User interfaces and soft walled gardens of tomorrow

A couple of years ago, many in the mobile industry foresaw that mobile operators would control most of the device specification, including the user experience. The manufacturers would turn into unknown hardware manufacturers, considered happy if their name was printed on the battery. There was plenty of evidence; NTT DoCoMo’s undisputed reign in Japan and Vodafone’s increasing specification work.

Today, I say the tables have turned. The manufactures are still the big brands and most of the user experience is still controlled by them. The operators are still waiting for data revenues to rise and their specifications of look-and-feel are shrinking. Someone proved that a Vodafone UI increased the usage of Vodafone services, but not to the extent that it gave any meaningful return of investment. It was too arduous and expensive to fight about the user interface. Most operators (maybe not in the US – yet) have lowered their walled gardens, to increase data revenues from uncontrolled Internet usage.

So what is it that hinders consumers from switching between operator or manufacturer brands? Brand, price, and service quality are the three motivations that come to mind for operators. And brand, overall quality, and industrial design for the manufacturers. These motivations are not walled gardens at all, but the primary values of these companies.

But there is one more thing: the user interface. Intangible and tangible at the same time, both logical and emotional. Anyone who has tried to switch between different device brands knows that this is not easy. Contacts are deleted, downloaded content is lost, and the camera does not take pictures, just to name a few. Look at the PC industry. A lot of consumers are turning to Apple because of one thing: Brand, coherently manifested in industrial design and user interface. But try to change! You will agree that the Mac is beautiful and that all the nice swooshes in the UI makes you feel as if the machine loves you. But the paradigm is not the one you are used to. And in the beginning that will drive you crazy!

Essentially the UI raises the comfort level once you are inside, which is also an exit barrier – a soft walled garden. So I don’t think we will have a homogenization of the user interface into a single mobile paradigm. Manufacturers will probably continue to manifest and develop their own unique UI:s because there is an opportunity to continuously ‘lock in’ the consumer. Because switching would mean learning – and boy, aren’t we consumers lazy!

There is a great incentive for the big structured mobile manufacturers (Nokia, Motorola and Sony Ericsson) to keep up their good work. There is also a big incitement for the historically more hardware-focused manufacturers (Samsung and BenQ) to invest more in this field. Strong brands like B&O and Apple will also have to keep this in mind when they are moving into our world. Google, Yahoo!, and other of our newly-found friends will have to consider this. And Microsoft will stick to their desktop paradigm, for better or for worse.

Customised Design Manufacturers are Here

The Customised Design Manufacturer (CDM) is a new business model in the mobile handset industry that fills a very important market gap: producing uniquely customised handsets on-demand for consumer brands and 3rd parties. CDMs are here to capture a portion of the emerging market for uniquely customised handsets (UCHs) i.e. handsets for niche customer segments. Operators (see Vodafone Simply and the upcoming NMT handset), MVNOs (see Helio and Jitterbug), handset manufacturers (see Alcatel’s ELLE phone and EmporiaLife) and consumer brands (see Versace, Dolce & Gabbana and Bang & Olufsen) want to deliver uniquely customised handsets to firstly differentiate and secondly capture the market for trully unique, branded handsets.

The Customised Design Manufacturer is a fabless manufacturer who caters for this very need: producing uniquely customised handsets for niche customer segments, taylor-made and styled to consumer brands, MVNOs and manufacturers. A CDM is an integrated business that combines brand licensing with handset industrial design, outsourced manufacturing, quality control, distribution, reverse logistics retailing and can also include an after sale, on-device service proposition as part of the handset.

In essence, a CDM is a specialised, yet vertically integrated service house that is able to act as a one-stop shop for brands wishing to enter the mobile phone business or MVNOs, MNOs and manufacturers wishing to outsource development of unique handset designs.

I first wrote about Customised Design Manufacturers after an inspirational talk with i-mate at 3GSM 2005. i-mate is the earliest example of a CDM, for prosumer and corporate customers. i-mate has been buying bulk from HTC and reselling customised handsets to several operators and independent retailers, adding in preloaded applications, internationalisation, warranty, support and marketing. Since 3GSM 2006, i-mate is transforming itself into a system integrator for corporate customers offering uniquely customised handsets with a complete enterprise device management solution.

