Significance: Google has rarely been associated with design excellence, though that has been changing as it comes up against Apple. Now it is recognizing that, in hardware, it needs to live on the cutting edge, in order to retain leadership of Android directions, influence the evolution of the post-PC base, and avoid seeing its brand overshadowed by Samsung and Amazon. To guard against that, it is turning its new Motorola Mobility unit into an innovation center, focusing on far fewer products but with a new and high end R&D facility to push the boundaries of mobile experience. This, Google hopes, will put it in the driving seat of its ecosystem, while not alienating other OEMs like Samsung, since Motorola will not be going after market leadership in device shipments, but after leading the platform forward. This will be especially important when Windows RT offers a potential escape route to irritated Android OEMs, though Microsoft has balancing acts of its own. Acer has criticized its decision to take its own lead in innovation by launching the Surface tablet, and it has distanced itself from its phone partners in the first wave of RT tablets. So Nokia and HTC will not figure, though Samsung will courtesy of its multi-device strategies. Samsung could be expected to rule the converged W8/WP8 roost, but it should look over its shoulder at Lenovo, coming up rapidly behind.
Google has lost little time in wielding the axe at Motorola Mobility, where it will cut 20% of the staff and refocus the unit on a narrower set of products and geographies. This may be a continuation of the streamlining in which Motorola itself has been engaged over the past few years, but it will also arouse speculation that Google, despite previous protestations, will basically turn its handset arm into a patent store and the basis of its own-branded devices plan.
However, one detail suggests that eminently sensible course ‘ grabbing the patents and sticking to what Google is good at in software ‘ is not the idea. This is the creation of a new Advanced Technology and Projects unit within Motorola, designed to be a center for cutting edge innovation. This shows Google conceding that entry into a mass market smartphone/tablet game is impractical, even with its vast resources ‘ but it still believes it can lead the industry in creating brand new experiences.
It is not clear how bluesky this division will be. It could, like similar facilities at Microsoft, IBM, Apple and Nokia, engage mainly in defining future concepts, filtering those which look most viable out to the wider industry while gaining strong engineering expertise and patent profile. Or it could be nearer to market, looking to take to extremes Google’s promise to reduce Motorola’s portfolio to a few new devices per year.
We can see a thought developing within the firm that it could be a power to develop showcase, next generation products, not so much to generate huge hardware sales as to kickstart the adoption of gadgets and user interfaces that drive web behavior, and therefore Google revenue. By setting a high bar and funding intense R&D programs, Google could set the gold standard for its whole ecosystem, many of whose members are more equipped to emulate others’ designs for a mass market than to innovate themselves.
A hint of this thinking has already been seen in the Nexus strategy, which mainly exists to demonstrate the ideal Android experience (in Google’s view) to partners and to encourage developers (though the new Nexus 7 tablet has a more direct consumer sales strategy because it has another role, to drive Google content and services revenues). It is also common practice at Intel, with its huge innovation programs and numerous reference designs in various segments; and perhaps at Microsoft ‘ we still think the Surface Tablet’s primary role is to show off the capabilities of Windows 8, establish a benchmark quality and scare partners into stepping up their own innovations, rather than to turn Microsoft, long term, into a device player.
It is critical for success in high end mobile devices that the user experience and the hardware are fully integrated and support a wide range of multiscreen content and cloud services using the latest gestures and UIs. That end-to-end model, at which Apple excels, is hard to achieve with a committee of players, as Google discovered with the Honeycomb tablet launch, and as Amazon recognized when it effectively went its own way on its Android implementation.
Frustrated by poor quality Android roll-outs which gave the platform a bad name against iOS, Google faced a choice ‘ take control of hardware completely as Apple does, or set stricter rules for its partners. Despite the purchase of Motorola, the second route was the only viable one to maintain Android’s huge base. Google established an inner circle of vendors which would gain advantages like privileged access and a part in the Nexus program, in return for sticking to its quality standards and showcasing Google brands. It will be careful to present Motorola as just one member of that club, so as not to alienate more powerful OEMs like Samsung. But it will also leverage the Motorola assets, not so much to boost device revenues, but to bring new ideas to the high end of the Android platform.
The new R&D department will be headed by Regina Dugan, a former director of the US Department of Defense’s famous DARPA program, showing how serious Google is about staying ahead of the curve on innovation, to fend off Apple, Microsoft and even Amazon. Dugan said in her statement: ‘It’s a small, lean and agile group that is unafraid of failure,’ and will ‘celebrate impatience’. She said she is hiring all kinds of experts from metal scientists and acoustics engineers to artificial intelligence researchers, but each will work for her unit for just two years so that they feel a ‘sense of urgency’ ‘ an idea implemented at DARPA.
