-functional apps within another app. Should a user click the ad, it then opens the app for the ad and a variety of features are available, including games, movies, or app purchases. Apple started this service with a 60% revenue sharing agreement with developers, which was less than the 70% shared for purchase of apps. However, recently the company has increased this revenue sharing deal to 70%, similar to its revenue share for apps. We believe that this is an effort not only to partially monetize the apps ecosystem but also to attract developers to the platform. Multi product dominance – increasing collaboration between iOS and OS X While in this note, we assess the smartphone prospects for each vendor, the issue now becomes that a smartphone user may increasingly wish to consume content across multiple devices. To this end, smartphone success will also be judged against multiple product suites. Here we believe market share is not so much a function of just PCs or smartphones but across all compute devices. Here we would argue that Apple’s dominance in the tablet market as well as continuous share gains within PCs can be key competitive advantages. Indeed, success here should be judged across all form factors and can in fact prove self-reinforcing.

Exhibit 57: Apple commands share simultaneously across the major compute markets 2012 market share (%) Smartphones Tablets PCs Apple 19% 58% 5% % 0% 0% Samsung 29% 12% 4% Research in Motion 5% 1% 0% HTC 5% 1% 0% LG 4% 0% 1% Motorola 3% 1% 0% Sony 3% 0% 0% Others 28% 27% 90% Total 100% 100% 100% Source: Gartner, Company data, Credit Suisse estimates Apple is one of the few players to simultaneously have a product offering in all three compute product categories. Indeed as shown in Exhibit 57, we look at the current levels of PC, tablet and smartphone volume share for different vendors within these end markets.

Handset Industry 2013 Outlook 50 07 January 2013

What is clear is that apart from Samsung, none of its rivals (for example Nokia, HTC or LG) play in more than one or two categories. This shows that with increasing move towards a seamless compute offering, Apple may continue to hold its competitive edge over rivals in these markets. Bringing both iOS and OS X closer together with new management structure. Having a common user interface and software platform can be a competitive advantage on many levels. The look and feel of the product and user interface, shortcuts and means of navigating multiple devices can become seamless. In the recent management changes announced by Apple in Oct 2012, the company appointed Craig Federighi as head of both iOS (smartphones and tablets) and OS X (PCs). In our view, this shows that Apple may be looking to bring together both these platforms even further in an attempt to offer an increasingly seamless user experience to its smartphone, tablet and PC users. Synchronization can be key for the consumer. In addition, one advantage that Apple holds is by manufacturing the devices as well as the software, the company has become effective at synchronizing information. For example, its iCloud service had nearly 200mn users in Oct 2012 (up from 125mn in Apr 2012), which works simultaneously across all of Apples devices. Although this cloud service is something which is now also being offered by rivals ( and Microsoft SkyDrive), the ease of synchronization means that the overall experience of iCloud is still superior for Apple users. Opens up new markets. We would note historically Windows has been a dominant platform in the work place. However, whether it is the move towards bring your own device (BYOD), or the consumerization of IT as can be seen from below charts, it appears at least anecdotally, this has allowed Apple, previously a more consumer focused company, to gain traction within the enterprise.

Exhibit 58: Bring Your Own Device (BYOD) on the rise…. Exhibit 59: …as is the smartphone/tablet usage at work Do you own your own smartphone that you use for work or does work 80% In 2013, do you see yourself relying on any of the following supply you with a smartphone? 70% devices that you now use more or less? 70% 5% I own my smartphone 60% 58% 16% 52% 50% 41% Work supplies me with my 40% 38% smartphone 33%

46% 30% 25% 21% 20% Work provides me with a 20% 17% smartphone and I also have a 10% personal smartphone 10% 3% 3% 4% 4% 1% 0% I don’t have a smartphone Laptop Tablet Smartphone Desktop PC 33% Same More Less Don’t use for work

Source: iPass Global Mobile Workforce Report (Q4 2012) Source: iPass Global Mobile Workforce Report (Q4 2012) Rising consumer devices within the enterprise. iPass recently published a detailed survey of some 1,700 mobile workers across 1,100 enterprises. The trend for smartphones is increasingly clear, whereas some 66% of users had a corporate issued smartphone in 2010 and by 2011 this had fallen to 58%, and further to 49% in 2012 (Exhibit 58). In other words, increasingly, mobile workers are using a smartphone of their choice, rather than having one prescribed by their employer. The clear trend is that enterprises are increasingly allowing mobile workers to choose the smart devices that the consumer wants, as opposed to issuing them. Purchase intentions imply continued growth for Apple and Android in the enterprise. Looking forward, in terms of purchase intentions for 2013, these market adoption trends are expected to continue. iPhone leads the pack in terms of intended smartphone purchases (41%) followed by Android (22%) as shown in Exhibit 60. Interestingly, Windows Phone came in third with 8% of respondents citing an intention to purchase/receive a device, followed by BlackBerry at 5% despite the upcoming debut of

Handset Industry 2013 Outlook 51 07 January 2013

BlackBerry 10 in Jan 2013. Similarly, in tablet space, 54% of enterprise workers who plan to purchase or receive a tablet device in 2013 indicated their preference for iPad (Exhibit 61).

Exhibit 60: iPhone leads in purchase intentions at work Exhibit 61: iPad is way ahead of competition in enterprise

45% Do you currently intend to change or upgrade your 60% 54% Do you currently have, or intend to receive/purchase any 41% smartphone(s) between now and end of 2013? of the following tablets between now and end of 2013? 40% 50%

35% 40% 29% 30% 30%

25% 22% 20% 11% 11% 20% 10% 8% 7% 6% 2% 15% 0% 10% 8% 5% 5% 1% 0% iPhone 5 Android Windows BlackBerry Symbian / Phone Nokia Source: iPass Global Mobile Workforce Report (Q4 2012) Source: iPass Global Mobile Workforce Report (Q4 2012) Exposure to all segments means platform share gains will continue. When judging success of a given platform along these lines, we would note that we expect Apple’s share to expand over time, partly due to its exposure. Indeed, Apple’s exposure to the faster growing tablet and smartphone segments will mean that within this segment characterized as mobile computing, Apple will see its compute share (smartphones, tablets and PCs) to rise from 18% currently to 22% over the long term. Google – all about smartphones so far Google will continue to be a strong player in the battle of ecosystems Traction so far being driven by all smartphones. In the compute market, we estimate Google to have captured a 43% share in 2012 and given its exposure to the fast growing smartphone market, this will grow close to 50% longer term. However, we would highlight as shown in Exhibit 57 that perhaps more worryingly is the fact that it has failed to gain meaningful traction to date in other product areas. Since its introduction in 2008, Android has steadily grown in share within the smartphone market, reaching nearly 75% unit share (Exhibit 62) during Q312. Despite this rise in popularity, the OS continues to be impacted by the platform’s inherent fragmentation causing headaches for app developers and consumers alike. In addition, we would argue that while the company has attempted to expand beyond smartphones with products/services such as Google TV, Chrome OS and now possibly Google glasses, these products have yet to deliver a meaningful advantage.

Exhibit 62: Android’s smartphone share at ~75% in Q312 Exhibit 63: Android daily activations over time 80% 1,400 1,300

70% 1,200

share share 60% 1,000 1,000 900 50% 850 800 700 40%

600 550 500

30% ('000) activations device 450

400 350 20% 300

200

10% 200 160 Android daily Android Android smartphone market smartphone Android 110130

0% 0

Jul-10 Jul-11 Jul-12

Oct-10 Oct-11

Apr-10 Apr-11 Apr-12

Jan-11 Jan-12

Jun-10 Feb-11 Mar-11 Jun-11 Feb-12 Mar-12 Jun-12

Sep-11 Sep-12 Sep-10

Dec-10 Dec-11

Nov-10 Nov-11

Aug-10 May-11 Aug-11 May-12 Aug-12 May-10 Source: Gartner, Credit Suisse estimates Source: Company data, Credit Suisse research

Handset Industry 2013 Outlook 52 07 January 2013

Daily device activations continue to surge. At Motorola’s event in Sep 2012, Google noted there are around 500mn Android devices being used currently. In addition, 1.3bn Android devices were being activated on a daily basis as compared to 1bn run-rate in July 2012. Interestingly, of these 1.3bn activations, only 70K were linked to tablets, which shows all the traction for Android is being driven by smartphones and tablets remain an area of concern for the company. Android OS’ fast-paced evolution and fragmentation issues linked to that Android is the preferred OS of many handset vendors. Android remains the preferred operating system platform for a number of handset OEMs mainly due to its open source software and also due to lack of licensing fee payments to OS provider. Furthermore, Android is constantly evolving to adopt the latest technologies through frequent iterations of the OS. While both of these are inherently positive attributes, both contribute to a fragmented landscape that continues to plague the Android operating system.

Exhibit 64: Android evolution continues with the introduction of Jelly Bean (version 4.2) in Oct 2012 Sep-08 Feb-09 Apr-09 Sep-09 Oct-09 v1.0 v1.1 v1.5/ Cupcake v1.6/ Donut v2.0/2.1/ Éclair u Watch/ record videos u Improved Android Market u Optimized hardware speed u Upgraded soft keyboard/text prediction u Universal search u Updated UI u Support for CDMA/EVDO, VPNs, text to u Improved maps, exchange integration speech u Live wall papers u Free turn by turn Google navigation May-10 Jan-11 Feb-11 May-11 Nov-11 v2.2/ Froyo v2.3/ Gingerbread v3.0/ Honeycomb (for tablets) v3.1 (for tablets) v4.0/ Ice Cream Sandwich u USB u Revised UI u New UI themes (system bar, action bar, u Connectivity for USB accessories u Unified OS for smartphones, tablets and u Flash 10.1 u Extra large screen size customizable homescreens) u Resizable Home screen widgets other platforms like TV u Performance optimization u Support for NFC u Redesigned keyboards u Support for external keyboards and u Holographic UI u Integration of Chrome's V8 JavaScript u Improved copy and paste feature u Support for tablets pointing devices u Improved multitasking and richer widgets engine for browser u sensor u New connectivity options (improved Wi-Fi, u Support for joysticks and gamepads u Support for 3D and OpenGL facetracking u New audio effects keyboard over USB or ) u Updated set of standard apps like gallery, u Android Beam for NFC-based sharing calendar, contacts, email u Powerful voice input engine u Redesigned gallery app with photo editor

Jun-12 Oct-12 v4.1/ Jelly Bean v4.2/ Jelly Bean u Improved interface and home screen - u Refined and refreshed user interface 60fps u Improved camera with HDR u New u New NFC hardware and controller u Offline voice dictation interface u Updated camera app u Enhancements for international u Voice activated search engine languages u Smart app updating u Interactive screen saver mode u widgets u Share single tablet with dedicated user space Source: Company data, Credit Suisse research Broad vendor adoption leads to a wide variety of hardware form factors. Hardware differences leading to platform fragmentation on Android include screen size, resolution, inclusion of a physical keyboard (or lack thereof), processor capability, and so on. Fragmented hardware and software causes support issues for vendors and carriers as well as a more complicated application creation process for developers.

Exhibit 65: Current distribution of Android install base by platform version Cupcake (v1.5) Donut (v1.6) 0.1% 0.3% Éclair (v2.1) Jelly Bean (v4.1) 3.1% 2.7% Froyo (v2.2) Ice Cream 12.0% Sandwich (v4.0.3 - 4.0.4) Gingerbread (v2.3 25.8% - v2.3.2) 0.3%

Honeycomb (v3.2) 1.4%

Honeycomb (v3.1) 0.4% Gingerbread (v2.3.3 - 2.3.7) 53.9% Source: Android Developers (Nov 2012)

Handset Industry 2013 Outlook 53 07 January 2013

Frequent updates to Android OS further leads to fragmentation problems. As the software is controlled by Google, while the phone is manufactured by various vendors, hardware cycles do not typically coincide with software cycles on the platform. Further, due to varying hardware capabilities, most phones currently in the market either cannot support newer versions of the OS or require significant R&D spend by the vendors to iron out compatibility. As seen in Exhibit 65, there are more than 10 versions of Android in use in the marketplace. The vast majority of Android users are running Android 2.3 version (nicknamed “Gingerbread”) which was first introduced in late 2010. Less than 3% of users are running the latest version of Android (Android 4.1, known as “Jelly Bean”) due to support and compatibility issues. Developers discouraged by combination of hardware and software fragmentation While Android’s popularity within the smartphone market forces many developers to create apps for the platform, there are several points of contention with the OS that frustrate and discourage developers. A highly fragmented operating system can present many different issues for developers, as it requires frequent updating and re-writing of apps. Android’s fragmentation issues manifest both in the form of constant software updates and different hardware platforms. Developers see fragmentation as the biggest risk to Android. According to an IDC- survey of over 2,700 apps developers in mid-2011, there was a question asking what the biggest threat to the success of Android is. As seen in Exhibit 66 below, the overwhelming majority identified the fragmentation of the OS, devices, etc. as the biggest risk to the platform. A fragmented landscape makes it difficult for developers to identify and adequately serve a target audience.

Exhibit 66: IDC Developer Survey: What is the biggest threat to the success of Android?

Fragmentation of the OS, Devices, and so forth

Tablet devices haven't seen traction yet

Too many Android app stores

Pricing on Tablets too high

The Android OS is inferior to Apple iOS

I can make more money with Apple

I have my hands full with iOS and/or Android (not enough time)

0% 10% 20% 30% 40% 50% 60% 70%

Source: IDC-Appcelerator Developers Survey (Q2 2011) Variety of hardware across vendors complicates development... Android is extremely popular with smartphone vendors, as the OS can be licensed for free and the platform is open-sourced, enabling a greater degree of customization. However, such broad adoption complicates application development as each vendor creates unique hardware specifications for different phones running Android. These differences include screen size, resolution, the inclusion of a physical keyboard (or lack thereof), processor capability, and so on. The lack of consistency makes the platform difficult to write for as the user experience varies considerably from one device to another. …as does the slow adoption of new OS releases. As seen above in Exhibit 65, nearly 55% of the current Android installed base is running Gingerbread version of Android OS, which is around 18 months old. Further, many phones currently in the marketplace do not have

Handset Industry 2013 Outlook 54 07 January 2013 the technical compatibility required to upgrade to the latest software. Similar to the complications caused by a variety of hardware form factors, the slow adoption of new Android OS releases makes it difficult for developers to design apps to target all Android users. Google trying to offer a range of services Over the past decade, Google has tried to offer a range of services for wireless platforms, which have been built around its search dominance, in an effort to improve the competitiveness of its overall offering. is now catching up with Apple App Store. In March 2012, Google also launched its all-in-one entertainment suite combined with cloud offering, termed as Google Play. This service offers consumers access to over 700,000 apps, millions of songs and books collection and thousands of movies all in one place. Given this service is cloud based, all the user content is stored online and readily available without having to store them or move them from one device to another. Still early days for . After not having a music-based service, Google had launched its Music Beta service in mid-2011, which since then has been integrated into its Google Play offering under the name Google Play Music. This music service allows users to store up to 20,000 songs over the cloud. Interesting features include the ability to play music even offline (using recently played tracks), ease of collation (even across multiple computers) and synchronization and playlist creation. Also in Nov 2012, the company signed a new agreement with European music publishers which gives it access to another 5.5mn tracks spanning 35 countries, and also announced launch of ‘scan and match’ music service for free (similar to Apple but the company charges $25 per year for this) for EU users, which will be followed by a US launch later. Wider range of Google services. Apart from offering typical mobile services such as an apps store, music and messaging, one of the strengths of the Android platform has been its tight integration, with a wide range of services offered by Google. This synergy can already be seen in areas of , social networking, blogging, and search through a number of services being launched by Google (either specifically designed or customized to work on mobile devices) over the past two to three years. AdMob, Buzz and are a few examples of such kind of services.

