February 15, 2011
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Mobile is a microcosm for market mechanics.
 In recent weeks we witnessed the mobile market churning in seemingly random directions, but each has actually affirmed fundamental and very mechanical aspects of every market. When Nokia makes a bold move by adopting Microsoft’s mobile operating system, it asserted one market imperative. When HP and Google forced Apple to blink, another market realty was at play. As Google’s Android OS heads toward ubiquity, yet a third force of marketing was displayed.
Commoditization: All markets commoditize over time as competitors provide similar or identical features. In the mobile market, Google is the major force toward commoditization as they emulate what Microsoft did with desktops (indeed, the rumor that Android and webOS will one day appear on phones, pads and laptops has caused Microsoft to publicly panic). More to the point, Google is forcing features down the price chain, assuring that Apple, HP and Microsoft follow, reducing differentiation between mobile environments.
Differentiation: With Android now leading mobile OS shipments and displacing Nokia’s Symbian OS as the top platform, Nokia sought differentiation without ruinous investments. Adopting Microsoft’s mobile operating system provided them market differentiation because, frankly, nobody else was using Windows Mobile. Nokia had only a few options aside from being assimilated into the Android universe, and one of those options – continued development of Symbian – was not working.
Whole product partnerships: Content will drive much of the mobile market as witnessed by music, e-books and magazines. Apple, as they are want to do, tried too hard to control content, hoping to get a slice of everybody’s pie as they did selling tunes. Magazine publishers (part of the mobile whole product mix) resisted, insisting that Apple share subscriber information. Google and HP (webOS) took the other path, giving publishers subscriber info and a larger piece of subscription revenues. Apple was forced to do likewise, reverting back to the industry norm that every participant in a whole product gets to do it their way, keeping control and money.
The marketing lesson herein is that market mechanics and forces are always stronger than any vendor. As strategists, we always maintain awareness of each market force and pick alternatives that ride market forces, not fight them. Nokia will attempt to ride a differentiation wave, Google drives the commoditization wave, and Apple bows to whole product realities.
It is as predictable as a politician’s promise is unreliable.
January 11, 2011
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Is owning 95% of a market enough?
 Taking in a number of market share estimates, Apple iPads have about 5% of the potential U.S. market for pads/slates/tablets (or as the wags at The Register prefer to call them, Fondle Slabs). This is based on current P.C. market penetrations (north of 76% of households) and the estimated U.S. deployment of iPads. Thus, the green field of the slab market is currently wide open.
Which explains why several million Android slabs were introduced at CES last week.
Market mechanics are based on many things, with technical innovation being a misleading indicator. Apple has always been an innovator, but innovation in and of itself is insufficient. Apple invented the PDA market with the Newton, which sold four or five units. Pure innovation, but not only was it ahead of the market, it was also poorly marketed. Alternately the iPad was very innovative and well marketed (on the heels of the popular iPhone), and it immediately found its way into the hands of early adopters.
They make up about 5% of any market.
The glory of the iPad is not its engineering or innovation, but the identification of a need in the consumer electronics market space and the dexterity required to change the face of the market. Tablet computers have existed for years, their origami like screens providing both laptop and slab capabilities. But it took Steve Jobs rethinking human interfaces and providing always-on data to make the market respond. Apple’s early adopters showed that millions of units could be sold and this attracted the attention of every gizmo maker who wanted a share of the other 95% of the market.
Most of them chose Android as their OS, for painfully obvious reasons (cheap, Linux-based, Google supported, etc.)
The evolution of the slab market is beginning to mimic the history of the personal computer market. Old people (like me) remember that Apple offered the first truly consumer oriented personal computer. They had competition (Radio Shack’s TRS-80, IMSI, Altair, etc.) and each had its own durn way of doing things. Along came IBM, who could redefine any market, and introduced the world to a scrubby little operating system called MS-DOS from an unknown company called Microsoft. With the freedom to put MS-DOS on any computer, and with the market willing to clone IBM systems, the entire personal computer market sped toward ubiquity (aside from Apple’s perpetual 5% market share). Each vendor provided different price points, niche features and varying levels of support.
But they all ran MS-DOS.
Today we see sudden explosions in smartphone and slab markets. As Apple did with their desktops, they innovated and proved the viability of a market for slick pocket computers and slates. Other vendors, wanting some of that market chose what they believed to be the most viable alternative to the Apple operating system (MS-DOS then and Android now). With personal computers, once the decision for a standard was made, the market erupted, competition thrived, prices fell and Apple remained a nice player.
It looks like the same thing is happening again with mobile devices. Apple innovates and then is surrounded by something more portable, open and accessible.
(Before anyone utters the content access issue, know that Google and other vendors are able to inject music, book and video content into Androids, which erases any iTunes advantage).
This puts Apple into an uncomfortable long-term position (unless being an early adopter innovator pleases their shareholders). Apple must either continue to innovate at a hyperactive pace or be satisfied with 5% of the market (or they could compete on price, but that is always disastrous). Odds are they will continue their innovation streak, settle for minority market share, and sue everybody over patent violations.
But they won’t dominate the market because 95% will be owned by several dozen competitors backed by Google.
Markets are defined by forces much stronger than innovation. Sure, it is essential to innovate, but whatever clever invention you whelp will be cloned, or worse yet improved upon. Consistent innovation will build a great brand but not Microsoft-level market domination. This is the innovators quandary, a Sisyphus styled purgatory from which some people chose not to escape.
