Palm: $1.2B Down the Shredder

[The acquisition by HP will not save Palm. Guest author Michael Valukenko explains why the sum of Palm and HP is close to zero]

As an old-time Palm user, I was always secretly hoping for resurgence of this familiar and trusted company. At a rational level however, I didn’t believe that the new Palm stands a chance in rapidly changing smartphone market. See my earlier analysis in Who can save Palm here at the VisionMobile blog.

HP’s acquisition makes Palm part of large and financially solid company, but doesn’t compensate for its other weaknesses. Smartphone competition today boils down to competition of service platforms with Apple and Google leading the way. Considering the realities of today’s smartphone market, there are very few real synergies between HP and Palm.

The three missing synergies

Today people don’t buy smartphones for their hardware, but for what they can do with them. This largely means software platform and services built around the phone. Both Apple and Google excel in this area, albeit using very different approaches.

Palm’s WebOS offers a slick UI and a promise of simplified app development by fully adopting the web paradigm. But it lacks a clear differentiation (a killer use case) and an ecosystem unlocking the device into hundreds or thousands different things people could do with it. Let’s face it: It wasn’t that WebOS devices didn’t sell well because Palm lacked marketing dollars. They didn’t sell because they weren’t good enough compared to competition. HP marketing money and distribution muscle won’t save the day.

Today’s leaders – iPhone, Blackberry and Android – all have clear differentiation: iPhone is all about entertainment and Internet and is backed by large iTunes user base. Blackberry sells mobile email and is backed by corporate IT adoption and a strong distribution network. Android seamlessly integrates with Google services promising free and open Internet. The vague notion of “HP Experience” looks pretty pale in comparison.

Critically important, app developers and Internet companies already have their hands full with iPhone, iPad, Blackberry, Android, not to mention the upcoming Windows Phone 7. What does HP have to offer in exchange for some mind-share? Any bright ideas?

Last, but definitely not least. Mobile operators/carriers take on the lion’s share of smartphone promotion and subsidy costs, hoping to attract new subscribers and increase ARPU of existing ones. What can HP/Palm offer to convince operators to take marketing and subsidy dollars from iPhone, Blackberry and Android, and put them into HP/Palm?  I don’t see much. Do you?

Clear differentiation, developer mindshare and operator subsidies  are all critical today for the success of a smartphone platform. All these were and remain Palm’s weaknesses regardless of its financial situation. HP does not complement Palm in any of these critical areas.

Chasing the Apple dream
A quick glance at HP earnings breakdown reveals HP as an electronics equipment company at its core. The company generates most of it revenues from selling printers, laptops, desktop PC and servers. Smartphone unit sales are catching up to laptop sales, while laptop margins are getting thinner and thinner. It is easy to see how tempting would it be for HP management to try to emulate Apple’s model of selling high-margin devices.

However Apple owes much of its success to its vertical integration, which allows blending hardware, software and services into iconic products. This vertical integration is ideally suited for breaking new grounds and creating new product categories. It is critical factor in Apple’s ability to create such products as Apple Lisa, iPod, iPhone and iPad.

As explained by Clayton Christensen in this seminal paper, vertical integration is an advantage in emerging product categories, where it helps to overcome technical challenges. Vertical integration however becomes a disadvantage in maturing markets, where flexibility, customization and modularity are of greater importance.

It is difficult to see HP successfully reproducing Apple’s model. The opportunity to be the first with iPhone-like product does no longer exist. 

Is this good news?
The deal doesn’t look particularly bright for HP shareholders. But may be in the broad scheme of things the deal is great news for many other people: Investment bankers will pocket multi-million dollar commissions, Palm’s investors and management will be spared from their misery, HP executives will boost their ego, business newspapers will sell some ads, and bloggers (including myself) will have something to write about.

How do you think the acquisition will shape up for Palm and HP?