Exhibit 67: List of other mobile services offered by Google/Android Mobile services Date of launch Details Mar 2004 Free webmail offering a search-oriented interface Google Jul 2004 Image organizer and viewer for digital photos, plus an integrated photo-sharing website Aug 2005 Free Windows and web-based application for instant messaging and VoIP Blogger Aug 2006 Blog publishing service that allows private or multi-user blogs with time-stamped entries YouTube Oct 2006 Video sharing website allowing users to upload and share videos Google Maps Nov 2007 Web mapping service application for mobile devices Mar 2009 Calling features like voicemail, call blocking/screening, call conferencing, international calls. Outbound call options available to US and international users, but incoming only available to US users AdMob Nov 2009 One of the largest mobile advertising platforms, which claimed to have more than 40bn mobile banner and text ads per month Goggles Dec 2009 Beta visual search app allowing users to take a picture and the app will bring up a description of the picture, a list of businesses nearby etc. Google Play Music May 2011 Online music streaming service with support for storing 20,000 songs Google+ Jun 2011 Launched as a social network platform, this service integrates many of other Google services like Gmail and Google Talk; user base of 400mn as of Sep 2012, of which 100mn are active users Google Play Mar 2012 Merger of Android Market and Google Music/Video services, along with cloud based support Google Drive Apr 2012 A suite of productivity applications (with 5GB of cloud storage for free, expandable on subscription) offering editing on documents, spreadsheets, presentations and more Source: Company data, Credit Suisse research Installed base rapidly growing, could be a major advantage for services. We believe that Google’s strategy behind Android will be to create a large installed base of Android

Handset Industry 2013 Outlook 55 07 January 2013 devices for ultimate access to the lucrative mobile advertising/search market. In particular, we believe the most likely approach is that Google will want to target the opportunity as being the search engine of choice on mobile devices that are Android enabled, thereby driving its potential advertising revenues and business model. With a 60-65% market share in online search, this can be leveraged in what is still a nascent mobile advertising world; this represents considerable upside potential in additional Internet advertising revenues. We estimate that Android-based smartphone shipments will grow from 220mn in 2011 to around 675mn/900mn by 2013/2015, thereby driving a significant increase in its smartphone subs base. Carrier friendliness missing in spite of carrier alliances. Although there are a number of global carriers that continue to be part of Android’s (OHA), such as , Telecom Italia, Telefonica, Sprint, KDDI, NTT DoCoMo and China Mobile, we would highlight that Android does not directly share service revenues with carriers at this stage. This suggests that carrier friendliness remains limited at best for the Android platform, especially when compared with RIM and Nokia’s strategy.

Multi product strategy, but limited success so far Google’s strategy suggests that having a commanding share in one platform or having a product in one segment is not sufficient, as such the company has set about driving a multi-product strategy. In aggregate, we would argue this is an area where Google remains disadvantaged today, relative to Apple’s vertically integrated strategy, as the experience is not exactly seamless. For example, a Samsung smartphone does not work seamlessly with a Motorola tablet and a PC. Over time, we would argue this disadvantage could fade. Motorola Mobility acquisition. Clearly, Google is interested in the mobile handset business given its $12.5bn acquisition of Motorola Mobility (MMI) in Aug 2011. More importantly, MMI was bought for its portfolio of 17,000 existing and 7,500 pending patents. How this impacts the smartphone market remains to be seen, however the move clearly allows Google to provide patent protection to its device makers. A range of new tablet launches. We believe that success in the broader compute space will be defined by a robust ecosystem and the ability to simultaneously compete across multiple devices (i.e. smartphone, tablet, and PC).

■ Google tablet has several differentiating features. In June 2012, Google announced the launch of the Nexus 7 tablet which began shipping in mid-July. The tablet is manufactured by and features a 7” form factor that weighs in at 340g. It boasts a NVidia Tegra 3 chipset with a quad core CPU and a 12-core GPU, and the 8GB version currently sells for $199. While the hardware is an improvement vs. the original Kindle Fire, we suspect that Google is subsidizing this device and hence it may not be a template other OEMs can follow.

■ Google expanding to 10” tablet market with : Following Apple’s 4th generation iPad, Google introduced its own 10” tablet the Nexus 10 in late Oct 2012. The new Google tablet boasts a 10.1” high resolution screen (2560x1600 pixels), Android 4.2 OS, a 5MP/1.9MP rear/front facing camera and is priced at $399/$499 for the 16GB/32GB models (a $100 discount to Apple’s 4th generation iPad). Outside of the Apple vs. Android user experience, one of the largest differences between the Nexus 10 and 4th generation iPad is the lack of LTE/Cellular option from Google. While the Nexus 10 offers a solid alternative to iOS, we believe it will likely consolidate the slew of 10” Android devices rather than take meaningful share from Apple.

■ Will it succeed in tablets? So far there has been limited sustainable traction for Android in terms of tablet share as shown in Exhibit 68, certainly the profitability of the vendors involved has been relatively weak. The issue has been a combination of too high a price point, lack of applications and poor user experience. We do believe that

Handset Industry 2013 Outlook 56 07 January 2013

with the improvements made to Google Play (the cloud service), the price point, design and recent improvement in available applications many of these have been addressed. As to whether this will capture material share the issue we would have is that given its spec we would believe Google are probably heavily subsidizing this device to achieve a $199 price point (for Nexus 7) meaning that this is not necessarily platform its other hardware OEMs will or can follow. Second, with Apple also now having launched the iPad mini (starting from $329) means that competition at the lower end of the tablet market will be stiff.

Exhibit 68: Tablet share by OS, CY11

Android, 33%

Apple, 58%

RIM, 1%

Amazon, 7%

Source: Company data, Credit Suisse estimates Google TV. Google TV is the smart TV platform offering launched by the company in Oct 2010 which includes video on demand, an internet browser, and internet television. To date, adoption of the product has been poor, however it shows another area through which Google aspires to expand its software and services offering. . This is currently an augmented reality project under testing in Google X Labs. The intended purpose for this project is to allow for internet use seamlessly via voice instruction, much like how Siri works today. It is still clearly in prototype form, but Google made it available for developers to purchase for $1,500 who were at its developer event in June 2012. Clearly it remains unseen whether such a compute form factor will take off, especially given the high price point, however it does strategically show Google’s desire to go address all potential compute products long term.

Exhibit 69: Google Glass prototype seen at I/O event in June 2012

Source: Company

Handset Industry 2013 Outlook 57 07 January 2013

Nexus Q dropped from lineup after poor customer feedback. Along with Android v4.1 OS and Nexus 7 tablet launch, Google had introduced a media player called in June 2012. The internet connected home media player connects to TVs, stereo systems, or just speakers and allows Android user to stream and share their content via Google Play. The device allows different Android smartphone and tablet users to stream content from Google Play Music, Movies and TV as well as YouTube to Q connected devices (TV/Stereo/Speakers). While much of the device connectivity is similar to Apple TV (Wi-Fi, Ethernet, HDMI, optical audio, micro-USB) it lacked a unique UI, and it was also priced higher at $299 vs. Apple TV at $99. Another noticeable difference was that it did not offer a similar ‘Mirroring’ for games as is offered on the Apple TV. Given poor feedback from customers, Google decided to drop this product from its offering in Oct 2012. Windows 8 – focusing on similar UI across devices The third ecosystem in this market remains Microsoft, with a 93% share in the PC market and a strong presence in consumer and enterprise markets translates into a meaningful 30% share overall today which drops to 25% longer term due to the tablet and smartphone markets growing faster than the PC market. Windows 8 software – adapting the OS to a multi-device product portfolio After a number of updated Windows Mobile versions over the last few years, Microsoft launched its completely revamped smartphone operating system in late 2010, named (WP7), which has been refreshed with WP8 launch in Oct 2012. Windows 8’s development has been focused around adapting the OS to the tablet form factor in terms of its touch interface, instant-on, and power consumption. In addition, Windows 8 is the only tablet OS that is able to run MS Office and iTunes natively and integrate with Xbox which makes the software a compelling platform for the consumer segment in addition to the business segment where Microsoft has traditionally been strong. Windows 8 aiming to create a seamless experience. Given that Microsoft’s tablet OS will be Windows, all applications designed to run on Windows for desktop or laptops will also run on tablets with Windows 8. iTunes runs on Windows, therefore, tablets running Windows 8 are the only other tablet form factor able to natively run iTunes besides Apple’s iPad. Windows 8’s ability to run iTunes, improved touch UI for tablets, and integrate functionality from elsewhere in Microsoft’s product portfolio (e.g. Xbox) will make Windows 8 a more compelling tablet platform for consumers versus other non-iOS tablets, including Android. A Windows 8 tablet could represent a competitive offering for consumers (particularly those with an Xbox connected to their primary TV). Microsoft embraces a simple, streamlined, guided experience for consumers, drawing on the design strengths of other Microsoft products like the WP8 OS and Xbox offering. Microsoft enables consumers to easily access and transfer media content in a multi-screen ecosystem, including desktops, laptops, tablets, Windows Phone 8 smartphones, and Xbox 360.

Exhibit 70: Windows Metro UI allows for a similar interface across all devices like Apple Smartphone Tablet Laptop

Source: Company, Credit Suisse research

Handset Industry 2013 Outlook 58 07 January 2013

Enterprise use case. When considering help desk calls, employee productivity, and employee satisfaction issues, the familiarity of the Windows operating system, combined with the support costs/infrastructure (e.g., helpdesk, security) needed to maintain multiple client operating systems, will likely outweigh the alternative operating systems for tablet devices from many business customers. Given that more than 4 million applications have been written for Windows, the majority being business applications, which is more than 10 times the next OS platform, and because of the added operational costs (which account for 60-70% of the TCO of a business computing device) of supporting an additional OS platform, we believe Windows 8 may prove to be an attractive tablet OS for the business vertical. Windows will ultimately be less expensive and easier to deploy/support for business users as compared with transitioning users to alternative an operating system for the tablet when factoring in application compatibility, migration, support, security, and retraining costs. Windows Phone – can WP8 revive falling customer traction and developer interest? Trying to keep up pace with Android on adding new OS features. When Microsoft announced an updated OS version (WP7.5 aka Mango) for its WP platform in mid-2011, it introduced more than 500 new features making it one of the major software upgrades. Among the new features incorporated were Bing Vision (support for visual search), improved communication features (like group contacts, threaded message view and Twitter integration), unified mailbox and support for multi-tasking and app switching. In the recent WP8 update, it has added a few incremental functionalities like new start screen, improved browser in the form of 10, app integration and ‘tap + send’ feature for sharing content.

Exhibit 71: Microsoft’s Windows Phone 8 has been improving, but will it prove enough? Oct-01 Jun-03 Mar-04 May-05 Pocket PC 2002 Mobile 2003 Mobile 2003 SE Mobile 5 u 240 x 320 Power PC devices but was also u Support for external keyboards u VGA support for 640 x 480, 176 x 220, 480 u Office Mobile with mobile PowerPoint, used for mobile phones u Bluetooth support x 480 screen resolution graphing in Excel and table/graphics for u enhanced UI with theme support u Enhanced Pocket Outlook u Landscape switching for pocket PCs Word Mobile u VPN support u Pocket Internet Explorer u WiFi support u Windows Media Player 10 u MSN messenger u Windows Media Player 9.0 u Caller ID with photo u Window Media Player 8 with streaming u MIDI support for u Enhanced Bluetooth support u Palm OS support u GPS management interface u Microsoft Reader 2 with DRM support u QWERTY keyboard support u Improved Pocket Outlook u ActiveSync

Feb-07 Apr-08 May-09 Oct-09 Mobile 6 Windows Mobile 6.1 Windows Mobile 6.5 Windows Mobile 6.5.1 u 320 x 320 and 800 x 480 WVGA support u Redesigned home screen u New UI u Improved UI with finger-touch u Remote desktop access u Threaded SMS u 6 browser u Upgrade to icon buttons from text u VoIP support u Full page zooming of Internet Explorer u Improved threaded SMS u for Windows Mobile u Enhanced ActiveSync u HTML email support for Outlook Mobile u JavaScript support on Internet Explorer Mobile u Operating System Live Update

Feb-10 Oct-10 May-11 Oct-12 Windows Mobile 6.5.3 Windows Phone 7 Windows Phone 7.5 (Mango) Windows Phone 8 u Enhanced finger-friendly UI u Upgrade of the entire OS u Support for multi-tasking and app u New start screen (resize live tile bars) u Support for multi-touch u Integration of Xbox Live and Zune services switching u Better browsing experience with IE10 u Complete touch support u Social and Productivity hubs u New communication features (group u Tap + Send for sharing photos, websites, u Tile-based UI contacts, threaded message view, Twitter contacts and other integration) u Update on the lock screen u Unified mailbox u Word flow keyboard for fun and faster u Enhanced search (Visual Search) typing u App switching u Wallet for store cards and digital coupons u Skype app integration u Rooms for privately sharing a calendar, photo album, group chat with other Source: Company data, Credit Suisse research Waning developer traction but still waiting to see the impact from WP8. Windows Phone Store now offers over 120,000 apps (up from around 40,000 at the start of 2012), which is decent improvement. But more importantly, both Apple and Android have already crossed 700K mark, which shows that the gap on the apps content is increasing. We believe this may be driven by developer interest remaining at high levels for both iOS and Android

Handset Industry 2013 Outlook 59 07 January 2013 platforms, while Windows Phone has seen falling level of developer interest (Exhibit 72). Maybe this is something which could see some revival with the recent launch of WP8 platform, but it remains difficult to see how Microsoft/Nokia can break this vicious circle.

Exhibit 72: Can WP8 revive the falling interest in Windows Phone amongst developers? 100% 'Very Interested' in developing for each platform (over time)

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Jan 2010 Mar 2010 Jun 2010 Sep 2010 Jan 2011 Apr 2011 Jun 2011 Nov 2011 Jan 2012 May 2012 Aug 2012 Nov 2012 iPhone (iOS) iPad (iOS) Android Phone Android Tablet Windows Phone BlackBerry Phone Windows 8 tablets Source: IDC Appcelerator Developer Survey (Q4 2012) Windows Phone Store still missing a number of popular apps. While we acknowledge that the total number of apps available on a store is less of a critical factor once the platform supports a critical mass of apps used by consumers on a regular basis. Although Windows Phone Store has seen an improvement in both the quantity and quality of apps being offered and is now supporting a number of popular apps like Facebook, Twitter, Kindle and Words with Friends, we would note that it still misses a number of other popular apps like Instagram, Dropbox, , Pandora radio and YouTube to name a few. Given these apps have been available on Apple and Android, this again shows apps developers’ preference to write for the latter two platforms vis-à-vis Windows Phone. Windows 8 trying to catalyze the ecosystem, but will it succeed? The Windows 8 product launch has been billed by Microsoft as the company’s most important release in a generation. The release is supposed to bring the company forward with a modern day’s operating system that is capable of renewing its efforts in the area of mobile computing. However, despite the release and the related product launches, we question the level of traction that the platform will garner in both smartphones and tablets. WP8 smartphone launches – so far so good, but is it enough? Looking at the device specifications of some of the new Windows Phone 8 smartphones launched by vendors including Nokia, HTC and Samsung (as we see in Exhibit 73), we note that Microsoft has worked upon improving some of the deficiencies in its smartphone offering. A clear example of this is support for dual core processors in all the recent WP8 smartphone models. While this is an improvement, competition is already on its way to support quad core processors like Samsung in its high end Galaxy offering. In addition, we believe that both iOS and Android continue to be way ahead of Windows Phone in terms of software functionalities and services ecosystem.

Handset Industry 2013 Outlook 60 07 January 2013

Exhibit 73: Smartphones based on Windows Phone OS following recent WP8 device launches Vendor Samsung HTC HTC Nokia Nokia Nokia Nokia Model Ativ S Windows Phone 8X Windows Phone 8S Lumia 920 Lumia 820 Lumia 810 Lumia 822

Image Technology UMTS/GSM UMTS/GSM/LTE UMTS/GSM UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM LTE/CDMA Announced Aug-12 Sep-12 Sep-12 Sep-12 Sep-12 Oct-12 Oct-12 Shipping date Exp Q4 2012 Nov-12 Nov-12 Nov-12 Nov-12 Nov-12 Nov-12 Operating System WP8 WP8 WP8 WP8 WP8 WP8 WP8 Application Processor Dual Core 1.5GHz Dual Core 1.5GHz Dual Core 1GHz Dual Core 1.5GHz Dual Core 1.5GHz Dual Core 1.5GHz Dual Core 1.5GHz RAM 1GB 1GB 512MB 1GB 1GB 1GB 1GB Memory 32GB 16GB 4GB 32GB 8GB 8GB 16GB Pixels 720 x 1280 720 x 1280 480 x 800 768 x 1280 480 x 800 480 x 800 480 x 800 Dimensions (w x h x d) (mm) 137.2 x 70.5 x 8.7 132.4 x 66.2 x 10.1 120.5 x 63 x 10.3 130.3 x 70.8 x 10.7 123.8 x 68.5 x 9.9 127.8 x 68.4 x 10.9 127.8 x 68.4 x 11.2 Weight (g) 135 130 113 185 160 145 142 Volume (cc) 84 89 78 99 84 95 95 Screen (in) 4.8 4.3 4.0 4.5 4.3 4.3 4.3 Megapixel 8.0 8.0 5.0 8.7 8.0 8.0 8.0 NFC yes yes no yes yes yes yes Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 14.8 12.0 NA 10.0 8.0 10.2 11.7 Standby time (hrs) 218 290 NA 400 330 360 400 Source: Company data, Credit Suisse research

Microsoft Surface tablets support decent feature set. Microsoft’s Surface tablets have an impressive feature set that is on-par with devices currently available in the market. Both versions (the Surface RT and the ) feature a 10.6” ClearType HD display as well as a built-in kickstand and a removable case that doubles as a keyboard. The Surface RT runs on ARM, is available in 32GB or 64GB, and is slightly heavier than the latest iPad at 652g. The Surface Pro uses an Intel Ivy Bridge Core i5 running Windows 8, will have a USB 3.0 port, and will support the use of a stylus. The Surface Pro will, however, be significantly heavier and thicker than competing tablets at 903g and 13.5mm respectively.