Customised Design Manufacturers are Here
In the last year, several CDMs have surfaced; Modelabs, Tedemis, TCL Alcatel (an OEM with an in-house CDM business unit), while Emblaze Mobile plans to follow the same path. Modelabs is the leading CDM today, having produced handsets for Airness and Elite Model Look brands and expected to launch MTV and Tag Heuer handsets. Tedemis was the matchmaker that lead TCL Alcatel to produce the Glamphone for the ELLE publisher brand.

ARCchart‘s new report titled ‘The New Age of Handset Customisation: 2006-2011‘ (of which I was the lead author), has analysis and case studies of these customised design manufacturers. The report also profiles tens of uniquely customised handsets to date, including Vertu, Xelibri, ESCADA, Firefly, Vodafone Simply, Dmobo’s Disney-themed M900, i-kids, ELLE Glamphone, Bang & Olufsen Serene, Goldvish, Casio G-Zone, Voce, Jitterbug and Nordisk MobilTelefon handsets, which targeted at a wide range of segments, including kids, fashionable
females, tweens, teenagers, sports enthusiasts, senior citizens and VIPs.

The report examines the Customised Design Manufacturer business model and provides insightful detail:
“Each of the three CDMs ARCchart has identified – modelabs, Tedemis and Emblaze Mobile – take a different approach to integrating all handset commercialisation stages under one roof. Modelabs has grown in-house teams for brand licensing, industrial design, supplier management, marketing, distribution and support. Tedemis grew from a brand manager into a value-adding matchmaker between brands and manufacturers, adding service integration functionality to the handsets. Finally, Emblaze Mobile is moving from a virtual ODM towards a full CDM business model with the acquisition of European Telecom.

TCL Alcatel has shown how an OEM can adopt such a business model by forming an in-house CDM business unit. The Chinese-French OEM has created an internal business team under the name ‘Brand Design’, dedicated to designing, manufacturing and marketing branded, customised devices for niche segments. The multi-disciplinary team pulls together functions across the breadth of the handset commercialisation process, including industrial design, engineering and marketing, to form a virtual CDM operation. This structure essentially allows TCL Alcatel to bridge the previously existing communication gaps between handset teams, allowing it to develop uniquely customised handsets, while leveraging the know-how and manufacturing assets of an OEM and reducing time-to-market and cost.”

Challenges faced by CDMs

However, creating a CDM is not simply a matter of integrating several business units under one roof. The ARCchart report has some interesting analysis on the challenges faced by CDMs today:

“Customised design manufacturers have arrived in a challenging market place. As of 2005, about 84% of the global handset market is controlled by the top six OEMs. This leaves limited market share for the remaining hundred or so OEMs, ODMs, ODEs and CDMs. Furthermore, generous operator subsidies have turned mobile phones into consumer electronics items which are perceived as low-value by the consumer. Brands who want to play in the handset space will have to place brand appeal above pricing considerations, in the eyes of the sophisticated consumer.

One of the most challenging aspects of a CDM business is merging the distribution and industrial design businesses. These two disciplines, within the traditional context of mobile phones, have different working cultures, processes, business models and margins. Distribution is about a high-volume, low margin business with cold, operational efficiency and large staff count. At the other end, industrial design is about small, closely-knit teams with creativity and flair which develop a few products a year and look to high margins. This challenge is also one that modelabs claims to have overcome, which is one of the reasons for its market lead. Another challenge for customised design manufacturers is linking brand companies to manufacturers. The cultural and communication gap is substantial, but not insurmountable. CDMs therefore have to act as a bridge between brand clients with creative, lifestyle marketing cultures and handset manufacturers who are engineering-led organisations.”

Coming into the limelight

The report predicts that CDMs such as Modelabs, Tedemis and TCL Alcatel will far outgrow ODMs and ODEs in the production of uniquely customised handsets in 2007. This is due to the appeal of CDMs as a one-stop shop for consumer brands wishing to enter the handset market.

The ELLE GlamPhone No 1 handset has sold more than 100,000 units in 1Q06, with the sales of GlamPhone range expected to reach 250,000 by 3Q06, according to the ARCchart report. Modelabs is expected to announce handsets for MTV and Tag Heuer, which will further make an PR impact in the industry and bring CDMs into the limelight. Modelabs’ strong growth in profitability (+59.6% in net income in 1H06) is another validation for the viability and promise of the CDM business model.

