‘Why does Faultline talk about handsets so much?’ a subscriber complained to me last week? Well it’s quite simple, the handset is one of the major global war zones for business ‘ attracting newcomers all the time, sucking in the wise, as well as the unwary ‘ they all know they need a piece of the cellular market.
When we first wrote Faultline, the factions lining up against each other were from about five business areas and they all wanted a piece of each other’s market, mostly as entertainment shifted to digital. That still holds true, but the mobile dimension is becoming more important every day.
Today there is an interregnum, that period between reigns, when each faction plots to back this king or that queen, and hopes to win favor in some future industry shape, only guessed at. The prize is portability not just in communication, but in entertainment and internet connectivity.
Back in the early days of Faultline, Telcos wanted a piece of the cable TV market, cable operators wanted to get into digital voice and broadband. TV and Film studios and record labels all wanted the global scale of digital content distribution (but without piracy), but then again broadcasters had the whip hand in controlling TV content. Software providers and portals and other technology enablers all felt that they should get a piece of the pie, and this landgrab was underlined by the internet. It was a shift from analog to digital markets for the most part, where to be a network provider was not enough, everyone wanted to be a key content gatekeeper. Back then the key to all this was not just to attract, but to ‘trap’ customers, permanently.
Technologies such as DRM, IPTV, VoIP, the not so humble DVR, and the economics of installing fiber optics in communities which until then had not warranted mass fiber adoption, all played their part. Terms like triple and quadruple play were invented for the first time.
If we look back further, the key device of the 1980s was the rise and rise of the personal computer, and it was the first generalized public digital device ‘ but not the last. And now we have to look at its development as a way to understand the waves hitting the biggest industry in the world ‘ portable telecommunications.
I personally remember the day when Microsoft decided that it would put everything behind Windows (the release of version 2.1) and that it would go to war with anyone who said different. IBM was the target and it had a better Windows in its Presentation Manager, co-written with Microsoft, but it still lost that war. And suddenly there was a dominant force in PCs.
Now more than 20 years on everyone involved in cellular has spent the past 15 years making sure that nothing similar happens to cellular services ‘ creating a series of standoffs which are very clearly thought out. Nokia (perhaps the IBM of the industry) wanted to become a Microsoft and control the handset operating system and now wants to turn itself into a web services business, so that Google cannot exert an undue influence over it. Microsoft wanted to extend its OS regimen to the mobile, but now also wants to turn itself into a Google, but has to continue to protect its past. Broadcasters realize that the web will take over content and wish to create Hulu class defenses against YouTube. Fixed line operators of all sorts feel the need to go online and to become mobile, and cellular only operators wish they had fixed lines so they could partake in a quadruple play. Consumer electronics giants realize too late that software is the key to devices on networks, while software driven businesses like Apple (it hardly makes any hardware these days) have becomes CE businesses but have done it without any special ownership of premium, patented technology. Just software and design.
There is a kind of brand entropy about all this. All of these once disparate businesses are being brought together to try to control digital communications and/or digital entertainment. Not all of them can win.
In 2003 we predicted that this would lead to the loss of household names and we put forward names like Comcast and Disney as examples. The ones which are actually in danger today are more like Nortel and Motorola, but equally Sony and Panasonic are in danger, and Alcatel as well. Various operators are in the same state of repair.
If we mimic the PC wars, one operating environment, which is either open, or is so widespread that it appears open, must win. Which is perhaps why so much development power is being directed behind Android. The logic seems to be that if the platform remains open, then its owner cannot truly control affairs. The PC operating system appeared open, it just turned out that it wasn’t.
Apple, Microsoft and Nokia’s operating environments are deemed to be proprietary in some way. The outcome from the PC wars was one operating system and one chip winner ‘ in Wintel.