– Michael

[Michael Vakulenko has been working in the mobile industry for over 16 years starting his career in wireless in Qualcomm. Throughout his career he gained broad experience in many aspects of mobile technologies including handset software, mobile services, network infrastructure and wireless system engineering. Today Michael consults to established companies, start-ups and operators. He can be reached at michaelv [/at/] WaveCompass.com]

Why handset OEMs shouldn't mess with UX and other lessons from the automotive industry

[Why are so many phone manufacturers trying to develop their own branded experience? Guest author Thucydides Sigs argues that there should be a limit to UX innovation and looks at what the phone industry can learn from how car manufacturers differentiate]

In Mobile World Congress, during a special panel on “New Devices” Motorola’s VP of software, Christy Wyatt, made an interesting statement: “I don’t want the same phone as my teenage daughter“. This was followed by Ari Jaaksi, Nokia VP of Maemo – nodding his head in confirmation.

Hmm. Last I checked, most soccer moms in the US either use an iPhone or want to get one. Most of their teenage daughters either have one or beg for one. And a surprising number of dads do as well. So why is it that Apple is doing quite well without customizing their iPhone, while Motorola and Nokia make a “Signature experience” such a core components of their strategy?

Before we start, half of the challenge is due to terminology, so lets setup some definitions. For years, OEMs have been trying to create a unique “Branded Experience” that spans multiple dimensions: how the device feels, which functions and services are bundled, how polished the graphics look. Part of this “Branded Experience” is also how consumers launch or switch between tasks, i.e. the “User Interaction model” which is largely dictated by the underlying “Software Platform”.

Most of the major consumer electronics brands have made significant efforts to establish their own “branded user experience”. Lenovo just showed their new U1 Tablet with their own OS and UX during CES, and Dell have been playing with “Dell Experience” on their Linux devices as well.

Nokia, which could have been shipping millions of Android phones today, felt compelled to do their own thing and have been spending hundreds of millions on building their own software and services platform – included the user interaction model, consumer services and branded user experience; making an almost life or death bet that they can become a ‘real’ software company.

The Phone Industry vs the Car Industry
So why are so many device vendors chasing this illusive goal? What are they trying to gain? What kind of user experience customization that makes sense for an OEM? And what doesn’t?

To crack this challenge, lets use the car industry as an analogy. Car vendors compete on industrial design, engine and performance, cost, colors, finish, entertainment, comfort and many other factors. But they don’t try to move the gas pedal to the other side just to have their own “Driving experience. Ford or BMW don’t say “We need to create our own driving experiences so we will use a joystick in the center panel and throttle on the door.”

Why is it that the Car industry competes on “overall user experience” but mostly refrain from touching the “User Interaction” model ?

Design constraints
Any interaction design is driven by three constraints: (i) The human body physical constraints, (ii) the task at hand constraints and (iii) the established paradigm constraints

First: the human body constraints. How many legs we have effects how many pedals we can use simultaneously. How we sit effects what we can do with our hands vs. legs. Same applies to the phone; the size of our palm, the number of fingers. These physical constraints limit the possible variations of both physical design and interaction design. Sure, you can come up with five pedals but you can’t reach them all at the same time. Or in the phone case, you can create a design with twenty main choices – but you don’t have enough fingers. And then there are the mental constraints of the human mind; how many choices we can effectively deal with at the same time, how we scan from right-to left and top to bottom, etc.

Second: the task at hand constraints. You need to drive the car: control speed and direction simultaneously so you need to access both the steering wheel and pedals at the same time. Same with phones; when phones were used mostly for voice calls, you needed to easily access the 0-9 digits with your right thumb and all phones ended up with the 3×5 key matrix. Nobody thought to customize the experience by providing 0-9 keys in a single row.  Well – Nokia did decide to try a circular keyboard with the 3650 – and it didn’t go that well.

Third: the established paradigm constraints: once a working interaction model is accepted, it reinforces itself as more and more consumers use it. It does not – and often is not – the best possible interaction model. It just needs to be good enough so consumers will keep on using it. And once they do – and more and more users do – it becomes very hard for others to transition to a different paradigm. So even if you have a better user interaction model, it is often impossible to change the dominant existing interaction model (the Qwerty keyboard is a great example here: suboptimal arrangement, but impossible to change the established paradigm). Small tweaks here and there (a la Manual vs. Automatic cars, Mac vs Windows, or Android vs iPhone) are possible – but there is only so much that makes sense to customize.

