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25 October 2017

Essential Products is clearly struggling with its Essential Phone which will lead to it focusing on

Essential Products is clearly struggling with its Essential Phone which we think will probably lead to it ending up focusing on the smart home only. Essential Products Inc. has used the only competitive weapon it ever really had and has cut the price of its flagship Essential smartphone by 29% from $699 to $499. Those that have already purchased the device will get a $200 credit towards purchasing other devices within the Essential ecosystem such as the 360 camera. The issue with this is it will really annoy fans of the device who paid full price and it is also an admission that there is nothing particularly special about this device leaving Essential Products in the same boat as everyone else in terms of competing on price. This is a real climb down for the company because competing directly with the Chinese and LG directly on price, it means that the user experience and ecosystem that it spent so much time creating is getting no traction with users. This fits exactly with our previous observation that Essential Products has created a great Google phone and nothing more.

Essential’s strategy is to create an ecosystem of products and services around its smartphone that reach into smartphone peripherals and the smart home. In the smart home, Essential has a good grasp of the real problems and has designed a product to address these issues but digital ecosystems are still completely defined by the experience on the smartphone.

Essential aims to differentiate in hardware, AI and the cross-device compatibility and consequently to get its innovations in the hands of users, it thinks that it needs a smartphone. The aim with the price cut is obviously to drive volume and user numbers but we suspect that this will put real pressure on its gross margins meaning that the $300m recently raised by the company will erode much more quickly. Furthermore, this action will almost certainly result in a hit to the company’s credibility as it makes much of the message it communicated at the time of launch look hollow. We continue to think that the company has no differentiation in smartphones but its strategy in the smart home looks interesting.

Consequently, we can see the smartphone being dropped with all the remaining focus and resources being placed on creating a position in the smart home. This will be easier and said than done as it is up against two companies that sell good products at cheap prices and have both the means and the will to lose money for a sustained period to build the market position they are looking for.  Against this, Essential Products has little chance but its hope lies in its understanding of the smart home and moving to address it ways that its opponents are currently failing to do. It has to move fast as both Amazon and Google are showing signs of realizing what it is they are missing in the smart home.

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