But it was more than that. There were just 4 or 5 PC makers ‘ Compaq, HP, IBM, Dell and perhaps Acer. There were other hangers on, and new companies arrived, but this was deemed to be where the differentiation was in the industry, across a handful of hardware PC product lines. But who can remember a single difference between the Compaq Presarios and the IBM ThinkPads. It became a war where the operating system and chip vendors could NOT lose and the PC industry was permanently struggling.
The REAL technology at that point was how fast the chip went, what capacity a disk drive held, which led onto which devices had CD then DVD players, flat LCD screens, Ethernet and USB ports and finally built in Wi-Fi and 3G cards.
If we go down the same path that means that Nokia or Samsung and perhaps LG or Sony Ericsson sort of win, but struggle, and all the other vendors lose. But you ask HP or Dell if it feels like it has won anything. It was Wintel always that showed the major profits and controlled their destiny and the same may happen in cellular.
What the PC and then laptop and now Netbook all became, were fashion items. How it looked, what it weighed, the color case it came in, which broadband network it attached to, how wide was its screen, and how many USB ports for how much money ‘ fashion and price and their characteristics largely coalesced into that ephemeral quality ‘ Brand.
Same in the handset market. It is not the companies with the logistics which are winning. Look at Apple. It had no stranglehold on any of the key technologies, except perhaps it had a fair chunk of buying power in Flash memory from its iPod days.
No. All of these companies can get economies of scale by choosing existing components in the marketplace and getting contract manufacturers, which now have enormous scale of their own, to build devices for them. They can all get strong logistics by partnering with the right Chinese or Taiwanese consortia. It is their negotiating power that brings them lower component prices, which often is through customer leverage. Did Apple get a better price from someone because it has AT&T captive as a client? You betcha. But on the way its CEO bravely decided to spend a few $billion on 40% of the world’s flash memory, so that Apple’s iPods were made as cheaply as anyone else’s MP3 player – but the reason they sold for more was back to brand and the proprietary DRM lock-in of iTunes.
Always in the past, in server markets, PC markets, any technology market, the way out of a proprietary lock-in is to open up markets ‘ so in the same way that Unix got the vote over IBM and HP servers, Android was bound to get a major push in the handset market. IBM and HP and DEC all fought tooth and claw to kill Unix, then they went further and invented their own versions, then they came to dominate the technology once again over time, once their price performance ratios came down to the level of Sun Microsystems and others. In other words, open systems keep proprietary systems honest, but eventually, when they can, proprietary players go back to proprietary systems. IBM and HP Unix, though originally based on the same code, are as different today as their pre-Unix operating systems. So if history is to repeat itself we should expect Nokia and Samsung to resist Android until the progress of smaller companies such as Motorola, LG and HTC force them to embrace Android, and then eventually, when everyone else is dead, for the Nokia and Samsung two Androids to begin to have proprietary extensions and to diverge.
Except for one thing. Everyone knows that and everyone is trying to avoid that. But somehow things are eerily the same. For instance the OSF versions of Unix pushed by incumbents in the 1980s, look remarkably similar to the way Nokia is opening Symbian and it remains the spearhead of the leading handset vendors ‘ for now.
If things like scale really were an edge in handset design, we would see this working more obviously for Nokia. It seems to work for Samsung, because it has gained market share of late, but it is Nokia that has retained margin, not Samsung. And why are companies like LG better able to track what Apple is about? How is it quicker to copy Apple design qualities?
The answer is simple, and it has become obvious to us as we have tracked the Palm Pre announcements, and the frenzy over the iPhone 3.0. There are multiple battles going on. Openness is for developers ‘ they want the promise of developing once and deploying across multiple platforms ‘ open operating systems get wider installation and attract them. But perversely right now it is the apparent innovation and apparent openness of Apple that has attracted developers. Before Apple created the App Store, all operator environments were walled gardens, so Apple appears open.
