Motorola's AJAR set to follow in Nokia's S60 footsteps

Motorola’s acquisition of TTPCom in June bought the OEM ownership of the AJAR operating system for low-end handsets. In a corporate newsletter published in October, Motorola announced that the AJAR platform would be licensed to other OEMs, following in the footsteps of Nokia’s S60 licensing strategy. I believe Motorola’s AJAR licensing will suffer from the same issues that have caused S60 licensing to fail to date.

Quick recap
Motorola completed the acquisition of the Cambridge-based company on 28 July 2006. TTPCom is now known as the Motorola TTPCom Product Group and fits within the Technology Office in the OEM’s Mobile Devices Division. As TheRegister points out Motorola paid a huge premium to buy TTPcom. “At first, the price tag of 103m ($192m) looks over-generous for a company that saw a 36 per cent revenue decline in its last fiscal year to 37.2m ($69m) and a slide into the red with a loss of 32.3m ($60m). But this acquisition has nothing to do with revenues and everything to do with gaining valuable technology assets for not one but two of Motorola’s most strategic growth initiatives ultra-low cost handsets and fixed-mobile convergence.”

The rationale behind the licensing strategy
AJAR is TTPCom’s operating system that includes the applications framework, applications suite and tools for voice phones and low-end feature phones. AJAR (literally means slightly open) was named after the middleground between open OSs and closed, proprietary OSs.

As Rob Shaddock, CTO at Motorola Mobile Devices explains in the TTPCom newsletter, Motorola initially licensed AJAR for use by its ODM suppliers. “We decided that it would give us more flexibility and the ability to move a bit faster if we could deliver a software platforms to the ODMs who were all using their own proprietary platforms.”, Shaddock says.

The newsletter further explains “most people in the industry thought that we ‘d be swallowed up by Motorola and that they ‘d never hear from us again. That couldn’t be further from the truth”. The newsletter continues saying that “the target is ‘ubiquitous AJAR’ for the mass market and feature phone segments. Targeting the top tier handset manufacturers and their supply chains, we aim to get this tool used right across the industry to reduce the cost of handset production and to enable manufacturers to meet the demands of operators more effectively.”

The rationale behind the AJAR licensing strategy is that “operators’ requirements are continuing to increase exponentially” (technically not true – I would say linearly, and are already showing signs of resource fatigue). “To manage the consequences, the industry needs a shared platform for the development of handset user experience – AJAR”.

So, Motorola’s plan is to license AJAR to top OEMs and create a community of value-added applications around the platform.

Can you trust a competitor as a strategic supplier ?
AJAR is targetted to low-end handsets, combining proven modem stacks with a low-memory-footprint OS platform – characteristics which are quite different S60’s target market and design goals. On the other hand, the challenges in Moto’s AJAR licensing strategy are quite similar to Nokia’s S60 challenges. Which OEM will trust a competitor to sell them a platform ? There are four issues with this strategy:

1. Risk of lock-in to the platform and lack of roadmap control – which is why Motorola, Nokia and Sony Ericsson are using internally-developed software platforms. Samsung is also known to be developing its own Linux platform, to replace Mizi.

2. Risk of IP leakage. Who will trust Motorola to build Chinese walls between the AJAR platform group and the OEM accounts groups ? “In sharing a tool like AJAR across the industry’s leading handset manufacturers it is crucial that we recognise the need for: transparency; a declared roadmap; absolute confidentiality of customer information; and a level playing field for pricing” reads the newsletter. Motorola’s words reflect a warm, intimate and trusting welcome, but it will take much more than words to convince customers to walk through the door.

3. The low-end and mid-range segment is very price sensitive and is mostly driven by internal OEM efforts. If a full operating system stack costs $5 for a high-end feature phone, how much can Motorola command for an OS for low-end phones ? The only upside to this is the tens of millions of shipments associated with low-end handsets.

