Analyst Angle: The dark side of the open OS handset trend

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
The migration to mobile messaging and data was the story of the first half of the decade. The story of the second half of the decade is the paradigm shift to open OS handsets. Granted, paradigm shift is an overused word, but the OS migration justifies the significance of the term. The massive influx of and impacts by open OS handsets seem to permeate the wireless industry news channels.
In December of 2007, MultiMedia Intelligence predicted that “2008 will see heightened battle for control of the platforms and business models,” and the handset as a platform would be the biggest macro trend of 2008. It seems apparent that we were right on the money with those calls. One only needs to examine the iPhone, the Samsung Instinct, the BlackBerry Storm, the G1, and the other iPhone killers on the market to see that the market momentum is undeniable.
The phones themselves are not only cool, but the flood of applications being written and delivered to the devices are cool, plentiful, fun, and in some cases, productive. The iPhone App Store, for example, recently accepted its 10,000th application and provided 300 million downloads. Some of the top applications include Pandora Radio, Facebook, and more games than one can imagine. My personal favorite is Pocket Guitar, which turns your iPhone into a virtual guitar. (My wife, however, is far less pleased with that app.) We have clearly just seen the tip of the iceberg when it comes to potential of third-party applications.
Changes in the market creates winners and losers
However, the paradigm shift is not necessarily good for all. We are seeing a shift in it the control of the platform; a change in the creation of the value add.
The paradigm shift is resulting in a repeat of 1984, not as in George Orwell’s famous novel, but rather the last great platform fight – the PC. In the PC platform fight, new entrants, seemingly harmless and insignificant, wrestled control of the platform and the ecosystem away from IBM, the “undefeatable giant.” Players such a Microsoft and Google grabbed control of the device; IBM was relegated to an assembler of parts and eventually divested the business. This time, however, there are a host of more mature adversaries battling for control of the platform, each with unique motivations. The combatants can be defined into 4 camps:
1. The incumbent – Nokia
Nokia recently acquired the remaining shares of Symbian, the world’s most dominant smartphone platform, in terms of installed base. The asset will be turned over to the Symbian Foundation, a nonprofit whose sole goal will be the advancement of the Symbian platform in its many flavors. Motorola and Sony Ericsson have signed up to contribute UIQ assets, while NTT DoCoMo (which uses Symbian-based wares in a number of its phones) will be donating code as well. Motorola’s long term involvement is likely in question as it resolves it strategic direction.
The “openness” of the Symbian Foundation is a colorful topic of debate. However, it seems clear that Nokia is striving to retain control of the handset platform and not be relegated to an assembler of components. Further, with handset operators also increasing their direct content and services initiatives, they too are on a path to provide services and content “over the top” of mobile operators.
2. The hardware insurgents – Apple, RIM
These companies look to combine compelling hardware with supporting “ecosystem” solutions. Their motivation is to reap hardware and services revenue. Clearly, both companies are hardware companies, looking to sell as many hardware devices as possible with strong margins. However, each has also made impressive forays to grab services revenue from the broader mobile marketplace.
3. The software guy – Microsoft
Microsoft is looking to extend its operating system expertise to the handset. It is looking to enhance the capabilities of the handset to run productivity and entertainment applications natively on the devices. Essentially, the handset is another computing device.
Control of the handset provides royalty revenues for the OS and an available market for its productivity applications. As mobility pervades computing, handset success can also be a defensive strategy.
4. The Internet up-start -Google
Google had created an open-source platform for handsets. Leveraging much of the work that was done in Linux, the Internet search giant is looking to create a community of developers and create a level playing field for third parties looking to provide content, services and applications to the handset.
Google is looking to create open Internet access to the handset. Essentially, handsets are another Internet client device to which it can deliver content and services, monetized by advertising and with minimal operator intervention. It wants to replicate the current PC broadband model to handsets and usurp the current role of the operator.
What does the platform battle mean to the existing mobile community
Clearly, it is easy to see that the value of handset will be increasingly determined by software, rather than the hardware. We have seen some truly innovative implementations over the last 18 months. We have also seen that competitive advantages created by innovations are short lived as competitors are quick to imitate and emulate successes. Just ask Danger and Apple; they have seen their share of “killer” devices.
So what happens to mobile handset providers when the functional of the phone is defined by a third party, open OS? The nature of competition moves from features to cost. The result is that margins begin getting squeezed and competitive advantage is determined by those with the lowest cost manufacturing. As the market makes the transition to cost based competition, the process is never pleasant.
The battle for the platform is an enormous threat to the existing business models of the rest of the mobile community. New competitors battling for platform control do not need to worry directly about network infrastructure or compatibility impacts. Internet issues such as spam, viruses and person-to-person file sharing could have massive ramifications for existing mobile operators. The impact of offloading data traffic from 3G networks to Wi-Fi networks on mobile data revenues is of little concern to the new providers. The new breed of platform combatants seems to have a mobile manifest destiny, looking to capture not only platform control but also the service and content revenue.
Questions or comments about this column? Contact Frank at [email protected] or contact RCR Wireless News at [email protected].