A commercial business is a very different environment to a government research program, and indeed, the main Google firm has recently cut back on many of its less commercial projects to focus its efforts more efficiently on its main areas of expertise. On the other hand, the company has achieved the scale where it needs to have influence beyond mere revenues, and as at other major hi-tech giants, that means innovating very publicly. And Google, even before it finalized the Motorola purchase, has been showing uncharacteristic interest in design excellence as a way to reassert leadership over a fragmented Android ecosystem. Vic Gundotra, SVP of engineering, commented recently: “We care more about design than we ever have in our history’ (which admittedly hasn’t been very much).
Motorola has not, since the RAZR, been associated with the cutting edge of product design, so as the old saying goes, to get where it wants to be, Google ‘wouldn’t be starting from here’. In this way, the totally different background of Dugan should help cast aside old habits, which have been notoriously hard to eliminate at Motorola under successive CEOs. Wade Trappe, a professor at the Rutgers University Winlab, told Bloomberg: “She is very good at driving a larger research program. And Motorola and the Android platform need to think out of the box to compete against the smooth interfaces and other features that the iPhone has.’
One aspect of turning Motorola into an IPR and innovation center is that it needs fewer resources on the product side. The search giant announced this week that it would cut 4,000 jobs from its new division, one-third in the US, and will close one-third of its subsidiary’s 94 offices worldwide. The aim is to exit unprofitable markets, accelerate the shutdown of the featurephone business, and create just a few high impact devices each year instead of dozens, according to Dennis Woodside, CEO of the unit. Motorola Mobility lost $233m in its first six weeks under Google, and has been unprofitable for 14 of the past 16 quarters.
Google’s previous claims that it would largely leave Motorola alone were already thrown into doubt when Woodside, a Google veteran, was named to succeed former CEO Sanjay Jha. He will now lose 40% of the handset maker’s vice presidents too, cut back in former strongholds in India and other parts of Asia (though not China), and reorganize R&D around three hubs ‘ in Motorola’s traditional Chicago base, Silicon Valley’s Sunnyvale, and Beijing. More Googlers will cross the Chinese wall, including consumer marketing chief Gary Briggs, who will now take that role at Motorola. And a potentially important hire is of Mark Randall, formerly of Amazon, to manage the supply chain, which has often been a Motorola weakness.
Some of Woodside’s actions fit in with directions already taken by Jha, such as reducing the number of devices and streamlining processes. But Jha, after a period of retrenchment, was starting to eye expansion in emerging markets again, chasing the high growth area of affordable smartphones. That policy now looks in doubt, and it remains to be seen whether the ‘few devices’ keep the Motorola brand for long, and what the reaction of other Android partners is.
But Google has signified its intention to turn Motorola into a very different animal, one which supports Google’s need for new form factors and control, rather than behaving like a traditional gadget maker. It will hope to avoid the conflicts of going into direct competition with other OEMs, while also leveraging Motorola to strengthen the whole Android platform, and the way that boosts usage of Google services.
It is a dangerous time to be shifting relationships with important partners like Samsung because, for the first time, they may have a viable escape route in the shape of Windows RT, especially in the tablet and ‘post-PC’ sectors where the high end growth potential, and the development of new user experiences, are concentrated. Of course, Microsoft it treading its own delicate line between showcasing its new platform with its own devices, and alienating its traditional partners. Indeed, it has the added complication of having two sets of vendors to keep onside ‘ the PC makers, several of which have lined up to launch Windows RT devices this year despite the challenge from Microsoft Surface; and the Windows Phone licensees.
The latter category are highly dependent on Windows RT for a growth path into non-handset gadgets and multiscreen services, since the user interface and code base is so similar across Windows 8 and Windows Phone 8. But Nokia and HTC, in particular, will now have a legion of new direct rivals, including huge PC makers like Lenovo which are using Windows RT as a bridge into a bigger mobile presence. And for now at least, the Windows Phone allies are being left outside the inner court, encouraged to debut WP8 handsets rather than first wave tablets.
It has been reported that Microsoft does not believe HTC’s lukewarm track record in Android tablets makes it suitable to be a premier launch partner for RT slates, and it has distanced itself somewhat from its longest standing mobile friend. Meanwhile Nokia is expected to unveil its first WP8 Lumia smartphone, complete with its groundbreaking PureView camera technology, next month, but not to offer a W8 tablet until 2013, meaning yet another year when the Finnish firm is not playing in this segment.
Apart from Surface itself, the first wave of Windows RT tablets will come from familiar PC names ‘ Dell, Asus, Samsung and Lenovo. While Microsoft is working with Nvidia for processors, as (reportedly) are Asus and Lenovo, Qualcomm has announced deals with Dell and Samsung, continuing to take advantage of its intense activity around ARM-based Windows variants to gain a headstart (even Samsung’s own processor is not yet ready for RT). Toshiba and Hewlett-Packard, however, will not participate in the first round of RT launches, though they will have Intel-based Windows 8 slates. Toshiba said this was because it had experienced delays in securing unspecified components, but it may also want to monitor the market for a while, given the risks ‘ for PC vendors ‘ of the RT platform, namely that it will not run the installed base of x86-based apps. That will be a blow to Texas Instruments, since Toshiba was working with its OMAP chip, as the HP delay is to Qualcomm.
