Google has the leading developer program, but Amazon is catching up

Developers. Decision-makers. Kingmakers?
For several years now, at SlashData we have been helping our clients – some of the biggest names in tech – to understand how their developer programs measure against the competition. Twice a year, we run an extensive and wide-ranging global survey to understand who developers are, what tools and resources they use, and where they are going. Developers share with us their experiences with vendors’ resources – which ones they use, how often they use them, and how happy they are with the experience. We also dig a little deeper into what developers value in vendor support, resources, and communities.

Our research shows that developers are becoming increasingly involved in all stages of the decision-making process. Not only are they writing specifications for vendors and tooling choices, but they are also influencing decision-makers and budget holders. If software is eating the world, then developers are writing the menu. 

To attract developers, many tech companies are actively investing in Developer Relations (DevRel) teams and developer marketing activities. They are creating an abundance of resources, training programs, technical support, events, and community activities. It’s not always clear which activities should be priorities and how resources should be allocated to achieve long-term strategic goals. We are here to help.

Our Developer Program Benchmarking research tracks 20+ of the leading developer programs, and captures developer sentiment across more than twenty developer program attributes, ranging from documentation and sample code to mentoring programs and access to experts. In so doing, it helps DevRel and developer marketing practitioners understand how their developer program compares against the rest.

Here, we give you a snapshot of the state of play for these developer programs. We use three KPIs to create a 360° overview of how each developer program performs:

  1. Adoption – How many developers use a vendor’s resources
  2. Engagement – How frequently developers engage with the resources
  3. Satisfaction – How developers rate their experience using the resources

bubble chart showing how developer perceive the leading developer programs

We can see that the Market Leaders; Google, Microsoft, and Amazon highly engage and satisfy developers. Their market share – or adoption rate, shown by the size of the bubble – reinforces their market-leading position. In fact, when we take a longer-term view of this data, it becomes clear that Google and Microsoft have long been the market leaders, staying at or near the top of the table for all three KPIs. 

Recently however, Amazon has made considerable progress. In fact, Amazon’s developer program has been growing faster than the global developer population, which is currently 24.3M (you can explore more in our developer population calculator), while Google and Microsoft’s share has dropped slightly. When you take into account the large increase in Amazon’s satisfaction score and their aggressive growth strategy, the top table positions don’t seem so assured.

Our data also uncovers the Satisfying Specialists – these developer programs are often small and focused. Unity, Red Hat and DigitalOcean sit firmly in this space. Developers don’t need to engage frequently with these vendors’ resources, but when they do, they have an excellent experience. For these vendors, low engagement is not a cause for concern, though it does come with its own challenges – when developers have fewer touchpoints there are fewer opportunities to speak to them or to influence their behaviour. For these (and other) vendors with low engagement, messaging becomes vital. 

The Under-realised Value segment contains developer programs that, although having high engagement amongst developers, are being held back by their low satisfaction ratings. These programs are often (though not always) small, and the vendors here have a clear imperative to improve their developers’ experience. Thankfully, with developers engaging frequently with the resources there are ample opportunities to effect positive change.

But what, exactly, to change? 

This brings us to the true power of our Developer Program Benchmarking research. Not only do we understand how developers engage with vendors’ resources, but we also know which resources are important to developers, and how satisfied they are with the resources that companies provide. 

Though developers’ preferences change and evolve, some things stay constant. Of the twenty-plus resources that we ask about, documentation & sample code, tutorials & how-to videos, and development tools, integrations & libraries have consistently been rated as the most important resources that companies should offer. This shows that developers are focused not only on getting things done, using documentation and development tools to speed up the development process, but they also highly value having the opportunity to learn. We can see this repeated further down the list – training courses & hands-on labs provide the learning opportunities, whilst technical support allows them to lean on experts when they need to.

Table showing the 5 resources: documentation, tutorials, development tools, training courses and technical support

In this way, we can tell which resources developers value, and how their experience matches their expectations. This information, when combined with our wealth of survey data on demographics, firmographics, technology choices, motivations, skills, and much more, becomes incredibly powerful for informing strategic planning. We help some of the leading tech companies in the world to understand precisely which resources need improvement, and which developers will benefit most from such improvements. Have you ever wanted to know how to tailor your tutorials to the right level of complexity? Have you ever tried to decide how to localise your content? What about marketing to enterprise developers, what do they care about? 

We also go a level deeper. For many developer programs, we specifically ask developers how they use resources relating to different products or disciplines. For example, we help developer programs to understand whether or not they are vulnerable in the cloud compute market, or what are the specific preferences of developers using IoT resources. Once again, coupled with the rest of our rich and diverse data, this information allows you to create a finely tuned strategy that allocates resources efficiently and effectively.

With developers having such power in the decision-making process, this is a win-win for everyone involved. By understanding what developers value, you can tailor your offering to suit their needs, increasing retention, growing your audience, and ultimately, adding to your bottom line. SlashData are the analysts of the developer nation, and we can help you understand developers.

You can download a preview of the latest Developer Programs Benchmarking here.

Under the Hood of Developer Marketing: Microsoft’s Jeff Sandquist

Developer Marketing – what is it, why is it important, how to develop it successfully? We’ve interviewed Jeff Sandquist, General Manager on the Cloud and Enterprise Team at Microsoft, to share with us his experiences. This interview is part of our Under the Hood of Developer Marketing series where we ask leading practitioners what Developer Marketing and Developer relations mean to them, what they do to make it happen, and how they measure success.

Continue reading Under the Hood of Developer Marketing: Microsoft’s Jeff Sandquist

Unity leads the way in developer satisfaction

As software continues to eat the world (to paraphrase Marc Andreessen), software developers fulfill an ever more critical role in the progress of technology and, by extension, society. Supporting developer productivity is good for business. Those developers then become innovators – co-creators – that give a boost to your core business.

It’s also challenging. Developer programs consist of a myriad of activities, ranging from simple providing sample code and developer education, to tooling, to in-person events and online communication. It’s hard to be great at everything, and it’s hard to allocate effort and money effectively for maximum impact.