The Twelve Stages of Handset Commercialisation

ARCchart‘s latest report is titled ‘The New Age of Handset Customisation: 2006-2011‘. The report analyses the new players, business models and market trends that are changing the economics and dynamics of delivering uniquely customised handsets. As the lead author of that report, I will spend some time highlighting key findings of the research in the next few posts.

Twelve Stages
So much time, money and energy is being devoted across the industry in producing handsets, yet there is scarse analyst coverage and analysis of the handset commercialisation process – understanding this process is key to all vendors wishing to play within the handset customisation business. The ARCchart report spends a chapter analysing this industry process – quite appropriately, the chapter is titled “The Silk Road of Customised Handsets”, and talks about the path of handset commercialisation, from brand licensing and industrial design to distribution and the retail experience”

Exactly how complex is the process of designing, producing, marketing and supporting a mobile handset ? The diagram below, taken from the ARCchart report, shows the twelve stages in the process of handset commercialisation:

The Twelve Stages of Handset Commercialisation

This diagram is particularly interesting, given that it also portrays the stages where the major players in the value chain are active today, and will be active in the future. The report then goes on to analyse each of the twelve stages. Of particular interest is the analysis of ‘brand licensing’ and ‘last mile handset customisation’ stages:

Brand licensing
“Handset OEMs have also typically been the brand owners. Companies like Nokia, Sony Ericsson and Samsung have both strong manufacturer organisations and healthy brands. However, with the increasing segmentation of OEMs, operator handset customisation and the entry of consumer brands, branded handsets for niche segments are slowly becoming a mainstream activity. Since brand marketing and handset manufacturing are two very different disciplines, a brand licensing agreement or proxy can bridge the gap.

Technically speaking, brand licensing involves a brand owner leasing the use of a brand to another company. It represents the exploitation of intellectual property in its purest form. Brand licensing typically involves contractual terms stipulating which products the brand will feature on, co-branding elements, positioning and rendering of the brand logo, product lifetime, distribution, pricing, promotion, retail placement and retail experience of the branded products.

The revenue model for brand licensing is a per-device royalty fee, often with a minimum volume commitment. This revenue model presents a low-risk, minimal cost endeavour for the brand owner, albeit at a limited potential for revenue returns. Brand owners may extend this model through strategic revenue share agreements, opting to share both increased potential revenues, with the potential risks.

Beyond 1-to-1 brand licensing between owner and licensee, there are a number of proxy companies specialising in multi-brand representation. These players secure long-term licensing deals with brands, which they then represent, sublicensing brands within their portfolio to product manufacturers. An example of a brand license aggregator is Global Wireless Entertainment, Inc. (GWE) which specializes in long-term brand acquisition and representation. GWE’s current brand portfolio includes Pele, Muhammad Ali, Warner Bros., DC Comics, Marvel, Lucas Film, NHL and NBA.”

Last mile Handset Customisation
“The final stages of handset customisation aim to furnish the handset with the external branding, applications, settings and increasingly, user interface components, to satisfy the customer’s requirements (typically an operator or OEM). Essentially, this process customises the plastics, settings and software of a basic handset in line with client specifications.

Traditionally, client-specific handset customisation includes adding external branding elements to the handset plastics (such as the operator logo), adding local language support in the software and programming network-specific settings onto the handset. In today’s age of operator-led handset customisation, this stage typically involves embedding specific applications to support operator services (e.g. an IM application), or the OEM value portfolio (e.g. a push-to-talk application). It also includes embedding clientspecific software modifications (e.g. for handling special SMS messages, GPRS optimisations, specific codecs and Java APIs).

Increasingly, this stage of handset customisation includes modifications to the user interface. The user interface of a handset is essentially made up of the visual elements of the applications that sit on the device, including the homescreen and menu application. Therefore, to customise the handset user interface, the manufacturer needs to adapt these applications one by one for a consistent look & feel. In the last two years, UI customisation frameworks have emerged which enable manufacturers to deliver a completely customised user interface within much shorter development times. UI customisation frameworks and their vendors (e-SIM, Digital Airways, TAT and MSX) are analysed further in Section G.3.”

The report also discusses the cost and time-to-market of the typical handset commercialisation process:

“The complete handset commercialisation lifecycle typically takes 12-18 months: a considerably long time, given that it is similar to the typical amount of time over which handsets are replaced in saturated mobile markets.