Exhibit 74: A slew of tablet refreshes and new product introductions through 2H12 Manufacturer Apple Apple Google/Samsung Google/Asus Amazon Amazon Microsoft Microsoft

Model iPad - 4th Generation iPad mini Nexus 10 Nexus 7 Kindle Fire HD 8.9 Kindle Fire HD Surface Windows RT Surface Windows 8 pro Announced Oct-12 Oct-12 Oct-12 Jun-12 Sep-12 Sep-12 Jun-12 Jun-12 Form factor Dimensions (w xhxd) mm 241.2 x 185.7x 9.4 200 x 134.7 x 7.2 264 x 178x 9 198 x 120 x 10.4 240 x 164 x 8.8 193 x 137 x 10.3 274.6 x 172 x 9.4 274.6 x 173 x 13.5 Volume (cc) 421 194 423 247 346 272 444 641 Weight (gm) 652 308 603 340 567 395 676 903 Display size (in) 9.7 7.9 9.7 7.0 8.9 7.0 10.6 10.6 Resolution 2048 x 1536 1024 x 768 2560 x 1600 1280 x 800 1280 x 800 1280 x 800 1366 x 768 1920 x 1080 Core internals A6X chip w ith quad core Dual-core A5 1.7 Ghz Dual Core Quad Core Tegra 3 1.5 Ghz Dual Core 1.2 GhzDual Core ARM Ivy Bridge Core i5 Processor graphics Operating system iOS 6 iOS 6 Android 4.1 Android 4.1 Android 4.0 Android 4.0 Window s RT Window s 8 Pro Memory (RAM) NA NA 2 GB 1 GB 1 GB 1 GB 2GB 4GB Storage (flash) 16/32/64 GB 16/32/64 GB 16/32GB 8/16 GB 16/32GB 16/32GB 32/64 GB 64/128 GB Features Cellular technology 4G LTE / 3G 4G LTE / 3G No No 4G LTE / 3G No N/A N/A Rear Camera Yes Yes Yes No No No Yes Yes Camera MP 5 MP / 1080p Video 5 MP / 1080p Video 5 MP / 1080p Video 1.2 MP / 720p Video 1.3 MP No 720p HD 720p HD + TruColor Front-facing camera (MP) 1.2MP HD Camera 1.2MP Camera 1.9MP HD Camera Yes No No 720p HD 720p HD + TruColor Wi-Fi 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n Yes 802.11a/b/g/n 802.11a/b/g/n GPS Yes Yes Yes Yes Yes NA N/A N/A Bluetooth 4.0 4.0 4.0 Yes Yes NA Yes Yes NFC No No Yes Yes No No No N/A Battery life (hrs) 10 10 7 8 11 11 N/A N/A USB No No Yes Micro USB Micro USB Micro USB Full size USB 2.0 Full size USB 3.0 Application Store Apple App Store Apple App Store Google Play Google Play Amazon Appstore Amazon Appstore Window s Store Window s Store Price $499 - $899 $329 - $659 $399 - $499 $199 - $249 $299-$499 $199 $499 - $699 N/A Source: Company data, Credit Suisse estimates

Handset Industry 2013 Outlook 61 07 January 2013

Windows 8 portfolio may be see limited traction given price points and competition. Microsoft has launched a massive marketing campaign to promote Windows 8, the Surface tablet, and Windows Phone 8, reportedly with a budget as high as $1.8bn and an expectation of generating 1.6bn impressions. Management believes that the ramp of Windows 8 products will be fairly quick in the coming holiday season. The company launched its new operating system on 60 model of products launched including desktops, laptops, ultrabooks, tablets, and smartphones (from Nokia, HTC, and Samsung). While the product set is extensive and spans the entire compute market, we see limited impact in the overall compute and tablet markets given the price points in both segments (as highlighted in Exhibit 74). Within tablets, $499 as starting price for the tablet with an additional $100 for the keyboard places Microsoft’s Surface in the same price point range as Apple’s iPad. While Surface has some unique features compared to other tablets, past Android tablet launches have shown us that it is very difficult to compete with iPad in the same price range. In addition, Microsoft will also have to compete with iPad mini and a number of Android tablets (with screen size ranging from 7” to 10”).

Handset Industry 2013 Outlook 62

Handset Industry 2013 Outlook Exhibit 75: Windows 8 portfolio – pricing remains a challenge for Microsoft in ultrabook and tablet markets

RAM SSD HDD Screen Price $400- $700- $1000- Vendor # Models Ultrabook Laptop Tablet Hybrid Desktop (in GB) (in GB) (in GB) (inches) (US$) < $400 $700 $1000 $1500 > $1500 NA Acer 8 1 3 1 1 2 6.0 101 710 16.6 1,063 0 0 5 1 2 0 Asus 7 0 2 0 4 1 3.7 139 826 13.3 1,149 0 1 0 0 1 5 Dell 8 2 1 2 0 3 6.4 160 514 16.2 966 0 2 1 2 1 2 HP 9 1 3 0 1 4 8.0 32 1024 17.4 878 0 3 3 3 0 0 Lenovo 5 0 3 1 1 0 4.0 256 209 11.8 829 0 1 3 1 0 0

Microsoft 2 0 0 2 0 0 3.0 NA 96 10.6 499 0 1 0 0 0 1 Samsung 9 0 1 2 3 3 4.0 72 413 15.7 1,057 0 0 3 2 1 3 Sony 4 0 3 0 0 1 5.3 128 667 15.5 1,054 0 0 3 1 0 0 Toshiba 4 0 4 0 0 0 7.0 80 667 14.0 892 0 0 3 1 0 0 Vizio 4 0 2 0 0 2 5.5 192 1024 20.2 1,209 0 0 1 2 1 0 Total/Average 60 4 22 8 10 16 5.5 114.6 652.9 15.5 991 0 8 22 13 6 11 Average Price 1,362 910 649 879 1,122 High Price 1,649 1,599 850 1,199 1,900 Low Price 1,199 499 499 699 449

1) Microsoft making a major marketing push around Windows 8. Microsoft has launched a massive marketing campaign to promote Windows 8, its Surface tablet, and Windows Phone 8 OS, expecting to generate 1.6bn impressions. Management believes that the ramp of Windows 8 products will be fairly quick in the coming holiday season. 2) Broad product portfolio launch. Microsoft released Windows 8 in late October and so far there are at least 60 models of products launched running on the new system, including desktop, laptop, ultrabooks, tablets. Additionally we have seen smartphone launches from 3 major handset vendors so far – Nokia, HTC and Samsung. The broad portfolio launch shows OEM’s embracement for the new ecosystem. 3) Limited stimulation on PC market. While the successful launch of Windows 8 has gained decent attraction from media, we think its impact on the PC market growth will be limited due to the high price points of Windows 8 products. Most ultrabooks are priced above $1,000, which is on par with Mac Air and much higher than iPad. Without meaningful discount compared to Apple’s products, we think ultrabooks and laptops are hard to compete with and gain traction from consumers. 4) Tablet pricing remains a challenge. A $499 price for the tablet with an additional $100 for the keyboard make Microsoft’s Surface tablet in the same price point range of iPad. While Surface has some unique features compared to other tablets, past Android tablet launches have shown us that it is very difficult to compete with iPad in the same price range. We remain cautious on the outlook of Windows 8 tablet sales given the dominant position Apple has in the 10” market, introduction of iPad Mini (8” screen) and aggressive pricing from 7” Android tablets.

07 January07 2013

Source: Company data, Credit Suisse estimates

63

07 January 2013

BlackBerry on a slide – can BB10 revive it? BlackBerry’s market share in the overall compute market continues to slide down (from 7% in 2010 to 6%/3% in 2011/2012) given sharp declines in the smartphone market along with the weak traction for its PlayBook device in the tablet market. Having already seen a number of delays in the launch of its new smartphone operating system, the company has finally announced that it is planning to launch its first two smartphones based on the new BB10 platform in Jan 2013. Although there are limited details at this stage around these devices, we have had a detailed look at the videos/reviews of the new OS and how it works on BlackBerry Dev Alpha smartphone (released only for developers). Although we acknowledge that the company is promising a number of improvements in its new OS, we are skeptical on the future of BlackBerry software as its BB10 OS may prove to be too little too late as the competing platforms in the market already support most of the new features. Improvements coming with BB10, but maybe too little too late Based on QNX, RIM’s new management believe that the new BB10 OS could make the company’s portfolio competitive once again. While BB10 is still not available, the OS has made a few appearances at developer events in the last few months, and although we acknowledge that the new OS shows marked improvement vs. previous versions, we still believe that it faces fierce competition from existing platforms such as Android and iOS, given most of the features offered by new BB10 is already being offered by rivals, which also benefit from presence of a strong ecosystem around their platforms. Some of the software features supported by BB10 are: Introducing ‘Flow’ with unified Hub application and ‘Peek’ feature. Within BB10, the company is planning to introduce an improved UI which allows for seamless integration of and notifications. It also allows for improved flow between screens and applications (fading animation as one flicks from one screen to another). The BlackBerry Hub app unifies all notifications from emails, texts, BBMs, third party and social media messages in one place and allows users to ‘peek’ at those notifications by sliding from left to right (but not completely) without having to open the Hub application.

Exhibit 76: RIM’s BB10 OS shows marked improvement Exhibit 77: View of ‘Peek’ and ‘Active Frames’ on BB10

Source: Company Source: Company Active Frames on homescreen. As shown on Exhibit 76, the main homescreen on BB10 allows users to have 16 apps on the screen at a time, with the option of adding additional pages (similar to Android and iOS). Also users can save upto a maximum of 8 ‘Active Frames’ (maximum of 4 on one single screen) which are essentially mini-apps, which give summarized information from a particular app and keep running in the background for latest updates. True multi-tasking with ‘Cascades’. With apps running in the background, BB10 offers a true multi-tasking on a smartphone/tablet. While difficult to gauge the impact on battery,

Handset Industry 2013 Outlook 64 07 January 2013 the demos show seamless switching between applications without start/stop lags, a feature still not available on some platforms. Also ‘Cascades’ feature allows for quick multitasking from within apps by showing all the app’s layers stacked up like a visual trail. BlackBerry Balance for personal and work modes. Sweeping down on screen of the device allows a user to switch between personal and work modes, fully sandboxed partition (Exhibit 78). This gives enterprise complete control over content saved on the work section of the device, along with full privacy for the user on the content stored on the personal mode. Improved touch keyboard. Given its history of strong keyboard design, RIM introduced a new keyboard that is adaptive. The keyboard features large keys, easy one hand typing (predictive text), and gestures commands (like swiping the keyboard to delete or jump to numbers/symbols).

Exhibit 78: ‘Balance’ partitions personal & work content Exhibit 79: A look at ‘Cascades’ and improved keyboard

Source: Company Source: Company Refreshed browser. RIM has also refreshed the browser, which is based on Webkit and also supports its new ‘peek’ feature and an inbuilt reader mode, which makes reading more enjoyable by stripping out advertisements and other clutter from a webpage. ‘Time Shift’ mode in camera. BB10 will allow users to adjust the photo frame back in time. An example is taking a photo while someone blinks, and being able to adjust the frame in time to a desired point (eyes open). BB10 has ambitions beyond smartphones and tablets RIM has also demonstrated the ability to port BB10 outside of just smartphones and tablets, as it can be integrated into cars (demo included a Porsche with integrated BB10). The integrated design could allow for cars to receive over the air software upgrades. In fact at RIM’s BlackBerry World event in May 2012, CEO noted that 60% of all cars already use the QNX platform, which forms the core of BB10, and there is a clear trend towards ‘connected car’ market. Trying to expand the ecosystem, but BB App World is #4 in terms of apps One of the critical measures that will be key in BB10’s success or failure will be the support from developer community, and quality of ecosystem around BB10 platform. While we acknowledge that it remains to be seen what level of developer support BB10 enjoys when the platform is officially launched in Jan 2013, we would note that with BB7 and predecessor platforms, apps support was quite weak. Also revamping its BlackBerry App World with its OS. After first launching its app store in April 2009, which has not met with a lot of success, RIM provided a much needed

Handset Industry 2013 Outlook 65 07 January 2013 improvement in an upgraded version of BlackBerry App World. In the new version demoed in Sep 2012, the app store has similar look and feel to Google’s Play Store giving users option to scroll through a vertical list of apps, and a carousel at the top placing certain apps under temporary spotlight. BlackBerry App World only has >105K apps vs. 700K for Apple and Android. One of the important things to consider is that even after 3.5 years since launch, BlackBerry App World had only over 105K apps (as of Sep 2012) as compared to Apple and Android, both of which boast of over 700K apps currently, which shows the gap between these platform when it comes to support from developer community. Although RIM has announced a number of partnerships in 2012 with major developers to issue BB10 specific apps, we remain of the view that with a new platform rolling out, developers would remain skeptical in terms of allocating their resources towards writing apps for BB10, as can be seen from Exhibit 72 which shows that developer interest in BB platform has fallen from 21% in Nov 2011 to 9% in Aug 2012. In addition, according to Flurry Analytics, the percentage of new projects built by developers per mobile platform within Flurry continues to remain at a mere 1% in Q212 (Exhibit 80), with iOS still maintaining its leading position with 67% share. Also, yoy growth rate per platform for BlackBerry projects in Q2 2012 was only 13%, much lower than iOS at 66%, Android at 82% and Windows Phone at 521%. Some of the developer partnerships announced by RIM are:

■ Gameloft: Gameloft announced that it will issue 11 new games on the BB10 platform including Shark Dash, The Oregon Trail, Nova 3, and Ice Age.

■ Pixelmags: Enables consumers to gain access to a number of digital publications and magazines on mobile devices. As a part of the partnership with RIM, Pixelmags will offer all BB10 users 10 free min a month to all of its digital content.

■ Mippin & Appcelerator: RIM is also working with app creation platforms Mippin and Appcelerator to help developers create apps on their BB10 platform. Mippin has about 40K apps on its platform, while Appcelerator has about 50K.

■ Citrix: In combination with BB10 rollout, Citrix is enabling full remote log in on BB10 devices. A user is able to connect the tablet/smartphone to a keyboard and monitor and enable secure remote.

Exhibit 80: New project starts for BlackBerry at Flurry remains low at mere 1% in Q2 2012

New Project Starts at Flurry (Q2 2011) New Project Starts at Flurry (Q2 2012) Windows BlackBerry, Windows BlackBerry, Phone, 1% 1% Phone, 4% 1%

Android, 27% Android, 28%

iOS, 67% iOS, 71%

Source: Flurry Analytics (Q2 2012)

Handset Industry 2013 Outlook 66 07 January 2013 Smartphones – winners and losers The significant market opportunity associated with smartphones has not gone unnoticed and is attracting a raft of new competitors. The fact that the market is quickly approaching the 1bn unit mark and $270bn+ in size is attracting more competitors from adjacent technology segments, as smartphones provide a computing experience that, to a degree, overlaps with PCs, netbooks and notebooks. Chipset companies such as Qualcomm can deliver scale to all OEMs, while reliable high quality operating systems such as Android and Windows Phone make software expertise less of a barrier. These factors break down barriers to entry and accelerate the competitive dynamics in the industry. A rising market will lift all players, but what investors really care about is who will dominate. In addition, market share gains should no longer be viewed in the traditional sense of simply higher volumes, or by hardware design and technology alone. Now, the ability to monetize services needs to be addressed. Also, is a vertically integrated business model such as Apple/RIM more or less viable versus the horizontal considerations proposed by Android? The final question is, therefore, what is needed to succeed in this ‘ever changing smartphone world’? Against this backdrop, the key issue then becomes what it takes to win the smartphone market. We have already discussed in the previous section the importance of platforms and the overall compute market. We believe that for smartphone manufacturers, there are nine key success factors, which are highlighted in Exhibit 81. We rank each vendor with a score out of 10 for each of these metrics objectively. We also recognize that many vendors are currently in a state of , with continually evolving strategies and, as such, have sought to try to quantify the maximum scope for improvement. Ultimately, our conclusions shape our view as to how each vendor is positioned for the market evolution, and which vendors are likely to take share in the smartphone and associated services profit pools. We outline our key conclusions for each vendor in the industry in this section.

