Windows Phone 7

Windows Phone 7, released in October 2010, originated as the Pocket PC 2000 operating system and was the successor to Windows Mobile 6.5. It‟s designed to be similar to Windows 7, integrating some of the programs familiar to Windows desktop users, such as Office, Internet Explorer, and Windows Media Player. [18] Windows Phone 7 only operates on the OS layer of the smartphone stack [13], in a similar structure as its desktop and server business.

Microsoft makes money through licensing the software to handset developers, and charges developers for development tools, as well as the Mobile2Market certification program. Major hardware manufacturers that produce phones for Windows Mobile include HTC, Samsung, Dell, and LG.[19,20]

In the last few years, however, Microsoft‟s share of the smartphone market has been shrinking. Faced with integrated hardware/software devices such as Blackberry and iPhone on the upper end, and free, open source devices such as Linux and Android on the lower end, Microsoft has been struggling to solidify its position in the smartphone market, and hasn‟t yet been able to carve out its own niche.

Figure 4: Windows Phone 7 Value Network [28]

- 12 - 2.3.3 Palm

Palm, now a division of HP, was the first company to dominate the PDA market. Originally releasing the Palm Pilot in 1996, USRobotics‟ Palm quickly became synonymous with PDAs.

It then released its Palm.net service, allowing users to access specially formatted web pages.

Within a few years of its initial success, however, competitors started flooding the market with cheaper and better products. For example, Microsoft released its Windows CE in 1996, boasting 65000 colors, when Palm‟s PDAs only had 256 colors.

While the Palm name has continued to survive in the marketplace, even after being sold over and over again, it never enjoyed its initial success and built up a dominant platform, or release a product that wasn‟t quickly imitated and bettered by another product.[21] Palm launched an app store in October 2009, but only had 6000 apps as of March, 2011.[22] HP bought Palm in April 2010 for 1.2 billion, and has plans to integrate Palm‟s WebOS into its line of tablet computers and smartphones. Palm has its own hardware, operating system, and native applications. Palm operates on the native applications, operating system, and handset layers of the smartphone stack. [13]

2.3.4 Symbian

Symbian started as a joint venture between Nokia, Sony-Ericsson, Motorola, Matsushita, Siemens, and Psion as an open-source platform for 3G mobile devices. It was designed to be a direct competitor to Windows Mobile. Although it started as a

mobile device OS, it was soon sidelined to a mobile phone OS.[23]

Nokia released the Ovi app store in 2009 [24], allowing devel-opers to build and distribute Java- and Flash-based appli-cations and widgets. In Nov, 2010, Nokia claimed 3 million downloads per day, and 165 million users.[25]

As Nokia was the dominant mobile phone developer worldwide, Symbian quickly rose to dominate the cell phone OS market, at one point reaching 88% of total market share.[26] It

Figure 5: Nokia Value Network [28]

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Figure 6: Apple's Value Network [28]

also opened an app store in 2009. However, when other options, such as the iPhone and Android, were released, the OS quickly lost its luster. Nokia had planned a follow-up OS, called MeGo, but announced that they had abandoned those plans in Feb 2011, deciding to put Windows Mobile 7 on its phones [27]. Nokia operates on the native applications, operating system, and handset layers of the smartphone stack. [13]

2.3.5 Apple

Apple has positioned itself as a device maker and vendor, OS owner and service platform maker [28], operating on the online services, native applications, operating system, and handsets layers of the smartphone stack [13]. The Apple iPhone operating system follows a system that is closed in many

ways by including the operating system, hardware, built-in appli-cations, and online services in its strategy. One advantage of this is maximum compatibility and efficiency between hardware &

software components. This gives developers a more focused approach, as they don‟t need to worry about multiple hardware and software configurations from multiple companies, each with their own limitations and interfaces.

All applications written for the iPhone/iOS are hosted by Apple. The App Store allows developers to focus on writing, and give marketing & distribution task to Apple. Apple receives a commission of 30% of the cost of the app. The App store is the only way to download iPhone apps. This ensures that Apple is able to control the quality of the applications released for the iPhone.