4. The window of opportunity is closing. Most OEMs have already selected their low-cost platforms, although Sony Ericsson and Samsung are still valid customer targets.

The answer is no
.. and that’s why Moto’s strategy won’t be going far. All in all, acquiring TTPCom was a sane decision for a manufacturer like Motorola with an in-sourcing platform strategy. Most certainly the acquisition will help Motorola strengthen its IP portfolio in 3G+ and convergence products. It comes at the right time, given Motorola’s increase of market share, confidence and R&D spending following the wild success of the lab project that became RAZR – something which reflects on the hiring frenzy at TTPCom’s Cambridge offices.

However, putting money into building an ecosystem and selling to competing OEMs seems like money down the drain.

Qualcomm an inch closer to Europe

Qualcomm has been struggling to sell BREW handsets outside CDMA markets for some time now. Its first breakthrough came with operator O2’s announcement in November 2005 that it will sell BREW-based handsets within its ‘X’ range of branded handsets. Later it emerged that O2 was buying the uiOne on-device portal and idle-screen customisation client-side application, but not DeliveryOne, Qualcomms’ back-end content and application delivery server-side infrastructure.

Today, a year later from the O2 press release, Qualcomm announced that operator Telecom Italia Mobile (TIM) has agreed to launch two BREW handsets, the Onda N5050 which will feature uiOne with downloadable themes, and the Samsung Z630. Both handsets support BREW extensions for 3D games, which in association with Gameloft will allow for downloadable 3D games to TIM subscribers. There was no explicit mention of the DeliveryOne infrastructure within the announcement for the deal, which probably means that TIM wouldn’t shell out the license fees for the server infrastructure when it is only agreed to a single ODM handset. [Update: Qualcomm PR contacted me to say that “TIM’s deployment of BREW services does include DeliveryOne. TIM has taken both the client technology and the server technology. DeliveryOne is used to deliver the uiOne ‘Themes’ and the BREW games”]. Note that Onda is an Italian value-added-distributor who also brands ODM handsets.

The TIM announcement brings Qualcomm an inch closer to Europe – although this success pattern seems to be not far off a marked improvement compared to last-year’s announcements, i.e. deals on 1-2 handset models with uiOne, but without with the server-side baggage. It once again confirms the following paradox: uiOne is a brilliant software solution for delivering idle-screen personalisation and customisation (see earlier article on this fascinating topic), while Qualcomm is the product’s biggest advantage (given the cash investment to build uiOne, a.k.a Trigenix-on-steroids), and its biggest drawback, given that operators are wary of being locked-in to the Qualcomm chipset-plus-OS-plus-UI-plus-services vertical stack.

[Update: Ok, so TIM has also ‘taken’ both the client technology and the server technology from Qualcomm, licensing and financial terms remaining undisclosed. This does mark a success for Qualcomm in selling the full uiOne solution in Europe, although much has yet to be proven, i.e. whether TIM will actually go beyond dipping its toe in the water, into deploying BREW devices and uiOne across a greater share of its handset portfolio.

At the same time it should be noted that Qualcomm possesses a strong card, which is an out-of-the-box software platform (BREW + uiOne) customisable to a good extent by mobile operators, and available on tier-2 or tier-3 ODM feature phones that come at competitive price points. This proposition does present an appealing option to European operators who have either not seen enough return-on-investment from their previous handset customisation efforts (e.g. O2, Vodafone?), or who are wondering how to best embark on portfolio-wide handset customisation strategies (e.g. TIM and T-Mobile)]


Operators: service-pipes or bit-pipes ?

In the last five years, tier-1 mobile network operators (MNOs) have looked for strategic inspiration in many places, albeit with limited success: at the killer app, the killer brand, the killer supermarket, the killer segmentation, the killer branded handset, the killer content and the killer service. All have been results of the operator-is-king mentality, which followed from the astonishing revenue growth reaped by networks in the early years of mobile. All have come far short of expectations.

