Note: This is a long post – but it needs to be since I am trying to set the context for the discussion. Hopefully you will like it.
The headings are
c) What is inside a mobile phone?
d) Comparisons to the early PC value chain
e) Existing strategies of handset vendors
g) Crossing the chasm
Recently, two developments have focused the spotlight on Android. Firstly, Verizon’s adoption of LIMO foundation Linux in preference to Android and secondly a report says that Linux will capture 20 percent of the high end mobile market by 2013 (mainly due to Android).
Both these developments view Android in context of the current ecosystem.
Techcrunch does a good comparison within the existing framework and that’s good
However, disruptive services like Android (and the iPhone) cannot be viewed only in context of the existing framework. They are game changers and can best be analysed in context of the crossing the chasm viewpoint from Geoffrey Moore.
Here is a synopsis:
Just like in the PC industry, both hardware and software components of mobile devices are being standardized. The device (both hardware and software) becomes malleable i.e. conceptually a kind of ‘putty’/ clay. Once that happens (and as we see below – it is already happening), the value chain changes completely. Android is likely to contribute significantly to this trend – and consequently the primary beneficiaries of Android will not the existing players but a new set of as yet undefined customers OR players in the existing value chain – for example SIM card vendors – who may avail opportunities to develop new capabilities and acquire new customers aka crossing the chasm
When the iPhone was launched, I posted a long article which was called The iPhone is extraordinary not because of its UI but because it’s the tail wagging the dog .
In a nutshell, the success (or otherwise) of the iPhone has to be viewed in terms of whether it can change the existing industry value chain.
To the surprise of most people, including me, the iPhone HAS indeed succeeded in changing the existing industry value chain by providing a product/service that people want. While the long term prospects for the iPhone are unclear, the fact remains that the iPhone has succeeded in changing sacrosanct industry practices (for instance in changing the billing relationship )
So .. what about Android?
Is Android just a Linux consortium?
Linux consortia have been around a plenty and prominent ones include LIMO, LIPS and others. In fact, many companies, will hedge their bets by joining as many such consortia as possible mainly for defensive and strategic reasons. So, if Android is viewed as ‘yet another Linux consortium’ – it is not a big deal in itself.
Is Android about free/cost savings?
Again .. thats only part of the story ..
Historically, the deployment of Linux on the Mobile device has been motivated by the need to save cost but Android is more than cost savings.
However, speaking of cost savings ..
Linux on mobile devices is an expensive proposition when viewed on a ‘like for like’ basis with operating systems like Symbian. The value proposition of Linux on Mobile devices is not based on reducing the cost of the Operating system per se – but rather in reducing the cost of the whole BOM (Bill of materials) for a mobile device including its IPR costs. This means the ability for OEMs/ device manufacturers to ‘mix and match’ software elements of the Operating system with the goal of reducing the combined cost of software and hardware is a greater driving factor for Linux on Mobile devices than the cost of Linux itself. (Note: We will use the term OEM – Original equipment manufacturers – to refer to device manufacturers like Nokia, Sony Ericsson etc) .
And Android of course, is more than Linux on mobile devices.
Android has some elements of cost reduction (in that the stack is provided for OEMs to take up and productise into new mobile devices). But it is more about new services (wherein lies the differentiation as we will see below).
Currently, applications and services are not differentiators for mobile devices (which is a far cry from what industry consultants will want us to believe! ). Inspite of all the industry efforts, the only two common elements across most handsets worldwide are: voice and SMS. Most people still buy devices on looks – as Nokia found out much to their surprise when they got caught in the clamshell vs. candybar wars
Consequently, despite all the talk – prior to the iPhone – the Mobile Web and other services were not differentiating factors for the public.
We show below how this status quo is changing and is creating opportunities for new players (not just Android). We explore the following areas with this background
a) Changes in the device value chain leading to opportunities for new players
b) The importance of services and applications in future
c) Long tail applications and developer support
d) Personalization and customization of handsets beyond ringtones and other cosmetics
e) Crossing the chasm – new entrants may try to go for a segment not currently served by the industry players.
WHAT IS INSIDE A MOBILE PHONE?
Daft as this question sounds, we need to first understand what is a phone/mobile device.
The Mobile Handset Industry in Transition by Jamie L. Anderson & Martin E. Jonsson has a very good explanation and I have used it in this section.
Essentially, a phone comprises of three components (Integrated circuits).
The Radio Frequency Circuit (RF): sends and receives voice or data signals to the mobile phone.