By Openness we mean that Apple’s App Store does not require anyone to talk to Apple ‘ write the code, submit it, have it reviewed and accepted and you are in. Market leaders like Nokia (and IBM before it) worry that this would tarnish their reputation and they deliberately put up hurdles to inclusion. In other networks, for instance the gaming console networks of Microsoft and Sony, the same thing applies ‘ they each have to negotiate for a slice of the game sales pie, and then push it through quality control ‘ but not Apple. Apple has created a simple and fairly pure marketplace. So while we stand by the idea that openness attracts developers, it’s not just operating system openness. In fact Apple has been accused of being less open than most on the operating system but it has an open business model where developers are concerned and first mover advantage.
But for consumers it is all about style. You can make a handset that costs $1,000 and you can make a similar handset, with a lower quality screen, less storage, some key features missing, a mere 3.2 megapixel camera (how pass’), average Wi-Fi, and only offer HSDPA at 3.6 Mbps, put it out for $400 and still convince people it’s a better handset ‘ simply because it ‘feels’ better and because more people can afford it.
Handsets have become like cars ‘ hardly any of us can afford the one with the fastest engines, the biggest trunk space, the largest number of seats ‘ what we buy is a compromise ‘ a statement that this car is more or less where we sit in society. A car says something about you, but nothing like as much as your phone. Or the software that’s on your phone.
Do you have a Facebook or Twitter phone, can you show off YouTube clips to your friends, win arguments by looking up things on Google, watch TV or play games, through your phone, on a big HDTV at your friend’s house.
Any moron could go out and buy the components on the market to make a phone ‘ people will even put the final spec together for you – this is a way of inviting every PC maker, CE builder and GPS business into the phone market ‘ but it is style and software that will win you customers, right now not technology. The Palm Pre is half the phone that the LG Arena is, or the N97, or the Samsung Pixon 12 or the Sony Ericsson Satio – but it is not these phones that have half of the US squabbling over which is the best offer in phones. It is a minor upgrade to a year old phone, the iPhone which has a rubbish camera, and mostly just new software, that and a Palm phone which will cost $140 or so, bringing Touch, ease of use and cool apps to the man in the street.
It is reminiscent of that interregnum when Microsoft had taken over software on the PC, but everyone still thought that the key issue was the hardware and suddenly 20 new manufacturers emerged. After the dust had settled Wintel was stronger, not weaker and the leading survivors had been made honest (and therefore offered value for money deals) and were virtually unassailable, and were the same companies after the interregnum, as before it.
So IF this is a rerun of history, and we make that a big IF, then unless Apple decides to open its operating system (which it had a chance to do in the PC wars a under Steve Jobs who virtually said ‘over my dead body’) then the outcome will be one proprietary leader and one open source second tier platform, and increasingly those are looking like Symbian and Android. In that version of copying history WinMob looks like IBM’s Presentation Manager and dies and Apple looks like,’ well Apple.
The Intel in that equation is perhaps ARM, a chip design, not a manufacturer, or perhaps Qualcomm (in poker parlance the chip leader) which has been rising underneath Android and will shortly begin to look at putting its weight behind Symbian as well.
But if history is no guidance here, it is because the situation is more complex. For a start there were no operators ‘ major purchasers who could change direction with a whim. There was no emerging country like China or India, sleeping giants able to sweep aside any decisions made in the US or Europe by the volume of their purchasing. And there were no wild cards like Java in the mix.
Also there was less at stake. Today not only could this result in a $2 trillion business changing hands, but it can take the multi $billion PC industry with it, through the permanently connected PC and netbooks which might lean away from Microsoft. When there is a lot more at stake and a 20 year history lesson to absorb, everyone will do whatever they can to not let history tamely repeat itself.
So what we have right now is the Dot com boom all over again. A frenzy of what appears to be innovation, when in fact it is purely design, compromise and seeking the tastes of the common man and the uncommon developer. One day we will wake up and smell the coffee and get back to the business of innovating in the cellular industry ‘ but not yet awhile, these are the dark years of the interregnum and we need a new king.