The sheer number of stages involved in commercialising a handset also indicates that the total handset development cost is substantially higher than the basic bill of materials (BOM). Over and above the BOM, the total cost includes costs for handset production operations, testing and quality assurance, retail training and customer support training. In total, a low-end handset is likely to cost between $3 – $10 million to develop, while a high-end handset may cost $10 – $50 million.”

The retail environment as a point of service discovery

Poor discovery and accessibility are two major obstables hindering the growth of data services. In simple English, the user often does not know that a service exists (it’s poorly communicated) or how to access it (it’s hidden under layers of menus). In the past vendors have suggested software methods for improving discoverability and accessibility: personalised WAP portals (see ChangingWorlds), on-device portals (see SurfKitchen, uiOne), on-SIM portals (see Celltick) and WAP toolbars (see Alatto), with results which are encouraging but not ground breaking.

A new paradigm for service discovery
An idea struck me while I was recently explaining the world of the mobile industry to a fellow passenger on the plane. Why not exploit the communication power of consumer brands and place them within the retail environment for service promotion ?

Here’s the scenario. Imagine walking into a mobile operator retail store in London in 2007. You spend ten minutes choosing your new phone and another five minutes choosing the right tariff. Following that the shop assistant shows you to a set of shelves stacked with branded, colourful boxes that easily fit in the palm of your hand. It looks like a console games shop, only now the shelves are stacked with small shiny boxes, each carrying a high street brand like Disney, Robbie Williams, Nike, Kodak, BBC News, AtoZ, the AA, the Discovery Channel, and SKY Sports.

Each box represents an information or entertainment service that you can get on your mobile phone. You ‘re already familiar with the 10s of brands already on the shelves, so you can pretty easily make out the stuff that of most interest. You pick the motorist news alert service from the AA and the London’s map & planner service from AtoZ. You pretty much know that the AA service is probably about traffic information, and you check the small print to find out that the service is about daily traffic alerts. Both services cost 2 pounds a month.

You take the two boxes to the shop assistant who scans the barcode on each box. She tells you that you ‘ll be able to access the services by pressing the MyStuff hard key on the phone, and then you ‘ll see the icons of the services on your screen (Technical note: the hard key is a shortcut to the WAP portal and specifically to the user’s own page. For smartphones a more elegant, and visually appealing alternative is to use an on-device portal local software application).

Behind the scenes: the point of discovery
This scenario presents a new paradigm for service discovery and accessibility. The use of consumer brands as a tangible, visual communication medium for the service proposition exploits the brand recognition that these content providers enjoy. The operator exploits this brand recognition in the retail environment to effectively communicate the value proposition of the service and allow the user to quickly browse and select from 10s of content providers. The branded box contains service details, pricing, as well as terms and conditions.
At the same time, the retail POS acts as an advertising medium: the operator can command a commission for the sale of a service and at the same time play the content provider/advertisers against each other for availability and pricing of shelf space. Naturally, independent retailers (see CarPhone Warehouse) can also implement this concept, aided by independent off-portal providers like Bango and RefreshMobile (minus the hard key shortcut).

The setup of a point of service discovery is straightforward for today’s mobile operators with 100s of retail points of sale. What an operator needs is a framework agreement with existing content providers, a logistics operation for the promotional boxes, some shelf space, training for the shop assistants, a MyStuff page on the portal and a straightforward mechanism for provisioning the portal that is accessible from the point of sale.

An important yet subtle element in this concept is the hard key: I fundamentally believe that operators should send hard key presses not to the portal front page but the user’s own page. Personalisation should take priority over Customisation.

Reality check
The beauty of this concept is that it’s easy to implement, and it can be easily demonstrated (ok, instinctive proof will have to do for now) to accelerate service adoption and hence data ARPU. The drawbacks of the approach I would consider to be minor: there is a cost to the shelf space occupied by the branded box shelves (and probably reduction of shelf space for selling phones). Then there is the concern of increased ‘product noise’ and ‘brand noise’ in the retail environment which may complicate the sale.

Overall though, I do believe it is a promising solution to boost service accessibility and discoverability that with an optimised retail planning can do wonders to the traditional mechanisms of service promotion.

Any operator listening ?