Prof. Javier Zamora discusses the key points from the first day at the MWC, in particular the agreement between Telefónica and Mozilla. CEOs from big operators such as Telecom Italia, Vodafone and ATT all spoke about the role of Apple and Android. It also became clear that shopping and making payments via mobile phones is increasing rapidly. In a new departure, Facebook announced that apps can be bought from the site but billed via the service provider. Other big hitters such as Google and Cisco have yet to make their keynote speeches.
In 2006, Barcelona held for the first time the Mobile Congress. At that edition the CEOs from VODAFONE, TELEFÓNICA, MOTOROLA, NOKIA and MICROSOFT were the keynote speakers. Those companies reflected to some extent the mobile industry value chain in 2006, accounting for an aggregated market value capitalization of more than $600B. Only six years later, that market capitalization has decreased to $500B.
The handset manufacturers, NOKIA and MOTOROLA, account for the decrease of $100B, while MICROSOFT and the telcos have similar valuations than six years ago. There is no doubt, that those figures reflect the deep transformation and the redefinition of the mobile industry value chain, with two new players in the scene: APPLE and GOOGLE with a combined valuation of $672B. Next week, it will take place the Mobile World Congress in Barcelona under the leitmotiv “REDEFNING MOBILE”. What shall we expect for the next six years?
Since ancestral times, wherever there is a narrow passage that many people have to cross, someone will try to establish itself as the gatekeeper and exercise control on the passersby. In fact controlling passageways, from maritime straits to oil pipes, has been one of the reasons humanity has endured many wars.
The digital space is not free of gatekeepers: they take the name of platform owners. When thinking about platforms that exert gatekeeping power, probably the first example that comes to mind is game consoles. Sony, Microsoft and Nintendo are masters of value capturing by charging game developers a fee for each copy of the games sold that run on their boxes. This allows them to recuperate the R&D costs needed to develop the console and the subsidies necessary to bring them to market at an affordable price.
The most known platform, Wintel, does not charge a commission on each program sold that runs on it. Intel and Microsoft make money solely by selling chips and operating systems. From the early days of DOS, Microsoft –and to some extent Intel, have tried to help developers to enhance their platform by providing tools to help them quickly produce Windows-specific software. Given the difficulties porting software from one operating system to another, once critical mass is reached, developers only develop for Windows and users are forced to buy Windows because there is where the applications are.
So, traditionally, companies striving for gate keeping strategies have been following one of two strategies: (1) grow the platform by heavily subsiding it to then extract rents by charging complementors to use it, the game consoles strategy, or (2) leverage network externalities so much that users have no choice but to buy the platform as all complementors are there already; the Wintel strategy.
But now there is a new strategy: make money both ways, by selling the platform very profitably, and at the same time charge complementors to use it: this is Apple’s strategy. That Apple makes a ton of money selling iPhones is not a secret (never mind iPads!) As can be seen in the side graph by asymco, Apple makes about 70% OF ALL profits made by the smartphone industry(*) with an estimated $6 billion in Q2 2011. Having seen this, one could think that the business model would rely on growing the platform Wintel-style, by inviting as many developers as possible to fend off competing Android attackers. But nothing further that reality. It is true that the Apple Store hosts and distributes apps for free (this was announced with great fanfare by Steve Jobs when introducing the App Store, see video from minute 3:20 or so) and charges 30% commission on all paid-for apps allegedly only to subsidize running the store, but just last week announced that it would enforce its restriction on direct-from the app purchases. What this means, in fact, is that apps like e-readers that to purchase content directed the user directly from the app to the developer’s site to performing the transaction, alien to the Apple store, would be “illegal” in Apple’s terms. The consequence is that the purchase has to be made through the Apple app store and therefore be subject to the 30% commission.
Even when you have an enormous market share, this is a risky move, as you are inducing complement providers to move to a competing platform and therefore weakening yours and strengthening a competitor. I cannot imagine Microsoft expecting to get a cut on each application sold for Windows, never mind on content read or watched on a Windows PC. What will content providers do in the Apple case? Some initial movements by publishers seem to indicate indicate that not much, and apps like Nook are already updated removing the direct purchase button. This will imply that users will have to either buy the content via the Apple store, or go directly to the web page of the content provider, transact there, and then move the content to the iPhone or iPad. Cumbersome and less clean, but such is life when the gatekeeper enforces a toll: passersby take an alternate route.