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Handset I Exhibit 81: Credit Suisse smartphone vendor scorecard – Apple and Samsung lead in 1st and 2nd place respectively Smartphones Weighting Apple Samsung Nokia HTC Huawei Motorola Sony ZTE LG RIM Lenovo ndustry Software 25% 9.0 7.2 7.5 7.2 7.2 7.2 7.2 7.2 7.2 5.3 7.2 Services 15% 8.4 7.4 6.0 7.4 7.4 7.4 7.4 7.4 7.4 5.6 7.4 Cloud 5% 9.5 5.0 4.5 5.0 5.0 5.0 5.0 5.0 5.0 2.0 5.0

2013 Outlook Product Portfiolio 15% 8.0 8.0 5.0 7.0 5.0 5.5 5.5 5.0 4.0 4.0 3.0 Distribution & Supply Chain 10% 9.0 8.8 7.5 5.3 6.5 4.5 3.3 5.5 3.5 6.5 2.3 Compute Convergence 5% 10.0 6.5 0.0 2.0 3.0 2.0 4.0 3.0 2.0 3.0 4.0 Brand 10% 9.0 8.0 5.5 4.5 2.5 3.5 4.0 2.5 3.0 6.0 1.5

IPR 10% 6.0 5.5 9.0 2.0 5.0 6.5 4.0 4.0 3.5 4.5 1.0 Chipset efficiency 5% 7.0 7.0 6.0 4.0 5.5 5.5 3.5 3.0 5.0 4.0 1.0 Total Score 100% 8.6 7.3 5.8 5.7 5.6 5.6 5.5 5.4 5.0 4.8 4.5 % score 86% 73% 58% 57% 56% 56% 55% 54% 50% 48% 45% Overall Rank 1 2 3 4 5 6 7 8 9 10 11

Unit share (2012E) 18.9% 29.1% 5.2% 4.5% 3.9% 2.7% 3.3% 3.8% 3.6% 4.6% 2.9% Rank 2 1 3 5 6 11 9 7 8 4 10 Value share (2012E) 37.9% 27.0% 3.4% 4.5% 2.2% 2.7% 3.0% 2.1% 2.6% 3.3% 1.6% Rank 1 2 4 3 9 7 6 10 8 5 11 Source: Gartner, Company data, Credit Suisse estimates Note: All scores are based on a scale of 1 to 10, with 10 being the best, and 1 being the lowest score Scorecard methodology: We believe that there are 9 key metrics in Huawei: Huawei ranks #5 with weak scores in Cloud, Compute smartphone industry today. As such, we have ranked smartphone vendors Convergence and Brand being offset by reasonable scores for distribution on each of these metrics. In addition, we have weighted each metric and Product Portfolio. Relative to the company’s #9 position in terms of depending on the relative importance to arrive at our score for vendors: value share, the company’s #5 ranking suggests share gains ahead. Apple: Apple maintains its #1 rank with a score of 8.6/10. Apple scores Motorola: Motorola scores #6 also with mediocre scores across all metrics. very high on Software, Services, Cloud offering and Compute Convergence, While the company gets a Software score in-line with Android peers, it along with strong Brand and Distribution scores. We believe areas where scores poorly on Cloud given the lack of a meaningful offering. there is scope for improvement are IPR and Chipset Efficiency. Sony: Sony, following the split of the Sony-Ericsson JV ranks #7 on our Samsung: Samsung ranks #2, as the company benefits from its broad scorecard and despite being focused on Android, the vendor suffers from portfolio across price points, strong distribution, Brand and Android focused limited distribution, lack of a Cloud offering and a weak IPR position. OS strategy. A differentiated Services offering and IPR remain weak points. LG: LG ranks at #9 (after ZTE at #8) on our scorecard with particularly Nokia: Nokia maintain its position at #3, driven by strong distribution and weak scores in Cloud, Compute Convergence, Brand, Distribution, and IPR. IPR, coupled with an improving software and services offering as the This limits a share recovery in our view. company transitions its smartphone portfolio to Windows Phone. The lack of a cloud offering and compute convergence remains major shortcomings. RIM: RIM slides down to #10 position with strength in Distribution being more than offset by a weak Cloud offering, IPR, Chipset, Compute HTC: HTC ranks #4 as the company gets mediocre scores across most Convergence position, and Software position (pending the launch of BB10 metrics and weak scores on IPR, Cloud, Brand and Compute Convergence. devices in early 2013). This suggests continued share loss ahead.

07 January07 2013

Source: Gartner, Company data, Credit Suisse estimates

68

07 January 2013

Apple – maintaining its share in fast growing market More than five years after the first iPhone launch, we believe that few handset vendors come close to the quality of its hardware, software, and services of the Apple product. In particular, we believe the success of iTunes and App Store are examples of the potential of new initiatives like iBooks and iAd. With Apple’s growing ecosystem of services further enhanced by iCloud, consumer attraction and developer loyalty remains strong. The iPad and its success also confirms the affinity of Apple users and will likely serve to keep Apple’s market share stable in the smartphone space, something that is atypical in the handset space. These factors are key to our determination of Apple’s first place ranking in our scorecard of smartphone vendors. Despite the strong growth in the low end of the smartphone market, we believe that Apple will maintain its global smartphone share at around 19-20% over 2012/2013, driven by distribution led growth especially in international markets. We would highlight several key drivers in favour of Apple’s ability to maintain its smartphone share: Exhibit 82: Apple’s smartphone share by region – maintaining its share at around 19-20% Apple Share 2010 2011 2012E 2013E Apple Units (mn) 2010 2011 2012E 2013E North America 23.5% 30.8% 38.0% 38.0% North America 16.9 33.0 45.9 51.6 Western Europe 17.6% 21.8% 24.5% 26.5% Western Europe 15.1 21.2 27.9 35.1 Japan 15.5% 20.7% 24.0% 28.0% Japan 2.8 5.2 7.7 10.0 China 6.4% 9.9% 11.8% 13.0% China 1.8 7.7 23.1 37.5 India 0.3% 2.5% 1.3% 1.5% India 0.0 0.3 0.3 0.6 Korea 23.2% 12.6% 7.0% 12.5% Korea 1.7 2.6 1.5 3.0 Other APAC 20.5% 26.0% 24.0% 29.0% Other APAC 6.0 12.7 17.3 30.1 Brazil 7.1% 10.2% 10.5% 13.0% Brazil 0.4 1.0 1.9 3.5 Mexico 6.8% 8.4% 8.5% 12.0% Mexico 0.2 0.8 1.3 2.7 Other LatAm 4.4% 4.0% 6.3% 7.0% Other LatAm 0.4 0.6 1.5 2.6 Russia 7.8% 5.8% 6.0% 8.0% Russia 0.3 0.5 0.9 1.7 Other Central & E. Europe 4.6% 7.4% 7.5% 10.0% Other Central & E. Europe 0.4 0.9 1.5 2.9 Middle East & Africa 3.2% 9.9% 9.8% 12.0% Middle East & Africa 0.6 3.0 4.5 9.3 Global smartphone share (%) 15.6% 18.9% 18.9% 19.5% Global smartphone share (%) 15.6% 18.9% 18.9% 19.5% Smartphone Units (mn) 46.6 89.3 135.2 190.7 Smartphone Units (mn) 46.6 89.3 135.2 190.7 Source: Gartner, Company data, Credit Suisse estimates Innovation on multiple fronts. Aside from just the company’s differentiation on software, we are of the opinion that perhaps Apple’s key competitive advantage in the smartphone segment is the ability to complement this with its vast product line up i.e. the iPad, Macs, as well as a potential move into the TV market long term. This creates stickiness to the platform that few others can replicate. Carrier expansion – next 50 carriers in EMs could add over 75mn units per year. Having looked at the telecom market by carrier, we create a list of top 50 carriers in EMs (in terms of mobile subscriptions) where Apple still does not have any carrier relationship for selling the iPhone. Using the framework below, we estimate that addressing these carriers is likely to drive an incremental 75mn iPhone units annually for Apple in the long term. ■ Top 50 unaddressed carriers in EMs support 1.8bn mobile subs. Put together, these top 50 carriers account for 1.8bn mobile subscriptions, as we show in Exhibit 84. We expect this number to grow to 2.3bn by 2015. As a reminder, 2.3bn subscriptions will account for over 35% of the global subscriber base in 2015. This shows that Apple can significantly expand its opportunity in EMs by simply addressing these carriers. While the iPhone is selling with China Unicom and China Telecom, we expect distribution to possibly expand further covering China Mobile at some point in future. Clearly, China Mobile is the largest carrier here with over 700mn subscriptions and it remains to be seen how and when Apple will address such an important carrier.

Handset Industry 2013 Outlook 69 07 January 2013

Exhibit 83: iPhone is now selling with over 250 carriers in over 105 countries Quarterly progression of number of carriers and countries where iPhone is being sold Calendar quarter # of countries # of carriers Q2 2012 >100 >250 Q1 2012 >100 >230 Q4 2011 Q3 2011 105 230 Q2 2011 105 228 Q1 2011 90 186 Q4 2010 90 185 Q3 2010 89 166 Q2 2010 88 154 Q1 2010 88 151 Q4 2009 86 Added 17 new carriers Q3 2009 80+ Q2 2009 80+ Q1 2009 81 Q4 2008 70 Q3 2008 51 Source: Company data, Credit Suisse research

■ High end of handset market is around 15% of industry volumes. We estimate that the high end of the handset market (devices priced at more than $400) will account for 15% of total volumes in 2012. Based on a subscription base of 2.3bn users not currently addressed by Apple, and assuming a 50% replacement rate for high-end devices, we estimate that Apple has the potential to address an incremental 175mn subscribers by extending its relationships for iPhone with these top 50 carriers in EMs.

■ Around 75mn incremental iPhone units annually. We estimate the iPhone to have around 45% market share in the handset market priced at more than $400. Using this, we work out that Apple can potentially sell around 75mn iPhones per year if it starts supplying these 50 carriers as seen in Exhibit 84.

Exhibit 84: The next 50 carriers could add over 75mn units per year Additional iPhone Opportunity with top 50 unserved carriers Long term # of subscriptions at top 50 carriers not covered by Apple (in emerging markets) 2,306 % of global subscriptions 37%

Handsets at > $400 ASP as % of total market 15% Handset replacement rate (%) 50% Opportunity from expanding distribution in underserved markets 176

Apple's market share in handsets > $400 ASP (%) 44% Potential opportunity for Apple (mn) 76 Source: Credit Suisse estimates A low end iPhone at some point? We maintain our view that Apple at some point will need to consider a lower price product for several reasons: ■ Saturation at some point in the high end. Apple has gained significant smartphone share over the period 2007-2012 and we believe the company is likely to maintain its smartphone share at around 19-20% going forward. However, with Apple already having around 60-70% share in the $500+ smartphone segment, which we assume to remain stable going forward, we believe that iPhone volumes at more than $500+ ASP segment could peak in the range of 150mn units per year. Although we assume some share gains (in the range of 15-20%) for Apple in the $350–$500 ASP market driven by older discounted iPhone models (iPhone 4/4S), we still believe that strong growth in the lower end of the smartphone market will result in declining smartphone share for

Handset Industry 2013 Outlook 70 07 January 2013

Apple in the long term. Given that we expect the smartphone market in the price range of $200-350 to grow from 165mn in 2011 to over 325mn by 2015, we believe it will be difficult for Apple to ignore this segment of the market much longer.

Exhibit 85: Apple’s share may peak at 20% in the absence of a low end iPhone model Global smartphone units (mn) 2008 2009 2010 2011 2012E 2013E <= $50 0 1 1 0 0 0 $50 - $100 0 0 6 5 7 21 $100 - $150 0 8 26 24 36 61 $150 - $200 5 20 48 59 93 160 $200 - $250 17 15 55 72 115 139 $250 - $300 20 24 18 40 64 74 $300 - $350 19 36 26 52 67 77 $350 - $400 23 11 23 32 37 45 $400 - $450 5 9 29 42 58 76 $450 - $500 29 9 14 29 44 62 > $500 21 40 53 119 195 259 Total 139 172 299 473 716 976

Apple share (%) 2008 2009 2010 2011 2012E 2013E <= $250 0% 0% 0% 0% 0% 0% $250 - $300 0% 0% 0% 0% 0% 0% $300 - $350 0% 0% 0% 0% 0% 6% $350 - $400 9% 0% 6% 5% 10% 20% $400 - $450 0% 0% 0% 5% 10% 20% $450 - $500 0% 0% 24% 10% 17% 18% > $500 45% 63% 79% 69% 61% 58% Total 8% 15% 16% 19% 19% 20% Source: Company data, Credit Suisse estimates

■ Android now selling nearly 4:1 vs. iPhone. With Android smartphones having sold nearly as much as 4x vs. Apple iPhone in 9M2012, we believe Apple will keep a close eye on competition from Google, not only in the smartphone space but also tablets. Indeed as we discuss in an earlier section, we note that Apple’s share of the compute market will be only 22% in volume terms long term in spite of success in smartphones/tablets, which means that the most practical means of gaining further share will be through a low end product.

Exhibit 86: Android smartphones have outsold Apple by nearly 4:1 so far in 2012 150

125

100

75

50

25 Number of smartphones shipped per quarter (mn) quarter per smartphones of Number shipped

0 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Android smartphone units (mn) Apple smartphone units (mn) Source: Gartner, Credit Suisse research

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Samsung – targeting all price tiers, a strong #2 We expect the strong smartphone growth seen by Samsung in 2011/2012 to continue and believe the company will capture significant volume share within the industry. We believe the company can achieve smartphone share of 32% by 2013 given several factors: Exhibit 87: Samsung’s smartphone share gains to continue into 2013 Samsung Share 2010 2011 2012E 2013E Samsung Units (mn) 2010 2011 2012E 2013E North America 9.8% 15.7% 26.5% 30.6% North America 7.1 16.8 32.0 41.5 Western Europe 9.6% 22.9% 39.0% 41.5% Western Europe 8.3 22.2 44.5 55.0 Japan 1.8% 6.3% 8.0% 17.5% Japan 0.3 1.6 2.6 6.3 China 4.4% 18.8% 17.5% 20.7% China 1.2 14.6 34.4 59.6 India 5.0% 25.1% 43.5% 42.5% India 0.5 3.3 9.0 17.3 Korea 45.4% 55.7% 62.5% 57.5% Korea 3.2 11.4 13.1 13.8 Other APAC 8.4% 16.3% 32.0% 35.5% Other APAC 2.5 7.9 23.1 36.8 Brazil 9.6% 17.0% 37.5% 40.0% Brazil 0.5 1.6 6.7 10.9 Mexico 12.1% 17.3% 25.0% 32.5% Mexico 0.4 1.6 3.8 7.3 Other LatAm 9.9% 20.6% 37.0% 42.5% Other LatAm 0.9 3.1 8.9 16.0 Russia 2.5% 12.9% 37.0% 39.0% Russia 0.1 1.1 5.9 8.2 Other Central & Eastern Europe 2.8% 6.3% 46.5% 48.5% Other Central & Eastern Europe 0.3 0.7 9.3 14.0 Middle East & Africa 1.1% 8.0% 32.5% 37.0% Middle East & Africa 0.2 2.4 15.0 28.7 Global smartphone share (%) 8.5% 18.7% 29.1% 32.3% Global smartphone share (%) 8.5% 18.7% 29.1% 32.3% Smartphone Units (mn) 25.4 88.3 208.1 315.3 Smartphone Units (mn) 25.4 88.3 208.1 315.3 Source: Gartner, Company data, Credit Suisse estimates A broad smartphone portfolio with some innovations. Samsung’s product portfolio includes a broad range of devices across various price points. The company has seen success both in the entry level (Galaxy Ace, Pocket, Music) and high end (Galaxy SIII, Note II) under the banner of its Galaxy branded smartphones. In addition, the company has also enjoyed success in its experiment with launching bigger screen size smartphones like Galaxy Note II which supports a 5.5” touchscreen. Also driven by the success of its Galaxy SIII smartphone, it has recently introduced Galaxy SIII mini aimed at mid-end of the market as the device supports smaller screen size (4” vs. 4.8” on Galaxy SIII) and 1GHz dual core processor (vs. 1.4GHz quad-core used in Galaxy SIII).

