The headaches of being a handset OEM

Some things remain true: Markets always shift and the lord giveth and the lord taketh. In the mobile handset industry we have seen Ericsson with 30%+ share of the market and then fall into oblivion before creating a joint venture with Sony and rising like the bird Phoenix. Does anyone remember the impact of the Vodafone terminal specifications to OEMs less than half a decade ago, for which even Nokia bent over backwards in the end? How come this changed so rapidly? Well, consumers change their minds. The industry too shifts between vertical and horizontal structures in a helical pattern. There is always a search for the next killer feature that will lead into a new shift powering market dynamics, but seldom is it a feature that creates that shift in balance but something completely different.

Consider first an example from another industry the automotive market. The last few years that market has undergone a feature renaissance , the killer features being environmental impact (look at the success of the Toyota Prius) and localization (i.e. with built in GPS). The previous killer feature was segmenting the car products into clear value propositions like SUVs, family cars, sports cars, etc. Before that it was hardware being able to build cars and ship them over the planet.

The shift of the millennium: from hardware to software
In the mobile handset industry we saw the shift in market differentiation, from hardware to software some years ago; until the end of 1999 all the big OEMs were more or less focusing on hardware. Technology differentiation was determined by how small you could make the phone, how good network reception you could achieve, and so on. In the beginning of this millennium a shift began; software became much more important. In 1998 Symbian was formed as a partnership between Ericsson, Nokia, Motorola and Psion. In 1999 J2ME was announced. The demand for software engineers surged.
It wasn t that hardware didn t matter or that it was commoditized. It wasn t that software hadn t mattered earlier either just that gradually software became more important than hardware. It takes years until we notice the difference, as it takes years to build a good software platform.

The next shift: from software to segmentation
We saw a similar shift last year, in 2006. In the third quarter of 2006 the average selling price (ASP) for several handset OEMs decreased considerably. Except one; Sony Ericsson who instead increased not only its handset ASP but also its market share. As argued earlier, increasing market share often leads to decreasing ASP, so why was Sony Ericsson an exception?

I would argue that Sony Ericsson found the new differentiator: vertical segments. A vertical segment is really just a product proposition that occupies a niche segment of the market. The more niche and targeted you can make any product, the more valuable the target consumer will find it and is thus willing to pay more for it.

The core handset differentiation shifts over time and eventually sinks under the value line .

The complexity of creating vertical segments
Designing a product to appeal to a target customer group as well as possible is important as long as that group is big enough to provide a return on investment. Today mobile handset tailoring and customizing is not an easy task and investments are substantial. There are three essential elements to creating a vertical handset proposition:

  • User Research: finding out what the customer segments want and to translate this into requirements
  • Supply-Demand Prediction and Logistics Handling: balancing supply and demand in a cost efficient and operationally responsive way
  • Product Flexing: to cost efficiently create multiple products according to requirement with minimal impact to time to market, development cost, and bill of material

The first two elements are competences taught in most marketing classes, but the third is specific to each (non-commoditized) industry. In the case of the mobile handset industry, this is the hardest part as it takes years to platformize handset software and hardware. Nokia has mastered the top two elements, but for some reason the inside of their phones look the same independently if it is game, business or multimedia that drives the phone. Sony Ericsson on the other hand was able to balance all three to a level which was in part responsible for their increase in handset ASP last year.

The next wave of differentiation?
Of course there will be a new differentiator when the art of segmentation has been mastered. We are already seeing open source as a threat to the ones that relied on the traditional model of software development. In markets where no new features can be added to the product the value lies in design, brand and product marketing, as is the case in eye-wear and watches. But surely there must be more features to add in mobile handsets, right?!

So where should we look for the next wave of differentiation? Undoubtedly OEMs will continue improving handset segmentation and user-centered design. However, I would argue that the next differentiating characteristics in mobile handsets will be delivery of True Personalization and the ability to cater to Multi-Sided Markets.

True Personalization
True Personalization is really about making the target segment so small that it becomes more or less one person (and I am not talking about ringtones, themes, mobile charms, and stickers). When Japan introduced number portability, many believed that the churn would grow immensely. It didn t, and I think one of the reasons is that DoCoMo had introduced soft walled gardens like personal email and i-mode services that users had attached themselves to earlier.