Every six months we benchmark top developer programs against each other. First, by measuring what developers value in those resources and activities, in all its diversity across several segments of the developer population. Second, by highlighting the best practice leaders: those vendors that are doing an excellent job in specific aspects of developer programs, to whom you can look for inspiration and insights on how to improve. There is no single leader across all of the 20 activities we measure – everyone can improve somewhere.

unity leads developer satisfaction

The top spot in terms of developer satisfaction is taken by Unity, with an overall developer satisfaction score of 75 out of 100. Unity shows exceptional performance on several attributes: tutorials, how-to videos & webinars, and official forums. This may be skewed by the fact that their products cater to a specific subset of developers (game developers) who might score attributes differently than others.

Google, Microsoft, and Mozilla are not only among the largest developer programs; they lead the pack in terms of developer satisfaction and engagement. Other major developer companies like Amazon, Facebook, Oracle, and Apple follow at some distance.

This doesn’t imply, however, that only the companies with the most traction and the biggest budgets can create excellent developer support programs. The living proof of that are Unity and Tencent. As we said, Unity has the highest developer satisfaction of all programs in our list. Tencent, the producer of WeChat who mostly addresses a geographical developer segment in China, has a developer satisfaction on par with Facebook and well beyond Twitter’s, and one of the highest levels of engagement in our survey. Other companies like Intel and Cisco may have moderate overall performances, but lead the way in important attributes such as training, technical support, or access to devices.

The study above shows data from the 12th edition SlashData Developer Economics survey. Over 21,200 respondents were asked which developer programs they used and how satisfied they are with them. These respondents came from 162 countries around the world and span mobile, desktop, IoT, cloud, AR/VR and machine learning developers and data scientists. The results were collected by SlashData over a period of six weeks between November and December 2016.

To access the full study drop us a note at sales@slashdata.co or download the brochure

Return on Developer Investment

My most fun job ever was as a C++ developer. Ok, I don’t have much grey hair yet, but I fondly remember the late 90s and the challenges of writing a background synchronisation application on a Compaq iPaq. And reverse engineering Mozilla’s Navigator into an XSLT parser.

My second most fun job ever has been building a company that helps the world understand developers, with research. We’ve come a long way – and a few pivots – from surveying the pulse of 400 developers in 2009 to 30,000 developers annually in 2016. That’s a lot of data – in fact more than our analyst team can chew.

It’s a privilege to be working with some of the biggest names in tech – I ‘ve learned a lot the past 2 years. Earlier this month, Amazon, Microsoft, Facebook, Adobe, Intel, Oracle and many more joined our first Future Developer Summit, and shared some of their best practices in how they work with developers. I ‘d like to share some the learnings here.

Return on Developer Investment.

You would think that with billions of dollars spent every year on building tools for developers, running hackathons, loyalty programs, tutorials and how-tos, evangelist and MVP programs – the platform leaders would have figured it all out. Yet, with so much money being spent on developer tools and marketing there is no standard for measuring the Return on Developer Investment.

Most companies represented at the Future Developer Summit shared how they measure success. At their inception, developer-facing orgs measure success by number of developers touched – but that’s a meaningless metric, a dinosaur from the age of print marketing. Some platforms are using NPS (net promoter score), polling their active developers once a year for how likely they are to recommend the platform. Many are informing product decisions based on developer comments (“will you ever fix that”?) – you’ll be surprised how many decisions are taken based on “the devs that I spoke to said..”.

Other developer relations teams are measuring success through the number of apps in the store, and the number of apps using signature APIs. In the case of open source projects, a popular metric is GitHub stars, forks and commits over time. The more sophisticated platforms track the Return on Developer Investment funnel from SDK downloads to app download and use. But there isn’t a consistent way to measure how the investments in hackathons, tutorials, how-tos, loaner devices, evangelism programs and some many more developer-facing activities are paying off for the likes of Google, Amazon and Facebook.

Quality of apps, not quantity.

Another theme of the Future Developer Summit was the need for quality, not quantity of applications at the start of an ecosystem. B2B ecosystems like Slack and Intuit prioritise quality; Poorly written messaging apps can damage not just the perception of Slack, but also the perception of chatbots in general. Similarly, a poorly written app for the QuickBooks platform can wreak havoc to sensitive financial data for thousands of small businesses. As a result both Slack and Intuit have very stringent app review processes, including weeks of testing, usability and security reviews. To improve quality for bots, Slack has pioneered a “Botness” program, bringing together bot platforms and leading bot developers; the aim is to “make bots suck less” i.e. improve the bot user experience and avert a long-term damage to the reputation of chat bots. There are already 250 members signed up and the next event is on November 4 in NYC .

The next Future Developer Summit will focus on best practices for developer relations. If you ‘d like to be part of the invite-only audience of platform leaders, register your interest at www.futuredeveloper.io

 

Who will be the iOS and Android of IoT?

[Put together, the announcements at Google I/O and from Apple, Samsung, Nest, Quirky and others in the past weeks paint a crystal clear picture of where the future of the Internet of Things is heading. Our latest report on the topic gives you the right tools to separate winners from losers in the IoT race. In this post, we line up the candidates in smart homes, smart cars and health.]

IoT-Developers_FINAL

The blast of IoT-related announcements in the past days and weeks, including at Apple WWDC and Google I/O, are more than an indication that the Internet of Things is picking up pace. Put together, they also offer a crystal clear picture of where the Internet of Things is heading.

The major players have put their stake in the ground:

  • A lot of attention at Google’s I/O conference went to the Google Wear and Google Fit announcements. At the same time, Google-owned home automation company Nest – known from its thermostat, smoke detector and now security camera (Nest acquired Dropcam) – has opened up its API to developers.
  • With the “Works with Nest” program, the company is positioning itself as the central hub for connected devices in the home; and it is not alone. Crowdsourcing product development site Quirky announced Wink, a hub + app + cloud platform that together with Nest is going to provide some strong competition for that other hub-in-the-home startup: SmartThings. Quirky is an interesting player as its backed by GE, with whom they have been partnering on a range of smart home solutions.
  • Apple announced HomeKit and HealthKit at its WWDC developer conference, adding to its push into the car earlier this year with CarPlay.
  • Samsung, finally, announced its own health platform SAMI and sensor designs Simband last month.