Exhibit 88: Samsung has a broad range of smartphone offerings Vendor Samsung Samsung Samsung Samsung Samsung Samsung Samsung Model Galaxy Discover Galaxy SIII mini Galaxy Music Duos Galaxy SIII Galaxy Pocket Duos Note II Ativ S

Image Technology UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM/LTE UMTS/GSM UMTS/GSM/LTE UMTS/GSM Announced Nov-12 Oct-12 Oct-12 Sep-12 Aug-12 Aug-12 Aug-12 Shipping date Nov-12 Nov-12 Exp Dec 2012 Sep-12 Sep-12 Sep-12 Exp Q4 2012 Operating System Android 4.0 Android 4.1 Android 4.0 Android 4.1 Android 2.3 Android 4.1 WP8 Application Processor 800MHz Dual Core 1GHz 850MHz Quad Core 1.4GHz 832MHz Quad Core 1.6GHz Dual Core 1.5GHz RAM 512MB 1GB 512MB 2GB 512MB 2GB 1GB Memory 4GB 16GB 4GB 16/32/64GB 3GB 16/32/64GB 32GB Pixels 320 x 480 480 x 800 240 x 320 720 x 1280 240 x 320 720 x 1280 720 x 1280 Dimensions (w x h x d) (mm) 112.8 x 61.5 x 11.5 121.6 x 63 x 9.9 110.1 x 59 x 12.3 136.6 x 70.6 x 8.6 103.9 x 57.9 x 13 151.1 x 80.5 x 9.4 137.2 x 70.5 x 8.7 Weight (g) 122 112 107 131 103 183 135 Volume (cc) 80 76 80 83 78 114 84 Screen (in) 3.5 4 3 4.8 2.8 5.5 4.8 Megapixel 3.2 5.0 3.2 8.0 2.0 8.0 8.0 NFC no yes no yes no yes yes Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 7.4 7.2 6.0 11.0 6.0 16.0 14.8 Standby time (hrs) 440 430 370 390 370 890 218 Source: Company data, Credit Suisse research

Handset Industry 2013 Outlook 72 07 January 2013

New range of Galaxy devices are selling in volumes. Reviews for Galaxy S III and Note II are amongst the most positive seen for any of the Samsung smartphones in the past. Distribution for these device is also strong, as Galaxy SIII is shipping with over 290 carriers globally compared to 140 carriers for Galaxy SII. Samsung recently noted that it has already crossed 30mn unit mark for Galaxy SIII in the first week of Nov 2012 in the first five months of device launch. In addition, it has shipped over 3mn units for Note II device in just over a month of shipping (as of Nov 2012).

Exhibit 89: Samsung's $400+ portfolio gaining a lot of traction, driven by SIII and Note II 40 35 30 25 20

15 Units (mn) Units 10 5 0

Galaxy S Galaxy S II Galaxy S III Galaxy Note I Galaxy Note II

Source: Company data, Credit Suisse estimates Robust distribution. An additional strength that Samsung has is that the company already has a distribution network in place covering both direct and indirect channels. The company has a strong distribution network in all key geographic regions with both carriers and retailers. Addressing the compute market effectively. With the company extending its Galaxy brand (Galaxy Tab, Galaxy Note and Galaxy line of smartphones) and given Samsung’s heritage in both mobile devices and PCs, we expect the company to become a major player in the compute market in the long term. Although we see Samsung is also extending support to Windows 8 and WP8 platforms (launch of Ativ S smartphone along with plans to ship 19mn laptops and tablets running Windows 8 in 2012), we believe that Android will continue to be the dominant platform for the company especially for smartphones. Some differentiation vs. rival Android vendors gives Samsung the edge. The major obstacle facing Samsung especially in the long run remains the need for differentiation from other Android vendors. Although the company so far has enjoyed an edge vs. other Android vendors driven by its scale, vertical integration, component quality (display screen) and more recently introduction of new features in addition to already available ones on Android, it needs to maintain this lead vs. rival Android vendors to avoid becoming yet another commoditized hardware company longer term.

■ Motion-based features add unique element to Galaxy SIII. Samsung’s customized OS includes several unique motion-based features that function as shortcuts in its Galaxy SIII. These features include Direct Call, which places a call from a text message conversation by simply lifting the phone to your ear (Exhibit 91), and Instant Muting which mutes incoming calls by placing your hand over the screen or turning the phone over. Tilt Zooming also allows users to scroll around zoomed in images by tilting the phone in any direction.

Handset Industry 2013 Outlook 73 07 January 2013

Exhibit 90: New motion controls in Samsung Galaxy SIII… Exhibit 91: …offer some differentiation vs. Android rivals

Source: Company data Source: Company data

■ Photo app boasts several innovative features. The photo app on Galaxy SIII comes with several innovative features including burst mode, the ability to recognize faces, and Buddy Share. Burst mode takes 8 photos in rapid succession, then allows the user to scroll through for the best shot before deleting the rest. The application automatically recognizes faces in photos and matches the name with the face if they have previously been tagged on the device. Buddy Share allows the user to easily send a photo to tagged friends with just a few simple clicks.

■ S Voice has high aspirations, but is still rough around the edges. S Voice is Samsung’s answer to the iPhone’s Siri as it provides voice-activated personal services. The application is capable of composing memos, text messages, and emails, can get the weather, and search the internet. It can also launch applications and place and answer calls, among many other features. Some litigation risks coming to the fore. Patent litigation has been one area which has been in limelight especially over the last couple of years with companies trying to either defend or aggressively monetize their portfolio of patents. Given the success Samsung has seen since 2011 (its smartphone market share has risen from 9% in 2010 to around 30% in 2012), we have seen the company being embroiled in a number of patent litigations globally.

■ Samsung vs. Apple. In Aug 2012, a federal court jury in the US determined that Samsung was infringing on 6 of 7 patents in question (mainly related to design and software) and awarded $1.05bn as damages to Apple. Both these companies have been engaged in patent battles in a number of countries including Korea, Japan, Germany, Australia, UK, Netherlands, France and Italy. Since the US judgment, the rulings in other countries have been mixed for Apple, with Samsung having an upper hand in Korea, Japan and UK. With both companies adding more devices from each other in their ongoing patent litigation claims, this battle between these two companies will continue to become more complicated.

■ Ericsson filing a lawsuit Samsung. In Nov 2012, Ericsson filed a patent infringement lawsuit against Samsung claiming after despite spending nearly 2 years in trying to reach patent negotiations, Samsung has declined to renew its license to Ericsson’s portfolio of patents on FRAND terms. As a reminder, Samsung had previously licensed Ericsson’s patents in 2001 and renewed in 2007, but its license has now expired, and talks around renewal have failed. Nokia – further share loss ahead Our view remains that Nokia will continue to see further smartphone share as its share slides to 2% in 2013 down from 5% in 2012. This is driven by our view around traction for

Handset Industry 2013 Outlook 74 07 January 2013

WP8 OS to remain weak and also gradual rollout of new Windows smartphones from Nokia as it tries to be more effective with its marketing and sales efforts behind new Lumia phones. Although the quality of new WP8 OS is much improved compared to previous versions, we believe that iOS and Android are still superior compared to WP8 OS and with lack of strong developer support, Windows Phone may see limited traction even in 2013.

Exhibit 92: Nokia’s smartphone share to decline further to 2% in 2013 Nokia Share 2010 2011 2012E 2013E Nokia Units (mn) 2010 2011 2012E 2013E North America 2.3% 0.9% 1.1% 0.9% North America 1.7 0.9 1.3 1.3 Western Europe 35.1% 17.0% 6.3% 1.0% Western Europe 30.2 16.5 7.2 1.3 Japan 0.0% 0.0% 0.0% 0.0% Japan 0.0 0.0 0.0 0.0 China 69.2% 28.6% 4.1% 2.0% China 19.2 22.2 8.1 5.8 India 72.5% 45.9% 11.0% 3.5% India 6.6 6.0 2.3 1.4 Korea 0.5% 0.1% 0.1% 0.1% Korea 0.0 0.0 0.0 0.0 Other APAC 48.1% 19.7% 6.0% 2.0% Other APAC 14.2 9.6 4.3 2.1 Brazil 47.3% 32.4% 8.3% 3.5% Brazil 2.4 3.0 1.5 1.0 Mexico 32.7% 16.6% 6.0% 1.5% Mexico 1.1 1.5 0.9 0.3 Other LatAm 35.3% 17.1% 8.0% 1.5% Other LatAm 3.2 2.6 1.9 0.6 Russia 69.8% 51.8% 14.5% 6.0% Russia 2.5 4.3 2.3 1.3 Other Central & Eastern Europe 77.4% 52.8% 10.5% 5.0% Other Central & Eastern Europe 7.3 6.2 2.1 1.4 Middle East & Africa 73.4% 38.9% 11.8% 2.7% Middle East & Africa 13.7 11.7 5.4 2.1 Global smartphone share (%) 34.2% 17.9% 5.2% 1.9% Global smartphone share (%) 34.2% 17.9% 5.2% 1.9% Smartphone Units (mn) 102.2 84.6 37.3 18.5 Smartphone Units (mn) 102.2 84.6 37.3 18.5 Source: Gartner, Company data, Credit Suisse estimates Nokia’s hardware offering surprisingly lacks iPhone and Galaxy SIII. Although we believe that hardware feature set is becoming less of a differentiating factor in the smartphone market, it still remains important to be competitive vs. rival offerings. Looking at Lumia 920, we believe that both iPhone 5 and Samsung Galaxy SIII have set the benchmark in this space with a number of improvements vs. earlier models.

■ Samsung the clear leader in processor speeds. The Lumia 920 supports Qualcomm’s dual-core 1.5GHz Snapdragon S4 processor. In terms of specs, although this is slightly faster than the iPhone 5’s 1.2GHz dual-core processor but Samsung already has support for quad-core processor in its Galaxy SIII models sold outside the US (which run its internally designed Exynos processor).

■ Nokia behind in device weight and thinness. One area where we believe Nokia lacks significantly in hardware is the thinness and weight of its new devices. The Lumia 920 weighs 185g, which is significantly higher than the weight of iPhone 5 (at 112g), Galaxy S3 (at 131g) and even HTC 8X (at 130g). Also in terms of device thinness, Lumia 920 is 10.7mm thick, whereas iPhone 5 is only 7.6mm thick and Galaxy SIII at 8.6mm (Exhibit 93).

■ Inching towards Samsung in screen size. In terms of screen size, we see that Samsung is clearly ahead of competition with Galaxy SIII supporting 4.8” touchscreen, significantly bigger than iPhone 5 at 4” and even Lumia 920 at 4.5”.

■ Wireless charging is something different. Within the Lumia 920, users have the option of charging the phone when near a wireless charging accessory, without any need to plug it in. Nokia has also been using a common standard for wireless charging which means it could be compatible with other brands’ charging systems.

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Exhibit 93: Nokia’s Lumia 920 is lacking in certain hardware features when compared to iPhone 5 and Galaxy SIII Detailed specifications of Nokia Lumia 920 vs. flagship smartphones from competing vendors Vendor Nokia HTC Samsung Samsung Apple LG Model Lumia 920 Windows Phone 8X Galaxy SIII Ativ S iPhone 5

Image Technology UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM UMTS/GSM/LTE UMTS/GSM Announced Sep-12 Sep-12 Sep-12 Aug-12 Sep-12 Oct-12 Shipping date Nov-12 Nov-12 Sep-12 Exp Q4 2012 Sep-12 Nov-12 Operating System WP8 WP8 Android 4.1 WP8 iOS6 Android 4.2 Application Processor Dual Core 1.5GHz Dual Core 1.5GHz Quad Core 1.4GHz Dual Core 1.5GHz Dual Core 1.2GHz Quad Core 1.5GHz RAM 1GB 1GB 2GB 1GB 1GB 2GB Memory 32GB 16GB 16/32/64GB 32GB 16/32/64GB 8/16GB Pixels 768 x 1280 720 x 1280 720 x 1280 720 x 1280 640 x 1136 768 x 1280 Dimensions (w x h x d) (mm) 130.3 x 70.8 x 10.7 132.4 x 66.2 x 10.1 136.6 x 70.6 x 8.6 137.2 x 70.5 x 8.7 123.8 x 58.6 x 7.6 133.9 x 68.7 x 9.1 Weight (g) 185 130 131 135 112 139 Volume (cc) 99 89 83 84 55 84 Screen (in) 4.5 4.3 4.8 4.8 4 4.7 Megapixel 8.7 8.0 8.0 8.0 8.0 8.0 NFC yes yes yes yes no yes Wi-Fi yes yes yes yes yes yes GPS yes yes yes yes yes yes Talk time (hrs) 10.0 12.0 11 14.8 8 15 Standby time (hrs) 400 290 390 218 225 390 Source: Company data, Credit Suisse research WP differentiation is not well understood by consumers. With WP7.5 OS, Nokia launched a range of aggressively priced smartphones (Lumia 900/800/710/610) during 2012, however the company was not able to transfer this into meaningful market share. This was either due to lack of consumer understanding around the Windows Phone platform or weak support from carriers globally. The experience from WP7.5 clearly demonstrates challenges around launching a viable third ecosystem in the smartphone market. WP8 offers more differentiation…but a slow roll out. With the launch of Windows Phone 8 OS, Nokia is looking to differentiate in areas of display resolution, higher quality (multi- core) processors, superior imaging integration as well improved location based services, all of which have been integrated in its new devices (Lumia 920/820). However, the company has emphasized that it plans to launch WP8 smartphones in a targeted manner, which will allow its commercial marketing efforts to be more effective. Our concern is that it will take some time for Nokia to ramp its upcoming WP8 portfolio and even if it is competitive, it may mean that any potential recovery in its smartphone share remains a 2H13 prospect. “We expect Q4 to continue the transition as we begin to ramp up sales of the Lumia 820 and the Lumia 920. We expect both products to start selling in November. As we bring our new products into the market we are planning a deliberate rollout where we focused our sales and marketing resources in select markets to key operator partnerships.” – Stephen A. Elop, President and CEO, on Nokia’s Q312 earnings call Nokia also adding software/services to WP8. In addition to features being offered by WP8, Nokia has also introduced new software and services linked to mapping, imaging and music that will be available on its new Lumina range.

■ Improved Maps. Given its ownership of Navteq, Nokia has increased its navigation feature set to include voice guided turn by turn navigation with Nokia Drive. The company also launched its public transportation navigation offering, Nokia Transport, which provides walking distance between stops in public transit and indoor navigation of stations. In addition, Nokia will offer full functionality while offline.

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Exhibit 94: Nokia Drive allows for turn-by-turn navigation Exhibit 95: Nokia Transport for public transport navigation

Source: Company data Source: Company data

■ Lens Apps. As Nokia integrates its PureView technology into the new hardware, it has also developed a number of preloaded apps to take advantage of the lens with Lens Apps. Some of apps include: o Nokia City Lens: Provides details to surrounding area by using GPS based services and inputs from the camera. o Cinemagraph. Allows for slight animation of still images in which a user can record footage (~15 fps), and then select a segment to animate within the image. For example, one would shoot an image of a flag, once taken he/she can select the flag to continue waving while the rest of the image stays still. o SmartShoot. Records a series of photos, then allows a user to layer for best overall image. For example, if someone accidentally walks across a photo, they can later be removed, as the layers are assembled. o Photosynth. Allows the user to capture panoramic images by taking a series of photos in sequence as the software frames them together into a single shot. o . Allows for a burst of photos to be taken and then the best one to be selected.

