Not a smart phone, but a commoditized flip phone that handled voice conversations, kept a contact list and something that resembles a calendar.  A cell phone so fancy that two decades ago we would have taken a human life to obtain one, but today is so feature free that we might give it to a child so some day he can tell his kids how hard he had it.

Markets change constantly, but often products change faster than the markets that support them.  Take the cellular carrier market … please.  Given that the domestic customer base is saturated, carriers are in a constant struggle to keep customers locked into their networks and find new streams of revenue.  Yet they must also help finance your newer and more sophisticated cell phones in order to bring you (back) into their fold.  This is why a $600 smart phone costs you only $200.  The carrier makes back the money they spent on your handset by getting a guaranteed two years of revenue from you via the contract you signed.  Expanded continuing revenue also partially explains why they charge a mandatory network data fee for the newer and fancier phones (that and they want you to grow addicted to having data on demand 24 x 7 x 365 x everywhere and thus in the future perceive it as a necessity and not a luxury).

Despite a slate of new monthly charges for owning a cell phone, the industry has not changed much in decades.  Carriers subsidize handsets, pads and slates, earning their money on the backend.  This creates competition between hardware makers to gain favor and deals with carriers who erect barriers to customers using unlocked phones.  This game is fixed and the carriers are not interested in changing it much.

Which is why Google is breaking the system.

Anytime all competitors are content with the status quo, a great marketing strategy is to break the status quo.  We disreputable marketing types call this changing the rules of the market.  In a mature market you can gain first mover advantage by changing the rules.  The problem is that the more complex the market, with incestuous economics, numerous players and relationships, changing the rules is non-trivial.  Despite making a lot of cheap unlocked phones possible, Google found that Android by itself could not break the carrier subsidy model.  The carriers want money, and are unwilling to relinquish any tool that have for making more.

So Google is breaking the system in smaller chunks.

The hot part of the mobile market is apps.  Apple has a 3-to-1 advantage over Android in the apps department, though many of Apple’s 200,000 extra apps are of questionable commercial value.  This temporary Apple advantage is an Achilles heel since, from a functional level, Apple doesn’t offer much over Android.  Breaking Apple’s status quo of being an app leader is as important as getting more Android phones into people’s hands (though at their rate of growth, Android phones may dominate the market before the 2012 presidential election is over).

Google is breaking the system by changing the revenue model.  You know, that thing that is so important to the carriers.

According to reports, Google may share app revenue with carriers.  Currently carriers get glitch from the roughly $75M Apple earned from apps (another $175M went to developers).  With smart phones making about 5% of the market, this small-but-growing-like-a-virus market means real money down the road in just raw app sales, not to mention in-flow revenue opportunities.  Currently, Apple’s app share would contribute less than 2% of AT&T’s wireless services revenue, but 2% now beats 0%, and once smart phones make up the other 95% of the cell phone market, that number rises to 35% of services revenue.  Multiply this again by the growing roster of apps and their usefulness (sans meowing cat apps) and app revenues may well rival service revenues for the top-line.  Now multiply this revenue engine with pads and slates, many new flavors of which arrive this holiday shopping season.

Non trivial treasure.  Google knows it.  Verizon knows it.  AT&T knows it.  Apple knows it.

Given this new revenue stream, carriers have motivation to promote Android handsets.  Since they will be able to buy such handies from everybody (Motorola, HTC, LG, Demented Dave’s Cellular Designs, etc.) they in turn will focus on promoting the Google/Android brand as opposed to any specific manufacturer’s product.  By breaking revenue model, Google is also breaking the partner loyalty model, another Apple advantage.  AT&T may still sell iPhones … to 5% of the market.  They will sell Androids to the other 95%.

Several marketing lessons are intertwined herein:

1. First, in any market where partners own the customer relationship, odds are they will not give it up (i.e., allow unlocked phones to cheaply enter the space).
2. When partners have a lock on the end customer, you have to help partners make money.
3. If your competitor owns the partner relationship, you have to find ways of helping the partner profit that also hurts your competitors (in this case, robbing Apple of their app and partner-promotional advantage).
4. If the market ain’t broke, break it.