Android didn’t really copy the iPhone – they are similar because of the human and paradigm constraints involved in small touch devices. Once you design an interface for a four inch touch device, there are not too many different choices. The designs just converge on similar concepts. Attempts to customize the UX beyond that are futile – they result either inferior user experience (because the human or service constraints are ignored) or just don’t get adopted for lack of critical mass.

What actually matters
What actually matters for a “branded experience” and where differentiation makes sense – is the services & features. Audi can compete by adopting their automobile industrial design language to the latest fashion, bundling “Services” like  infotainment system or features like ABS. In a similar way, phone or computer vendors can differentiate on slicker industrial design, bundled music or navigation services (Nokia attempts to do with Ovi) or features like inductive charging (Palm).

Instead of OEMs focusing on strengthening their brand by building their own interaction model, they should focus on the consumers (what a novel concept) and what consumers want: which means empowering the consumers to personalize the device to their own needs. This is the powerful role the application store fills and why Apple can ship the same iPhone to the teenage girl, the soccer mom and the business daddy.  Not only is focusing on the services and app store good for consumers, it is also good for the OEMs: making consumers happy is the best thing you can do to strengthen your brand. And – there is a lot to gain by selling real-estate on their app stores: turning them into “Malls” and renting out sections. Turning the OEM into a ‘landlord’ who can ‘auction’ this ‘real-estate’ statically or dynamically to all application developers. VisionMobile have been covering this trend in their annual Mobile Megatrends report.

So why are so many OEMs going down the slippery slope of “Branded User Experience” and end up with their own flawed user interaction model and a large software team needed to keep the effort alive?

The faulty OEM logic
First, because they are looking at Apple and getting envious. We industry insiders hate to admit it, but there is a strong Apple envy syndrome in the industry. The OEM false logic is something like this “Apple has high margins, branded user experience and owns the user interaction paradigm. So if we develop our own user interaction and create a branded user experience, we will have high margins”

WRONG: Just pure faulty logic. The fact that lions have a mane does not mean that if you bought a mane wig you will become a lion.  There is much more to Apple’s high margins than owning the user interaction model.

Second, when new usage paradigms emerge, and there is no dominant user interaction model, there are opportunities to innovate and be the first to build the new paradigm.  When the world was dominated by closed source software (the Microsoft era) this offered significant revenue upside.

But we live in a different era – “Open Source” has changed the dynamics of the game. All it takes is that at least one of the software solutions be open sourced, and the upside from controlling the basic interaction model and underlying software platform is minimal or none. The company who leads this effort gets industry recognition, establishes itself as a thought leader and strengthens its brand – but it is no longer a sustainable source of revenues or competitive advantage.  To the contrary; quite possibly, they can turn into the “mule” which guides the rest of the industry and can be embraced and extended.

Motorola’s Sanjay Jha realized this when he made Motorola embrace (and extend) Android. Nokia on the other hand could have been selling millions of fantastic Android phones with Ovi services if it wasn’t for their Finnish pride.

When Microsoft had to fight Netscape in the mid nineties, it has done so by an “Embrace and Extend” strategy. It would be beneficial to many OEMs to remember this and put an end to their mediocre attempts to invent new interaction models. Instead focus on what matters to consumers; great app store, superior services and overall compelling device experience.

– Thucycides Sigs

[Thucydides Sigs – a pseudonym – has many years of experience juggling computing constraints, mobile software and consumers needs. With that said, imagine listening to a violin sonata not know who the artist is or who composed it. You end up having to listen more carefully in order to make a judgment. He can be reached at thucydides /dot/ sigs [at] gmail [dot] com]

The Wintel future for mobile: a wake up call for network operators

[The PC-esque commodisation of the mobile industry has been prophesied many times before, but never before has it become so lucidly clear. Research Director Andreas Constantinou uncovers the dynamics of the mobile industry that will lead to a Wintel future, and the impending disruption to the network business model]

We ‘ve all heard this before. The story of the bit-pipe future for mobile networks/carriers and the threat of Google and Facebook to the mobile industry status quo. But this time the facts are clear; the dice has been cast and is pointing to a Wintel future for the mobile industry. Bear with me – this is a long argument.