My thesis is that operators should re-evaluate their strategies, not in the context of the one-sided market, but in the context of a two-sided market, where value flows both from the left and right of the chain. In other words, rather than continue the one-firm-provides-all strategy, they should adopt a platform strategy, by linking users with content providers and advertisers. They should take lessons from Google, VISA, Microsoft, Shell, Monster and shopping malls. MNOs should focus on extracting value only where they can add value, i.e. through network, handset and retail enablers.

Let me explain, starting with a short history of how operators have tried to run the show so far.

The killer app
The buzzword of the telecoms-bubble era was the killer app. What was it? Email, chat, TV, IMS, mobile broadband (I still find the term amusing!) ? Nobody knew and nobody ever found out – the killer app turned out to be a bubble in itself.

The killer supermarket
Operators then tried the ‘killer supermarket’ recipe. The idea was that you could get customers to pay just for walking around the supermarket and browsing the shelves. Oh, and when you wanted to go across the street a guard at the door said: “Sorry, you can walk within our beautiful gardens, but you can’t go out. Don’t you remember ? You agreed to these terms when you walked in”. Within these gardens, operators dreamed that they could open up a bank, utility services and all the shops that the consumer would ever need. Tier-1 MNOs had to stop dreaming when the golden era of GSM growth started to dry and so was funding for blue sky projects. Walled gardens, too had to open after journalists did not spare any flattery with the whole garden business.

The killer brand
One of the most memorable milestones in mobile operator history was around 2002 when most tier-1 MNOs got jealous of Orange’s success and thought they should have national colours and buy lots of paint buckets to dress up their portals, handsets and everything else. Thus came Vodafone’s Red, O2’s Blue, T-mobile’s Magenta and Sprint’s Yellow. The colours did have a memorable effect on the consumer, but they lacked a memorable deliverable.

When the brand deliverables are not clear or relevant to the consumer (what does an MNO brand stand for?), there is little tangible differentiation to the eyes of the consumer, other than price. What does Vodafone Live! mean today to the average consumer ? Sergio Zyman (ex CMO, Coca Cola) wrote an entire book to express the point that marketing and promotion fails if it promotes the brand for the brand’s sake. As he puts it ‘in the absence of [brand] relevance, consumers always fall back on price’.

The killer segmentation
Since 2004, operators invested in building more and more sophisticated marketing segmentation plans. Most tier-1 MNOs today have about 10 segments (including business users), as shown in the case of T-Mobile below.

T-Mobile segmentation
However, MNOs eventually had to realise that their organisations were built to run networks, not targeted marketing campaigns (the smartest MNOs like KPN moved into the wholesale business). The one-brand-fits-all approach was found to pale in comparison to the focused, niche segmentation of other manufacturers such as Nokia (with 50+ segments), SonyEricsson (see Cybershot and Walkman ranges) and 100s of high-street brands with niche and relevant brand propositions that enjoy loyal fan clubs. These companies built their brands through money, years of promotions and smart marketers.

The killer content
It was then that operators realised they needed Disney, MTV and Ferrari to get their users excited. However, content licensing turned out to be expensive (from 20M to license Disney content for a major operator, to nearly $100M to build ESPN Mobile, which as we all know went the way of the dodo).

The killer handset
What if operators could be making their own handsets ? Surely they would deliver the best handset for their own consumer segments, they thought. Vodafone decided to walk down this path and assembled a fine team to produce the Simply range. Vodafone’s Simply proposition, comprising of handsets, customer service and dedicated calling plan, was designed for a consumer segment the operator calls ‘adult personal users’. However, according to reliable sources, Vodafone country operations are today struggling to sell Simply handsets, because the range is competing unfavourably with other handsets in terms of price. Here’s another lesson: operators don’t know how to sell handset propositions, but manufacturers do. So much for the killer handset notion.