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This week the geeks at Google released a gizmo that lets average people create Android apps via a brain-dead-simple user interface.  The reaction from the technical community involved hysterical laughter, deriding the tool and the alleged limitation of the applications it could craft.  Uniformly they snickered noting that while Apple’s App Store is loaded with professionally honed software downloads, Google was encouraging point-and-meow apps.  They used the news to lambaste Google’s Nexus One handset, which had a short life before cellular carriers started selling their own Android handies.

The technical community doesn’t get it, which means the market is about to shift.

Nexus One and the Android App Inventor served similar purposes, namely market seeding.  Android was a relatively new entrant into the handset OS market, and going up against Apple, Microsoft, RIMM, Symbian and other established players.  Adopting Android presented a risk to everyone – handset makers, software developers, carriers and consumers.  In order to reduce risk and encourage experimental adoption, Google needed to get a handset into people’s hands.  Thus they conscripted HTC to build One that showcased Android (and HTC was smart to exploit the opportunity to showcase their design and manufacturing capabilities).  This assured that developers, early adopters, carriers, analysts, reporters and even competitors saw what Android could do and in turn created both desire and FUD in the market.

Google used Nexus to move Android past a market hurdle.

Apple’s most significant remaining advantage in the market is its app store (face it, Android, Symbian^3, WebOS and maybe even Windows 7 mobile-whatever-they-are-calling-it-this-week have similar/identical/good-enough capabilities at the OS level).  Apple app richness is a market hurdle.  To get past that hurdle requires people believing that Android is a good environment for which to build apps (and given how well the durn things are selling in the East, Asian Android apps is a redundant phrase).  Android App Inventor is a simple tool for creating apps, and is the Nexus One of applications – it exists to reduce risk of discovery, and as a side effect, maybe cause a user to instigate the next great idea for an mobile application.

The reason misreading the intent of an event is an indicator of a market shift is that those slinging misguided rhetorical missiles are those of inert thinking.  When conventional viewpoints prevail, unconventional thinking succeeds.  Google recognizes the app market hurdle while various tech industry pundits don’t.  “The goal is to enable people to become creators, not just consumers, in this mobile world,” was how the Android App Inventor project leader phrased it.  “I think Google’s App Inventor tool that enables anyone to program an Android app could be profound,” opined one wag.

The unconventional thinking here is the same that drove social networks.  People, the unruly bunch that they are, have more net ideas than all the professional developers combined and raised several orders of magnitude, then multiplied by the number of interns politicians sleep with (that last item being a truly staggering sum).  Any of these end users may never perfect an app, but they will invent more apps that Steve Jobs has in his digital wet dreams.  Android App Inventor unleashes imaginations.

The best parallel I can recall was Borland.  In the early days of MS-DOS, a compiler cost a couple of thousand 1980’s dollars.  Borland put Turbo Pascal onto the market for $49 and every two-bit hack started writing applications.  Borland and shareware marketplaces, not Microsoft, made MS-DOS successful.  Rough hacks created by hobbyists were hijacked and converted into mainstream applications.  Android App Inventor follows the same path, taking it one step further by putting programmer power into the hands of every man, woman, child and highly functioning dog (though congressmen are still not yet advanced enough).

Android App Inventor is a game changer.  The pundits just don’t understand the game.

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Today Hewlett Packard palmed Palm for whopping $1.2B, or about 1/10^th of HP’s petty cash.  This was newsworthy for many reasons including the fact that Palm’s struggling handset line will now join HP’s struggling handset line (bet you forgot that HP makes cell phones – so did the rest of the market).  In a world where RIM owns the corporate market, Apple owns the consumer market, Microsoft hasn’t helped HP’s market, and Google/Android are changing the rules of the market, this marriage seems slightly more absurd than half of Hollywood hook-ups.

The deal is not without upside.  First, the market for mobile is not yet saturated.  Especially on the low end, there is plenty of green field. As unlocked handsets become more prevalent and popular, HP can use its retail savvy to shove cell phones into public ears.  I can almost here the cashier at Wal Mart saying “Would you like some printer cartridges with that?”

Interestingly, Todd Bradley is a top executive in HP’s Personal Systems Group and was also a former CEO of Palm.  In announcing the acquisition, Bradley noted that Palm had a lot of intellectual property, some 1,650 patents.  These alone might be worth the acquisition as it allows HP to license and monetize the investment, or choke the life out of competitors.  HP is not immune to litigating, though it is not their forte.