Exhibit 96: City Lens – GPS based augmented reality Exhibit 97: SmartShoot – remove layers from images

Source: Company Source: Company

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■ Nokia Music – free music streaming service. On the music front, Nokia has already launched a music app for Lumia owners in the US which offers them a free music streaming service. The service aims to provide consumers access to over 150 exclusive playlists curated by US based music “experts”. o Ad-free and no subscriptions needed. The service is completely ad-free and does not require registration or subscription. o Offline playlists. Users can create their own playlists from a library of millions of songs which can also be accessed offline. o MP3 Store with over 15mn songs. Nokia’s MP3 store offers over 15mn songs which Lumia owners can download and then play through Nokia Music. o Gig Finder. Based off the user’s GPS based location, this feature allows one to track down local concerts and shows as well as purchase tickets and get directions to the location. RIM – struggle continues, all eyes now on BB10

Exhibit 98: RIM’s smartphone share to decline from 5% in 2012 to 3% in 2013 Research in Motion Share 2010 2011 2012E 2013E Research in Motion Units (mn) 2010 2011 2012E 2013E North America 30.2% 12.0% 3.7% 2.3% North America 21.7 12.8 4.5 3.2 Western Europe 16.2% 13.7% 7.1% 3.0% Western Europe 13.9 13.3 8.1 4.0 Japan 0.5% 0.3% 0.0% 0.0% Japan 0.1 0.1 0.0 0.0 China 0.1% 0.4% 0.0% 0.1% China 0.0 0.3 0.1 0.1 India 10.3% 10.2% 5.5% 2.5% India 0.9 1.3 1.1 1.0 Korea 0.3% 0.1% 0.0% 0.0% Korea 0.0 0.0 0.0 0.0 Other APAC 12.9% 11.4% 6.3% 2.8% Other APAC 3.8 5.6 4.5 2.9 Brazil 20.9% 18.5% 6.5% 3.0% Brazil 1.1 1.7 1.2 0.8 Mexico 24.5% 29.1% 20.5% 9.0% Mexico 0.8 2.7 3.1 2.0 Other LatAm 40.4% 34.0% 14.5% 9.0% Other LatAm 3.6 5.1 3.5 3.4 Russia 4.1% 0.5% 0.1% 0.1% Russia 0.2 0.0 0.0 0.0 Other Central & Eastern Europe 6.6% 2.5% 0.7% 0.6% Other Central & Eastern Europe 0.6 0.3 0.1 0.2 Middle East & Africa 15.8% 27.6% 15.0% 10.0% Middle East & Africa 2.9 8.3 6.9 7.8 Global smartphone share (%) 16.7% 10.9% 4.6% 2.6% Global smartphone share (%) 16.7% 10.9% 4.6% 2.6% Smartphone Units (mn) 49.8 51.6 33.2 25.3 Smartphone Units (mn) 49.8 51.6 33.2 25.3 Source: Gartner, Company data, Credit Suisse estimates As shown in Exhibit 98, RIM’s market share has been rapidly declining in recent years given a combination of mixed execution, weak touchscreen offering, delays in launching its new software platform and inherent developer issues with the existing BlackBerry OS platform. Although the company is expected to introduce its new smartphones based on new BB10 OS in Jan 2013, we believe that it may find difficult to get traction given the strong positioning of both iOS and Android, and now the entry of WP8. This combined with limited visibility on both the quality of its new BB10 OS and upcoming smartphones, means that the company’s smartphone share may continue to erode, as we expect it to fall from 5% in 2012 to around 3% in 2013. Improvements coming with BB10, but maybe too little too late. Based on QNX, RIM’s new management believe that the new BB10 OS could make the company’s portfolio competitive once again. While BB10 is still not available, the OS has made a few appearances at developer events in the last few months, and although we acknowledge that the new OS shows marked improvement vs. previous versions, we still believe that it faces fierce competition from existing platforms such as Android and iOS, given most of the features offered by new BB10 is already being offered by rivals, which also benefit from presence of a strong ecosystem around their platforms. Some of the software features supported by BB10 to improve the user experience are ‘Flow’, ‘Active Frames’,

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‘Cascades’ and ‘BlackBerry Balance’, all of which have been discussed in detail in an earlier section. Launch of first two BB10 smartphones to be announced in Jan 2013. After having seen multiple delays in launch of BB10 platform, RIM has announced that it will officially launch its new BB10 OS as well as unveil its first two BB10 smartphones in an event on Jan 30th 2013. So we have yet to see the specifications of the actual device when it is launched. However, in order to develop an ecosystem around its new BB10 OS, RIM has already issued developers its BB10 Dev Alpha smartphone, although this is not the final product. Exhibit 99 shows this bar shaped device features a 4.2” touchscreen (1280x768), 16GB internal storage and 1GB RAM. It also includes a microSD card slot and mini HDMI port, as well as front and back facing cameras. Exhibit 99: BB10 Dev Alpha smartphone (on the left) and 2nd rumored smartphone (right)

Source: CrackBerry.com A high price point could be detrimental to adoption. We believe that one of the reasons for the delay in launching BB10 devices could have been RIM’s dependence on Qualcomm’s Snapdragon 8960 processor, which has seen constraints during 2012 due to 28nm capacity. What this also may imply that the new BB10 smartphones could be highly spec’d devices targeting at a high price point. We simply do not believe much of a share opportunity exists in the high end of the market, given the success seen by Apple and Samsung in that segment of the market as we discuss in a previous section. BlackBerry App World only has >105K apps vs. 700K for Apple and Android. Even after 3.5 years since launch, BlackBerry App World had only over 105K apps (as of Sep 2012) as compared to Apple and Android, both of which boast of over 700K apps currently. Although RIM has announced a number of partnerships in 2012 with major developers (Gameloft, Mippin, Appcelerator to name a few) to issue BB10 specific apps, we remain of the view that with a new platform rolling out, developers would remain skeptical in terms of allocating their resources towards writing apps for BB10, as can be seen from a recent IDC-Appcelerator developer survey which shows that developer interest in BB platform has fallen from 21% in Nov 2011 to 9% in Nov 2012 (Exhibit 72). After weakness in developed markets, pressures in EMs may increase. For RIM, geographically our concern would be that a major source of pressure over the past 2 years has come from developed markets, with the company still enjoying some traction in markets such as Latin America and parts of APAC (for e.g. Indonesia and India) where RIM had benefited in the past from a move towards lower end smartphone experience.

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However, with Android now seeing launch of a number of low end smartphones from different vendors in these markets, we believe RIM’s market share in some of these EM countries will come under more pressure in 2013. Also as RIM goes through its portfolio transition, and as its BB7 devices age, our concern is that share erosion could accelerate. Running out of the services revenue stream. One of the benefits that RIM had in the past was that its strong Services revenue stream had been more or less stable so far over the last few quarters. However, we believe that visibility of the services revenue stream is rapidly deteriorating given BB10 monetization of the NOC, ongoing carrier renegotiation and declining subscribers. This means that service revenue should fall, and we note the recent quarter marks the first time management has discussed its expectation that some of the base may generate no service revenue. We assume services revenue of $3.9bn/$3.3bn in FY13/14, down 4%/16% y/y, further compounding issues around profitability. In turn, this would expose the company’s high level of hardware losses which we estimate could be as high as $3.5bn/$2.7bn in FY13/FY14. Multiple Android vendors may struggle Within the Android camp of vendors, apart from continued strength at Samsung, we are already seeing signs of weakness at other leading Android vendors (like HTC, Motorola Mobility, Sony Mobile and LG) which shows that the competition within the Android community remains stiff with vendors trying to differentiate from one another. In fact, we believe that cumulative smartphone share of Android vendors may continue to grow reaching nearly 70% in 2013 given robust trends at Samsung and widespread adoption by Chinese and white-label vendors. HTC – significant share loss in 2012 Being a pure smartphone play and having an early focus on Android, HTC enjoyed a lot of success in smartphones in 2010/2011, as it was building its brand and distribution especially in developed markets. However, since Q411, it has lost a significant level of share driven by reversal of fortunes in the US market (accounted for around 40% of its volumes in 2011). With HTC now trying to strengthen its product portfolio for both Android and Windows Phone where it lags Samsung and Nokia respectively, our HTC analyst Pauline Chen expects the company to ship 44mn smartphone units in 2013, which implies 5% share, down from 9%/5% in 2011/2012 (Exhibit 100).

Exhibit 100: HTC’s share may continue on downward spiral after nearly halving in 2012 HTC Share 2010 2011 2012E 2013E HTC Units (mn) 2010 2011 2012E 2013E North America 14.6% 16.4% 7.2% 6.4% North America 10.5 17.6 8.7 8.7 Western Europe 11.7% 10.8% 5.5% 6.5% Western Europe 10.1 10.5 6.3 8.6 Japan 0.9% 1.3% 1.6% 1.0% Japan 0.2 0.3 0.5 0.4 China 3.2% 3.0% 3.2% 2.8% China 0.9 2.3 6.2 7.9 India 9.1% 8.1% 4.4% 4.5% India 0.8 1.1 0.9 1.8 Korea 2.5% 1.9% 0.2% 1.0% Korea 0.2 0.4 0.0 0.2 Other APAC 3.3% 14.4% 9.3% 10.1% Other APAC 1.0 7.0 6.7 10.5 Brazil 0.8% 0.9% 0.9% 1.5% Brazil 0.0 0.1 0.2 0.4 Mexico 0.7% 0.4% 2.5% 3.0% Mexico 0.0 0.0 0.4 0.7 Other LatAm 0.5% 0.4% 0.8% 1.0% Other LatAm 0.0 0.1 0.2 0.4 Russia 6.3% 13.3% 3.0% 4.8% Russia 0.2 1.1 0.5 1.0 Other Central & Eastern Europe 2.7% 10.4% 5.8% 5.3% Other Central & Eastern Europe 0.3 1.2 1.1 1.5 Middle East & Africa 2.1% 4.4% 1.8% 2.4% Middle East & Africa 0.4 1.3 0.8 1.9 Global smartphone share (%) 8.2% 9.1% 4.5% 4.5% Global smartphone share (%) 8.2% 9.1% 4.5% 4.5% Smartphone Units (mn) 24.6 43.0 32.4 44.0 Smartphone Units (mn) 24.6 43.0 32.4 44.0 Source: Gartner, Company data, Credit Suisse estimates Significant exposure to developed markets where share has been under pressure. Nearly 50% of HTC global shipments are likely to come from NA and WE markets combined in

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2012. Although this number has come down from 85%/65% in 2010/2011, we believe that the vendor still has weak presence in a number of emerging markets like China, Brazil and Mexico. With competition getting more intense in these developed markets especially in the high end segment from both Apple and Samsung, we believe that HTC will continue to struggle in NA and WE markets, leading to further share loss in 2013. Distribution is not that effective in our view. We note that HTC still supplies only a limited number of carriers especially in emerging markets, compared with RIM and Nokia at 500 and Apple at 250 carriers globally. This focus and concentration around developed markets was clearly highlighted as Apple’s iPhone 4S and Samsung’s Galaxy SII devices gained a lot of traction at multiple carriers in developed markets during Q411, a trend which continues in 2012 with the launch of iPhone 5 and Galaxy SIII. Portfolio focused at the high end, but offers minimal differentiation. A glance at Exhibit 101 shows that HTC’s smartphone portfolio is still mainly targeted at the high-end. In addition, with success in Android fading quickly, the company is now trying to also diversify by launching a few Windows Phone based devices. But the main issue with HTC’s portfolio is that it continues to lag behind Samsung and Nokia on both these platforms respectively when it comes to hardware and software offering.

Exhibit 101: HTC’s new portfolio – focused at the high end but offers limited differentiation Detailed specifications for HTC’s latest smartphone offering in the marketplace Vendor HTC HTC HTC HTC HTC HTC HTC Model Droid DNA One SV Desire SV One VX One X+ Windows Phone 8X Windows Phone 8S

Image Technology CDMA/LTE UMTS/GSM/LTE UMTS/GSM UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM Announced Nov-12 Nov-12 Nov-12 Oct-12 Oct-12 Sep-12 Sep-12 Shipping date Nov-12 Exp Dec 2012 Nov-12 Nov-12 Nov-12 Nov-12 Nov-12 Operating System Android 4.1 Android 4.0 Android 4.0 Android 4.0 Android 4.1 WP8 WP8 Application Processor Quad Core 1.5GHz Dual Core 1.2GHz Dual Core 1GHz Dual Core 1.5GHz Quad Core 1.7GHz Dual Core 1.5GHz Dual Core 1GHz RAM 2GB 1GB 768MB 1GB 1GB 1GB 512MB Memory 16GB 8GB 4GB 8GB 64GB 16GB 4GB Pixels 1080 x 1920 480 x 800 480 x 800 540 x 960 720 x 1280 720 x 1280 480 x 800 Dimensions (w x h x d) (mm) 141 x 70.5 x 9.7 128 x 66.9 x 9.2 129.7 x 67.9 x 10.7 133.5 x 67.6 x 9.2 134.4 x 69.9 x 8.9 132.4 x 66.2 x 10.1 120.5 x 63 x 10.3 Weight (g) 142 122 131 125 135 130 113 Volume (cc) 96 79 94 83 84 89 78 Screen (in) 5 4.3 4.3 4.5 4.7 4.3 4.0 Megapixel 8.0 5.0 8.0 5.0 8.0 8.0 5.0 NFC yes yes no yes yes yes no Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 12.7 22.5 NA NA 12.8 12.0 NA Standby time (hrs) 353 NA NA NA 360 290 NA Source: Company data, Credit Suisse research Motorola Mobility/Google – uncertain ambitions Since Motorola Mobility has been acquired by Google (acquisition announced in July 2011 and completed in Aug 2012), the company’s exact plans in the smartphone device market has been unclear. Uncertainty around ambitions in the smartphone hardware market along with management changes has already led to Motorola Mobility’s smartphone share trending down since the middle of 2011. Given our view that Google is unlikely adopt an aggressive strategy for Motorola Mobility as it may come with the risk of alienating its other Android partners, we believe that Motorola Mobility will continue to see gradual share declines going forward. Change of control with new management team. With Google having changed the control of Motorola Mobility having appointed Dennis Woodside as CEO of Motorola Mobility replacing Dr. Sanjay Jha in May 2012, there has been significant changes in senior

Handset Industry 2013 Outlook 81 07 January 2013 executive team at the handset company. We believe this would have had some impact in terms of disruption in the company’s existing strategy.

Exhibit 102: Uncertainty around Google’s ambitions in smartphone hardware space has led to share loss for Motorola Motorola Share 2010 2011 2012E 2013E Motorola Units (mn) 2010 2011 2012E 2013E North America 13.0% 7.5% 7.4% 5.1% North America 9.4 8.1 9.0 7.0 Western Europe 0.8% 1.3% 0.9% 0.4% Western Europe 0.7 1.2 1.0 0.5 Japan 0.0% 0.1% 0.3% 0.3% Japan 0.0 0.0 0.1 0.1 China 6.1% 6.1% 2.2% 1.3% China 1.7 4.7 4.3 3.6 India 0.3% 0.4% 0.3% 0.2% India 0.0 0.1 0.1 0.1 Korea 4.6% 1.8% 0.2% 0.5% Korea 0.3 0.4 0.0 0.1 Other APAC 1.2% 1.7% 1.6% 0.5% Other APAC 0.4 0.8 1.2 0.5 Brazil 6.3% 4.2% 7.5% 2.5% Brazil 0.3 0.4 1.3 0.7 Mexico 9.7% 4.4% 6.5% 3.5% Mexico 0.3 0.4 1.0 0.8 Other LatAm 5.0% 5.2% 5.3% 3.0% Other LatAm 0.4 0.8 1.3 1.1 Russia 0.2% 0.0% 0.0% 0.0% Russia 0.0 0.0 0.0 0.0 Other Central & Eastern Europe 0.3% 2.1% 1.2% 0.8% Other Central & Eastern Europe 0.0 0.2 0.2 0.2 Middle East & Africa 0.3% 0.8% 0.5% 0.5% Middle East & Africa 0.1 0.2 0.2 0.4 Global smartphone share (%) 4.6% 3.7% 2.7% 1.5% Global smartphone share (%) 4.6% 3.7% 2.7% 1.5% Smartphone Units (mn) 13.7 17.4 19.7 15.1 Smartphone Units (mn) 13.7 17.4 19.7 15.1 Source: Gartner, Company data, Credit Suisse estimates Product introductions have been lackluster of late. We believe Motorola’s product introductions over the last 12 months have been somewhat lackluster. While the company has launched multiple Android smartphones, and tried to integrate its high-end offering under the RAZR brand umbrella, it has struggled to differentiate its new range of DROID RAZR smartphones versus other higher end Android devices from peers.

