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Summary:

Since 2007, Apple has led the way in a tightly integrated mobile product, combining hardware, software, ecosystem and IP. Competitors have taken notice because four of the six main mobile platforms have followed; the latest is Google’s purchase of Motorola. So where does this leave Microsoft?

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Since its introduction, Apple’s iPhone has been a wide sales success, allowing the company to compete for the role of top smartphone maker in a handful of years. Aside from the design, capacitive touchscreen and intuitive user interface, Apple has proven that to compete in the mobile space, the chances of success improve when the entire experience is integrated. That means not just solid hardware and software design, but a mobile app and media ecosystem as well as patents to protect your efforts.

Monday’s news of Google purchasing Motorola Mobility for $12.5 billion underscores this shift, as another big player, namely Google, is in position to adopt such vertical integration. Google will effectively enter the hardware market with the Motorola acquisition, although it’s possible it will choose not to alienate its hardware partners and later divest Motorola while retaining the many patents it gained from this deal.

That’s unlikely though, because the mobile market is shifting away from the platform licensing model as the top companies are instead looking to replicate Apple’s business model, something my colleague Darrell thinks won’t happen for Google, even after the Motorola deal.

Outside of Google and Apple, take a close look at the rest of the “who’s who” in mobile and you can see the shift:

  • Research In Motion. The company has always had an Apple-like approach, never licensing its BlackBerry OS to other companies. Instead, RIM integrated its hardware and software to build a popular brand, which it supplemented through closed services such as BlackBerry Messenger. That sounds like Apple, but a huge missing piece was an integrated mobile app store that provides easy one-stop shopping. RIM eventually added a store, called BlackBerry World, in April 2009 with 200 initial apps. Twelve months later, the company bought the QNX operating system and shows no signs of licensing it.
  • Palm and HP. Like Apple and RIM, Palm controlled both the hardware and software of its devices, although it did license the Palm OS to Sony for several years. There was never a Palm OS app store, however, causing consumers to find their own third-party apps either directly from developers or independent stores that aggregated software titles. Palm eventually replaced the Palm OS with webOS, didn’t license it and was snapped up by HP for $1.2 billion in 2010. HP now sells webOS hardware, doesn’t license the platform — although says it’s open to the idea — and runs the webOS App Catalog for software sales. The company is rumored to be working on a music store and launched a movie store for webOS in July.
  • Samsung. The company is poised to become the next smartphone king on the back of Android phones, but it’s hedging its bets with its own Bada platform, which is reportedly outselling Windows Phone 7 handsets. Samsung’s efforts to create media stores for e-books, music and video content helps make Samsung Android devices more appealing, but those stores could be leveraged by the company’s Bada phones. That would give Samsung its own ecosystem to supplement the platform and the hardware it builds.
  • Microsoft. Licensing platforms is a core business model for Microsoft, which previously developed Windows Phone for hardware manufacturers to build around. Palm, HP, HTC, Samsung and many others used Windows Phone to get in the smartphone game prior to Apple’s 2007 entry. Microsoft continued this approach with its new Windows Phone 7 software, but added a mobile app store and penned a huge deal — reportedly $1 billion — for a flailing Nokia to rely on WP7 for smartphones going forward.

How far will Google go as a partner vs being a perceived competitor?

So the mobile space is now composed of four “complete” platforms with vertical integration and two “almost complete” with Google and Microsoft. Google is now closer to a fully integrated play, even though it says Motorola will be run as a separate company. The Motorola purchase is surely a patent play to help protect all Android licensees from current and potential future suits.

And Google’s hardware partners are praising that fact. The short quotes from Samsung, Sony Ericsson, HTC and LG all share positive words for Google’s commitment to defend Android. But make no mistake: unless Google later divests Motorola Mobility, other Android partners could question Google’s motives with Android going forward. Horace Dediu’s Asymco blog notes the challenges of being both an owner and a platform partner:

[A] licensor that is also a licensee makes other licensees uncomfortable. The supplier is also a competitor. This is classic channel conflict and never ends well. Open or not, with or without equity, these arrangements are always unworkable.