Otherwise the only item Palm brings to the table is a mobile OS, one so innovative and exciting that the market didn’t even bother to yawn.  In an industry where driving component cost down while improving the user experience is 90% of the battle, incorporating the Android OS makes much more sense, as recent mobile market share data shows.  Some speculate that HP wants a private OS to spread across handsets, slates and device types to be named later.  But buying Palm for this is like buying a deceased nag to run the triple crown.

Odds of winning are about the same.

All in all this appears to be an insider deal, were former Palm executives working in HP are overly optimistic about alleged synergies and product potentials.  But as far as technology companies go, HP has successfully merged other entities and made a buck or two.  The Compaq merger worked despite many misgivings (I had my doubts, but the dual brands and economies of scale in standardized PCs let HP take top honors away from Dell).  But HP has had its share of acquisition and partnership failures too (DEC via the Compaq deal is nothing, and outside of HP-UX nobody uses Itanium, much to Intel’s chagrin).

From an outside perspective, the market dynamics look oddly promising.  The smart phone market is growing at nearly a 40% CAGR clip and mobile data is almost the new norm.  But smart phones as a percent of all cell phones are still relative small –around 10% of all handsets according to some 2009 data and projections.  So perhaps HP is merely betting the long game – that by acquiring Palm and getting WebOS in shape, HP can catch the break of the new wave.

The problem is that HP needs to add something that the competition has not or cannot.  Palm has failed, and HP’s mobile bread is currently buttered by Microsoft, who is losing market share faster than Steve Ballmer is losing hair.  Assuming that HP cannot add magic (and, face it, they don’t do that very often), then they will have to compete on price.  Perhaps Palm’s IP combined with Compaq’s mass manufacturing prowess will shove deeply discounted smart phones into the market.  Given the bargains you can get on consumer edition HP and Compaq desktops and laptops at every office supply store on the planet, this might well be where HP is heading.

There is no marketing lesson today.  Just stunned wonder.

UPDATE: Perhaps I spoke too soon.  HTC announced that they are going to run and run hard with Android in an attempt to saturate the smart phone market.  They have a head start and will likely beat HP to the wave crest.  The marketing lesson is that if you see a hot mass market ready for exploiting, so do your competitors.  If they have a faster and cheaper approach than you, expect to lose.

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For dot-communists and those raised in the era of Linux, vendor lock-in is the art of keeping customers captive. By making people commit to a technology, and thus raising the pain of switching away from said technology, vendors cause customers to linger even when they do not want to. I know CIOs who for decades have blustered against Cognos and being locked into stiff annual license fees for PowerHouse, Cognos’ ancient 4GL.

Yet they pay the fee every year knowing that rewriting thousands of lines of PowerHouse code is pretty pricy too.

Another variation of vendor lock-in is commonly called upgrade robbery. I encountered such a scam this week when I noticed my ancient (circa 2003) smartphone buttons started to stick. In order to upgrade to a newer smartphone, AT&T insists that I buy $720 worth of wireless data that I do not need or want. My options are to switch carriers (who currently require the same data plans), or buy an unlocked phone for which AT&T may or may not automatically add a data plan for using. More maniacal still is that mandatory data plans are designed to condition cellular subscribers into using data services. Thus, at the end of a two year data engagement, the luxury of wireless data will have become and necessity.

Pretty pricy phones.

Amazon also has a bit of a lock-in with their popular Kindle ebook reader, though their version of lock-in is somewhat friendlier. The data format for Kindle books is proprietary, and Amazon is in no hurry to openly license the format to competing hardware makers. Buying an Amazon ebook means only owning Kindles for reading it, which if you are a typical bibliophile or literary pack rat means you have one and only one upgrade and replacement path – Amazon lock-in.

Pretty pricy e-paper.

Oddly, lock-in rarely lives long, with Cognos being an obvious exception. Customer lock-in is a strategy that invites competition, either with competing proprietary products, or more insidiously with open technology. Just ask Steve Balmer if Linux has caused Microsoft any problems in the market (and if you want to see Steve toss another chair, ask him if Vista caused Microsoft any problems in the market).

Already we see cracks in the each of the lock-in strategies. AT&T and their enabler Apple are repeatedly prodding Google to go nuclear, and recent rumors indicate Google may break the upgrade lock-in mechanism. Google is allegedly entering the hardware business and launching their own phones, to be available unlocked and at retail. Since G-phones are just as slick as iPhones, and since their open source souls allow for a broader range of potential applications, this is a market changing event. In the short term AT&T, Verizon and other lock-in experts will likely gouge customers slipping an unlocked G-phone onto their networks.