The killer service
We ‘ve heard it again and again. At 3GSM 04 the killer service was 3G. At 3GSM 05 it was HSDPA. At 3GSM 06 it was Mobile TV. All have come and gone, but still 80-90% of data revenues are driven by SMS in most western markets. In most cases, operators who have licensed DoCoMo’s i-mode solution have been able to convert at best 10% of their subscriber base. A new tariff and marketing plan stands to make much more revenue for the operator than x (insert a large number) billions spent on upgrading the network and handsets for next-generation services.

So where to next ?

From product to platform strategy
I would argue that tier-1 operators need to go back to square one and reconsider their long-term strategies. Starting from first principles, operators should extract value where they can add value. Beyond the voice and data transport network, there are two other things that operators do well: handset customisation and retail shops. However, these should be seen not as products, but as platforms.

My thesis is that MNOs should look into the mirror and realise that the market is not one-sided, as in the traditional manufacturing business, where revenue flows from right to left. MNOs should understand that they are part of a two-sided market, where buyers are on both sides of the value-chain equation and value flows from both the left and right. Two-sided markets have been successfully exploited by credit card companies (VISA, who links consumers to merchants), operating systems (Microsoft, who links PC users to application developers), internet search (Google, who links surfers to advertisers), recruitment (Monster, who links job hunters to employers), fuel(Shell, who links gas stations to car owners) and shopping malls (who link shoppers to retailers). Two-sided market concepts and strategies are the subject of the article “Strategies for Two-Sided Markets” by Eisenmann, Parker and Van Alstyne appearing in the October 06 issue of the Harvard Business Review (and well worth a read in my opinion).

In this context, operators should realise that they should act as the platform that links consumers with service providers and advertisers. This in essence is a three-sided market, where value flows from, and to, all three sides. Rather than try to be the manufacturing point for all goods, operators should extract value by adopting a platform strategy.

I have been thinking about this topic since my early strategy days at Orange. All in all, I believe MNOs should focus their platform strategies three pillars:

Pillar 1: Focus on Voice
Voice is the quintessential mobile service, revenue and profit-wise. Operators should own and manage voice services, but also provide peripheral data services related to voice. Examples are T-Mobile’s My Faves, Comverse’s visual voicemail, SnapIn’s self-service and SKT’s avatar-based videotelephony service).

Pillar 2: Develop Platform, not Product Strategies
Operators should realise that consumer service innovation most often comes from 3rd party service developers (and as Bill Joy says, the smartest guys work for someone else). Operators should develop platforms that link service providers with advertisers and consumers (and do it faster than Yahoo, Google and Nokia) – in other words be service pipes, to avoid being bit pipes.

MNOs can develop platforms that expose network, device customisation and retail enablers as follows:
– Network, location, subscription and device management APIs on the network side
– on-device portals and on-device electronic service guides that act as an accessibility/discoverablity portals for 3rd party services across all handsets.
– offer service promotion through retail stores – here operators win doubly by reselling services and selling retail space.

Operators should offer these platform constituents to all service providers (big and small), all advertisers and all consumers, and let the killer app, brand, supermarket, segmentation, branded handset, content and service be figured out by someone else.

Pillar 3: Develop brand deliverables that make sense to the consumer
If MNOs want to to be ranked more favourably within the list of handset purchase criteria, they should refocus on developing clear and sustainable brand deliverables that are relevant to the consumer, namely:
– offer choice. This can be choice of latest handsets, choice of home-screens or themes, choice of third party brand, service provider, etc
– offer peace of mind. Good examples are Orange’s Signature Premium package and Telefonica’s use of FOTA as an assurance of instant handset fix)
– offer convenience, i.e. allow users to visually check their balance, or how much a particular service will cost, check their voicemail, request upgrades, manage their subscription,etc.

In in all, operators should become platforms or service pipes, before they degrade to being bit pipes.

Thoughts and rants are welcome.

