Why Talent is Limiting Supply in the Smartphone OS Market

Written by Ariel Seidman on August 17th, 2010

How many smartphone mobile operating systems can the market support? Wrong question. In a market of billions of potential devices with limited network effects [1] and hyper-growth demand the market could support lots of smartphone mobile operating systems – where lots is defined as greater than six and less than twenty. The limiting factor is not demand but rather supply. How many companies can build a competitive mobile OS? The fire sale of Palm and the launch of Blackberry Torch makes it clear that the list of companies that have the skills and resources to build, launch, and sustain a competitive mobile OS is getting smaller each month. Watching this playout feels like watching the top riders in the Tour de France fight their way to the top of Col du Tourmalet — each and every year only the most talented riders keep pace as the ride becomes absolutely grueling.

Companies are starting to fall by the wayside as the stacked teams of Apple, Google, and soon Microsoft take firm control of the race.
Lets look at a checklist of capabilities one needs to launch a competitive mobile OS. Half way down this list you will realize that very few companies have assembled a deep and wide enough talent pool to execute a smartphone mobile os on a global scale.

What you need What it gets you
User Experience
Multi-touch interface Parity
Visual appeal Potential differentiation
Multi-tasking Parity
Apps
Games, Games, and Games (1) Acquisition (great games sell devices)
(2) Lock-In (spend creates switching costs)
20,000 Quality Apps Parity
Discovery & Merchandising Easy & trust worthy
Media
Music Lock-In (spend creates switching costs)
Movie rentals Engagement
TV show rentals Engagement
Browser
HTML5 + CSS3 Compliant Browser Parity
Information Finding
Search Utility
Carrier financial incentive via revenue share
Voice Search Cool demo
Maps (limited number of suppliers) Utility + parity
Navigation (limited number of suppliers) Utility + parity
Communication Cloud
Mail Utility + parity
Voice Transcription Diffentriated
PIM Services Utility + parity
Payments
One Click Buy (micro transactions) Parity + Frictionless commerce
Global (90+ markets) Utility + parity
Fraud Mgmt Utility + parity
Launch Marketing
$250M consumer marketing Consumer awareness.
Percieved momentum for developers
$50M App developer launch Studio compensation to seed app library and app competitions
Devices & Distribution
#1 and/or #2 Carrier in top 20 markets (first yr) Market coverage
3 to 4 OEM’s building 8 million devices (first yr) Consumer choice of mid to high-end devices
Developers, Developers, Developers!
Popular IDE App quality
Time to market
Developer happiness
Deep SDK Device access (e.g. camera, acceleramator)
UI (e.g. animation, controls)
Service access (e.g. maps, contacts, mails)
Enterprise
Security Parity
Employee device & app provisioning Parity

[1] Limited Network Effects: During the PC war application developers propelled Windows PC to its monopoly position – users adopted the OS with the widest range of applications and developers adopted the platform with the most users. In the mobile smartphone OS war the top 20,000 apps that matter will be replicated to the top five mobile os platforms in each market or region muting the possible network effects because the development costs are relatively low.

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Myth of the Month: Microsoft Windows Phone 7 is Too Late.

Written by Ariel Seidman on August 8th, 2010

Only two short years ago many thought Apple had built an insurmountable lead.  Android’s recent surge is proving that entirely wrong. Today, many believe that Microsoft is too late to the game.   This too is entirely wrong.  A lead of sixty million devices is not much of a lead in the mobile phone market.  To put this in perspective:

  • 140 million DVD units per year [source]
  • 360 million PCs (laptops, netbooks, tablets) units per year [source]
  • 100 million videogame consoles units per year [source]
  • 1.3 billion mobile phone units per year [source]

Mobile phones sell more than all of those – combined.  The two largest handset manufacturers Nokia and Samsung shipped 175M mobile phones (mostly feature phones) in Q1 of 2010.  That is more than 3x the total global PC shipments for Q1 2010.

The smartphone market of today is not what Google, Apple, Microsoft, HP, and Nokia are fighting for.   Today’s smartphone market is measured in tens of millions of devices per quarter across all the major players and by 2011 there will be 449M smartphone users (i.e. active subscribers).  The smartphone market of three to four years will be measured in hundreds of millions of smartphone devices per quarter.