Apple‟s chief core competence is innovative design and technology. It has also turned computer equipment into an “experience”. Even though it often isn‟t a first mover, it is able to look at existing products in a new way [29]. Apple also is able to understand what users want and like, and build products built around those needs. Examples include: simplicity, product design, and marketing.

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Because of the “experience” mentality, the hardware is the core of the company. Apple is applying the „razor-and-blade‟ strategy in reverse. The add-ons, such as the iTunes Store, App Store, etc, don‟t make the company nearly as much money as the initial hardware. For example, analysts estimate that Apple nets about $0.10 off of each song sold in the iTunes store.[30] While the iTunes store generated 4.1 billion in revenue in FY2010, considering Apple‟s total $65 billion revenue, it isn‟t a large part of their income stream.

2.3.6 Google

Google‟s core competences are to “organize the world„s information and make it universally accessible and useful” [31], and to sell advertising. Google currently leads in search and advertising revenue on the

Web. While Google has had success with its various applications, such as Google Docs, Maps, etc, the main goal is to create more opportunities to display advertising.

The position of Google‟s

business model is that of an OSV (operating system vendor), an application aggregator, and an online services provider [28], and operates on the online services, native applications, operating system layers of the smartphone stack [13]. Google bought Android, Inc. in 2005, and released the Android OS on Nov. 5, 2007. Hardware vendors are free to download and modify most of the OS for their own phones, and software developers are free to download the SDK and build Android apps. Google‟s goal is to be able to run Android on any handset by any manufacturer, and to be used on any wireless network.

In addition, Google handles user accounts, but doesn‟t restrict apps and transactions to its network. Google often (though not always) acts as the broker between the user and the app developers through the Android Store.[32]

By open-sourcing the Android platform, Google has given hardware companies and service providers resources that would take large amounts of money to develop in-house. As a result, different hardware companies have created their own “flavors” of Android interfaces. For

Figure 7: Google Value Network [28]

Services Platform OS Device Maker

Device Vendor

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example, HTC has created the Sense, Motorola the Blur, Samsung the TouchWiz, and Sony Ericsson the UX.

An advantage of this strategy is that Google has multiple companies working to build and distribute Android phones. It works on multiple networks, and as many companies are releasing phones with Android, its market share is consistently growing.

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III. Methodology

3.1 Proposition Summary

The design of this thesis uses a set of 9 propositions to examine the current smartphone market in the United States, and the applicability of two particular business models to this market. It uses an adapted & simplified version of an ecosystem framework designed by Yamakami [33]. The entities included in this thesis are users, app developers, and platform providers. The factors in this study are market share, network effects, and platform elements, such as network effects, app stores and advertising. Agencies studied are restricted to smartphones using either iOS or Android. This study will then compare these factors with Google and Apple‟s business strategies and effect on the market to analyze the probable near-term trends.

This thesis uses propositions rather than hypotheses for a few reasons. The most significant reason is the fact that the focus of the thesis is a projection of the future. As such, it is not empirically testable. This situation leads itself to a qualitative rather than quantitative study, which has the purpose of “generating understanding of a social phenomenon”. [34] This is useful in situations where a study cannot be extracted from its context.

I also wanted to give a broad overview of the smartphone industry, and give a foundation for future research [35] to investigate more specific topics. I also chose a format that allowed me to use multiple sources and forms of input, rather than a limited sample.

3.2 Research Questions:

1. What is the evidence that Google‟s strategy is to sell advertising?

2. What is the evidence that Apple‟s strategy is to sell hardware?

3. Is the smartphone industry able to support multiple platforms?

4. How do the platform leaders‟ roles affect the evolution of the industry?

5. What complementors have platform leaders chosen to work with?

6. What have the platform leaders done to share “returns on innovation”?

7. In what ways have the platform leaders captured value?

8. Are there market forces that would prevent or enable tipping?

9. Which platform approach will make more money in the next 3-5 years?

- 17 - 3.3 Propositions:

1. The “open” platform leader‟s (Google) strategy is to give away an "element"

of the platform, the store, and generate value through traffic and profits through advertising.