The virgin years of mobile
The mobile industry has rapidly evolved through two decades:
– 1990s growth: The 1990s was the decade of unrestrained growth, building up huge empires on thin air (a.k.a. radio spectrum). Operators invested on building networks with worldwide reach, on increasing spectral efficiency (more bits per pipe, setting 2G to 3.5G standards) and snapping up new subscribers
– 2000s competition: The 2000s was the decade of competition, reality check and disillusionment. Operators invested in competing with more complex tarriffs, deeper device subsidies, unique devices (custom or exclusives) and bundling fancy services on the device (from mobile TV to myFaves and social networking).

Next up: survival
The 2010s decade is about survival. It’s no secret that ARPU (average revenue per user) has been dropping for the last few years, and the much-promised data services have failed to deliver. Plus networks are threatened by the establishment of over-the-top services like OEM-own services (Apple App Store, Nokia Ovi, Sony Ericsson PlayNow, RIM Blackberry services), the entry of alternative payment providers (Apple iTunes, Paypal Mobile, Google Checkout), alternative voice providers (Skype, Google Voice) and of course the myriad of social networking services (epitomised by Facebook and Tencent).

So, how are operators differentiating today beyond tariff games?

Investing on device subsidies: Network operators are spending big money to snap high-spending customers away from their competitors; for example investing 300-400 EUR on the top models from RIM, HTC/Google and Apple (case in point: Orange France). The subsidies are recouped back from such customers in around 9 months, but without factoring in the disproportionately high cost to the network, where the cost increases linearly per-MB consumed. All this, for a short-lived advantage, no stickiness to the network. Worse than all – operators are pouring marketing and subsidy investments into the same companies – including Apple, Google and RIM – that aim to commoditise their network.

Selling broadband Internet dongles and mobile WiFi (MiFi) hotspot devices at flat-rate bundles that aim to drive revenues, but at the same time lead to surging network OPEX costs. To appreciate this irony, consider that operator marketing budgets are never linked to the network infrastructure OPEX budgets; and so marketing groups may spend away into fancy deals, while resulting in alarmingly high network costs, especially for network maintenance and upgrades. Operators are investing into the bit-pipe business without knowing how to monetise it.

Customising devices (a favourite pastime of operators) like Vodafone 360 and Orange Signature that aim to deliver own services on the mobile, while limiting the experience to high-end devices. Although 360 has some strategic attributes (locking customer contacts into the network), its execution has been inefficient to say the least with a team of 250 people at Vodafone needed to launch the service (which could have been accomplished with perhaps 50 people in a software startup environment). Operators are pushing Internet brands to the forefront of the customer experience (see Skype promos from Three and Verizon) for a short-lived advantage of customer attraction.

To sum this all up; operators are investing in their demise, pouring money into the same Internet companies that aim to commoditise them into bit-pipes. Worst of all is they ‘re drawn into a inward spiral, a black hole that is near impossible to escape from; as an operator, if you don’t have the latest devices and cheapest tariffs, your competitors will.

The loss of control points
The situation is much more dire, as the current balance of power in the mobile industry is about to be shaken up. Operators control around 70% of the mobile industry pie of $1 trillion, thanks to three very important control points:

device subsidies: operators (with few regional exceptions) pour large marketing budgets into promotions and device subsidies, thereby in effect dictating terms to their handset suppliers. Only Apple has been able to challenge this status quo to date, but on a tiny 2% of the mobile market. Yet, a new disruption is appearing in the form of Android that might extend to well beyond a tiny market share, to significantly drop retail price points and render subsidies meaningless (more on this Wintel phenomenon later).