Microsoft, it’s your move.

Even with such a warning, Microsoft is now in a unique position: Does it want to continue the licensing model or should it simply work a deal to buy Nokia — or another hardware maker — outright? Mary Jo Foley makes the case for no deal, saying Microsoft has little to gain. I think it’s too early to say yay or nay, however.

Now that Google will in some sense be competing with its hardware partners, some of them could choose to invest more resources in Microsoft’s platform as a result. In that scenario, Microsoft wins by gathering more handset support without needing to buy a hardware maker. The likely reason this hasn’t happened yet is that Android has sales momentum while Windows Phone 7 doesn’t. Simply put: Handset makers get more bang for their buck with Android right now.

On the other hand, Microsoft could see that its licensing model doesn’t allow for control over the complete mobile experience in terms of hardware, software, and ecosystem. If Microsoft wants to play the mobile game the same way others are, a Nokia purchase makes sense. From a patent standpoint, the buy would help Microsoft add to its existing portfolio of IP, which could turn into a billion dollar business: Microsoft currently earns royalties from Android handset makers.

Regardless of what Microsoft chooses to do — not to mention Android partners which are publicly smiling today over the Google-Motorola deal — the mobile market has changed. You can’t just build a solid smartphone and hope that it will sell. The whole package is now the end product: hardware, software, user experience, ecosystem and intellectual property to keep your business protected.

  1. Google is already a competitor with the Nexus, I don’t understand the point… perhaps this makes them a stronger competitor but this is mostly about the patents…

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    1. The Nexus is still made by a partner of Google, not Google directly. So far, the first one was made by HTC and the second by Samsung. Now with Motorola under Google’s belt, guess who’ll be making the third, fourth and fifth?

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    2. I agree, but Google is only a limited competitor at best with the Nexus: HTC built the first one and Samsung build the second. Google no longer sells the phone directly to consumers.

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  2. “Now that Google will in some sense be competing with its hardware partners, some of them could choose to invest more resources in Microsoft’s platform as a result.”

    HTC has been very supportive of WP7, it just has not sold enough of them. Samsung and LG also built WP7 devices.

    How cansthey invest more resources in their WP7 devices. They cannot even customize the interface and the hardware specifications are pretty standard.

    But Nokia apparently will have more freedom on the UI, and WP7 Tango will be released so that Nokia can cater to its market.

    Handset manufacturers may worry that one day they will only be able to sell their own handset if they have their own OS (Bada & Brew), but this happened long before Google bought Motorola.

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  3. “Apple has proven that to compete in the mobile space, the chances of success improve when the entire experience is integrated.”

    This seems an odd statement given that at this point it seems like Android is currently pretty soundly beating Apple by using the opposite approach, and none of the other companies that are vertically integrated come close. How can you say Apple is proving this? Maybe they are just proving that having a great product and great marketing allow you to successfully compete against companies lacking one or the other.

    Really, if things continue as they are, you guys might want start rethinking your fairly canned “Apple shows how X is the best way” stories. ;)

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    1. Nestor Montemayor 3 Tuesday, August 16, 2011

      the thing is what are you considering? market share or profits? the iphone is the most profitable phone in the world even though there may be mlre android hansets may be acrivated per day.

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  4. The author’s evidence actually points to the opposite direction: RIM is dying; Nokia abandoned integrated approach and went with MSFT; Palm/HP’s market share is negligible; Bada maybe outselling WM7 but that doesn’t mean jack. In fact, the only successful integrated OEM is Apple.

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    1. Good point, it’s impossible to find software and hardware skills in the same organisation. Apple itself combines fantastic software & design; the hardware manufacturing expertise lies outside.

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  5. They’re sharing the software. Other hardware partners should not get too worried. Anybody with Internet can download Android source. I doubt Microsoft is going to make WP7 a simple download link.

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  6. Motorola was even worse competitor then Google is. Remember that Motorola was planing to join patent attack on other Android Manufacturers. With 12 mld Google stop the internal war. I am pretty sure Samsung , HTC and LG are happy with that.

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