The common theme is that [tweetable]all these recent IoT announcements focus on developers more than products. Why is that?[/tweetable]

All these companies have understood a fundamental truth about the Internet of Things. IoT is not about technology or features or devices or connectivity. We explain this idea in depth, and with many more examples, in our new report – IoT: Breaking Free of Internet and Things.

[tweetable]The biggest opportunity in IoT is in thousands of niches and use cases, just waiting to be discovered[/tweetable] by tweaking and experimenting with new ideas.

How do you deal as a company with such diversity and unpredictability? How do you design products for future unknown needs? Luckily we have some recent examples of companies that solved this conundrum. In the past 6 years, Apple and Google propelled themselves to top positions in mobile by fostering vibrant communities of innovators (app developers) that together unlocked countless new use cases and needs, from silly (Flappy Bird) to life saving (PocketCPR).

We’ll leave the full discussion of the exact mechanics for another time, but with the smartphone model in hand, it becomes clear what the companies above are trying to do. They want to achieve the same kind of dominant position as Apple and Google in mobile, using the same recipe. And some of them inevitably will.

The stakes are high. Successful community owners will gain immense competitive advantages, typically leading to winner-takes-all markets. The game is on: [tweetable]who will be the equivalents of iOS and Android in the Internet of Things?[/tweetable]

Who will be the kings of IoT?

Three areas in particular seem on the brink of seeing Android/iOS-like ecosystems of entrepreneurs gaining momentum: home, health and cars.

In the home, there are at least 4 serious ecosystem contenders.

  1. Apple signalled its intentions by releasing HomeKit, the developer API that enables discovery and control of third party connected devices. Some clever people (e.g. at Forbes and Macworld) have pointed out that the Apple TV might be the perfect substrate for a HomeKit-driven hub.
  2. Google has made a clear investment in the home with its $3.2B acquisition of Nest, as well as other initiatives like Android TV and ChromeCast.
  3. GE has been building momentum with its Quirky partnership and now the Wink platform.
  4. Meanwhile in startup land, SmartThings has been pursuing this ecosystem vision for almost 2 years since its headline-making Kickstarter campaign.

In health and wellness, things are heating up too. Fitness wearables like Pebble, Razer, Nike+ and Fitbit have successful SDKs with tens of thousands of registered developers. However, in our new report we explain that the bigger opportunity is in combining and mashing up data from different sources. That is the core functionality of the following candidates:

  1. Apple puts its stake in the ground with HealthKit.
  2. Samsung did the same with the SAMI platform. Samsung is in a unique position to bundle an IoT platform with hardware (components, not devices), for example the set of reference sensors (Simband) that they announced at the same time. This strategy is also the basis for the company’s success in smartphones. Samsung can also bring a large amount of Samsung device users into play; a strong carrot for ambitious IoT entrepreneurs.
  3. Google has been playing with wearables for a while (Android Wear, Google Glass). At Google I/O, the company announced Google Fit, a set of APIs that will “blend data from multiple apps and devices”.
  4. Again there are several startups on the scene – Human API and Validic come to mind.

In cars too, we find a mix of internet giants, car maker incumbents and startups that are building developer platforms. We discussed them in depth in our March report “Apps for Connected Cars? Your Mileage May Vary”.

  1. Apple took the lead earlier this year by announcing CarPlay.
  2. Google is following suit with Android Auto, backed by the Open Automotive Alliance with all the major car makers. The announcement mentioned that “Android developers will soon be able to create entirely new experiences for the car” – a clear hint at Google’s intentions to empower a community of entrepreneurs to discover unexpected user needs.
  3. Microsoft has Windows in the Car.
  4. The leading platform-oriented car makers are Ford with AppLink and GM.
  5. Interesting startups with an “over the dashboard” play include Dash and Carvoyant.

What about the sectors that have historically been the focus of the Internet of Things industry, like utilities (smart metering), industrial applications or smart cities? While they represent attractive business opportunities, these arenas focus mostly on solving well-understood needs for known customers. As such, they are not likely to sprout ecosystems that can spectacularly break open the IoT market.

On the other hand, we might see some unexpected platform players coming on the scene. One set of strong candidates focuses on a different part of the IoT challenge: selling and distributing the physical products. Amazon has made its opening in the Internet of Things with a dedicated online storefront and with back-end services (Kinetics), a simple expansion for its AWS infrastructure. We’ve written earlier this year about the plans of Chinese e-commerce company JD.com (together with Baidu) to set up a service line for IoT entrepreneurs.

The wheels are in motion

Time will tell who will take the top position, but the wheels are clearly in motion.

As time goes by, hardware becomes less and less a barrier to entry. Just look at Cruise, an 8-person startup that built a self-driving car in record time with low-cost sensors and components. Dedicated Internet of Things platforms are booming (we count 50+ so far). The cost of connectivity is dropping. This allows entrepreneurs to focus on making sense of data and drive meaningful action, more than on solving underlying technology problems.

As this trend continues, VisionMobile forecasts a fast growth of the IoT developer base in the next years, reaching well over 4 million innovators and entrepreneurs by the end of the decade. With every new use for Internet of Things technology that they discover, demand will grow and this market will become more attractive still. Exciting times!

How can you separate winners from losers in the Internet of Things? Whether you’re a developer, investor or platform company, our IoT report will allow you to make the right bets. Download your copy now.

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From 4 to 4000 apps: disruption deja-vu in the car industry?

[What if cars were like mobile phones? There are some eerie similarities between the approaches of car makers in 2014, and operators and handset makers in 2008. Will car makers be disrupted in the same way that the mobile industry was? Senior analyst Stijn Schuermans shares his feeling of deja-vu.]

Automotive-report_illustration_web

“Cars are the biggest and oldest mobile devices. We are the face of mobility. We’ve been around for over a century. But we welcome the competition from newcomers like Apple and Samsung.”
— paraphrasing John Ellis (Head of Ford’s developer program) at CES 2013

Let’s entertain that thought for a moment. What if cars were like mobile phones?