And that will be a mistake.

Smaller and hungrier carriers have already adjusted their voice plans to compete with the confusing and costly packages offered by the likes of AT&T and Verizon. Smaller carriers already offer flat-rate, unlimited voice plans and are earning sufficient revenues to expand their coverage maps (the chief differentiator of the major carriers). With over 70 GSM carriers in the U.S., the potential for competition is huge – vendor lock-in is thus a poor long term strategy.

This is where Google aggravates this situation. Currently, unlocked phones are a small business (albeit growing). Amazon sells unlocked phones, but has a special FAQ page due to the confusion factor and a general lack of iPhone-level lust for unlocked gizmos. A Google phone on Wal-Mart shelves with Google-simple instructions for swapping SIM cards will change the demand side of the equation. This will help the smaller carriers and tempt one of the major carriers to drop the data plan requirement.

Likewise, Barnes and Noble is teaming up with Adobe to promote open standards in ebook data formats, directly attacking Amazon’s Kindle lock-in and opening the ebook reader market to manufactures everywhere.

So when should a vendor employ a lock-in strategy? It depends on how much of your soul you are willing to give the Devil, but it does have a place in growth strategies. In new markets where you are taking large risks by inventing and promoting new product concepts, lock-in may be necessary to temporarily forestall competition and to guarantee some degree of recurring revenue. Amazon’s Kindle is a good example. Though not a new concept, Amazon was attempting to popularize ebooks and needed to assure that consumers would come to Amazon to buy the books as well as the reader. Publishers also need some assurance that the market would not be confused by too many products spread over too many vendors.

But lock-in is short lived – aside from mainframes and Cognos PowerHouse – and should not be a strategy on which to pin all future hopes. Amazon should have moved toward an open document format with the Kindle II, which in the short run would have cannibalized hardware sales while solidifying Amazon as the place for ebooks and growing the ebook market.

I’d have more to say, but I want to spend some time browsing unlocked phones on Amazon.

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(next graphic borrowed from JoinVision.com – click to enlarge)

The database market is tiny when measured by the number of serious competitors. Oracle is the king of the enterprise database server beasts while IBM’s DB2 or Microsoft’s SQL Server holds a tenuous second places (depending on whose measure you use, the common analyst measures being revenues, installations, recent developer involvement, moon phases or the pattern of chicken bones tossed into a fire pit). Microsoft’s SQL Server has its adherents, but that is largely out of religion for Windows not over-arching trends. Also-rans like Ingress, Sybase and others have receded into obscurity. For enterprise database technology, this is a seriously contracted market and one that would cause any government lawyer to skip their triple martini lunches.

Now Larry is buying the bottom of the market.

In Sun he also gets MySQL, the Open Source competitor for which Sun overpaid. MySQL not only has absconded with nearly the entire low end of the market (a sector where Oracle never made money nor marketed their wares with any real intent), but it is eating most of the middle ground as well. When I talk to CTOs and ask them about non-mission critical applications, they contentedly use MySQL and forgo the expense of establishing another Oracle instance.

That has to annoy Ellison no end (knew I liked MySQL for a reason).

In buying Sun, Oracle is significantly consolidating the entire database market, and demonstrably the enterprise database market. Granted MySQL’s Open Source nature means Oracle doesn’t really control it at all. Larry can’t kill it off on a whim. Yet Oracle can influence its growth, support and overall market viability. Oracle can affect MySQL’s future.

More to the point, the government simply does not like one corporation owning a wide or deep part of any market, and now Oracle has both. It has width – covering one half of the enterprise database market (if you consider Microsoft’s SQL Server an enterprise solution) and it has depth now owning – for practical purposes – the bottom and middle via MySQL. Using rough estimates of penetration, we can visualize what most of us instinctively know about this merger – that the number of alternative providers in the market is suddenly smaller.

Ignoring for a moment MySQL and the steam venting from Steve Ballmer’s ears this morning, the other parts of Sun are equally interesting, both from a market and an antitrust standpoint. Like MySQL, Java is Open Source. But Oracle has a vested interest in Java given the architecture of Fusion and derivatives. With Oracle dominating the enterprise application market and competitors depending heavily on Java for their applications, there is an inherent competitive advantage for Oracle to control the fate of Java. Again, being Open Source, Larry can instigate only limited intrigue, but there is enough leverage to make trouble for his foes.

