Remapping the handset OEM landscape: squeezed in between a rock and a hard place

[In a race for profits, the mobile industry finds itself squeezed between vertically integrated players like Apple and horizontal players like Google. What is the fate of handset manufacturers? Guest author Vinay Kapoor takes a peek into the future landscape of the mobile industry]

The top 5 mobile OEM list was recently shaken and stirred by the entry of RIM into the list of top 5 OEMs and the subsequent exit of Motorola. Previously, the top-5 OEM leaderboard had been stable for half a decade and so the most excitement you could get would be a change in the relative position of the incumbents.

Looking today at the comparative handset sales of RIM, Apple and Motorola, it is clear that the exit of Motorola from this list of top 5 OEMs has been a long time coming. While Motorola’s decline in sales may be reversed, it is unclear if Android can help propel Motorola back into the top-5 list.

So what does the future hold? If we look at the top 5 OEMs, Nokia, Samsung and LG are fairly spaced out to not expect a major change in their relative positions, assuming an absence of disruptive events. Yet, Apple and Sony Ericsson are much closer, just 1.5 million units apart.

Sony Ericsson’s President, Bert Nordberg recently stated that Sony Ericsson is seeking to not be a volume player, but rather a value player and as such will focus on smart phones. Such high value products and the higher profit that they bring would clearly take preference over market share. This is not a bad thing at all; for example Apple and RIM command a meagre 3% of the mobile device volumes, but 55% of the profits according to a Deutsche Bank analysis. Left unchecked, an un-necessary race for volumes and growth can have disastrous consequences.

Quality and profits are certainly more important than a blind race for meaningless volumes. This is a reason why the top 5 OEM list, is only part of the big picture. The strategic positioning of the manufacturers on and off that list is equally important and can often signal a rapid change in fortunes.

What’ clear is that in early 2011 we should see Apple displace Sony Ericsson from 5^th position, making the top-5 list the territory of a Finnish mass-producer, two South Korean workhorses and two North America challengers.

Learning from the industry’s mistakes

Taking inspiration from a certain eruption from a volcano in Iceland (whose name I cannot pronounce!), the industry is undergoing a change in landscape. Much like the results of a volcanic eruption, this landscape and the map we draw-off of it, will change for the foreseeable future. The two “eruptions” in our case have been the surge in emergence of new, vertically integrated product experiences, as a result of Apple and RIM’s success, and the open source phenomena, triggered by Google’s Android platform.

The Evolution

From the perspective of mobile software, we are in a new phase of evolution of this landscape.

Up until the beginning of the century, OEMs built devices around vertically integrated systems. This included in-house ownership of the complete solution from hardware all the way up to the applications. The applications themselves were little more than enablers of the underlying technology; in other words software-enabled hardware.

During 2002-2008, there was an emergence of several “horizontal” value players. A lot of the underlying technology was sourced from organizations who specialized in componentised software layers, selling middleware, browsers, application frameworks and operating systems. This has been especially prevalent in smartphones powered by the likes of windows mobile and Symbian.

Since around 2009, OEMs have been building systems around open source software and open interfaces. This is not only true for software (Android, Symbian, LiMo, MeeGo), but also the hardware pieces are becoming more off–the-shelf and commoditized

The success of Apple and RIM, both of which have vertically integrated offerings (to varying degrees) has polarized the industry; manufacturers are now stuck between a rock (vertically integrated offerings from Apple and RIM) and a hard place (open source software platforms).

So, on one end are the players who are embracing and driving open source and commoditizing suppliers (Nokia, Motorola, LG) while on the other end are the players who believe in control and in-house vertical integration (Apple, RIM). Samsung, with its Bada programming layer is clearly looking to replicate Apple and RIM’s vertically integrated model. Sony Ericsson is leaning to the Open end with Android and Symbian (5 of 8 products in the core portfolio)

So is the Apple and RIM vertical model a one-way street for everyone to embrace? Apple and RIM are essentially able to afford the luxury of a complete in-house solution because of the relative lack of variation required in their software, due to fairly narrow deviations in their products (it’s not just a case of affording.. they are also buying companies to effect this – e.g. chipset, ad networks in case of Apple, QNX and Dash in case of RIM).