At the moment, they would be like the feature phones of yesteryear. Today’s mainstream cars have 4 “apps”: driving from A to B (obviously), climate control, music (AM/FM radio, CDs, and more recently internet radio) and GPS navigation.

Feature phones in 2008 Cars in 2014
Telephony Driving
Texting Climate control
Contacts GPS navigation
Camera Music

In fact, this is not the only parallel we can draw between these two industries, as car makers are betting heavily on the concept of apps in the car. There are some eerie similarities between the approaches of car makers in 2014, and operators and handset makers in 2008. We’ve listed some in our latest report: “Apps for connected cars? Your mileage may vary”.

QNX is the new Symbian. Genivi is the new LiMo. Windows Embedded Automotive is the new Windows Mobile. Just like mobile operators in 2008, car makers are very hopeful that apps under their control will bring significant new revenue streams from value-added services. Developers are named “partners”, but it is clear that car makers (as were telcos) are mostly see them as suppliers of content and treat them accordingly. (For the full list, take a look inside the report.)

How mobile was disrupted

Can we use this insight – car apps are just like mobile, shifted in time – to predict the future of the car app market? In our report “The Telco Innovation Toolbox” (2 years old, but still highly relevant), we showed what has happened in the mobile industry.

From the 4 “most wanted” apps of the feature phone days (according to market research acquired at great expense, no doubt), we went to smartphones with now over a million apps, encompassing every imaginable user need. Service distribution and industry power shifted from telcos to mobile platforms: Android and iOS.

Fundamentally, the basis of competition in the mobile industry shifted from reliability and scale (which network has the most bars) to choice and flexibility (which handset has the most apps). This wealth of applications unlocked a user demand that far exceeds that of a selection of “best” or “most important” features in a product designed by a single organisation.

The same shift in cars?

Can the same shift happen for car apps? Will the basis of competition for car makers change from reliability and scale in the production of cars and infotainment systems, to choice and flexibility of in-vehicle and out-of-vehicle services that will unlock new user demand? We believe it can, and it will.

Already car makers like Ford and General Motors and over-the-dashboard players like Mirrorlink, Apple, Google and most recently, Microsoft are working towards app platforms for cars. The introduction of Apple’s CarPlay, Google’s Open Automotive Alliance and Microsoft’s Windows in the Car seems to herald a tipping point in the industry. Here are players that have a deep expertise in fostering vibrant ecosystems, in building developer communities and in enabling developers to add value. There is now a realistic and acute possibility that these new entrants will sweep away the existing car app platforms with a dominant, over-the-top solution, just as they did in the smartphone world.

In short, car makers should take the following statement as a heads-up:

Now you know what’s at stake. Find out how the car industry is changing and what to do about it. Our full report on automotive developer programs is available as a free download.

Microsoft + Nokia: the marriage of two broken business models

Microsoft’s acquisition of Nokia’s Devices division is the new beginning for both Microsoft and Nokia. But how does it make sense when both Nokia’s legacy OEM and Microsoft’s mobile software licensing business models are broken? VisionMobile Strategy Director Michael Vakulenko takes a long-term perspective of the acquisition through a business model lens.

Nokia and Microsoft

Most of the analysis on the Microsoft acquisition of Nokia comments on the reasons for the acquisition, whether it’s a good or a bad strategy or attempts to predict how Microsoft products will evolve. The key question however is what is the likely future for the new Microsoft? Continue reading Microsoft + Nokia: the marriage of two broken business models

Microsoft-Nokia: A Tale of Two Broken Business Models

[The launch of the Lumia line marks the pivotal point in the Microsoft-Nokia partnership. But how successful will it be? VisionMobile Strategy Director Michael Vakulenko voices his concerns about the partnership between Nokia and Microsoft.]

VisionMobile: Nokia + Microsoft: A tale of two broken business models

[updated] Nokia and Microsoft are fighting two very different battles: Microsoft is trying to protect its aging PC software licensing business. Nokia, on the other hand, fights to survive as a as a handset manufacturer, hoping to see profits of the smartphone business. There is one thing in common, though: Both were disrupted by fundamental shifts in the mobile industry.

The basis for competition in software and mobile has changed – the once-successful business models of Microsoft and Nokia can no longer ensure profitable growth. The partnership between the two companies cannot change that. Vic Gundotra of Google once cynically said that two turkeys don’t make an eagle. Or do they?

Microsoft: A PC company in the mobile age

Reports about “Microsoft making more money on Android than on Windows Phone”, make for a catchy headline, but miss the point. Microsoft’s mobile strategy is about reducing ecosystem churn, i.e. protecting revenues from Windows and Office licensing. Every iPhone or iPad sold, represents a user who might choose to move away from a PC or Office license. Every iPhone developer represents a developer who adds value to Apple ecosystem and not Microsoft’s.

As of January of 2012, Microsoft Windows & Windows Live, Server & Tools and Business divisions were responsible for over 75% of the revenues, but, more importantly, practically all of the operating income. The company reported weaker than-expected PC demand in the last quarter of 2011. Revenue of Windows & Windows Live Division fell 6 percent year over year (and this is during the lucrative holiday quarter!), and yet worse – operating income declined by 11 percent.

The company’s core business is challenged at multiple levels. iPhone and iPad users are increasingly choosing Mac as their next computer – Mac success means less Windows licensing revenues. Moreover, tablets are displacing netbooks and laptops, which were the hope of the PC industry until recently. Google and a slew of Internet startups are opening cracks in Microsoft Office defenses by pushing migration of productivity tools into the cloud.  The end result is ecosystem churn, which means less and less Windows and Office licenses sold.

Microsoft badly needs to renew its growth. See this excellent analysis by Adam Hartung, Forbes. But, Windows Phone is a “loss leader”, not a growth engine. It’s daydreaming to expect that Windows Phone license revenues will be able to pay back all the investment that was made and is being made into the platform. Even at a $20 license fee. As reported in March 2010, the Windows Mobile R&D team headcount back in FY 2009 was 2,000 staff with a total OPEX of $900 Million. The numbers could only have grown since then.