2. The “closed" platform leader's (Apple‟s) strategy is to sell an "agency" of the platform, such as hardware, to boost traffic and access to the platform.

3. The "mother" platform (smartphone industry) can support multiple platforms.

4. The multiple roles of the new platform leaders have forced the traditional platform leaders to evolve.

5. Platform leaders have chosen to work with integral complementors (app developers) and supplementary complementors (advertising providers).

6. Ways that platform leaders have chosen to share returns on investment are financial (app and ad commission) and elemental (advertising viewers).

7. Ways that platform leaders have captured value include both consumer investment (hardware, apps), and complementor investment (app developers, advertisers)

8. The smartphone industry is not prone to tipping, as investment reduces the chance of users changing platforms.

9. In the next five years, the more open platform strategy will make more money.

- 18 - 3.4 Trends

The emergence of the smartphone – initially with the iPhone, and later with the Android, marks a turning point in the smartphone market from a group of companies organized on strictly delineated roles, with the telecom company as the platform leader, to a more „fuzzy‟

market, in which one company may have multiple roles. For example, Apple has worked with the network provider (AT &T) and app developers, and has also sold directly to users. The carriers are being pushed into a more supplementary role, and are struggling to adjust to a market in which they provide less value and wield less power than they have in the past.

As smartphones are similar to small computers with added connectivity functions, such as phone and internet, the value chain is similar in many ways to the computer industry, with different companies acting as hardware, software, and operating system vendors. However, there is one significant difference that has made the entire smartphone value chain different from that of a PC. The presence of mobile service companies, such as AT&T and Verizon, has changed the position of the platform leader, setting up the current clash between the business model used by traditional network providers with the business models used by today‟s smartphone platform sponsors.

The next section will examine several trends in the market. These trends are divided into three sections. These are: Platform/Operating Systems, App Stores, and Advertising. Each section will be examined in terms of revenue, profit, and usage.

According to Gartner [36], Nokia was the dominant smartphone company worldwide until the middle of 2010. However, with the rise of Android, that dominance faltered, and in January 2011, there were more Android phones than Symbian phones. Apple has grown slowly, going from 10% to 15% market share over the last few years. While the iPhone has been a hugely successful product, its competitors are catching up in quality and functionality, and the premium price tag has been harder to justify. Google has had the most significant improvement. Starting from a base of roughly 3-4% of the market in Sep 2009, Google has leapfrogged to the front, overtaking both Apple and Research in Motion (RIM) in 2010.

Projections indicate that by the end of 2011, Android may account for 49% of the smartphone market.

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One of the most important parts of any platform is its partnerships. Evaluating the possible partnerships from the perspective of the 5-level stack will show each company‟s strategy, along with their similarities and differences.

3.4.1 Google’s Platform Strategy

Google‟s coring strategy has hinged on controlling part of the Android OS, while opening other parts. Core apps that integrate with Google‟s services, such as Gmail, Google Maps, and YouTube are proprietary. The core part of the OS, while officially open, is controlled by Google, as improvements to the code is reviewed and approved by Google.[37]

Google has also had to keep the platform integrated, while considering future innovation. It also needs to maintain compatibility with past complements, and maintain platform leadership while other companies, are eager to take its place.[5] Since Android is relatively new, Google hasn‟t had many challenges in this area. Although it has released several versions, they are all relatively minor upgrades, allowing all apps to function on the new software. As previously mentioned, Android‟s rapid release schedule have kept possible competitors off-balance, minimizing the risk of leadership challenges.

On the network level, Google is network agnostic, working with hardware manufacturers that support different wireless technologies. For example, Verizon and Sprint use CDMA technology, while AT&T, Cellular One, and T-Mobile use GSM. All of these service providers have Android phones available for their customers.

Google offers its own online services, letting users access Gmail, Google Maps, YouTube, etc. through applications and widgets. In addition, developers can access their own services through either Google‟s API libraries or through web sites optimized for mobile devices.