This is obvious for the iPhone where Apple is essentially upgrading a single product year after year. Even in the case of RIM, with seemingly several different variations on the Blackberry hardware, they deal with one main Blackberry vanilla design. Note that in that sense both Apple and RIM are both playing a fairly risky game, akin to putting your eggs in one basket. This risk is manageable as both Apple and RIM still sport unique selling points; best-in-class product design, services and user interface in case of Apple and proprietary messaging solution in case of RIM.

In case of Apple, the iPhone’s hardware and software is designed to wow the user. A combination of Apple’s brand value, shrewd marketing and design-centred approach has resulted in a desirable product that goes to the extent to sacrificing seemingly important features to keep things simple for the user. However, the iPhone would not be this ‘desirable’ were it not for the massive amount of applications, both good and bad, available to the user. That much content means that users tend to not get bored with the limitations of the few built in applications on the device.

Blackberry on the other hand has taken the approach of creating a messaging solution that is extremely simple to use and needs no complicated “setup”. The device is of course valuable to enterprises with it’s built in security mechanisms and fully integrated enterprise solutions. Once again, superior consumer experience and focus on the core group (enterprise users) has been achieved through vertical integration of the complete value chain.

For the incumbent handset OEMs who need to reduce the total cost of ownership for software, going back to the days of 100% in-house software, does not sound appealing at all. The sheer amount of work required to adapt software to 10s of hardware SKUs is not very appetizing. For these OEMs open source is a real blessing that helps tap into innovation while at the same time cutting costs on the core software R&D. This is one reason, why Samsung’s Bada move is very bold indeed. It will be interesting to see how Samsung manages to competitively maintain Bada, without the R&D cost of managing that platform having an impact on the Korean manufacturer’s bottomline.

So, it seems that a polarized universe is the only way forward with some players betting on open source and commoditized hardware, and others on vertical systems.

The struggle for differentiation

Once Sony Ericsson and Samsung have finally placed their bets with Bada and Android the ecosystem will settle down into this polarized state.

The vertically integrated players will have the privilege of keeping a high barrier to entry for any new entrant. This assumed new entrant will have to replicate what Apple did with the iPhone, which is not something you see very often.

The players in the open ecosystem will, however, have to guard against the king of cost Shanzai (fake phone) brands that have the possibility to challenge established OEMs. The assumption here is that a drive to open systems will lower the barrier to entry. When any tom-dick-and-harry can slap one of several open source software stacks on top of one of several chipsets readily support such software stacks, the need to differentiate will extend beyond hardware and software design. It is too risky to assume that the consumer will remain committed to a brand solely on the basis of these easy-to-replicate characteristics.

So what is it that the OEMs can use to differentiate their offerings? One must remember that a consumers experience of product and a brand is an amalgamation of several points of contact with the brand and the product. The look and feel of the hardware, and the usability of the device are just two such contact points. A consumer interacts with both the device and the brand in many other ways, like using a cloud service provided with the device, or calling a call-centre for support. A differentiated offering will evolve, based on not just user interface but complete user experience (hardware, software, UI, cloud services, customer service). These will be necessary defences and barriers, which the incumbents will need, in order to protect against being reduced to commodities fighting on price. We may see OEMs positioning their products based on this complete package rather than simply advertising stunning hardware and user interface design.

Those that build a robust defence (the Gorillas) will command the landscape through their sheer size and position. The super efficient king-of-cost players will present a challenge with their sheer agility and cunning (the foxes). Rest assured, anyone stuck in the middle (the jungle) will be stuck in a constant struggle for survival. What a great ending to the fairy tale!

- Vinay

[Vinay Kapoor is a Business development director at Tieto where he helps build new revenue streams and helps shape Tieto’s mobile devices strategy. Vinay has been a mobile industry insider for over a decade and has an avid interest in the events that shape this ever changing industry. You can follow him on Twitter (www.twitter.com/vinaykap) or on his blog (http://wirelessmantra.blogspot.com)]

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