Partnering with a fast-declining Nokia buys Microsoft neither market share nor new revenue engines. First and foremost, Microsoft needs to establish significant market share for Windows Phone in North America — the hotbed of mobile innovation.

However, Nokia is traditionally weak in North America in both market share and brand awareness. Plus the European reception of Lumia was lukewarm with slight above one million devices sold during the Christmas launch season. Instead of placing so much faith in the partnership with Nokia, Microsoft could have focused their efforts on a close alliance with the faster-moving Samsung as the key OEM for the Windows Phone platform.

Microsoft will be challenged to find new growth engines. Up until now, Microsoft has been losing money in Internet and mobile. In the last quarter of 2011 alone, the company’s Online Services Division lost $458 Million adding to mounting multi-billion loses in the last six years (see this revealing Business Insider chart).

Throwing boat-loads of money at mobile and Internet without a winning business model can only work for limited time for Microsoft. Mounting costs will inevitably raise the concerns of impatient investors over the viability of its mobile strategy.

 

Nokia: a handset maker in the software age

Apple has outpaced Nokia not only because of better products, but because it changed the basis of competition. The competition has changed from a competition of devices to a competition of software ecosystems. Nokia understood the challenge back in 2007, but in a classic case of Christensen’s Innovator’s Dilemma, was late to respond.

Today, the mobile handset market is driven by owners of software ecosystems, companies like Apple, Google and Microsoft. The role of handset OEMs has been reduced to that of a foot solder in the broader battle between ecosystems. OEM business has become a commodity business, where OEMs have little room for differentiation, besides price.

Since Nokia was slow in fostering its own software ecosystem, the company had little choice but to join Motorola, Sony-Ericsson, Samsung, LG, ZTE, Huawei and a host of smaller OEMs in the fierce “competition to the best”. Michael Porter calls competition to the best “the granddaddy of all strategy mistakes”.

The partnership with Microsoft might not be able to save Nokia from the perils of commoditisation. Windows Phone is a very attractive product, but it arrived to the market two years late. Apple and Google had enough time to establish strong network effects for their iOS and Android platforms. These network effects between users and app developers ensure explosive growth, user lock-in and multi-billion dollar investments by developers (see our recent post on how platforms are not created equal). In these hyper competitive conditions, Windows Phone devices will be challenged to command premium prices – like it it not, Nokia will have to compete on price with Android devices.

In retrospect, Nokia associated itself with a fledgling software ecosystem that is yet to build strong network effects. With both profitability and volumes in question, Nokia finds itself in a one-way street, depending on Microsoft to help support its smartphone business (see how Microsoft paid $250 Million to Nokia in Q4 2011).

Given the new market conditions, Nokia’s real competition is not iPhone or Android, but Samsung.  Samsung is not only the largest, but also the most profitable Android OEM. Its true competitive advantage lies in its vertical integration across the most expensive smartphone hardware components: the display, application and baseband processors and memory. Samsung even owns the fabs that manufacture many of these components. Samsung’s superior business model has launched the company to the second place of the industry in terms of profit share, second only to Apple.

Nokia’s business model of high-margin, branded OEM is in question and its dependency on Windows Phone alone is a weakness.  Nokia would be much better off if the company manufactured both Android and Windows Phone devices. Nokia, with its economies of scale and strong brand name, could auction placement of either OS to the highest bidder on its devices.

Nokia is running out of time and Samsung is gaining market share eagerly. How soon will Microsoft need to knock on Samsung’s door offering to pay billions for promoting Windows Phone on millions of Samsung devices?

 

Insisting on sailing upwind

In this partnership, Nokia and Microsoft insist on sailing upwind with their sails flapping (those of you who’ve had any experience sailing will know how boring this can be). Combining two business models of the 1990’s won’t help the two companies regain their positions in the new world order, dominated by companies with Internet-age business models, like Apple, Google, Amazon and Facebook.

As it seems, the only way out for Nokia and Microsoft would be the acquisition of Nokia’s smartphone business by Microsoft, as Andreas Constantinou predicted a year ago on this blog.

— Michael
[Michael Vakulenko is a Strategy Director at VisionMobile, where he focuses on mobile platform research and mobile ecosystem economics. Michael has been working in the mobile industry for over 16 years, starting his career in wireless in Qualcomm. Michael has a broad experience across many aspects of the mobile industry, including smartphone ecosystems, mobile services, handset software, wireless chipsets and network infrastructure. He can be reached at michael [/at/] visionmobile.com]

Is Microsoft buying Nokia? An analysis of the acquisition endgame

In a surprising move, Nokia and Microsoft decided to enter a strategic relationship for the OEM’s smartphone business. While the marriage appears promising at the outset, Research Director Andreas Constantinou argues that the only way for that marriage to succeed is for Microsoft to acquire Nokia’s smartphone business.

VisionMobile - Nokia & Microsoft deal_pic

The Elop and Ballmer duo on stage on February 11th was the main topic of discussion at this year’s Mobile World Congress. The reverberations of the Microsoft-Nokia announcement were felt even by the huge green robot tucked away at Google’s stand in Hall 8.

Following the news of the Nokia and Microsoft tie-up, Stephen Elop’s appointment to the helm of Nokia seems like an arranged marriage – and one whose best men were the carriers who wanted to avoid an all-out Android coup. It was also a marriage of desperation, which Elop memorably described in his memo as ‘jumping into the unknown’ from the ‘burning platform’ that is Symbian.

A marriage of desperation
Microsoft has been desperate to see its mobile business succeed. After a decade of lacklustre efforts at mobile device sales and severe product delays, Microsoft was getting desperate; it needed to stop the churn of Microsoft users to the Apple ecosystem and plug its $1 billion-a-year operational costs for its mobile phone business. Even having spent most of its $500M marketing budget for WP7 it had only got breadcrumbs in terms of sales, with Microsoft reporting 2 million shipments but no comment on sell-throughs (which leads us to suspect this was not more than 1 million of actual end-user sales).