Prioritize: Take over the world or Enjoy good margins

The end of each quarter is always an exciting period in the mobile business, the average selling price and market shares of the manufacturers are disclosed. The third quarter, 2006, looked like this in terms of market shares:

Nokia 33.6%
Motorola 22%
Samsung 11.1%
Sony Ericsson 6.7%
LG 6.3%


As can be seen, the top five cell phone manufacturers own around 80% of the market, less than 10% correspond to a handful of Japanese OEMs and the remaining 10% of a collection of smaller brands. Result: The world will more and more be ruled by a few handset vendors, instead of many. (In the CDMA-space, Qualcomm has tried to create the opposite situation with 1-3% companies like Pantech-Curitel and the Japanese vendors, but as any monopolized market everyone involved pays a higher price. Due to a lot of reasons; cost being one of them, dependency from one player another, CDMA has not gained market share over time.)

Disclosure: Average Selling Price and Market share are connected
What then happens is that people look at the report to find statements like ‘Nokia device ASP of EUR 93, down from EUR 102 in Q2 2006‘ or from SEMC ‘Average Selling Price increases sequentially to 147‘. After this statement they usually make two statements: ‘Why are Nokia losing their margins?!’ or ‘Sony Ericsson is one of the few vendors who really know how to make phones!’. It is not that strange that Nokia and Motorola have largest market shares but not the best ASP. The world market looks roughly like this (divided by type of phone):

Low end (Voice phones) 41%
Mid/High-end (Feature phones) 42%
OpenOS (Smart phones) 17%

Source: Nomura 2005
(To avoid unnecessary discussion: the OpenOS-figure is rather high, Gartner for example has a guesstimate of around 10 %.)

In the stagnant markets (Western Europe, Korea, Japan) the devices that are sold are to a greater extent feature and OpenOS phones, and people switch phones at least once a year. Here it is a margin business; few phones with good margins are sold. In BRICE (Brazil, Russia, India, China, Emerging) mainly voice phones are sold and these countries has a LOT more people. This is a volume market; a lot of terminals, but with bad margins. (In US, and some other parts of the world, the gaps are as usual bigger and there is a large diversity.)

So with greater presence in these the volume markets you get better market share, but also lowered average sales price and margins. Bigger players always have the economy of scale to help them, but it is usually easier to increase price than to lower development costs and bill of material.

Vertical vs. Horizontal
Sony Ericsson focuses on the feature phone market and not voice phones. At the same time, they are doing something even more important to help their ASP: They focus on clear vertical segments. Sony Ericsson has created two recognizable sub-brands that actually help the user select phones: Walkman for music centric devices and Cybershot for the devices sporting a better camera experience. This is good marketing! The best way of making a consumer pay more is to make her understand why she should. Motorola’s four letter abbreviations (RAZR, ROKR, SLVR, etc) or Nokia’s N-series, E-series or four digit versions don’t bring the same clarity. (The 2xxx, 3xxx, 5xxx, etc series might be clear to Nokia’s marketing gurus, but they are certainly not clear to us consumers.) Samsung and LG haven’t even tried, but spend their time creating pushing the envelope of hardware instead.

What Sony Ericsson has done is to create a vertical device: A device which is dedicated to a certain usage (or at least better at this). Nokia with its S60 is moving the other direction: towards a horizontal platform. Most other devices are just fuzzy. There is another group of companies who has followed a similar strategy as Sony Ericsson has: ELLE, Bang & Olufsens Serene, Nokia’s Vertu, Goldvish and others with them. The ‘vertical’ is not a dedicated usage, but an attitude, a clear proposition.

The great thing of having a horizontal strategy is that you can become the required middle-man. Who would have built applications for anything but Microsoft Windows a couple of years ago? What we don’t know is whether the horizontals become important. Will people buy a handset so that they can download apps? Or will they choose a pre-packaged target group (and maybe add some links, wallpapers and Java-applications and games)? The risk of going for the platform strategy is that if a certain usage or application becomes dominant you risk become a pipe, or plumbing. Who would have thought that Microsoft’s greatest threat would be Google or Adobe?

Hampus Jakobsson, TAT