Google has developed native applications for many of its services, and has worked to make the operating accessible to third parties through the API libraries and the release of an SDK (Software Development Kit) for internal applications and external access to services. The SDK and APIs are freely available, and anyone who wants to can build an Android application and put it on the Android Store, or on their own site.[38]

The Android operating system is the core of the entire platform. Released by the Open Hand-set Alliance (OHA), the first version of Android was made public with the release of the HTC

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G1 in November 2008. From a software perspective, Android is similar to Apple‟s iOS, but also differs in many ways. While the OS is officially open source, Google wields the majority of power and in the OHA. Google has received criticism for controlling the core OS too tightly, [37,39] and the OHA has started to show signs of trouble as many companies develop their own proprietary features.

Google has developed Android at an amazing speed, with 4 major versions made in the space of 15 months [40]. This has created issues with manufacturers, as different phones are released at different times, with different versions of Android. Manufacturers are responsible for releasing OS updates for their phones, and while some manufacturers have consistently released upgrades in a reasonable period of time, others haven‟t done so well.[41] With significant work needed for each update, and each company releasing multiple phones each year, the ROI for many of updates isn‟t worth the investment. This has given Google a de facto control of the phone, as handset manufacturers face a high rate of software updates, along with significant customization costs. They don‟t want to be „left behind‟ when the next version of the software is released, so they don‟t put as much effort into software development and customization that they otherwise would. [42]

Barriers to entry for Android are small to none. There is a small ($25USD) fee for each developer for inclusion in the Android Marketplace, but once that is paid, it is free to develop and release apps. However, Google takes a 30% commission of apps sold in the Android Marketplace. Android apps are written in Java, and development tools are available on many different platforms. Google is trying to keep the app and hardware development in order to be able to offer a wide selection of apps and phones.. This is the motivation to draw more users and eventually tip the market.

3.4.2 Apple’s Platform Strategy

Apple‟s coring strategy has been very clear. The company is involved in every part of the ecosystem, from hardware to software to network to apps. The majority of the ecosystem, including hardware design, OS design, and app design, is under the exclusive control of Apple. This strategy has served Apple by allowing it to ensure that the entire iPhone

“experience” works exactly the way Apple intents, with a minimum of unexpected issues.

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Apple has also overcome the challenges outlined by Cusamamo and Gower [5] in the same way, by ensuring it remains a significant influence in every part of the ecosystem.

On the network level, Apple has chosen to „lock‟ the iPhone, which means that only carriers with agreements with Apple are allowed to sell the iPhone. “Jailbreaking” or unlocking the iPhone to be used with other carriers voids the user‟s warranty. In most countries, there are only one or two carriers that Apple has chosen to work with [43]. In others, there are several.

Apple offers one online service, MobileMe, which allows digital content to be shared among various Apple products (iPhone, iPad, Mac). The company also uses the iTunes to sell music and movies.

Apple has also released an SDK that allows anyone to create native applications. Once an app has been developed, the programmer has to go through Apple‟s approval process, in which the app is checked for bugs, objectionable content, and other issues. If approved, the app will then appear in the iPhone app store. Apple also has a set of its own native applications, such as iTunes, email, and YouTube.

The iOS operating system is proprietary software that is only distributed for use on Apple‟s hardware, such as the iPhone, iPad, and iPod touch. It is designed to work with Apple‟s other software, such as iTunes and MobileMe. iOS is unique in that it is designed to work on a very small set of hardware, and is able to be optimized for that hardware. This is in contrast with most other operating systems, such as Windows, Linux, and Android, which are relatively generic programs that are compatible with a broad set of hardware.

The iOS operating system is proprietary software that is only distributed for use on Apple‟s hardware, such as the iPhone, iPad, and iPod touch. It is designed to work with Apple‟s other software, such as iTunes and MobileMe. iOS is unique in that it is designed to work on a very small set of hardware, and is able to be optimized for that hardware. This is in contrast with most other operating systems, such as Windows, Linux, and Android, which are relatively generic programs that are compatible with a broad set of hardware.