VisionMobile_Smartphone_Sales_2010_pic

Nokia has been desperate seeing its platform play fail spectacularly in comparison to its newfound competitors; Apple who had amassed a developer ecosystem and operator demand which was second to none, and Android who in 2 short years matched Nokia’s smartphone sales in Q4 2010. MeeGo was trumpeted as the big guns in Nokia’s arsenal in February 2010, but once again Nokia’s software R&D failed to deliver on the promise. More importantly, despite the 10+ acquisitions during 2007-2010, Nokia failed to amass a strong-enough developer and services ecosystem on Symbian, Java or Qt that could compete with Apple or Google. Like Elop said in his now-famous burning platform memo, “our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem”.

It was in an act of desperation that led Nokia to befriend the lesser of two evils in the shape of Microsoft. It is ironic how in mobile the least enemy is a friend, much like how carriers backed Android in 2008-9 to fend off Apple, and backed Microsoft in 2003-5 to fend off Nokia.

The courtship
Despite the surface-level coverage of the Microsoft and Nokia news, not much has been said about the two giants’ courtship and even less on the prenuptial agreement. According to our sources, Nokia asked both Microsoft and Google to bid for its smartphone business, with the help of a small army of McKinsey suits. Following a long negotiation cycle with both parties, Nokia came to a straightforward conclusion; it would back Microsoft who’s total bid equalled more than $1 billion (including patents, licensing fees, marketing support and revenue shares) and not Google who’s bid was about half that. Funny how cash-rich platform vendors are buying their way into the market these days.

Nokia announced its decision to Microsoft and Google on February 9th , only 2 short days before the Ballmer/Elop press conference – which prompted Vic Gundotra to pen the tongue-in-cheek tweet “#feb11 “Two turkeys do not make an Eagle”, scornful of both Nokia and Microsoft.

The last-minute decision meant that Intel heard the news at the very last minute, and in turn had to ask its MeeGo partners on Friday night (Feb 11th) to remove the mention of Nokia from the MeeGo PR quotes going out on the following week at MWC. This is the stuff industry disruptions are made of.

 

A chemistry mismatch
What Nokia announced was not just a marriage; it was a radical change in its business model, from a vertical powerhouse to an assembler – which is what prompted us to question the motivations and the end goal for Elop.

We already knew that Symbian had been demoted to an internal-only OS (see earlier analysis – Symbian is dead, long live Symbian). However we were expecting to see Nokia take a more measured stance; for example using Windows Phone 7 in certain markets (especially in North America where carrier handset subsidies are OS-led) or taking a classic dual-supplier strategy by inking deals with both Microsoft and Google.

Instead Elop presented a terminal picture for Symbian which would be destined to ship on only another 150 million devices until being completely replaced by WP7.  Elop knew that an all-out replacement of Symbian with WP7 would mean haemorrhaging valuable brainpower as the 7,000+ Symbian staff had spent 15 years on the anti-Microsoft camp. These are the decisions made by boards with long-term strategy agendas, who see organisations made up of ‘assets’ and not ‘people’.

Besides the death blow to Symbian, Elop relegated MeeGo to an R&D project with just a single device launch in the horizon, if any at all (which carrier is going to subsidise a platform that’s dead on arrival?). Moreover Qt’s future seems uncertain as it has no place on Windows Phone (Microsoft wouldn’t allow copyleft software to be used with Windows Phone), plus it is too heavy for S40 class devices and MeeGo is too small an addressable market to justify the Qt ongoing investment. Qt (and its 400 thousand developers) need a new home.

Nokia Mobile Devices Net Sales Mix

What appears somewhat suspicious is that Nokia went not for a tactical, but a deep partnership with Microsoft, solidified by the multiple revenue streams exchanged between the two companies, a kind of revenue ‘keiretsu’ that ties the two giants in a longer commitment.

More importantly, the marriage to Nokia’s smartphone business seems like it’s lacking in chemistry. For the last decade, Nokia has operated as a vertical silo, owning and integrating all value elements, from software, UI, industrial design, services, app store and developer ecosystem. That silo has now huge holes punched through so that it can accommodate Microsoft’s horizontal software-licensing business model. This situation is somewhat like trying to fit a square peg in a round hole.

There are fundamental conflicts here, as both Microsoft and Nokia want to own the developer experience (think APIs, support, tools, developer marketplace, conferences, marketing), and the application discovery and delivery process (think Windows Marketplace vs Ovi Store). This is a chemically unstable mix that won’t survive the test of time. It would be like having Nokia owning Office while Microsoft still runs the Windows business. Yet at the same time Nokia has little value to offer other than design, development, manufacturing and sales of handsets in the picture Elop and Ballmer painted. Something’s not right.

Moreover, Microsoft faces a fundamental customer imbalance on its mobile platform. With such a strong endorsement of Nokia, Microsoft has placed too much favour and device sales expectations on a single vendor.

Microsoft did not only hurt the feelings of HTC, Samsung and LG (previously committed to launching 50! Windows Mobile handsets) with such an imbalanced endorsement. More importantly, with Nokia volumes likely to ramp up fast, Microsoft will have to deal with a single-customer monopoly and end up financing Samsung, LG or HTC towards ramping up Windows Phone production to balance it up. Windows Phone may quickly end up looking like a platform of unbalanced OEM interests – much like Symbian Ltd or Symbian Foundation were – and we know how these panned out.

There are two more troubling clues in the way this ceremony was setup. Despite fundamental changes to the handset business, Elop made no reorganization in the NSN business which is performing at marginal profit (operating margin at only 3.7% vs 11.3% for handsets). As Tomi Ahonen points out, Elop seems to be ready to get rid of NSN. Plus there was no announcement of Ovi plans or clear strategic guidance with regards to the Nokia services business.

 

The acquisition scenario
There have been earlier rumours of acquisition discussions between the two companies. We now believe that the only scenario for the Nokia and Microsoft partnership to succeed is an acquisition scenario; Microsoft buys Nokia’s smartphone business, while Nokia gets more resource to play with what it does best – that is creating mass-market phones at unbeatable levels of supply chain efficiency, unmatched supplier bargaining power and customisation to 100s of variants per handset model for distribution to diverse global regions, channels, carriers and retailers.