mobile termination: by design, mobile operators are the exclusive gateway to reaching any specific subscriber. That’s how operators have been able to charge ridiculously high voice and roaming charges (incl. receiver pays model). However, mobile termination is slowly coming under threat as more and more services are being delivered over the network like social networking and VoIP, while flat-rate tariffs for mobile Internet is becoming the norm. Consider that Google might at some point offer free voice calls amongst Android device users. It’s a question of when, not if. But abstracting the service from the underlying network carrier, the service providers assume the mobile termination gateway role, by acting as the service transport across networks and devices.

payment broker: The premium SMS boom is the best example of how operators have leveraged their billing relationship outside their network, charging often 50-60% commission for reverse billing, i.e. the ability to charge users for a ringtone, game or televoting from their mobile phone bill. Yet, Internet players are now carving up their niche into the operator-own game in the form of Apple App Store (no doubt to be transformed into a payment gateway for third parties) followed by Paypal Mobile and Google Checkout.

Wintel and the Google game
A very important change in industry dynamics is underway. Google’s Android has morphed from a feared entrant to a loved ally, with all handset manufacturers (except for Nokia) investing in Android-powered handsets thanks to Android’s low cost of creating a differentiated handset. In parallel, chipset vendors led by Qualcomm and Mediatek are rolling out out-of-the-box solutions that pre-integrate hardware + a software platform + applications (e.g. Android Market), that can be easily differentiated in both plastics and UI.

These out-of-the-box solutions will rapidly decrease in price led by the impending price competition amongst chipset vendors (led by Mediatek exports) and the advancement in silicon manufacturing (with sub-40nm chips squeezing smartphone capabilities in feature-phone price points). Combined with Android (low cost of UI differentiation + bundled apps market so incremental revenue) this should lead to a diversity of Android-powered phone at $100 retail price points in the 3-year horizon. This is a game where Asian mobile and consumer electronics manufacturers will gladly play, by creating low-cost, on-demand phone + service solutions for media brands and operators.

This is the Wintel game of the PC industry, making its appearance in the mobile industry; only the title of ‘Intel-inside’ is still up for grabs. What’s more, with smartphone prices at $100 dollars, the operator subsidies are going to become meaningless, in effect creating a handicap for network operators and a sudden loss of negotiating power. The tables are slowly turning.

What about Symbian and Windows Mobile, you might ask? We believe Symbian will become a Nokia-only operating system (more this on a future post), while Windows Mobile is driven by short-lived motivations today (a fresh UI and an operator interest in it), which can easily be delivered by Android, once UI design and technology firms release customisable layers on top of Android (something that Ocean Observations is hinting to be working on with Brandroid = Brand + Android).

What about Apple, Nokia and RIM; the few tier-0 handset OEMs that have developed vertical propositions (from hardware to services) will still be able to command premium prices; making this so very similar to the PC industry where you can buy an Apple computer at premium price or get the same functionality for half the price in a PC clone.

The shock to the operators will be like the shock that the music industry got when they woke up one day and realised that the Internet has disintermediated their brick & mortar business model.

All is not lost
Operators can still get their act together. It’s rare that operators have invested in long-term strategy – see Orange’s investment in mega-SIMs in 2007 (albeit betting at the wrong standard). And there might be the odd operator that has the conviction and foresight at the management level to achieve such long-term planning. We ‘ve long advocated that operators should platformise (read: Network-as-a-Service) while creating new control points and meaningful brand deliverables – for a brief analysis see our Mobile Megatrends 2010 deck, especially the chapter on ‘new smart pipe strategies at the intersection of brands and consumers’. Or drop us a line.

Comments welcome as always,

– Andreas

Demolition Derby in Devices: The roller-coaster ride is on

[The economic realities will lead to a roller-coaster ride that will shake up the mobile industry. Guest blogger Richard Kramer talks about the impending price war, the implications for industry growth, and how this will alter the landscape of device vendors in the next decade]

With all the discussion of technology trends on the blogosphere, there are some harsh economic realities creeping up on the handset space. The collective efforts of vendors to deliver great products will lead to an all-out smash-up for market share, bringing steep declines in pricing.

