I can still remember meeting with people from RIMM 10 years ago, as they were a relative upstart compared to Palm, and were feeling out Microsoft’s intentions in the smart phone space. Since then, a lot has happened. Lots of new players and threats have emerged, and many have fizzled out after great hype.
All of the recent hype about iPhone 3G would make you think that the Smartphone market is Apple’s to win (from RIMM). Heck, much of the coverage makes it sound as if the iPhone is the first phone to have a popular developer ecosystem. CNET even went so far as to predict that the iPhone would replace Facebook and MySpace as the preferred social network targeted by widget vendors and advertisers! As in the past, the popular consensus is bound to look myopic in hindsight.
In this industry, there are 4 types of players who compete and cooperate:
· Carriers – companies like AT&T or Orange who sell you communications bandwidth for your phone. They own spectrum, and lease that spectrum to you. They want you to A) pay as much as possible for as long as possible, B) not cost them a lot in customer support. Carriers have the control, since spectrum is a scarce physical resource. This is why everyone else is interested in “network neutrality” legislation.
· Handset makers – these are companies like Nokia who make phones and want to get a profit on the hardware sale.
· Phone OS providers – companies like Microsoft who try to license their software to handset makers.
· Service providers – companies like Google who make profit when people use their service from a mobile phone.
I won’t take the risk of making predictions that could come back to bite me, but it’s safe to predict that the carnage is far from over. For the next 5 years at least, the following 5 companies will all be very relevant with significant share. For each one, I talk a bit about the business model and strategy to help understand how things might play out:
Google Android aims to be an open-source operating system for Smartphones; free to all handset makers. Google like to say that they “do everything out in the open”, so it was fun to see them get caught being secretive. But it’s all a bit unfair, since Google is more open than Apple, Microsoft, or RIMM – and in fact that openness may be their downfall.
You see, Android is basically a strategic hedge by Google, to ensure that nobody can tie up the mobile platform with a closed, proprietary system. Google benefits when everyone develops using web standards and targeting Google services. Google’s business model is to profit on the services (like search) and use that profit to subsidize the phone user experience. This is a really strong strategy; and Google’s absolutely dominant ability to monetize their services will make them relevant on all mobile phones, regardless of how many Android units have shipped in 5 years.
Google’s weakness is that their strategy is fundamentally opposed to the strategy of the carriers. Phone Carriers want you to keep paying your bill, and to use data plans that are more profitable. They don’t want you calling them with an expensive support call about some 3rd party application that they didn’t even write. Carriers may not mind open source, but they want a controlled developer ecosystem.
Symbian is the dominant smartphone platform outside of the USA. The big news recently was that Nokia has purchased Symbian and will open-source the platform.
Unlike Google, who makes money from the services, the handset makers get their profit from selling the hardware. An open-source Symbian means that they don’t see a sustainable business model in licensing the handset OS. While open-source Symbian and Android are a blow to Microsoft’s Windows Mobile strategy (at a minimum, creating some pricing pressure), open-source Symbian is also blow to Google’s Android plans. The handset makers are wary of Google and want to keep their options open.
RIMM owns a proprietary handset, operating system, and services. Because they control everything except the carrier, they can offer seamless end-to-end experience. This is why BlackBerries are so strong in the USA. RIMM knows how to work with carriers, too.
Apple is essentially copying RIMM’s strategy, controlling a proprietary handset, operating system, and services. Just like RIMM, they provide a seamless end-to-end experience. Just like RIMM, they make carriers happy by providing a sexy device that makes it easier for the carrier to sell expensive contracts.
Much has been made about how “innovative” the iPhone SDK and store is, but people apparently forget that Windows Mobile, Palm, and even RIMM have had additional applications available for a long time. The sort of applications, and the download trends, look a lot like other platforms. When people mention that Facebook is the #3 download from the App Store, they forget that Facebook released an app (web-based) for iPhone long before the SDK was released, and it was immensely popular. Windows Mobile recently got two Facebook apps, and installs of the Facebook app for BlackBerry still outnumber iPhone.
What Apple is doing differently is important, though. By centrally controlling the application store, they give an improved user experience. And more importantly, they provide a visible brand where people wanting support can call *instead* of calling the carrier. Apple’s app store will certainly increase expense for the carriers, but less so than the more open strategies of Google or Microsoft.
Apple business model is to profit up-front on the hardware, and break even on the services. They take a 30% cut of app store revenues and charge a subscription for mobile me, but their primary strategy is to profit on hardware. This gives them the free cash flow up front.
Microsoft’s business model historically has been to make money licensing our proprietary operating system. As a platform, we offer C++, .NET, or Silverlight, as well as AJAX.
As the entire company moves toward a software plus services strategy, our mobile strategy combines operating system with services. This is what the Danger acquisition was about, and it is no mistake that the Live Search app is one of the most popular applications for Windows Mobile.
Search is the Lever
Common wisdom says that this is about Apple and RIMM, but I think this is actually about Google and Microsoft. It’s true that Google hasn’t shipped a single unit yet, and Microsoft’s primary revenue stream (licensing the OS) seems threatened by open-source Symbian and Android. And neither company sells a sexy handset to drive cash flow-positive revenue.
But both companies control search engines, and search service is far more monetizable than any of the other services. The end-to-end experience using the WLS app on Windows Mobile is the sort of experience Google would love to have on all mobile handsets, and you can bet that they will. Apple getting $0.30 every time someone installs the “Flash Light” application is cool, but the revenues and margins of app store and iTunes store won’t be able to compete with search. Like iTunes and app store, the Mobile Me service is an attempt by Apple to protect their high hardware margins.
Search will be a critical component of RIMM or Apple experience anyway. Search is a really hard market to enter, and none of the other contenders will be able to afford the infrastructure necessary.Of course, when anyone makes money, the carriers want to take a cut. So the carriers are the wildcard here. This is a fact that Google and Microsoft have known for a long time, and both companies will need to get better at making carriers’ lives easier to make inroads against Apple and RIMM.
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