What this will do the power of the iOS platform remains to be seen. The next months will tell, but seeing the profit share on the smartphone market, Apple can make a few experiments.
(*) This, by the way, should make all companies that rushed to build Android phones think about the commoditization of their product and what future they have. But this will be the topic of another post.
After attending to four intense days at the GSMA Mobile World Congress in Barcelona last February, we could summarize what happened at the congress in two different ways. On one hand, we could glimpse the headlines in the front pages of the four issues of the official Show Daily:
However, a picture is worth a thousand words. Specially, the one I took the last day of the congress in a panel discussion devoted to “Services and Service Enablers for LTE”, where LTE stands for Long Term Evolution or 4G. In the panel were sitting representatives from the mobile industry value chain: an operator, a device manufacturer, a network equipment vendor, a standardization body and Google. As one can see, Google and Apple (absent at the show) are the new “kids” on the block (mobile industry) and they are literally running the show!
LEADING THE TRANSFORMATION: From Connecting People to Connecting Life
THE OPERATORS: Avoiding being the “dumb” pipe
TRENDS: Connecting the unconnected
“What happens in Vegas, stays in Vegas” is already a trademark slogan used in the official Las Vegas tourism web site. However, the Consumer Electronic Show (CES) is the exception that proves the rule. Anyone serious about being a techie should pilgrim at least once to CES, which is held at the beginning of January in Las Vegas. Last Sunday, CES ended beating records with more than 20,000 products from 2,700 technology companies and an attendance of more than 140,00 industry professionals. I personally fulfilled my pilgrimage duties by attending CES in 2003, 2004, 2006 and 2007. As tradition dictates, Microsoft, as one of the main sponsors of the event, kicks off the show with a keynote presentation. In my case, it coincided with the last years of the reign of Bill Gates. For instance in 2003, Gates introduced Small Personal Object Technology (SPOT)-based wristwatches. These watches were designed to receive and display continuous, up-to-date information through the use of a FM communication technology. In 2004, Bill Gates announced the Windows Mobile Phone edition for smartphones. 2006 was the year of Vista Windows Operating System (OS). Finally in 2007, Microsoft focused on connected entertainment around the Xbox 360 and the Vista Media Center. In retrospect, Microsoft did not fare very well with those four CES announcements intended to dominate three connected screens: PC, mobile and TV.
For the last three years, I stop attending CES. Although, I recommend and it is a must experience for newcomers. However in a world of “connected experiences”, it is difficult to justify the investment of time, energy and money, when you can follow up to the minute what is happening at the show from any connected device. This year was the year of the tablet. Wait a minute… it was also the theme of CES 2010! As a matter of fact, many of the announced tablets at CES 2010 never reached the market. Nevertheless one tablet, which was not even announced at CES 2010, surpassed all selling expectations: the iPad. Once more, Steve stole the show. And I do not mean Steve Ballmer, Microsoft CEO, but Steve Jobs, Apple CEO. Let’s have a brief flashback. During CES 2007, Apple announced at the same time but in MacWorld in San Francisco the iPhone. A handset that has changed the mobile industry as a whole. It forced competitors to halt ongoing projects and start from scratch to compete with the iPhone. For instance, Microsoft redefined completely its mobility strategy launching last summer Windows 7 Phone. It took a year before the mobile industry could react and compete with the iPhone. Furthermore, it took three years to Android, the free OS from Google, to be the fastest-growing OS for smartphones over iOS (Apple). However, Apple could possibly retake soon the leading position with yesterday’s announcement that the iPhone 4 will be available on Verizon network this February.