Despite the potential for using SPARC’s massive multi-threading chip to create a monster database engine, I cannot seriously believe Oracle wants to get into the server hardware business. X86 architectures are the new norm and if today’s VMWare introduction of vSphere 4 is an indication, the cloud is the new mainframe, making SPARC’s minor advantage irrelevant.

Finally, there is StorageTek, another outfit Sun bled too much cash for (was Jonathan Schwartz secretly on a buying spree for Larry?). All data needs backup, but storage is a highly competitive arena and Oracle prefers fat software margins over skinny and shrinking hardware margins. Spinning off StorageTek is highly likely though who the buyer might be is unclear. Perhaps Oracle will do with StorageTek what EMC did with VMWare and create a beast with two backs.

Regardless, we can expect the Fed’s to get deeply involved and for Ellison to crush them. Owning control over MySQL and Java are juicy enough for him to play hardball (as if he knows any other way). All this time I worried about the technology business being commoditized. I should have been worried about Oracle swallowing it whole.

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DeviceAnywhere surveys examine what technologies mobile applications developers design for, how DeviceAnywhere services are used and most interestingly what kinds of mobile applications are being written. This last bit says everything about how the mobile application market has shifted and what consumers really want.

They want the Internet in their pocket.

The Internet is a success because it is Darwinian in nature. Every mutant content provider self-formed out of the digital muck, rapidly mated in orgiastic enthusiasm, and new species of content and application are perpetually being delivered. Go forth and iterate.

The reason a Darwinian Internet creates is popular is that every possible combinations of content and amusement is tried, with the failures dying in obscurity and the winners consuming ever more bandwidth. Even seemingly trivial Internet applications – and by this I mean Twitter – can evolve into ragingly popular services.

Humans are now Internet addicted. Waiting to get home or to the office to hear music, read news or toke on Tweets creates withdraw symptoms. DeviceAnywhere’s survey shows that the majority of developers are focused on mobile Internet – more so than games, downloadable content or mobile banking. Mobile smut was not specifically mentioned, but I’m sure access to such content while riding the bus to work is a significant part of the new mobile content movement.

Price reductions in mobile data bandwidth paired with increasing demand for Internet content and the simplicity of maintenance/delivery of web content/applications is conspiring to fundamentally change the mobile application market. Mobile internet is becoming as ubiquitous as mobile handsets. Over time developers have and will continue to drift toward creating mobile experiences based on Internet technologies, mainly web.

For handset makers, the breeds an imperative: creating stable, strongly standards-compliant micro PCs. The closer a handset can come to mimicking everything about the desktop Internet experience, the more content that handset can deliver and the more mobile application developers will drift toward that solution set.

Commoditization of the means of delivery.

This brings to the fore an interesting question: What happens to major parts of the mobile industry when everyone and his dog focus on mobile Internet application? Good things in general happen from the customer perspective, though certain vendors will be left eating air. First, the differentiation of the handset operating system becomes minimized. People will not pick handsets based on the relative irrelevancy of built-in tools but the ability to deliver the profusion of online applications. Sure, certain combinations have staying power. For example I’ll always begrudgingly use a Windows handset because Outlook runs my life and strict compatibility is essential. But for the super majority of buyers, Internet delivery (web, Java, 2.0, etc.) will be the growing decisive factor. After that, the ease and joy of using the device will drive handset sales, which is where Apple currently hold and advantage.

It also means a latent boon for web application tool vendors that can find mobile Internet leverage points for their offerings. Toolsets that allow for the creation of mobile web/Java apps will gain favor with developers who follow the trend. A mobile application needs to gather handset info, contribute to analytics and leverage handset features (like GPS) to make it more useful than the next mobile development toolset.

Does this mean native applications like BREW, Windows/exe and Android/Linux installables are going away? Slowly, yes. There are applications people need and want to run when not connected to the net. But given the integration of Java into the Internet experience and the ability to install over the air a Java application, handset support of a well architected native Java virtual engine will be more important. The divide becomes what applications are installed at the factory and which are so important the relative fragility of wireless data connections mandate manual software installation (my handset’s GPS software being an example). Everything else goes web and other Internet standards staples.

The more things change the more they commoditize.