January 4, 2011
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Steve Jobs needs to call Andy Grove ASAP.
Groves, one of Intel’s founders, was very clear on the concept of paranoia in the tech biz. Perhaps being Hungarian and thus too well acquainted with Soviet oppression, Andy learned paranoia at a young age. But he refined his paranoiac inclinations being in the technology business, a war zone where corporate death comes quickly and painfully. Like a battlefield where every soldier is out for himself, nobody and no company are safe from competition.
Not even Apple.
Wildly popular and cult-like, the iPhone and iPad made indelible marks in the consumer electronics space. Though pads and smartphones existed before Jobs took on the job, Apple refined the product category and advanced the expectations of the market. Combined brilliance in product design and marketing led to worldwide buzz, techno lust and a stock price that makes members of the House of Saud blink ($330 but leveling off, though still almost half of their neighbor Google’s share price). Yes, iEverything seemed like a juggernaut ready to run rough over the entire gizmo landscape.
Which is why Steve needs to call Andy.
 Several news reports show that competition is catching up to Apple. Nielsen notes that Android smartphones are now outselling iPhones (though the pending Verizon deal will likely add some gas to Job’s jalopy). At CES, an estimated 100 new pad devices will be unveiled – nearly all of them are running Android, with HP’s webOS being treated worse than a redheaded stepchild with bad breath. The two brightest points of light in Apple’s device line-up are under assault by a ‘free’ mobile operating system, appearing on literally hundreds of new phones and slates. Worse yet, Google is allegedly ready to give application and content developers a larger share of sales price and critical buyer demographic information, putting Apple’s (and even Amazon.com’s) content distribution network under exacerbating pressure.
Steve, you don’t really need to be paranoid … they are out to get you.
Strategy is a key aspect of marketing. One strategic element that remains pure throughout is that market share ultimately means more than style or margins. Microsoft made only small change on each copy of MS-DOS and later Windows, but they assured it was the de facto desktop operating system and reaped many rewards, from OS revenues to being the top office application provider. Apple is not using this strategy and Google is. This explains why Android, in a very short time, overtook Apple in mobile phones and by the time next year will have done the same in slates/pads.
It pays to be paranoid, and to be born that way.
September 14, 2010
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America used to beg for immigrants, because the joint was big and there was plenty of room and opportunity to go around.
Kinda like the Android market.
IDC caused Steve Jobs to dance a jig (not a pretty sight) when they predicted that the smart phone market would grow by 55.4% this year, a full 10% more than they had last prognosticated. Steve could hear cash registers ringing at every Apple store with thoughts of iPhones flying out the doors. IDC then caused Jobs to change underpants midday when they also predicted that Android and Windows phones would lead this surge in sales through 2014.
Cachet casts a short shadow.
IDC thinks Android smart phones will comprise nearly 25% of units within two election cycles (and can we just call them ‘phones’ since they will be the market by 2014). Windows phones are estimated to take a relatively paltry 9.8% share, which is vastly superior to their current and enduring abysmal numbers. This future estimate of Windows mobiles also indicates that medicinal marijuana sales are soaring in Framingham.
In the wake of two key competitors rising, IDC also expect Apple to fall, from their relatively lofty 14.7% to a near single-digit stance at 10.9%, just above Microsoft. In short, the market is growing strong and Apple will have a smaller piece of the larger pie. Apple’s unit sales will be up, but their dominance and leadership brand will sink faster than the Sri Lankan navy.
(rounding out the roster, RIM stays steady and Sybian declines though they maintain overall leadership)
One need not ponder long why Android is winning. Like MS-DOS and Windows, Google is making sure that everybody who wants to make a smart phone has a good (enough) operating system and that developers can get started on the cheap. Microsoft made their billions by being ubiquitous and the common technical currency. With no profit motive in the OS itself, Google assures that Android becomes the Windows of smart phones, though without the need to reboot your handset every hour.
Verizon is helping.
Selling handsets is a mixed game, with incestuous finances between manufacturers and carriers. Verizon champions Android not only because being shut out of the iPhone phenomenon left them in a snit, but also because they see opportunities not open to others. Verizon’s app store is an example. Getting iPhone apps involves going through Apple, which for various reasons restricts what is available. It also keeps carriers from making money on apps, which is a lucrative and rapidly growing business. Since Google’s goal is to be ubiquitous, expanding the total app count and perpetual app availability is essential. Thus they don’t care, and possibly even encourage, that other app stores exist (they only created and sold Nexus One handsets to seed the market). Google may some day shutter their Android app store for lack of interest.
There are three interrelated marketing lessons herein.
1) Today’s new and expensive toys becomes the commodity of tomorrow. iPhone features will be in nearly every pocket by 2014, though not iPhones. Attempting to live on mere cachet is, in the long run, impossible and unprofitable.
2) Forcing such commoditization is a way to make big money … tangently. Google doesn’t earn meaningful lucre from Android licensing (it is, after all, a Linux derivative). But they do earn ubiquity and such massive scale of adoption leads toward making money in other ways.
3) Open markets drive commoditization, and thus encouraging people to make the small bucks (app fees) creates a market place that is bigger and more varied than your walled-garden competitors. As Microsoft proved, that strategy makes real money in the long run.
Now, if the analyst at IDC will put down their bongs and put their hands against the wall …
August 10, 2010
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I opened a box of Cracker Jacks and the toy prize was a cell phone.
 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:
- 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).
- When partners have a lock on the end customer, you have to help partners make money.
- 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).
- If the market ain’t broke, break it.
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