From a financial standpoint, Microsoft capitalisation stands at $220B, more than six times Nokia’s market cap of $33B at the time of writing. Microsoft would also acquire a high-profit margin business that would go a long way in helping the Redmond giant push its Entertainment and Devices division at high profitability levels for the first time. Despite Microsoft being a software business, it has experience in running hardware products, with the Xbox business doing well recently on strong Kinect sales.

For Nokia, a joint venture would make more sense than a pure sale of its smartphone business, given that the hardware giant is an important component of the Finnish economy. It would allow Nokia to focus on what it does best and substantially increase its S40 R&D budget (as Elop already announced it would) to rework its aging feature-phone OS. A joint venture would also allow Nokia to make a comeback when they are ready to take on the high-end phone market again.

Besides, with shares recently hitting a 13-year low and Nokia being owned by American institutional investors, the Nokia board has little they can do in the face of potential suitors. This makes Nokia a very interesting acquisition target, not just for Microsoft but for anyone with cash at hand and mobile ambitions, including Chinese, Korean and Japanese suitors.

The acquisition scenario would allow Microsoft to leverage on Nokia’s accounts with carriers across the world to woo them into moving subsidy budgets from Android into WP7. This is all too important, as the Microsoft brand enjoys little consumer awareness compared to Apple and Android, meaning that Microsoft is more dependent on carrier subsidy and marketing budgets than its nearest competitors.

Fundamentally, we believe there is no place for Nokia, an all-in-one integrated handset OEM and services company, in the new telecoms value chain. The old guard of top-5 OEMs are squeezed between leaders (Apple, RIM) who lead in terms of performance & profits, and assemblers (Huawei, ZTE, Dell, Acer) who lead in terms of me-too designs & razor-thin margins (see our earlier analysis on the evolution of the handset value pyramid). Nokia’s business needs to break-up into independent, self-sustained entities, particularly the smartphone business (within Microsoft’s new home) and the mobile phone business as an independent entity that can focus on competing with PC-borne assemblers.

The Microsoft-Nokia acquisition might not have been planned from the outset, but it is a scenario whose viability has been ensured from the outset. There are no conspiracy theories here, except that Elop (as the 7th biggest shareholder of Microsoft) would benefit greatly from trading Microsoft shares with Nokia ones, only to see them boost in value after being repatriated.

Let the debate begin!

– Andreas
you should follow me on Twitter: @andreascon

Andreas Constantinou is Research Director at VisionMobile and has been working in the mobile software industry since 2001, when he fondly recalls being a member of the team behind the very first Orange-Microsoft handsets which set the world of telecoms software in motion.

One cuckoo, two turkeys and three horses; how the mobile race has changed

[How do Nokia’s options look in a post-Microsoft and Google world? Why does Google’s strategy with Android resemble a cuckoo’s routine practice of planting its eggs on other birds’ nests? Guest author Delius Observer examines the similes and shows just how much nature has to teach us]

One cuckoo, two turkeys and three horses; how the mobile race has changed

Vic Goduntra, a vice president of engineering at Google, recently tweeted that “two turkeys don’t make an eagle”, echoing an earlier comment made several years ago by a Nokia executive about Siemens and BenQ merging their mobile units. His snipe, was a cheep, premature call as Nokia gets rescued from those icy Atlantic waters by the rich, (white) knight in shining armour. However, in chirping away, Vic would also have known that Nokia’s only other choice to escape from the burning platform would have meant succumbing to Google’s Androidian Cuckoo Strategy, and that would have been a lot worse. What just happened between Nokia and Microsoft should be a wake-up call for the mobile industry.

Google’s Androidian Cuckoo Strategy
The cuckoo, which at first glance has the appearance of a glamorous, aspiring bird of prey, is in fact a brood parasite – a cunning species that lays its egg in another bird’s nest and, in doing so, tricks the host to raise the chick as their own.

In one fell swoop, the cuckoo will turf out one of the host’s own eggs and slyly lay one of its own. Sitting cosily under the warm breast of the host, the parasitic cuckoo egg incubates and then hatches – a little earlier than the rest, naturally. With the egg’s kernel breaking through the shell, its natural reflex is then to immediately dislodge the other eggs from the nest – a well-designed, dominant, first mover advantage. In doing so, it quickly becomes the only chick left resident. Now at the exclusive beck and call of its foster parents, it has the sole monopoly on food supply and attention. The young cuckoo quickly fledges, and rapidly leaves the foster nest in record time. And so it continues, with the cuckoo returning again the next season.

This story should be a familiar one, as it is a story that is playing out across the globe where the poor unknowing parents think they are delivering their own beautiful offspring, but are instead just acting as surrogate hosts to a far grander plan. Cuckoos are, as the BBC’s ‘countryfile’ website states: “nature’s hustlers, cheats that have perfected the ultimate long con”.

This is the story of Google’s Androidian Cuckoo Strategy and the handset manufacturers who play surrogate host in order to raise Google’s young Andricks. Google started this strategy by designing an ecosystem that it cunningly called “open”. Of course, because the offspring’s eggs are delivered out in the open air, many have drunk the deceptively refreshing ‘Kool Aid’ of “open”. The real story, however, is a far subtler affair. Whilst the egg and bird may be open and free, the point of conception is still very much done on a private branch, with the DNA of the next egg always a closely guarded secret – even to those inside the fuzzy ecosystem.

“Run, run as fast as you can! You can’t catch me”, says one new Gingerbread fledgling, as the other birds look on, green with envy, wondering why their offspring have been Froyo’d.

The many handset manufacturers that have joined the Google flock are hoodwinked – and they’re all now singing the same repetitive, robot-like call. Now the birds are just the servants of the dominant master cuckoo. Of course, Androidian Cuckoos have ruthlessly quick development cycles and the Andricks are out of the door in no time, but in doing so, the process sucks most of the energy out of each foster parent. Meanwhile, danger lurks in the grasses as the mighty Oracle hisses over the heart of the cuckoo’s Harmonious virtual machine.

Whilst a few birds are today flying high, others are bewildered and disoriented, trying to work out what exactly is going on. For some it will end in pathetic, dismal fatality. But, a few will no doubt adapt their defenses to overcome the parasite in more imaginative pathways to survival. For, as Dr Nicholas Davies of the University of Cambridge states, with cuckoos “over evolutionary time, the hosts fight back so that the poor cuckoo has to work incredibly hard to be lazy, simply because it has to overcome all of these defences. What we witness is a fantastic arms race between parasite and host.”