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In between existing television channels are buffers collectively called “white space”. The FCC established these buffers in the Bad Old Days™ because back then television broadcast equipment was less than precise. A broadcast signal could drift a little up or down the frequency spectrum causing recliner-bound fathers to order their children to adjust dials, knobs and rabbit ears (if you do not know what “rabbit ears” were, then you are too young to be reading this). Basically white space buffers kept channel 2 from clobbering channel 3.

But with television broadcasts going digital this February and the unused white space spectrum being valuable, the FCC has opened it up for “unlicensed” use. Unlicensed spectrum devices do not require getting FCC approval for every user. Your home wi-fi, your kids walkie-talkies, your BlueTooth toys are all unlicensed gear. Unlike all these gizmos, signals for devices in the white space 700MHz band can travel for miles and go through walls, which is why your old television worked indoors even if your kids couldn’t tune it properly.

The FFC’s idea is to open white space for unlicensed data devices. Being unlicensed, there is little restriction for what this space can be used. As long as the device follows FCC mandated rules for not interfering with other devices, anything goes. Think of it as wi-fi without the limitations of wi-fi. Think of a long distance wi-fi connection that runs between 10-20 megabits a second (slower than home/corporate wi-fi but significantly faster than 3G mobile data). Think of it as a huge arena where devices will freely communicate with other devices in an all but unregulated environment.

Think that this market is 100% untapped.

Like the Internet itself, profit in the white space derives from its unregulated nature. When the cost of entry is low and the variety of uses nearly endless, potential and profitability are mind boggling. Chip makers will be obvious early winners, and I expect Intel will quietly shift some of their WiMax investments to WhiteSpaceMax in 2009. Cisco no doubt has engineers soldering away on breadboards today. Since Google pushed hard for the FCC to allow white space exploitation, they likely have an advertising revenue backend already mapped.

These are the obvious profiteers. The yet identified winners fall into two categories: companies that understand new uses of data and companies who redefine “devices”. We have to look at these in inverse order.

What is a “device”? An automobile is a device. So is a toaster. I can think of about 100 useful ideas on how a car with free long distance wi-fi could benefit from data. So far I’m drawing a blank on how toasters would benefit from having fresh data feeds (maybe my brain needs some toasted carbohydrates to restart the idea factory). Creative minds who view “devices” as an abstract, and who can leverage the wealth of data available via the Internet, going to make some money.

Let’s take a really simple idea like GPSs and gasoline. If a GPS maker augmented their product to mine the data at GasBuddy.com, the device could at the press of a button find the cheapest gasoline nearby, guide the driver there, then prompt him to enter-in what they paid and thus update the GasBuddy database. When gas goes back to $4 a gallon, this will be a much sought after addition (note to Garmin, TomTom and everyone else in the GPS business — considered this copyrighted and I expect royalty checks when you implement this).

But GPS toys are existing devices. What previously unimagined gizmo could be mass manufactured and download/upload data? The answer may lie in what data is useful in motion when using a cell phone is not practical. Or better still, when a cell phone is present but passive. Imagine an eye-level billboard that sense that you are standing in front of it, and from some white space signal knows who you are (is told your cell phone number). Based on a database in the cloud, it could tailor an advertisement to you and the location where you are at (“Hungry? Try the Peking Cat restaurant two block east on Main Street. Much better than the Vietnamese food you ordered online last week from Wok my Dog.”)

Combinations of existing devices may suddenly become useful by their ability upstream data. Convinced your kid is abusing his driving privileges? Why not add a camera in the car, tied to the speedometer and GPS system that streams audio/video/location/velocity data back to your PC, and let’s you VoIP him in real time? “Billy, get your hands off your girlfriend and back on the wheel …. NOW!”

White space is a big and very empty world. But it is a largely unregulated world and one ready for profiteering.

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Much has been made about Google’s mobile advertising potential in deploying Android, their free Linux-based mobile operating system. Google will indeed make a(nother) boatload money through advertisements on cell phones. But this is only part of the Google strategy. The other components should worry competitors more.

Let’s stipulate a few things in order for the market dynamics to be clear:

• Mobile devices are the prophesized unified communications portal (servers be damned).
• Due to constant availability, mobile devices will become the first option for most people for discovery and use of information.
• Unifying the end user experience while roaming and at the desk creates commitment by the customer/user.