In November 2009 I wrote a note about what Arete saw as the impending dynamics of the mobile device market. I called it Demolition Derby. This followed on from a piece called Clash of the Titans, about how the PC and Handset worlds were colliding, brought together by common software platforms and adopting common chipset architectures. As handsets morphed into connected devices, it opened the door for computing industry players, now flooding in.

New categories of non-phone devices
A USB modem/datacard market of 70m units in 2009 should counted as an extra third of the smartphone market, as it connected a range of computing devices. By the end of 2010, I believe there will be many new categories of non-phone mobile devices to track (datacards, embedded PCs, tablets, etc.), and they may be equal to high-end smartphone market in units in 2011.  Having looked at the roadmaps of nearly every established and wannabe vendor in the mobile device space, I cannot recall a period in the past 15 years of covering the device market with so many credible vendors, most with their best product portfolios ever, tossing their hats in the ring.  I see three things happening because of this:

 

1. First, a brutal price war is coming. This will affect nearly every segment of the mobile device market. Anyone who thinks they are insulated from this price war is simply deluded. I have lost count of the number of vendors planning to offer a touch-screen slim mono-bloc Android device for H2 2010. The only thing that will set all these devices apart will be brand, and in the end, price.  Chipmakers – the canaries in the handset coal mine – are already talking about slim HSPA modems at $10 price points, and $20 combined application processors and RF. Both Huawei and ZTE now targeting Top Three positions in devices, with deep engagements developing operator brands. They are already #1 and #2 in USB modems.  Just look at the pricing trends ZTE and Huawei brought to the infrastructure market; this will come to mobile devices.

2. Second, growth will rebound with a vengeance. I expect 15% volume growth in 2010, well ahead of the cautious consensus of 8%.  I first noted this failure of vision in forecasting in a 2005 note entitled “A Billion Handsets in 2007” when the consensus was looking for 6% growth whereas we got 20%+ growth for three years, thanks to the onset of $25 BoM devices. Consumers will not care about software platform debates or feature creep packing devices with GHz processors in 2010. Ask your friends who don’t read mobile blogs and aren’t hung up about AppStores or tear-downs:  they will simply respond to an impossibly wide choice of impossibly great devices, offered to them at impossibly cheap prices.

3. Third, the detente is over. The long-term stability that alllowed the top five vendors to command 80% market share for most of this decade is breaking down.  This is not simply a question of “Motorola fades, Samsung steps in” or “LG replaces SonyEricsson in the featurephone space”.  Within a year, there could be dangerously steep market share declines among the former market leaders (i.e. Nokia) to accompany their decline in value share. Operators are grasping control of the handset value chain; many intend to follow the lead of Vodafone 360 to develop their own range of mid-tier and low-end devices. Whether or not this delivers better user experiences, operators are determined to target their subsidy spend to their favourite ODM partners. In developed markets, long-established vendors are getting eclipsed: in 2010, RIM or Apple could pass traditional vendors like SonyEricsson or Motorola in units. RIM and Apple already handily out-paced older rivals in sales value, and with $41bn of estimated sales in 2010, are on par with Nokia.

Hyper competition
So where does this lead us? Even with far greater volumes than anyone dares to imagine, there is no way to satisfy everyone’s hopes of share gains, or profits. With Apple driving to $25bn in 2010 sales and Mediatek-based customers seeking share in emerging markets, the mobile device market is entering a phase of hyper-competition. It is all too easy for industry pundits to forget that Motorola and Sony Ericsson collectively lost over $5bn in the past 2.5 years. More such losses are to come.

Never before have we seen so many vendors acting individually rationally, but collectively insane. Albert Einstein once famously said that “the defintiion of insanity was doing the same thing over and over but expecting a different result”.

The men in the white coats will have a field day with the mobile device market in 2010.

– Richard

[After four years as the #1 rated technology analyst in Europe, Richard Kramer left Goldman Sachs in 2000 to form an independent global technology research group. Arete has 10 years experience dissecting the financials and industry trends in  semis, software, devices and telecom operators, out of offices in London, Boston, New York and Hong Kong. Richard can be reached at richard [dot] kramer [at] arete.net]