The Mixed Signal Circuit: converts the signals from digital to analog and vice versa
The Baseband Circuit (BB): The BB is the phone processor where both the application software and the communication software is managed.
Unlike the application software, the communication software needs to operate in real time. In entry level phones, the Real Time Critical Operating System (RTOS), manages both the functions. In smartphones, there are two operating systems – one for the communications and the other for the applications. Microsoft and Symbian are examples of application operating. Android addresses the smartphone market.
COMPARISONS TO THE EARLY PC VALUE CHAIN
In hardware terms, the handset industry today can be compared to PC industry in the 1980. At that time, the PC manufacturers were vertically integrated. As the industry evolved, the vertical integration model was broken.
For instance, if we compare the handset industry to the early PC industry
a) Hardware innovations in themselves do not provide differentiation. Hardware quickly becomes commoditised.
b) Barriers to entry are reduced. The software and the hardware each become increasingly modularized. This leads to new entrants who can enter the marketplace – just like in the PC industry with lower barriers to entry.
c) Systems integration becomes a core competency and supply chain efficiency will decide the winners and the losers
d) As variable costs rather than fixed costs become more relevant, economies of scale may not be the dominant factor i.e. it may be possible for new players to enter the market who can be profitable even if they sell a smaller number of handsets.
e) ‘Softer’ components like brand, customer service, customization, applications and services are likely to be a more important source of differentiation as hardware differentiators are harmonized.
f) First mover advantage is likely to be short lived in this world. If one vendor introduces an X Megapixel camera, others will follow suit. This is again reminiscent of the PC industry with almost every manufacturer talking about faster processing speed, greater memory etc. customers will quickly learn this.
To some extent, we are already seeing the first manifestations of this trend. For instance:
a) OEMs are tending to outsource components of the phone to specialized companies called ODMs (Original design manufacturers).
b) For phones, the user interface component and the operating system components are decoupling (for example UIQ and S60 with Symbian). The implication here being – the core OS is bog standard. Differentiation comes from within the user interface which needs to be separate from the OS
c) Both software and hardware is becoming modularized. This explains the rise of Linux in the first place as we discussed above since its modularized architecture lends itself to the ‘mix and match’ in comparison to the more monolithic operating systems. It also explains why device manufacturers like Nokia are working with Linux but are not a member of any Linux consortia i.e. they see the value of Linux in itself
d) Since IPR is a variable cost, the significance of IPR is also relevant in the Linux context and especially the Android context Open source vs. Open Standards – complementing or competing?
EXISTING STRATEGIES OF HANDSET VENDORS
The strategies of existing handset manufacturers are dictated by the existing industry structure. In Breaking up the handset value chain Jamie Anderson and Martin Zander describe the industry structure in terms of three paradigms which we will also use here.
1. The semiconductor paradigm :
Is the domain of the semiconductor companies such as Texas instruments, Infineon etc. Here, cost reduction is the key driving factor. Hence, economies of scale, Moore’s law http://en.wikipedia.org/wiki/Moore’s_law (Gordon not Geoffrey!) and economies of scale are important. Other than cost reduction, there is little scope for differentiation in this paradigm.
2. The telecom paradigm
The telecom paradigm is the domain of the OEMs like Nokia, Sony Ericsson etc. The buyers in sector are the Telecoms operators and there is a constant tradeoff between new requirements vs. the cost of production. Here, the volumes matter but the features matter as well!
3. The computing paradigm
The features in the computing paradigm are driven by the PC industry and by convergence with the PC/Web. Here, the application, operating system and other services are the main drivers.
Knowing the above, here is the existing scenario in the handset value chain
Firstly, the OEMs ..
a) Nokia is the undisputed market leader – with excellent supply chain capabilities and great execution which lead it to dominate both the low end and the high end segments(smartphones)
b) Handset growth continues in Asia and Asia will be a key market anyway. Nokia dominates this market through a combination of factors
c) Nokia continues to excel on the computing paradigm – for instance its emphasis on Mobile Ajax, Mobile Widgets, acquisition of Navteq and its belief that it is an Internet company
d) While Nokia focuses on scale and convergence, Sony Ericsson focuses on handsets that do ‘one thing well’. They also have considerable success with this strategy.
e) Samsung and LG have a broad strategy. Considering Nokia’s historical weakness in the USA and the willingness of Samsung and LG to customize handsets according to the Operator’s wishes – they do well in America.
f) Motorola .. Did many things wrong post RAZR. But from our standpoint, Motorola was focused on technology and not enough on the features, services and aesthetics of a device. As Dean Bubley says in his usual skeptical viewpoint – and I paraphrase .. If it were possible for Motorola to port Fortran on phones .. they would try! Which kind of sums up Motorola’s strategy.