Therein lay the competitive threat from the G-Phone. For years now Google has created end user services (search, maps, photo galleries, office apps, more). The services are generally cost free for the users. These applications have mobile counterparts and most (soon all) are bundled on G-Phones.

In other words, Google built the backend to mobile services before offering mobile phones.

Contrast this with Apple and the occasionally-on Mobile Me. Apple delivered a fancy handset and later added server-side applications that crashed often enough to cause the news media to suspend their Apple Adulation long enough to question if massively scaled server operations were Apple’s forte. Alternately Google has built an empire on centralized services and now is creating the mobile experience to extend it.

Sure, Google gave away mobile apps all along and you can run any of those apps from nearly any mobile handset (thanks to Google testing those apps using the services of another Silicon Strategies Marketing client DeviceAnywhere). But Google prioritizes access to these applications by bundling them onto G-Phones. Since the unit cost to handset makes for G-Phone system is zilch, handset vendors have a great incentive to adopt Android, put G-Phones in the hands of their customers and thus make Google apps the defacto mobile standard.

Slick.

Now here is where things get a bit scary … scary enough that the Federal Trade Commission will eventually investigate. Once enough people adopt Gmail, Google Office, Picasa, etc. for their application of default, Google track almost every moment of your life (turn off the cell phone camera when you and your sweetheart go to bed). Google will have a direct intelligence spread superior to the U.S. government.

Perhaps the CIA will be more interested in Google than the FTC.

Google has executed a classic blocking maneuver that will feed their core advertising business. By making mobile and desktop a contiguous environment they drive a wedge between users and all application competitors. All things being equal, who wouldn’t want to use the same apps in the office and in a restaurant? Microsoft can’t compete because they won’t give away Window’s Mobile to handset makers or port mobile apps to non-Windows handsets. Symbian will not compete as there is no central server backbone for applications.

Slick.

After the markets finish sinking, buy Google. Their mobile advantage will take Google stock even higher.

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In very short order (relatively speaking) the mobile market has seen:

• Google/Android advance a Linux mobile operating system
• Symbian convert to Open Source
• Motorola release Eclipse-based mobile development tools
• Verizon open its network to certifiable devices not sold by Verizon
• Wi-Fi handsets are now commonly sold by network carriers, eliminating some data network revenues

In short, the mobile market has opened up and this trend will accelerate (which is seemingly impossible, but I never bet against an avalanche). Two dominate forces are causing this to happen: competition and customer resentment.

In a rare moment of governmental lucidity, regulatory agencies in charge of frequency allocations made sure that no company could monopolize the cellular industry. This came as a huge surprise to AT&T who is unaccustomed to real competition, and it showed in their perpetual inability to focus on their market mission.

Congress — in an even rarer show of caffeinated consciousness — made your telephone number your property, forcing cellular carriers to release your number if you ever decided to switch to another network. This removed vendor lock-in based on the obvious need human and business continuity through numerical IDs.

Competition required each cellular providers to keep trying new things in order keep their customers happy, and thus keep their customers. Better and simpler service pricing, faster data networks, fancier and heavily subsidized handsets. The technology and markets have evolved so rapidly and brought so much new end-user convenience that many people would rather do without television than their mobile handset.

But there was a weakness in the market induced when the carriers tried to keep customers locked-in. The choice of handsets for any carrier was limited to what they sold and supported. The back room economics of this had to do with the terms of your service contract. The logic (so to speak) went like this:

• To encourage you to subscribe to our services, we’ll sell you a $500 handset for $1.95 (we, the network carrier, eat the $498.05)
• In turn you agree to subscribe to our services for no less than two years, and pay massive fees for an early cancellation
• Don’t worry, we’ll earn enough off of you in two years to more than make-up for this initial loss (unless of course you don’t use your hands free kit, fly your car off a bridge, drown and thus fail to pay your cellular bill on time)
• And if you use some foreign device on our network, don’t expect to get any help from us

The carriers then would write sole-source deals with handset manufacturers for the latest and niftiest new handsets. So if you wanted a SuperCell X400L then you could only get it by subscribing with Honest Earl’s Cheapo Celluar. This limited the number of X400Ls, the number of applications and accessories that worked with it, and thus your choices.

This model is about to break and break hard. As more and more people start carrying these portable computers we call cell phones, they want more functionality which means more applications. Carrier network are not software companies and cannot possibly design every type of application for their set of phones. Thus, customers are a bit disgruntled by the limitations of what handsets run on what networks. What do you mean I have to subscribe to Sprint is I want to play Mega Reversi?