Exhibit 103: Motorola’s new smartphones having nothing different to offer vs. Android smartphones from other vendors Detailed specifications for Motorola’s latest smartphone offering in the market Vendor Motorola Motorola Motorola Motorola Motorola Motorola Motorola Model Electrify M XT905 RAZR i XT890 DROID RAZR MAXX HD DROID RAZR HD DEFY XT ATRIX HD

Image Technology CDMA/LTE UMTS/GSM CDMA/LTE CDMA/LTE CDMA/LTE CDMA UMTS/GSM/LTE Announced Nov-12 Sep-12 Sep-12 Sep-12 Sep-12 Jul-12 Jul-12 Shipping date Nov-12 Oct-12 Nov-12 Oct-12 Sep-12 Jul-12 Jul-12 Operating System Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 2.3 Android 4.0 Application Processor Dual Core 1.5GHz 2 GHz Intel Atom Dual Core 1.5GHz Dual Core 1.5GHz Dual Core 1.5GHz 1GHz Dual Core 1.5GHz RAM 1GB 1GB 1GB 1GB 1GB 512MB 1GB Memory 8GB 8GB 32GB 16GB 8GB 1GB 8GB Pixels 540 x 960 540 x 960 720 x 1280 720 x 1280 540 x 960 480 x 854 720 x 1280 Dimensions (w x h x d) (mm) 123.2 x 61.5 x 8.6 122.5 x 60.9 x 8.3 131.9 x 67.9 x 9.3 131.9 x 67.9 x 8.4 122.5 x 60.9 x 8.3 115 x 58.5 x 12 133.5 x 69.9 x 8.4 Weight (g) 111 126 157 146 126 130 140 Volume (cc) 65 62 83 75 62 81 78 Screen (in) 4.3 4.3 4.7 4.7 4.3 3.7 4.5 Megapixel 8.0 8.0 8.0 8.0 8.0 5.0 8.0 NFC yes yes yes yes no no no Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 16.7 20.0 32.0 24.0 20.0 5.5 9.0 Standby time (hrs) 432 360 372 286 408 300 205 Source: Company data, Credit Suisse research Distribution is limited to Americas and China, and its losing in both these regions. A key issue for Motorola Mobility in its smartphone business has been its limited geographic reach, which is limited to NA, China and Latam. Outside of these regions, we have seen limited traction for Motorola smartphones, as evidenced by low smartphone share (which is less than 2%) in each of the following geographies – WE, CEE, MEA and APAC (ex

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China). Even in its core NA and Latam markets, the vendor is losing steam as competition continues to intensify within the Android camp. Sony Mobile – offering no differentiation in Android

Exhibit 104: Sony Ericsson / Sony Mobile’s share to continue to see gradual declines Sony Ericsson Share 2010 2011 2012E 2013E Sony Ericsson Units (mn) 2010 2011 2012E 2013E North America 0.5% 0.4% 0.4% 0.5% North America 0.3 0.4 0.5 0.7 Western Europe 6.3% 5.9% 5.6% 2.1% Western Europe 5.4 5.7 6.4 2.8 Japan 3.2% 8.5% 8.0% 5.0% Japan 0.6 2.1 2.6 1.8 China 2.4% 3.9% 1.2% 0.8% China 0.7 3.0 2.3 2.2 India 1.1% 3.2% 2.3% 1.0% India 0.1 0.4 0.5 0.4 Korea 1.1% 0.5% 0.2% 0.1% Korea 0.1 0.1 0.0 0.0 Other APAC 3.2% 3.4% 3.0% 1.5% Other APAC 0.9 1.6 2.2 1.6 Brazil 6.3% 6.4% 4.8% 3.0% Brazil 0.3 0.6 0.9 0.8 Mexico 11.7% 12.4% 11.0% 7.0% Mexico 0.4 1.2 1.7 1.6 Other LatAm 3.3% 6.0% 5.8% 4.0% Other LatAm 0.3 0.9 1.4 1.5 Russia 4.0% 6.5% 5.0% 3.5% Russia 0.1 0.5 0.8 0.7 Other Central & Eastern Europe 4.4% 8.3% 6.0% 3.0% Other Central & Eastern Europe 0.4 1.0 1.2 0.9 Middle East & Africa 3.4% 6.8% 7.0% 3.0% Middle East & Africa 0.6 2.0 3.2 2.3 Global smartphone share (%) 3.4% 4.2% 3.3% 1.8% Global smartphone share (%) 3.4% 4.2% 3.3% 1.8% Smartphone Units (mn) 10.3 19.6 23.5 17.2 Smartphone Units (mn) 10.3 19.6 23.5 17.2 Source: Gartner, Company data, Credit Suisse estimates For Sony, we expect the company’s strategy to focus on high end product offering but it continues to lack in areas like global scale and distribution. In addition, the company continues to lack the early mover advantage in Android-based offerings when it comes to launching new smartphones or upgrading OS on an existing device to the latest version. Change in control has led to some disruptions. With Sony having taken full control over Sony Ericsson in Feb 2012, we believe changes in management team and smartphone strategy would have had a negative impact on its smartphone share in 2012. This risk of disruption is something similar to what we have seen in the past with handset shares of vendors like Motorola and Sony Ericsson when they had senior management changes in late 2007.

Handset Industry 2013 Outlook 83 07 January 2013

Exhibit 105: Sony’s smartphones all looking very similar, but breadth in portfolio and differentiation missing Detailed specifications for key smartphones from Sony Vendor Sony Sony Sony Sony Sony Sony Sony Model Xperia TL Xperia V Xperia J Xperia TX Xperia T Xperia SL Xperia tipo dual

Image Technology UMTS/GSM/LTE UMTS/GSM/LTE UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM Announced Oct-12 Aug-12 Aug-12 Aug-12 Aug-12 Aug-12 Jun-12 Shipping date Nov-12 Exp Dec 2012 Oct-12 Oct-12 Sep-12 Sep-12 Sep-12 Operating System Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Application Processor Dual Core 1.5GHz Dual Core 1.5GHz 1GHz Dual Core 1.5GHz Dual Core 1.5GHz Dual Core 1.7GHz 800MHz RAM 1GB 1GB 512MB 1GB 1GB 1GB 512MB Memory 16GB 8GB 4GB 16GB 16GB 32GB 3GB Pixels 720 x 1280 720 x 1280 480 x 854 720 x 1280 720 x 1280 720 x 1280 320 x 480 Dimensions (w x h x d) (mm) 129.4 x 67.3 x 9.4 129 x 65 x 10.7 124.3 x 61.2 x 9.2 131 x 68.6 x 8.6 129.4 x 67.3 x 9.4 128 x 64 x 10.6 103 x 57 x 13 Weight (g) 148 120 124 127 139 144 99.4 Volume (cc) 82 90 70 77 82 87 76 Screen (in) 4.6 4.3 4.0 4.6 4.5 4.3 3.2 Megapixel 13.0 13.0 5.0 13.0 13.0 12.0 3.2 NFC yes yes no yes yes yes no Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 7.0 7.0 7.4 6.7 7.0 8.5 6.0 Standby time (hrs) 450 400 618 400 410 420 360 Source: Company data, Credit Suisse research Hardly any differentiation in its smartphone offering. Looking at the key smartphones launched by Sony in the last few months, we note that all their devices look very similar in terms of feature set. Even at the high-end of the segment, their XPERIA range of smartphones do not seem to offer anything different from majority of Android vendors. Chinese tier I brands – on track on gain share Looking at Chinese vendors, we would note three tier I vendors – Huawei, ZTE and Lenovo – have continued to gain share in 2011/2012. In fact, these vendors on a combined basis had around 6% global smartphone share in 2011, which is likely to expand to 10% in 2012. Huawei – share gains have come slower than expected Huawei gaining share but only gradually. At MWC in Feb 2012, Huawei noted that the company is targeting to sell 60mn smartphones in 2012, up from around 20mn smartphones in 2011. Since then, the company has lowered its target to a range of 25- 30mn smartphones for 2012. In 9M2012, the vendor had shipped 20mn units, which means it would have to sell 10mn units to reach the high end of its revised target. This means that the vendor will see its smartphone rise from 3% in 2011 to 4% in 2012. Distribution still an issue. In addition to broadening its smartphone portfolio to cover range of price points, Huawei continues to expand distribution both in carrier and retail channels. However, its global share is still being heavily influenced by China and also US to some extent, it is clear that traction remains limited outside these regions. In a way, this shows the challenges and the time required to build a strong distribution network. This drives our view that Huawei may be able to sell 45mn smartphones in 2013, which implies 5% global share.

Handset Industry 2013 Outlook 84 07 January 2013

Exhibit 106: Huawei continues to see share gains, albeit slower than expectations Huawei Share 2010 2011 2012E 2013E Huawei Units (mn) 2010 2011 2012E 2013E North America 0.0% 4.3% 3.1% 3.0% North America 0.0 4.6 3.7 4.1 Western Europe 0.2% 0.9% 1.4% 1.8% Western Europe 0.2 0.9 1.5 2.3 Japan 0.0% 0.3% 0.2% 0.3% Japan 0.0 0.1 0.1 0.1 China 0.6% 10.2% 9.5% 10.0% China 0.2 7.9 18.7 28.8 India 0.0% 0.3% 0.9% 1.5% India 0.0 0.0 0.2 0.6 Korea 0.0% 0.0% 0.0% 0.0% Korea 0.0 0.0 0.0 0.0 Other APAC 0.0% 1.1% 1.3% 2.0% Other APAC 0.0 0.5 0.9 2.1 Brazil 0.0% 0.6% 0.8% 2.0% Brazil 0.0 0.1 0.1 0.5 Mexico 0.0% 1.1% 1.2% 3.5% Mexico 0.0 0.1 0.2 0.8 Other LatAm 0.0% 3.3% 3.0% 5.0% Other LatAm 0.0 0.5 0.7 1.9 Russia 0.0% 1.1% 1.2% 2.5% Russia 0.0 0.1 0.2 0.5 Other Central & Eastern Europe 0.1% 3.6% 3.5% 5.0% Other Central & Eastern Europe 0.0 0.4 0.7 1.4 Middle East & Africa 0.0% 1.5% 2.0% 2.5% Middle East & Africa 0.0 0.5 0.9 1.9 Global smartphone share (%) 0.1% 3.3% 3.9% 4.6% Global smartphone share (%) 0.1% 3.3% 3.9% 4.6% Smartphone Units (mn) 0.4 15.6 27.9 45.1 Smartphone Units (mn) 0.4 15.6 27.9 45.1 Source: Gartner, Company data, Credit Suisse estimates Product portfolio – hiccup at start of 2012, but improving all the time. Having announced its high-end smartphone Ascend D Quad at MWC in Feb 2012, the device (which uses its own internally designed quad-core apps processor and was one of the most hyped device at MWC event) had seen a number of delays owing to chipset issues, and finally started shipping in Oct 2012. Although this was a clear setback, more importantly, the company has been introducing a number of terminals in the lower end of the smartphone market, again under its Ascend flagship brand, which have been received positively in markets like China, parts of Latam and CEE.

Exhibit 107: Huawei is looking to offer a broad range of smartphones across price points Detailed specifications for recent smartphone launches from Huawei Vendor Huawei Huawei Huawei Huawei Huawei Huawei Huawei Model 2 Ascend Y Summit Ascend P1 Fusion 2 U8665 Ascend Y201 Pro Ascend G600

Image Technology UMTS/GSM CDMA UMTS/GSM UMTS/GSM/LTE UMTS/GSM UMTS/GSM UMTS/GSM Announced Oct-12 Oct-12 Oct-12 Oct-12 Oct-12 Aug-12 Aug-12 Shipping date Nov-12 Oct-12 Oct-12 Oct-12 Oct-12 Oct-12 Sep-12 Operating System Android 4.0 Android 2.3 Android 2.3 Android 4.0 Android 2.3 Android 4.0 Android 4.0 Application Processor Quad Core 1.4GHz 800MHz 600MHz Dual Core 1.5GHz 800MHz 800MHz Dual Core 1.2Hz RAM 2GB 256MB 512MB 1GB 512MB 512MB 768MB Memory 8GB 120MB 512MB 4GB 4GB 4GB 4GB Pixels 720 x 1280 320 x 480 320 x 480 540 x 960 320 x 480 320 x 480 540 x 960 Dimensions (w x h x d) (mm) 134 x 67.5 x 10.5 116.8 x 61 x 11.7 115.8 x 59.9 x 12.2 132.5 x 65.4 x 9.9 115.8 x 61 x 11.7 117 x 61.5 x 11.7 134 x 67.5 x 10.5 Weight (g) 145 125 125 135 124 125 NA Volume (cc) 95 83 85 86 83 84 95 Screen (in) 4.5 3.5 3.5 4.3 3.5 3.5 4.5 Megapixel 8.0 3.2 3.2 8.0 3.2 3.2 8.0 NFC no no no no no no yes Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 13.0 7.5 7.0 6.0 5.0 5.0 6.0 Standby time (hrs) 541 300 216 336 350 500 360 Source: Company data, Credit Suisse research ZTE – seeing gradual share gains, distribution still an issue ZTE share gains driven by China and US. Over the last 2 years, ZTE has come from having virtually no presence in smartphones to nearly 4% share in 2012. This has been driven by its focus on certain markets – China and US – which together will account for

Handset Industry 2013 Outlook 85 07 January 2013 over 70% of its global shipments in 2012. Our ZTE analyst, YT Boon, expects the company to ship around 27-28mn smartphones in 2012 which will imply 4% global share in 2012. Exhibit 108: ZTE in a similar situation to Huawei – gaining share but only gradually ZTE Share 2010 2011 2012E 2013E ZTE Units (mn) 2010 2011 2012E 2013E North America 0.0% 0.6% 2.5% 2.5% North America 0.0 0.6 3.0 3.4 Western Europe 0.1% 1.2% 1.8% 2.0% Western Europe 0.1 1.1 2.1 2.7 Japan 0.0% 0.1% 0.2% 0.2% Japan 0.0 0.0 0.1 0.1 China 0.5% 7.8% 8.3% 8.0% China 0.1 6.1 16.2 23.1 India 0.0% 0.1% 1.7% 1.5% India 0.0 0.0 0.3 0.6 Korea 0.0% 0.0% 0.0% 0.0% Korea 0.0 0.0 0.0 0.0 Other APAC 0.0% 2.0% 2.5% 2.0% Other APAC 0.0 1.0 1.8 2.1 Brazil 0.0% 2.5% 2.8% 2.8% Brazil 0.0 0.2 0.5 0.8 Mexico 0.0% 2.3% 2.8% 3.0% Mexico 0.0 0.2 0.4 0.7 Other LatAm 0.0% 4.9% 3.3% 3.5% Other LatAm 0.0 0.7 0.8 1.3 Russia 0.0% 0.0% 0.0% 1.5% Russia 0.0 0.0 0.0 0.3 Other Central & Eastern Europe 0.0% 3.0% 4.8% 6.0% Other Central & Eastern Europe 0.0 0.4 0.9 1.7 Middle East & Africa 0.0% 0.5% 2.3% 3.0% Middle East & Africa 0.0 0.1 1.0 2.3 Global smartphone share (%) 0.1% 2.2% 3.8% 4.0% Global smartphone share (%) 0.1% 2.2% 3.8% 4.0% Smartphone Units (mn) 0.3 10.5 27.2 39.0 Smartphone Units (mn) 0.3 10.5 27.2 39.0 Source: Gartner, Company data, Credit Suisse estimates Offering smartphones across price points and technologies. Looking at the smartphone device specifications for some of the recent ZTE launches, it is clear that the company is looking to offer a broad range of devices across price points and technologies, in an attempt to cater to demands from US and Chinese carriers. Exhibit 109: ZTE’s smartphone portfolio has seen major improvement – offering across price points and technologies Detailed specifications for recent smartphone launches from ZTE Vendor ZTE ZTE ZTE ZTE ZTE ZTE ZTE Model V889M V790 Groove X501 Flash Anthem 4G Warp Sequent Grand Era U895

Image Technology UMTS/GSM UMTS/GSM CDMA CDMA/LTE CDMA/LTE CDMA UMTS/GSM Announced Nov-12 Nov-12 Nov-12 Nov-12 Sep-12 Sep-12 Sep-12 Shipping date Exp Q4 2012 Exp Q4 2012 Nov-12 Nov-12 Sep-12 Sep-12 Sep-12 Operating System Android 4.0 Android 4.0 Android 2.3 Android 4.0 Android 2.3 Android 4.0 Android 4.0 Application Processor Dual Core 1GHz 1GHz 800MHz Dual Core 1.5GHz Dual Core 1.2GHz 1.4GHz Quad Core 1.5GHz RAM 512MB 512MB 512MB 1GB 512MB 768MB 1GB Memory 4GB 1GB 1GB 8GB 4GB 4GB 4GB Pixels 480 x 800 320 x 480 320 x 480 720 x 1280 480 x 800 540 x 960 720 x 1280 Dimensions (w x h x d) (mm) 120.5 x 63.6 x 11.9 116 x 61.7 x 12.6 118.6 x 62.5 x 13.9 133.9 x 65.7 x 9.7 130.1 x 68.1 x 13.7 127 x 64.8 x 9.9 133 x 66 x 8.6 Weight (g) 130 149 128 142 190 130 110 Volume (cc) 91 90 103 85 121 81 75 Screen (in) 4 3.5 3.2 4.5 4.3 4.3 4.5 Megapixel 5.0 3.2 3.2 12.6 5.0 5.0 8.0 NFC no no no yes no no no Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) 8.0 NA 5.0 8.0 4.0 7.0 NA Standby time (hrs) 450 NA 300 216 244 220 NA Source: Company data, Credit Suisse research Lenovo – another new entrant, but already 2nd largest smartphone brand in China In calendar Q312, Lenovo shipped around 7mn smartphones compared to around 5mn in the previous quarter. Although its guidance is to ship around 15-20mn smartphones in FY13 (ending Mar 2013), given it has already shipped ~12mn units in 1HFY13, our Lenovo analyst, Thompson Wu, believes that the company could exceed its shipment

