20-10-2012, 04:24 PM
Structuring the Smartphone Industry
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INTRODUCTION
The convergence of mobile telephony, Internet services, and personal computing devic-es is resulting in the emergence of a “mobile Internet” (Ishii 2004; Funk 2001). The key devices for accessing the mobile Internet—currently dubbed “smartphones”—are pow-erful new computing devices offering traditional wireless voice service as well as native software applications and, perhaps most importantly, the ability to connect to and run a myriad of Internet-based services including email, geo-location, streaming video, and social networking, while providing a good user experience. The business opportunities presented by this new category have attracted many of the major global information and communications technology (ICT) firms, including firms from the mobile telephony, personal computer, Internet, and personal digital assistant (PDA) industries, into a complex new landscape of competition. For many of these firms, capturing a portion of the total value created by the smartphone industry is believed to be a key to future growth and profits.
The interest is understandable. Today more than 1.3 billion mobile phone handsets are being sold annually, and in 2010 smartphones made up almost 20% of that total (Gart-ner, 2010; Ahonen, 2010). Sales of smartphones are increasing almost 100% per year, and total global sales volume is expected to surpass that of PCs by 2012 (Gartner, 2010). By collapsing the boundaries between previously distinct devices, smartphones are sub-suming sales of mobile phones entirely and, increasingly, netbook and notebook PCs. To complicate the landscape, the smartphone is not the only device at stake, tablets and ebook readers are emerging as key components of the mobile universe. Across all devic-es, total mobile revenues—including advertising, subscriptions, handsets, applications, and so on—are forecast to surpass $1 trillion by 2014 (Gartner, 2010). Given the rate at which smartphone are penetrating the market and component prices are declining by 2015 there will be, at least, 2 billion smart mobile devices in use globally.
PLATFORMS AND INDUSTRY ARCHITECTURE
In the early platform literature, the platform was seen as a base architecture for product de-velopment, with standard components that could be built upon (Cusumano and Suarez, 2008). More recent research, especially on today’s complex ICT industries, has argued that a platform is not solely a technology, but also the outcome of a set of business behaviors and relationships between actors in an ecosystem. This ecosystem for modern high-tech plat-forms is characterized as having high levels of interdependence between actors, as well as high potential for innovation by each actor (Gawer and Cusumano 2002; 2008; Gawer 2009). As a result, even those firms with clear market dominance in one area—e.g., Nokia with handsets—are dependent on the innovation of complementary firms to maintain their lead-ership position. Hardware firms and software firms rely on each other to push technology forward. Even Apple and its relatively closed iOS depends upon thousands of application developers to continue to create desirable apps for end-users; those developers that create iPhone apps have bet on the iOS platform’s success and must rely on Apple to maintain and update their access to its operating system for ongoing development. In this system the in-terdependence is not limited to the transactional, supply-chain flow of typical goods and services, but is also based on the strategic exchange and integration of innovation among primary firms and their complementors to advance the platform (Tee and Gawer, 2009).
The platform owner usually has intellectual property rights to use as leverage over those building applications upon the platform. Depending upon the robustness of rights, this means that the platform owner may be able to appropriate some of the value created by the applications built by platform users—indeed, the platform owner may depend on such val-ue-creation by complements. The platform owner may also use its power asymmetry to stimulate competition among complementary firms providing the same service, which can lower its costs and further fortify its position (Tee and Gawer, 2009).
Customer Lock-in
Platform strategies often include, or are even predicated upon, “locking in” more than one layer of the stack through switching costs or other market barriers (See Figure 1). For exam-ple, though most persons attribute Microsoft’s dominance to its control of the Window’s OS, equally, or perhaps more important, is the Microsoft Office productivity suite, which is the consumers’ connection to Microsoft and is likely more important for the mindshare lock-in than the desirability of Windows. With smartphones, lock-in and switching costs depend on the industry architecture for that specific market. For example, in the U.S., with its subscrip-tion-based plans, customer switching costs are high due to contracts (typically 1-2 years with early termination fees) and incompatible network technologies (e.g., CDMA and GSM). Re-searchers have estimated these customer switching costs in the U.S. to be $230 (Cullen and Shcherbakov, 2010).
Industry Architecture
Switching costs and lock-in strategies in the smartphone industry will depend in part on what has been called the industry architecture. Jacobides’ (2006) concept of industry archi-tecture is based upon identifying the different roles played by firms in an industry, and how those roles allocate the division of labor and share of the total value generated. The rules governing who does what, and how firms collaborate, can be “designed” in the sense that they come from regulation, standards, and so on, or “emergent” in that they evolve from so-cial and economic norms (Jacobides, 2006). As Tee and Gawer (2009) showed in their case study of the Japanese cell phone system i-mode, these architectures can be important deter-minants of how firms are able to establish and promote platforms, as they provide the back-ground structure to the platform ecosystem.
The United States, with its large smartphone market, has an industry architecture that is im-portant to consider. For example, the network carriers in the U.S. play a prominent role in everything from customer engagement to handset development. In Jacobides’ language, there are designed factors (e.g., multiple incompatible network standards, primarily GSM and CDMA) and emergent factors (culture of subscription-based usage plans), both of which increase switching costs and lock-in customers, that contribute to this. Carriers such as Veri-zon and AT&T not only operate the network, but also sell handsets and provide content, in essence vying to be a one-stop shop for end-users in their mobile experience. The degree to which handset manufacturers must work with the carriers is reflected in the pricing for smartphones in the U.S.—typically $200 or less if the customer signs up for a 1- or 2-year contract, a fraction of the full retail price. This subsidization of the purchase price, which the carrier earns back through monthly subscription revenue, creates a very high barrier to entry for independent retailers or handset manufacturers wanting to sell standalone smartphones direct to customers.1