Asus has been the most prominent player in the build-up to the fall’s tablet jamboree because it is making the Google Nexus 7 and also both flavours of W8. But Samsung and Lenovo are the companies to watch on this list. There are few signs that Dell (or HP when it joins in) will greatly change their poor record to date of understanding the mobile and post-PC sectors. Asus is strong in its particular hybrid segment and will undoubtedly experiment with some attractive new form factors to combine the best elements of laptops and tablets, but it does not have a broad mobile play.
By contrast, Samsung and Lenovo will bridge the handset and PC worlds as soon as they unleash RT designs, in a way that nobody else yet does (except Apple). Samsung has the inner ear of both Google and Microsoft because of its market power, and will also debut a WP8 handset around the same time as Nokia, hinting that it will put greater firepower behind that OS this time around, because of the integration with W8 and the opportunities for multiscreen offerings.
Samsung’s potential is clear, while Lenovo has so far had little success in mobile outside China, despite the power of its ThinkPad PC brand. It has gained experience with its Android launches and its championing of the shortlived ‘smartbook’ category led by Qualcomm and Freescale, in which it produced some devices which showed its design potential in the hybrid world. And Lenovo is gaining scale as it rides the wave of smartphone growth in China, which is now the world’s largest market for those products. The firm is now the number two smartphone vendor in China despite its weak international presence, and has $3.7bn in cash, so is widely expected to be looking for acquisitions to boost its multi-device mobile portfolio.
CEO Yang Yuanqing said on the recent Q1 earnings call: ‘Our smartphone sales in China reached almost 5m this quarter. Total phone sales volume reached almost 7m to surpass our China PC volume for the first time. In June our smartphone market share in China reached 13%. Now we have surpassed Nokia and Huawei to become the number two smartphone and the all-phone player for the first time in China.’ Samsung is in number one position still.
The revelation throws new light on the recent rumors that cash-rich Lenovo might acquire Nokia, suggesting it has no need to do so, at least in terms of Chinese growth, where Nokia is struggling to cash in on an estimated smartphone CAGR of 20%. However, although the firm dismissed such speculation out of hand, Nokia would have some attraction, mainly in bringing its non-ThinkPad brands to the attention of the wider world and bigger distribution channels. This will be Lenovo’s challenge ‘ to convince the world outside China that it has more than ThinkPad, and to raise the profile of its handsets, tablets and ultrabooks while also providing an integrated cloud/content offering. That will require acquisitions or strong partnerships ‘ but nonetheless, as Google and Microsoft wobble on their ecosystem tightropes, look for Lenovo to emerge as a genuine challenger to Samsung, and a possible crown jewel for the Windows 8 alliance.
HTC plans major push in China
One of the few bright points in HTC’s recent quarter was good growth in China, at a time when most non-local players are losing out to ZTE and others. The Taiwanese company plans to build on this with a major push in China, even as it saves cost by pulling back from many other markets.
HTC said when it made its most recent profit warning that it would reduce its presence, or pull out altogether, in some territories in South East Asia and Latin America, where its market share is declining. To compensate, it will step up its efforts in China, where its smartphone share grew from 2.6% in the first quarter of this year, to 6% in Q2.
To try to build on this, HTC will increase its engineering teams and salesforce in the country, with the ambitious aim to be a top two smartphone brand in the country by 2015. This may prove over-optimistic, given the even faster growth of some domestic brands in recent quarters, often at the expense of Apple, Motorola and Nokia.
Ray Yam, head of HTC China, told reporters that he aimed to gain another 3-4% market share in each of the last two quarters of this year, riding the smartphone explosion in China, which is now the world’s largest market. HTC has 2,700 branded counters in China, with a planned expansion to 3,500 by the end of the year ‘ though this is still dwarfed by Samsung’s 6,000.
Yam told The Wall Street Journal: “I do believe HTC has all the elements for success…but we need to be cautious and we need to make every step right. If we make one wrong step, then it will take us a much longer time to recover.”
Meanwhile, in other areas HTC is looking for cost reductions and CEO Peter Chou, in a memo to employees, said the firm must ‘kill bureaucracy’ and improve communication in order to regain share. ‘We have people in meetings and talking all the time but without decision, strategic direction or sense of urgency,’ he wrote. ‘Bureaucracy crept in without clear ownership. We agreed to do something but we either didn’t do it or executed it loosely.’
He added his thoughts on HTC’s current predicament, writing: ‘We are disappointed that our sales are down while smartphone market share is growing. Our competitors can leverage their scale, brand awareness and big marketing budget to do things which HTC could not do.’ He conceded that ‘the fast growth from the last two years has slowed us down’, but insisted ‘we are coming back’.
HTC’s share of the global smartphone market dropped to 4.5% in the first quarter of 2012 from a peak of 10.7% in Q211 but its sales have missed analyst estimates for the past four quarters, according to Bloomberg.