Handset Industry 2013 Outlook 86 07 January 2013 guidance for the full year. Assuming 25mn units for Lenovo in FY13 would imply around 3% global smartphone share for the vendor. Exhibit 110: Lenovo’s smartphone portfolio so far has been focused on China market Detailed specifications for recent smartphone launches from Lenovo Vendor Lenovo Lenovo Lenovo Lenovo Lenovo Lenovo Lenovo Model A660 S880 S560 K860 A65 p700i A60+

Image Technology UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM Announced Sep-12 Aug-12 Aug-12 Aug-12 Jul-12 Jul-12 Jan-12 Shipping date Oct-12 Sep-12 Aug-12 Aug-12 Jul-12 Jul-12 Jan-12 Operating System Android 4.0 Android 4.0 Android 4.0 Android 4.0 Android 2.3 Android 4.0 Android 2.3 Application Processor Dual Core 1GHz 1GHz Dual Core 1GHz Quad Core 1.4GHz 800MHz Dual Core 1GHz 1GHz RAM 512MB 512MB 512MB 1GB NA 512MB 256MB Memory 4GB 4GB 4GB 8GB 220MB 4GB 512MB Pixels 480 x 800 480 x 800 480 x 800 720 x 1280 320 x 480 480 x 800 480 x 320 Dimensions (w x h x d) (mm) 125 x 65 x 10.5 142 x 78 x 9.9 125 x 63 x 12.3 143.6 x 74.5 x 9.5 116 x 59.9 x 12.6 125.6 x 64.6 x 12.8 115.8 x 60.8 x 11.9 Weight (g) 138 196 155 190 162 135 Volume (cc) 85 110 97 102 88 104 84 Screen (in) 4 5 4 5.0 3.5 4 3.5 Megapixel 5.0 5.0 5.0 8.0 3.2 5.0 2.0 NFC no no no no no no no Wi-Fi yes yes yes yes yes yes yes GPS yes yes yes yes yes yes yes Talk time (hrs) NA 17.0 8.0 31.0 6.0 22.0 3.0 Standby time (hrs) NA 312 250 336 150 312 192 Source: Company data, Credit Suisse research Gain a strong China foothold. This is very important as China is both the largest PC and smartphone markets globally, consuming 22%/26% YTD 2012 shipments. We expect China to account for around 30% of global smartphone market by 2015 in volume terms. China happens to be Lenovo’s core market generating 44%/67% of revenues/op profits YTD FY13. Lenovo can leverage its China PC position (33% PC share YTD ‘12), localized manufacturing, PC supply chain advantages (i.e. distribution), a popular China brand, and operational experience in the region as a stepping stone for its smartphone business. By driving synergies in PCs and smartphone, we believe Lenovo’s China smartphone business can deliver operating margins comparable, if not better, to the industry average of 1-1.5% long-term vs. a 3.2% loss in the F2Q13 Sept. Selective country expansion. Lenovo is not initially building a global smartphone business. Instead, Lenovo is focused on China and expanding into select Asia-Pac/Eastern European countries with a large and fast growing smartphone market opportunity. In the December 2012 quarter, Lenovo has entered into India (#1 in PC share), Indonesia (#3), Philippines (#2), and Russia (#3). These are countries in which it also has top three PC market and infrastructure investments we believe it can leverage such as distribution and marketing. Indeed, we believe it is choosing countries where it can leverage its PC infrastructure and related costs to accelerate scaling benefits created through synergies between both business units (PC/smartphones). Lenovo plans to double its countries- addressed in FY14 to ten, from five in FY13. Expand and strength operator relationships. Operator support is needed to deepen its penetration in China, expand into new countries, and enter the high-end smartphone market. This latter is a market we expect Lenovo will attack in FY14, and Lenovo will compete with other smartphone vendors (i.e. Apple/Samsung) for subsidies and marketing dollars. We believe having strong relationship will assist Lenovo in winning its portion of these subsidy/marketing dollars. In China currently, it is deliberately choosing to distribute its popular smartphones through operators, rather than use its own distribution, in efforts to build a longer-lasting operator relationship. It is working with China Unicom, China

Handset Industry 2013 Outlook 87 07 January 2013

Mobile, and China Telecom and looks to balance distribution amongst the three operators in FY14. Leverage China distribution advantage. According to Lenovo, roughly half of China smartphones are sold through open-channels, which can yield 3x better gross margins vs. operator channels. To date, more than 70% of Lenovo’s smartphones sold have been through operators for the reasons we discuss above. Indeed, Lenovo will eventually leverage its China distribution advantage once it achieves a certain level of scale, and having developed its operator relationships. Once it does so, which we expect will gradually shift in FY14, we expect the profitability of its MIDH business unit will begin to improve meaningfully. In-house design and manufacturing. In Wuhan China, Lenovo is building a design and manufacturing facility for smartphones, tablets and other mobile devices. The facility will strengthen its R&D, enhance its supply chain by improving its end-to-end product capability, accelerate production cycles, and product portfolio. We believe this will provide a key time to market and product portfolio advantage in the highly competitive white-box brands of the China smartphone market. Lenovo’s Wuhan operations are set to begin in Oct-13. Smartphone revenues reaching 7.5/8.5% in FY13/FY14. We expect Lenovo to ship 25mn/38mn smartphones in FY13/FY14, up from ~4mn in FY12. Of these, we expect the company to ship 94%/84% respectively of its overall shipments in China. These estimates would imply Lenovo’s China smartphone market share reaches ~10% in CY12/CY13. Significant growth for white-label / grey market vendors driven by Android China has been a key driver for smartphone volume growth, something which we believe is likely to continue as we expect smartphone shipments in China to rise from 78mn units in 2011 to nearly 200mn/300mn units in 2012/2013. This fast growth has been driven by combined effect of push from all three carriers in the region along with chipset manufacturers’ ability and intent to customize their smartphone chipsets to drive lower end smartphones especially at white-label manufacturers. Even long term, we believe that China would account for as much as 30% of global smartphone volumes compared to only around 15% in 2011. MediaTek and Spreadtrum fuelling low-end smartphones in China. According to our analyst Randy Abrams (who covers both MediaTek and Spreadtrum), smartphone baseband volumes for these two vendors together may grow from 10mn units in 2011 to nearly 150mn/335mn units in 2012/2013 (Exhibit 111). In the past, both these vendors were struggling to transition from 2.5G baseband chips towards 3G/smartphone chips due to technology and performance issues, something which seems to have been addressed. This has resulted in aggressive plans from both these chipset vendors to target local handset OEMs in China to fuel the low-end smartphone market. In fact, China Unicom’s recently launched devices focused on mass market dual core smartphones from branded Chinese vendors and saw an almost even split of designs based on MediaTek and Qualcomm. Qualcomm secured wins from Hisense, KTouch/Tianyu, Coolpad, and Huawei while MediaTek was designed into smartphones from Malata, Lenovo, TCL, and ZTE.

Handset Industry 2013 Outlook 88 07 January 2013

Exhibit 111: Smartphone baseband volumes at MTEK/SPRD Exhibit 112: QCOM remains engaged with local vendors in millions, unless otherwise stated Qualcomm’s reference design chipset roadmap for China 300 Q1’13 91

8x30 250 Dual Kraits

200 Q2’12 Q4’11 MSM 8x25Q Quad Core 150 Q2’11 / Q3’11 8x25 Dual Core 31 243 7x27A MSM Single Quad Core 100 7x25 Core MSM Dual Core 7x27

Smartphone baseband units (mn) units baseband Smartphone 116 50 18 First 1GHz 11 2 Single Core 0 38 47 0 First High Volume 21 0 10 10 40+ OEMs 100+ Launches 100+ in Design <60 days Launch Time-to-Market Q112 Q212 Q312 Q412E 2011 2012E 2013E SpreadTrum MediaTek Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research Qualcomm remains engaged with local Chinese vendors with its reference designs. Although Taiwanese chipset vendors (MediaTek and Spreadtrum) have seen a lot of traction with local handset vendors in China, up until 1H12, their success in 3G and smartphone market had been limited. In addition, Qualcomm was also not actively involved in offering reference designs to local vendors in a big way until end of 2011, which meant that local handset OEMs were not able to offer quality devices in the low-end of the smartphone market. With improvements in its QRD portfolio (7x27A – first 1GHz single core chip launched in Q411, followed by 8x25 dual core chip introduced in Q212), Qualcomm has been able to fuel the low-end of the smartphone market in China and India with its reference design partnerships with a number of local vendors including Huawei, ZTE, Lenovo, Oppo, Coolpad, Haier, BYD, TCL-Alcatel to name a few. In fact, Qualcomm now has reference designs in over 100 smartphone devices with over 40 OEMs across 12 countries. Chipset roadmap improvement has led to Android smartphones flooding the China market. Driven by this continued improvement in smartphone chipset offering from MediaTek, Spreadtrum and Qualcomm, we have seen that white-label and grey market handset manufacturers have flooded the smartphone market in China with a number of Android device launches. While most of these devices are clearly aimed at the low-end of the segment with prices ranging from $70 to $100 (Exhibit 113), we also see smartphone launches at higher end of the market.

Handset Industry 2013 Outlook 89 07 January 2013

Exhibit 113: Slew of Android smartphones across price points being manufactured by white-label vendors in China Detailed specifications for Android smartphones from white-label manufacturers in China NON-BRANDED OEMs Chipset SC6820 MTK 6515 MTK 6515M MTK 6515 MTK 6575 MTK 6577 QCOM MSM 8255 MTK 6577 Model N9300 Mini i9300 Dex Nebula V11 Elysium Coolpad 7266 W3

Image Technology GSM/EDGE GSM/EDGE GSM/EDGE GSM/EDGE UMTS/GSM UMTS/GSM UMTS/GSM UMTS/GSM Operating System Android 2.3 Android 2.3 Android 2.3 Android 2.3 Android 4.0 Android 4.0 Android 4.0 Android 4.0 Application Processor 1GHz 800MHz 1GHz 1GHz 1GHz Dual Core 1GHz Dual Core 1GHz Dual Core 1GHz RAM 256MB 256MB 256MB 256MB 512MB 512MB 512MB 1GB Memory 256MB 256MB 256MB 256MB 512MB 4GB 4GB 4GB Pixels 320 x 480 320 x 480 320 x 480 320 x 480 480 x 800 480 x 800 480 x 800 480 x 800 Dimensions (w x h x d) (mm) 116 x 61 x 10 127 x 68 x 10 115 x 61 x 11 110 x 60 x 13 120 x 65 x 10 126 x 65 x 11 124 x 65 x 10.7 125 x 65 x 13 Weight (g) 100 NA 128 115 90 120 125 150 Volume (cc) 71 86 77 86 78 90 86 106 Screen (inches) 3.5 3.5 3.5 3.5 3.5 4.3 4.0 4.5 Megapixel 3.0 3.2 8.0 0.3 5.0 5.0 5.0 8.0 Wi-Fi yes yes yes yes yes yes yes yes GPS no no no no no no yes yes Dual SIM yes yes yes yes yes yes no yes Talk time (hrs) 4.0 NA 3.0 4.0 4.0 6.0 6.0 3.0 Standby time (hrs) 72 NA 90 72 90 72 80 90 Wholesale Price (USD) 65 78 70 82 130 150 185 240 Source: Company data, Credit Suisse estimates

Handset Industry 2013 Outlook 90 07 January 2013

Companies Mentioned (Price as of 04-Jan-2013) (005930.KS, W1,525,000) LG Electronics Inc (066570.KS, W78,700) China Telecom (0728.HK, HK$4.3) China Unicom Hong Kong Ltd (0762.HK, HK$12.78) ZTE Corporation (0763.HK, HK$13.72) China Mobile Limited (0941.HK, HK$90.65) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.43) Lenovo Group Ltd (0992.HK, HK$7.5) United Microelectronics (2303.TW, NT$12.4) Advanced Semicon. Engr. (2311.TW, NT$26.2) Taiwan Semiconductor Manufacturing (2330.TW, NT$101.5) Foxconn Technology Corp (2354.TW, NT$89.5) MediaTek Inc. (2454.TW, NT$305.5) HTC Corp (2498.TW, NT$287.0) Sony (6758.T, ¥968) Apple Inc (AAPL.OQ, $527.02) Amazon com Inc. (AMZN.OQ, $259.15) Broadcom Corp. (BRCM.OQ, $34.44) Cisco Systems Inc. (CSCO.OQ, $20.5) Deutsche Telekom (DTEGn.F, €8.86) Ericsson (ERICb.ST, Skr68.05) Google, Inc. (GOOG.OQ, $737.97) Leap Wireless (LEAP.OQ, $6.98) Marvell Technology Group Ltd. (MRVL.OQ, $7.82) Microsoft Corporation (MSFT.OQ, $26.78) Nokia (NOK1V.HE, €3.22) QUALCOMM Inc. (QCOM.OQ, $63.56) RDA Microelectronics (RDA.OQ, $10.98) Research In Motion Limited (RIMM.OQ, $11.95) Sprint (S.N, $5.92) Spreadtrum Communication (SPRD.OQ, $17.17) AT&T (T.N, $35.23) Texas Instruments Inc. (TXN.OQ, $31.84) Verizon (VZ.N, $44.3)

Disclosure Appendix

Important Global Disclosures Kulbinder Garcha and Achal Sultania, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchm ark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Handset Industry 2013 Outlook 91 07 January 2013

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined o n a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names The subject company (005930.KS, 066570.KS, 0728.HK, 0941.HK, 2354.TW, AAPL.OQ, 0763.HK, 2454.TW, 2498.TW, AMZN.OQ, BRCM.OQ, DTEGn.F, ERICb.ST, GOOG.OQ, 6758.T, CSCO.OQ, MSFT.OQ, NOK1V.HE, RIMM.OQ, S.N, T.N, VZ.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (066570.KS, 0941.HK, 2454.TW, AMZN.OQ, DTEGn.F, ERICb.ST, GOOG.OQ, CSCO.OQ, MSFT.OQ, NOK1V.HE, S.N, T.N, VZ.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (005930.KS, 066570.KS, AAPL.OQ, 0763.HK, BRCM.OQ, DTEGn.F, ERICb.ST, 6758.T, CSCO.OQ, MSFT.OQ, NOK1V.HE, S.N, T.N, VZ.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (066570.KS, DTEGn.F, NOK1V.HE, S.N, T.N, VZ.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (066570.KS, 0941.HK, 2454.TW, AMZN.OQ, DTEGn.F, ERICb.ST, GOOG.OQ, CSCO.OQ, MSFT.OQ, NOK1V.HE, S.N, T.N, VZ.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (005930.KS, 066570.KS, 0728.HK, 0762.HK, 0941.HK, AAPL.OQ, 2454.TW, 2498.TW, AMZN.OQ, BRCM.OQ, DTEGn.F, ERICb.ST, GOOG.OQ, CSCO.OQ, MSFT.OQ, NOK1V.HE, QCOM.OQ, RIMM.OQ, S.N, SPRD.OQ, T.N, VZ.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (005930.KS, 066570.KS, AAPL.OQ, 0763.HK, BRCM.OQ, DTEGn.F, ERICb.ST, 6758.T, CSCO.OQ, MSFT.OQ, NOK1V.HE, S.N, T.N, VZ.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ, AMZN.OQ, BRCM.OQ, GOOG.OQ, 6758.T, CSCO.OQ, LEAP.OQ, MSFT.OQ, QCOM.OQ, RIMM.OQ, S.N, SPRD.OQ, T.N, VZ.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0728.HK, 0763.HK, 2454.TW, 2498.TW, DTEGn.F, NOK1V.HE). Credit Suisse has a material conflict of interest with the subject company (2454.TW). Credit Suisse is acting as the Joint non-exclusive financial advisor and facilitator to Mediatek on their announced tender offer for Mstar Semiconductor Inc.

Handset Industry 2013 Outlook 92 07 January 2013

Credit Suisse has a material conflict of interest with the subject company (DTEGn.F). Credit Suisse Securities (USA) LLC is acting as financial advisor to MetroPCS Communications Inc on the announced proposed merger with Deutsche Telekom. Credit Suisse has a material conflict of interest with the subject company (S.N). Credit Suisse acted as financial advisor to a shareholder of Clearwire in connection with the announced proposed acquisition of Clearwire by Sprint. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. 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Handset Industry 2013 Outlook 93 07 January 2013

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Handset Outlook 2013_07 Handset Industry 2013 Outlook JAN.doc94