Think about it: If you had to change your email address to move to a Dell, HP or Mac instead of your current IBM/Lenovo, would you change? The OEM that is able to create an identity that resides within your mobile that is easily personalizable by the user and moved to new devices within the same brand, will definitely see less churn. I know a lot of people who don t change phones (even within the brand) because it is such an hassle to configure and move bookmarks, contacts, rss-feeds, contacts, settings, etc, and that some things like sms and email is not even transferable.

When the user is able to micro segment and truly personalize her own device she will never switch! Why do you think Nokia created the Nokia LifeBlog?

Catering to Multi-Sided Markets
Mobile phones will increasingly resemble platforms, but no one in the manufacturing part of the value chain will want a new Wintel, i.e. a singular platform. The manufacturer-operator battle is clear and a dividing line exists between the two the players above this line (operators and service providers) want all handsets to be the same for their applications, services, advertisements, etc. The players below (the handset OEM) don t want to become too platformized and end up like set-top-box manufacturers (I love asking people what the brand or even manufacturer of their set-top box is. Many answer TiVo or some other non-manufacturer; little knowing or caring about that it is built in Taiwan or China.

The way forward: handset OEMs are either building services or service platforms of their own, or are creating a flexible white label solution for third parties. Look at Nokia Ad Service, Content Discoverer as well as Motorola s Screen3. Rumors say that Google is having close talks with LG and Samsung, two hardware centric manufacturers, who should watch out for platformization. Why would Motorola not just use uiOne and why does Three remove the Nokia Active Standby? Because being able to enable third parties to monetize the mobile platform, but keeping control of the user experience will be a promising post sales revenue stream.


Hampus, TAT

Make it – then break it: the UI-paradigm of converged devices

A lot of people spend their time thinking about how machines should present information and a control interface for humans, the so called user interface. There is an increasing need to improve the UI as our devices consolidate and merge. A couple of years ago the portable phone (in reality a voice modem) was equipped with a personal digital assistant (PDA, for those who forgot what it meant). Then the digital camera joined the same screen real estate. And then the camcorder. This past year the music player and web browser. Next year TV, GPS, and mapping functionality.

The jury is still out on whether convergence will continue and mobile phones become the ultimate in-pocket-Swiss-army-knife-machine. I believe that the form factor will be what sets the limits and determines whether the functions should be split into separate devices, and nothing else.

Nokia 3310First you make it..
So onto the UI-paradigm then. Nokia revolutionized mobile phone usage with their NaviKey concept. The 3110 sported a key in the middle, the’get-on-with-it-button’, two arrows keys to swap function and a ‘clear key’ for back or delete. The phone became simpler and faster to operate, with only large text, and one clear option. Today all phone manufacturers have adopted this thinking one way or another. In this way, the user interface paradigm has been standardized, much like the way the play/pause/rewind/forward paradigm has been for media players.

..then you break it!
But it is time to think differently. These disparate functions crammed inside the phone should of course fulfill the basic rules the converged paradigm, but not all the rules. Look at the ‘take picture’ function of the camera. Does it have anything to do with the mobile phone and all its list menus? No. Then don’t force it to look and feel like one. Sony Ericsson has made an excellent choice in their new CyberShot series! The camera application looks and feels lika a camera, and not a mobile phone. This takes time to adapt to; the first Nokia with camera even had a menu you could fold up and select ‘take picture’.

The more there are established paradigms out there the less reason there is to invent a new one. The UI can be the same, but adapted to add the benefits you have from the other functions, for example a context menu with ‘send to blog’ or ‘send as MMS’. These adaptations make the functions add to each other in a 1+1=3 kind of way.
I believe we will have devices divided into these functions pretty soon, all looking part mobile phone and part their own:

  • Talk (the most fundamental function and still the king)
  • Organizer (calendar, timer, alarm, etc)
  • Media (music player, picture browser, etc)
  • Share (messaging, blogs, etc)
  • Camera (looking just like any point-and-shoot camera, plus the adaptations)
  • Web (looking just like on the PC – just the web, again with adaptations)
  • Downloaded Applications (which will look like the service on the web they represent, but inherit the basic UI-paradigm of the device, for example a picture browser with Flickr content sown into it.)

Samsung A970When product planners will think of future devices they should pick and choose from this toolbox and select a form factor. For example: a ‘Business device’ will have Organizer and Web as their two main themes and have a QWERTY-keyboard and a large screen, a ‘Life recorder’ would center around Media, Share and Camera, and a ‘Portable Web device’ would have Web and Downloaded Apps as the two big features. And some devices will try to combine them all into a Swiss army knife and bet on the so called professional pioneers, a.k.a. tech geeks.

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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

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.