Let’s be clear why Microsoft is not too late to this game:

  • Massive market.  An early lead of 60M devices in a 1.3B/yr shipped devices is not much a of a lead.
  • Device churn: People churn through phones rapidly (PC turnover is ~4 yrs and phones is ~18 months)
  • Weak lock-In:  Users are not spending hundreds or thousands of dollars on content (music, apps).
  • Weak network effects:  Given low cost of developing apps, the important ones are being replicated to the top tier platforms.
  • Carriers want Microsoft: They don’t want a Google and Android dominated market.  They want at least four major platforms each with 25% of the market, and believe Microsoft has the patience (i.e. warchest) and persistence to be one of them.

Full Disclosure:  I don’t work at Microsoft and I don’t own any Microsoft shares.  I simply believe the Android vs. iPhone conversation is myopic and ignores how insignificant of a lead both of them have established.

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Behind Google’s Data Buying Binge

Written by Ariel Seidman on August 6th, 2010

Google used to be based on a simple premise.  The web is a big place, we help you find the relevant piece of information for your question and direct you there — as quickly as possible.  You don’t consume information on Google, you simply find it.  Users only spend 3.4% of their time on search engines.  This is changing.  Having the best algorithm is no longer enough.  Google is investing heavily to own the data across key vertical categories and slowly becoming a destination experience for consuming this data.  Unless you own and curate rich data-sets there are natural limits to both the search relevancy and experience you can provide.  Google is quickly adapting by buying access to vast and rich data sets. Let’s look at their recent buying binge:

  • Travel: Acquired ITA Software which aggregates flight routes and pricing information and enables advanced search capabilities on travel data.
  • Local: Attempted to purchase Yelp.com, and after that fell through they ramped investment to build their own local data set.  Additionally,  Google has been investing for years in map with StreetView and satellite imagery.
  • Metaweb (Freebase): Structured data of  people, places, and things.

When Google focuses on a category like local this is what happens to the search experience.  For a query like Delfina Pizzeria (an excellent pizza place in San Franciso) rather than linking to the best sources of information like Yelp, Zagat, SF Chronicle, etc. Google first pushes you towards Google Places. It currently includes a mix of their own content and other sources of licensed content.  What happens when they have their own pictures, reviews, and check-in data — do they really need to license all this other content from the likes of  Zagat and SF Chronicle.

I expect Google to complete the buying binge by acquiring companies with rich data sets across other highly monetizable categories:

  • Shopping: Amazon and eBay to a lesser extent are capturing significant percent of query share in a very lucrative area.  If users bypass Google and go directly to Amazon for their product queries this represents a serious threat to their business.  They need to acquire a company with a huge selection of product data — rich and structured product attribute (size, color), inventory availability, pricing and promotions, and user reviews.  I can’t think of one company (beyond Amazon) that has done this well at the scale Google would need.  This may require acquiring multiple companies to create this.
  • Real-Estate: Is somebody like Trulia next?

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Practicing Focus the Apple Way

Written by Ariel Seidman on July 27th, 2010

Today, Apple launched a whole slew of new and upgraded products today, here are the highlights:

  • New Magic trackpad  – this  is very cool as it brings full multi-touch to the desktop (review here)
  • 27 Inch LED Display (review here)
  • Upgrades to iMac line (review here)

A pretty significant product launch.  So, you would think with Apple passing on a big Steve Jobs press event at the very least they would swap the Apple.com homepage to promote the new products.  Not a chance.  They are laser focused on the iPhone.

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Android is Leaving the Door Open for Microsoft’s Windows Phone 7

Written by Ariel Seidman on July 25th, 2010

When discussing the mobile landscape many people I talk with dismiss Microsoft’s upcoming Windows Phone 7 as too late.  They are definitely late, but not out.  Given a large enough market Microsoft knows how to execute (see gaming and enterprise software).  Additionally, the strong number two player in the market – Google –  is leaving the door open for them.

Fragmented User Experiences

Each Android device OEM (HTC, Motorala, Samsung, etc.) has created their own user experience layer on top of the out-of-the-box Android UI.  None of them have done a particularly good job.  Beyond the poor execution these fragmented user experiences create two problems for Android.  First, it creates a learning curve as user upgrade their devices. Users abhor relearning basic functions (ever wonder why Mapquest still has significant traffic in the face of far superior products).  If you are running the HTC Sense UI for Android and one day consider upgrading to a Motorola device running Motoblur these UI differences will appear daunting.  HTC is perfectly fine with this kind of reaction as they are trying to build lock-in to HTC devices.  But what happens when the user says to themselves well as long as I will need to relearn a user experience why don’t I try an iPhone or Windows Phone.  The second and perhaps more serious risk to Google from these fragmented user experience is the user never carves away a piece of their mind for Android.  To the consumer Android means ten different things based upon what kind of marketing the carrier did for the device, which UI layer you were running.  In fact many people have no idea that they are even running Android as there is nothing unique about the user experience that says I am running Android.