Next, the other players and related developments
a) The semiconductor vendors continue to suffer from the same trends that affect them with cost being their primary differentiation. The chipset vendors need at least 2.5B$ of sales to cover their R and D expenses. (Arete consulting). It is already in consolidation mode with existing players like TI, freescale, Infinion etc being affected.
b) ODMs may move up the value chain. In a first of its kind , Taiwanese ODM BenQ mobile moved up the value chain by acquiring the assets of Siemens but ultimately itself went into administration.
c) Qualcomm focused on the chipset for CDMA giving up their handset ambitions
d) Reflecting the significance attached to the modular nature of Linux as discussed above, we see the emergence of a whole raft of Linux integration vendors such as Windriver.
e) ODMs like HTC continue to focus on technical excellence and are focused on devices like the HTC touch, Android and Windows
f) MSM – Mobile software management is a key development and one to watch. MSM relates to deep customization of handset software at all stages of the lifecycle (not just post production). Technologies like FOTA (firmware over the air update) are a part of MSM. Andreas has a good post about this What if handset features could shape and evolve with the user? the user side of mobile software management
And then the iPhone came along and shook up the ecosystem. The billing relationship was changed and the handsets were no longer subsidised. The customers still continued to buy the iPhone. For the first time, the Mobile Web became a differentiating factor. Develops were important. Developers had a chance to make money. Advanced features of devices like search were used for the first time.
It is in this backdrop that Android makes an entrance .. and I hope you have been following this article so far .. It was necessary to set all this context before we discuss Android.
So, knowing the above, what can we say about Android
a) Firstly, Android is a computer and not a phone . It has no IMS stack and hence leaves the network layer applications for the Operator. (No SIP/IMS stack for Android )
b) As hardware and software become commoditised, the Android offers a cheaper ‘software toolkit’ for to build devices.
c) Increasingly differentiation will be based on brand and softer elements like customer service. Android works well with this trend
d) The software layer has been well thought out in a holistic manner – especially its integration with the Web. For instance, photos can be accessed from online services (and not just from the phone’s memory). XMPP protocol can be used to send data to other Android applications(handset capability exchange)
e) As services become important, so do developers!
CROSSING THE CHASM
When we think of all the above factors, the only certain thing is: there is considerable flux in the handset value chain and that the past will be substantially different from the future. Hence, a new entrant will probably choose a battlefield where it can serve a segment of the market which may be underserved today. This is the philosophy behind Geoffrey Moore’s seminal book Crossing the chasm which says ..
A company should focus on a single market, a beachhead, win domination over a small specific market and use it as a springboard to adjacent extended markets to win. .
The ‘springboard’ is a market segment that is ignored or underserved by the existing players
Consequently, the question should be:
Who benefits from the introduction of an entire open source software stack?
There are many possibilities of new entrants to the device value chain given the existing flux in the value chain. For instance:
• Chipset vendors who may aspire to become OEMs
• ODMs who may venture into OEM territory;
• Operators who may want to assemble their own devices
• SIM card vendors who may want to build their own device,
• Brands who have been burnt by the MVNO trend – but will see the possibility to create new devices
• Wimax vendors looking for wimax devices and so on ..
These new categories will become the ‘beachhead’ from which Android may start. Thus, Android attempts to solve a problem which can be best understood when viewed across the value chain within a historical context especially keeping the trend of commoditization in view. A whole bunch of new manufacturers start up in the mobile phone business – mainly because they can!! A ‘long tail’ of handset manufacturers if you will!
To recap again ..
Just like the PC industry, both hardware and software components of mobile devices are being standardized. The device (both hardware and software) becomes malleable i.e. conceptually a kind of ‘putty’/ clay. Once that happens (and as we see below – it is already happening), the value chain changes completely. Android is likely to contribute significantly to this trend – and consequently the primary beneficiaries of Android will not the existing players but a new set of as yet undefined customers OR players in the existing value chain – for example SIM card vendors – who may avail opportunities to develop new capabilities and acquire new customers aka crossing the chasm
The timing for both iPhone and Android is good – there is considerable disillusionment in the industry at the moment and the customers’s appetite has been whetted by the success of the iPhone – opening opportunities for new players.
As usual, comments welcome and thanks for reading this to the end!
Changed to : Who benefits from the introduction of an entire open source software stack? – Thanks Andreas / Visionmobile