Led by the techie caste, people have started using “unlocked” devices — unsupported devices on carrier networks. The carriers may offer support for unlocked devices, but the end-user success rate has been high enough to spawn a thriving market in unlocked devices. This is in part because the handset manufacturers earn a better margin by selling more directly to the customer and also broaden their markets in the process. Want an AT&T Tilt without the AT&T? Buy an unlocked HTC 8925 and slip in your SIM card from your old Alaska Wireless handset (unwise if you are not in Alaska).

Vendor lock-in was beginning to break, so the rest of the market decided to help the process along. Nokia will gladly sell their handsets to anyone as will HTC. Google wants to make one operating system to cover all cell phones (which has to keep Steve Jobs up at night) and Symbian was released into the wild as Open Source to counter Google. The networks are beginning to see the trend and not fight it.

When competition is assured and customers can collaborate on alternatives, it is better to lead the trend than to be crushed by it. Cellular customers will have the final say and it will eventually be that all devices will work on all networks (tower protocols being the current, and perhaps temporary limit).

Want to make some money? Start thinking about mobile applications. That is where the next next thing will be.

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I’m pondering these realities as I comb through reports in the wireless market, where Silicon Strategies has a new client. The evolution of the wireless market will soon make a shift and the smarter vendors are rapidly adapting to the inevitable.

First, a musing on closed and open markets. In closed markets, the vendor has control by virtue of either a monopoly or through customer lock-in due to the high cost customers face in switching to different technologies. The IT technology industry was a closed market for a seeming eternity until the folks at Berkeley began porting and promoting their flavor of UNIX (which could be considered the original computer virus). When Sun Micro and other vendors began using open standards (like UNIX) as a wedge into the market, the closed system protected by high switching costs began to fade. Microsoft has a virtual monopoly on desktop operating systems, and we may be seeing the first cracks in that closed system as well.

Open systems work on the principle that choice creates other competitive realities and opportunities. For example, there is not a dime’s worth of technical difference between most of the Linux distributions. Linux purchasing decisions are primarily based on other issues, such as the perceived financial soundness of the vendors or their dedication to Open Source principals (or in the case of Novell, the seeming immunity from litigation by Microsoft).

TV cable operators are another case study of closed systems. Due to the dubious nature of local franchise laws and the instituted monopolies they create, cable carriers have zero incentive to innovate. It wasn’t until home satellite came into being that there was any movement by the cable companies, and even that has been lackluster due to the limited competition created between these two closed systems (like the limited innovation that existed between VMS and MPE — and if those abbreviations don’t date me, nothing can). There have been various attempts to create an standardized set-top box for cable consumers, but higher margins are created by renting gear to couch potatoes instead of letting customer buy one of many makes at Circuit City.

Now we are about to see a fissure in the wireless market. Google started the collapse by prodding the FTC to mandate some degree of open access by whomever wins the bidding war of the soon-to-be re-purposed 700Mhz spectrum. Google’s stand (and now the FTC’s as well) is that whomever wins temporary ownership of this chunk of air must make some or all of it open to allow any application, and certified device, any wireless service and any third party services provider to tap into the 700Mhz waves.

Naturally, this raised a stink from every vendor who had designs on any piece of this space. Cisco complained. Verizon cried foul. Even Satan, who current resides in Redmond, grumbled. But as soon as the FTC put their bureaucratic foot down … well, people started changing their tunes. Verizon, who had been one of the noisier detractors to Google’s open system scheme not only turned their opinion 180 degrees, they started opening the existing network, presumably as a show of philosophical acclimation to curry FTC approval.

In other words, once the inevitable opening of cellular services were going to be mandated somewhere, Verizon decided to join the new paradigm than fight to preserve the old.

Good move on their part. Sun rode the UNIX revolution, and took a great deal of market away from competitors, and opened new markets as well. Later in life they fought the Linux revolution and lost big. Both UNIX and Linux were opening previously closed systems, and Verizon learned from Sun’s mistake.

There is a truism among market strategists that notes the best way to win in a market is to change the rules. But the same applies when the rules are changed against you. If the change is inevitable, or worse still mandated by law, then the smart people will use the new rules to their advantage, create new differentiators, and leave their competition to slowly die.

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