Google sees this as a serious liability and future versions of Android are focused almost exclusively on improving the out of the box user experience to avoid this experience fragmentation.

Bloatware

Yes, everybody pre-installs applications – even the iPhone.  While the iPhone does pre-install maps, weather, finance.  Carriers selling Android devices are going much further.  They are pre-installing niche products like the Nascar and Football apps – Wired provides the gory details here.  For example, my Droid Incredible from Verizon pre-installs City ID (a zip code lookup application), Footprint (local guides), Teeter (a game).  It is bad enough to pre-install niche apps, they prohibit you from removing these applications.  With that kind of experience it’s not surprising that 80% of Android owners will not buy another one.

Mess of a Marketplace

The Android Marketplace is a living example of a philosophy taken to its extreme with negative consequences. Android believes in a laissez-faire market.  Let all the apps in and allow the use to decide what is best.  The Android narrative goes something like this. Apple is the North Korea of the smartphone market and we (Android) are the open enlightened western country – where would you rather live?   This positioning may work for a small subset of developers but for users who actually simply want to find and install the latest app it is really not so simple.   Jon Lech Johansen’s recent blog post Google’s Mismanagement of the Android Market captures it well:

one should not need a PhD in Computer Science to use a smartphone. How is a consumer supposed to know exactly what the permission “act as an account authenticator” means?

Another example of this mismanagement, try searching for Yahoo in the Android Market. If you don’t have an Android I included a screenshot of what you see.  The first result (as of July 25, 2010) is an app made by a company called Lovemaq.  They stole the Yahoo logo, wrapped a few Yahoo.com web pages into an Android app, layered some ads around the app, and threw it into the Android Market.

Updated July 29, 2010:  Android app that steals your data was downloaded by millions.

The Case for Microsoft

After killing Windows Mobile 6 and the KIN Microsoft finally has their shit together. They are bringing a unique user experience (opens engadget’s recent review) in Windows Phone 7, a history of cultivating and supporting application developers, and strong relationships with both enterprise customer and OEM device manufacturers.  Combine this with a stomach for losing billions of dollars to build scale and the door Android is leaving open Windows Phone 7 will be a serious competitor far faster than most people realize.

Image courtesy of Flickr twenty_questions

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How Enterprise Software Companies are Getting “Blue Starred”

Written by Ariel Seidman on July 24th, 2010

In the movie Wall Street Gordon Gekko attempt s to buy-out and liquidate Blue Star Airlines in order to extract $75M from their over-funded pension.   Gordon Gekko sings the turn-around tune to  union leaders yet his true intentions to liquidate become apparent to all and the showdown between Gordon and his naïve protégé Bud Fox (his father is a union leader at Blue Star) begins.  After having dinner with an old friend from the enterprise software world I realized a form of liquidation is now hitting the enterprise software business.  These companies are getting “Blue Starred.”   Buyout firms are extracting value from enterprise software leaving business users with systems that barely work.

First, lets begin with some context on the enterprise software business.  During the golden years (nineties) of enterprise software – companies like Siebel, Peoplesoft, ePhipany and many more brought software from the back-office (order processing and billing) into the hands of sales reps, customer service, marketing, and human resources (commonly referred to as the front-office).  The license based enterprise software revenue model works like this.  They sell $1M worth of software licenses and then charge companies annual maintenance fees (approximately 20% of the original license cost) for patches and incremental versions of the software.   So, a $1M license software deal actually translated into $2M over five years ($200K annual maintenance fees times five years plus the original license deal of $1M.)   Once a customer installs the software they are effectively locked in for many years.  These maintenance revenue streams are highly profitable as they not paying sales commissions and support costs are spread across thousands of customers.

With that context, it’s pretty clear what buyout firms are doing.  Acquire an enterprise software company with a significant customer base, cut new product development, move support to a low-cost labor market, and milk the maintenance revenue stream.

Yes, this is part of the natural product lifecycle – these are companies on their death-bed.   But the unfortunate part of this is that users (customer service agents, payroll admin, and hiring managers) are stuck with barely usable (try using Oracle Applications) and now largely unsupported tools.

Given the improvements in user experience (Apple) and collaboration tools (Facebook, LinkedIn, etc.) over the past five years these older software tools are a massive productivity drain for millions of users.  There needs to be a better and faster way to flush out mostly defunct enterprise systems and migrate users quickly to something usable.  There is hope, companies like Yammer cleverly bypasses traditional IT purchasers and first hooks the people that matter most — the users.

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