And what of Google’s proverbial ‘don’t be evil’? Nicolas continues: “So, we know how the cuckoo pulls off its dastardly plan, but still haven’t answered the question of why. Is it a cruel or evil bird? Of course not; this is just nature at work, and perhaps one of the best examples of Darwin’s survival of the fittest. The arms race will continue with both sides evolving to protect themselves or deceive the other, but our fascination with the cuckoo will remain. After all, everyone loves a rogue.”

Indeed we do, and the rogue’s quip about turkeys was typical of its scheming behaviour. From a mountain view they look down and think one should aspire to be eagles, when what they should really be doing is taking a long, hard look in the mirror and owning up to the mobile industry that they are in fact nothing but a conniving cuckoo – albeit a successful one.

Microsoft + Nokia: running with four legs
In the past few months Nokia realised that in order to halt its slide towards irrelevance, it had to take its head out of the sand and instead take a leap of faith. The brave gamble that Nokia has now chosen is perhaps not the ideal one, but it was the only strategy available for long-term survival and is a bold rejection of the short-termism demanded by short-sighted investors in accepting the call of the cuckoo. In tying Nokia and Microsoft together they have created a rather old-fashioned type of partnership but it will be a partnership of bones not a collection of feathers.

Have no doubt about it, Nokia is “all in” with Microsoft and, yes Vic, four legs are indeed better than two to compete in this race. The trick will be to rapidly get those legs working together, and come up with a pedigree that can run the course. Can they do it?

The jury is currently out and they need to move exceptionally fast. They need to accomplish two feats rapidly; prove the financials and fix the developer message.

Step one is to actually sign the agreement and rapidly prove to both the investment community and the wider ecosystem that they can make the financials work. Indeed, it seems that perhaps one of the reasons why the Capital Markets Day felt like a damp squid, was not because Mr. Elop couldn’t sell the story to investors, but because the guy he’s negotiating the finer details with was sitting right next to him. A complex partnership like this will take time to put together with details of licensing costs, patent portfolios, split revenue shares on search, advertising and mapping as well as marketing contributions, let alone Nokia’s own complex reduction in costs associated with substantial redundancies and the reductions in OPEX that are needed.

The other thing to fix is the confused developer message. One thing that I had expected to hear on Friday was that Qt would run on Windows Phone. In hindsight, however, perhaps this doesn’t make sense. Qt is a fantastic technology but, like many others, it hasn’t reached critical mass. What is needed in this battle of ecosystems is a huge ‘network of externalities’, with a wide range of designer and developer tools. Only with Microsoft do you get that. It is all the more puzzling that Nokia didn’t go ‘all in’ from a developer perspective and instead chose to play coy. In choosing Microsoft tools for Windows Phones and Qt for Symbian and MeeGo, it has created yet another confused message for developers. Developers cannot get economies of scope by using Qt for some dying platforms and Microsoft for others. Nokia must be more courageous. Dust off the old Microsoft Silverlight agreement and get that environment up and running again on Symbian and Series 40 as a stopgap over the long harvest season. This will create the bold message developers urgently need. In this battle of ecosystems Nokia’s strategy cannot afford to be half-cocked.

What lies ahead
As we look ahead to the coming weeks and months, here are a few predictions:-

• Nokia is able to get Windows Phones out the door in record time, taking advantage of Microsoft’s Chassis Specification, a strategy which follows the tight, vertical integration of Apple’s iPhone without the overheads. Whatever the perception, it’s faster to build a Windows Phone from scratch than a cuckoo because of the chassis design.

• There will be an increase in the use of patents to fight the cuckoo club and the almighty Apple. However, Nokia’s earlier Symbian and MeeGo open source strategies may well come home to roost, as they gave away core assets which many vultures will circle around.

• Nokia competes well in the next billion market by using the lower cost base of an enhanced Series 40 platform and creating a smartphone-like experience in the sub $75 market.

• In the long-term, Nokia will realise that there is no division between smartphones and mass-market phones, and will combine those two groups together.

• Members of the cuckoo club finally realise their long-term future only lies in commoditisation and they seek to either combine with other cuckoos for short term economy of scale, or search for the assets that enable them to co-exist profitably with the parasite.

• Someone writes a loving obituary for the truly open, benevolent and well-meaning MeeGo; bless it. RIP. No doubt a resurrection under a different name will happen at a later date.

A three-horse race
Nokia emphasised during its Capital Market Day that the smartphone business is now a three horse race. As things stand, that looks like wishful thinking. But if Nokia and Microsoft can execute with incredible speed and agility in the coming months (and it’s only months they have), then they’ve a shot at getting a thoroughbred in the running.

So which horses do Google, Nokia and Apple have in the line up?

Seabiscuit – the real Trojan horse of the race, full of cuckoos. This one’s been leaving fragmented crumbs all over the place but is currently the bookies’ favourite. This is a wild one for sure! It’s been a fast sprinter but will need to be careful it doesn’t split in two or get strained on the third furlong by its supporters pulling out.

Northern Dancer – the dark horse in the race with the odds currently against it. It will use the Seattle based white knight to give it the extra feet needed and use a range of betting operators to increase its odds. With thoroughbred development tools, attached to a large existing ecosystem, it now has the combined power for survival. It will need to ensure that its more old-fashioned, deep partnership style has the staying power and agility. They have a lot of catching up to do, but don’t write this horse off just yet!

Pegasus – the last horse is not just easy on the eye but is also nothing short of magical. Not only does this white horse have a vertically integrated set of four legs, but it also has wings too and is riding high. This one can’t put a foot wrong. But the dynamics are changing, and how long it can remain so high and mighty remains to be seen.

How the mobile race plays out in the months and years to come depends upon how the various parts of each ecosystem and the punters place their bets.

But, whatever happens, just beware of the cuckoo.

– Delius

[Delius Observer is a pseudonym and can be reached at deliusobserver@gmail.com]