History repeats itself with the iPad. None of the announced tablets in CES 2010 were prepared to compete with the performance of the iPad. For this reason, CES 2011 was again the year of the tablet. This time, Google introduced Honeycomb or Android 3.0 ready for tablets. Moreover, this CES edition showcased more than new 100 tablets, most of them running either with Android or Windows 7. In fact, Steve Ballmer devoted his keynote presentation to three main areas: gaming, mobility and Windows 7 PCs. Where the tablets were only another form factor that a PC running Windows 7 can be sold. Ballmer also indicated that Windows 7 is the fastest-selling operating system in history, with 20% of all PCs connected to the Internet. Nonetheless, this percentage is far away from the 95% market share of all the PCs sold in 2000 that Microsoft had in 2000 according to a Gartner report. Ten years later, if we take into account the 500 million PCs and smartphones sold in 2010, Microsoft reduced its market share to 70%. Besides, it is expected that in 2011 that figure will drop to 50% market share, and according to a recent Forrester report, 50% of all PC sold in 2015 in the US will be tablets. In other words, the OS battles we are currently witnessing in the mobile industry are shifting to the PC industry, which Microsoft has been dominating for the last twenty years. “The Art of War.com” reads that if you want to win those OS battles, it is necessary to invoke again Ballmer’s outcry “developers! developers!” to lock-in customers in your platform. The only difference now is that we called these software Apps. Apps that can run in your smartphone, your tablet and/or your desktop that can be easily downloaded from online stores. With the current force distribution, it is unlikely that a winner-takes-it-all scenario will happen again. I bet we are going to live together with Windows 7, Android (and Chrome OS for netbooks) and iOS as the main brands to navigate the cloud in the coming years. Meanwhile, I can attend another CES in the comfort of my own tablet. Although, Apple, the manufacturer of my tablet, which is the largest consumer electronics company in the world in market capitalization ($313 billions), is always the absent player in CES but the one which is stealing the show since 2007.
There is an Indian proverb (or maybe it is Confucian, who knows) that says that there is no worst enemy that the one who was your best friend. And this is because he or she knows you well. In 2007,when unveiling the iPhone, Eric Schmidt, CEO of Google came on stage and announced that Google had developed specific applications for the device, and in fact, the first and probably most famous ad of the iPhone showed Google Maps. Schmidt was on Apple’s board and the two companies seemed to have found a set of synergies that allowed them to look forward to a great future together.
And then Google created Android and the Nexus. And then Google looked at what it had done and saw that it was good.
And Apple did not like it as much. Why would Google come up with a strategy that upset its longtime partner so much? Our blog post of January 24 “The battle for the smart phone” details our views: controlling its own destiny away from the influence of the very successful closed ecosystem of Apple or the who-knows-what-will happen ecosystem of Windows Mobile. Google feared that at some point a company controlling the gateway between Google and the final customer could penalize its applications and favor either their own or someone else’s. For a company that so far has only been able to monetize traffic via advertising, the prospect of its traffic being disfavored was not an option.
How successful has Nexus One been so far?
It took the iPhone 74 days to sell one million devices; in the same period since its introduction, Google had sold a mere 0.13 million. Granted that the market of black screen multi-touch sensitive screens is more crowded now than in 2007, but the sales of Nexus have been, in my opinion, deceiving. What effect has this had in the market cap of the company? We have said in many occasions in this same blog that the stock market is not a complete representation of a company’s fares, but it is certainly an indication of what capital markets think of it, particularly when compared with others in the same industry. The graph above shows the evolution of Apple, Microsoft and Google since January 1st 2010. Apple has increased 13%, while Microsoft and Google have dropped 5.3% and 8.7% respectively. Capital markets, then, today believe that Apple will do better that they thought it would do at the beginning of the year. The contrary is true for Microsoft and Google.
It seems that Google and Apple will not fight the big war after all. Two days ago, the CEOs of both companies were caught having coffee together in a bar in Palo Alto. They were chatting amicably. You and I know that this is not by chance; Jobs had called Google evil not a month ago and ha sued HTC, the manufacturer of the Nexus One, for more patent infringements that one can imagine. HAving as your enemy your former best friend is not a good idea. If Google and Apple had to make a public statement that they would cease hostilities without a formal press release, is there a better way than staging a cup a coffee?