Mobile Wars! Apple vs. Google vs. Those Other GuysBy
It's been a big couple of weeks in mobile. Verizon Wireless finally got the iPhone. Hewlett-Packard (HPQ) unveiled the first fruits of its Palm purchase last year. Nokia (NOK), the world's biggest handset maker, abandoned its once-dominant Symbian mobile software system and demoted itself to a kind of glorified contract manufacturer of Microsoft (MSFT)-powered devices.
The struggle for mobile dominance has entered a new phase. Why would Nokia throw out Symbian, with its 37 percent market share, in favor of software with less than one-seventh of that? Because recently hired Chief Executive Officer Stephen Elop is convinced that Microsoft has better odds of going up against the four other mobile powers—Apple (AAPL), Google (GOOG), Research In Motion (RIMM), and HP—and making its new Windows Phone 7 software a center of gravity for the world's programmers, manufacturers, and consumers. "The game has changed from a battle of devices to a war of ecosystems," Elop told investors at a London press conference on Feb. 11.
Actually, it's the same game that created the most valuable franchises in tech history, from IBM (IBM) to Microsoft to Facebook. All successfully established themselves as "platforms," in which countless entrepreneurs and programmers developed technologies that gave value to customers and profitability to shareholders—sucking oxygen away from rivals all the while. In the 1960s, IBM trounced Sperry and other mainframe makers by creating a soup-to-nuts stack of hardware, software, and services. In PCs, Microsoft erased Apple's early lead by signing up hardware makers to create cheap machines, and software companies to develop Windows versions of everything from word processors to Tetris. Facebook vanquished social networks such as MySpace (NWS) by repositioning itself as a platform—a decision that led to the creation of gamemaker Zynga and other app companies that keep Facebook's 500 million users hanging around.
What's different this time is scale. "Mobile is the biggest platform war ever," says Bill Whyman, an analyst with International Strategy & Investment. More smartphones were sold than PCs in the fourth quarter, and sales should reach $120 billion this year. That doesn't count billions more in mobile services, ads, and e-commerce.
This war will probably last for some time, too. Unlike with PCs, where the unquestioned victor—Microsoft—quickly emerged and enjoyed years of near monopoly, no one has a divine right to dominance in mobile. Microsoft crushed its competition by forcing consumers to make a choice. There were far more software applications for PCs, and most didn't work on Macs. The more Microsoft-powered machines out there, the more people wrote software for them, the more people bought them, and the bigger the whole ecosystem became. Economists have a name for that phenomenon: "network effects."
All cell phones can talk to each other and handle the same websites and e-mail systems, so winning means making products that function more effectively and appealingly. That sums up Apple's success. Steve Jobs figured out long ago that when people spend their own money, they'll pay for something a lot nicer than the unsexy gear the cheapskates in corporate procurement choose. While others competed on price, Apple focused on making its products reliable and easy to use. Once customers buy an iPhone and start investing in iTunes songs and apps, they tend to stick with the ecosystem and keep buying—even though there's no proprietary lock on the proverbial door. Apple's huge sales volume makes carriers and suppliers more likely to agree to its terms. The software that powers everything Apple makes—all variations of the Mac operating system OS X—is as intuitive to developers as Angry Birds is to app shoppers.
The result is economic leverage of staggering power. To create a blockbuster, Apple doesn't need to spend billions on a start-from-scratch moonshot of a development project. It just needs to tweak a previous hit. Take the iPad, which is in many ways a large iPod touch. Apple won't say how much the iPad cost to develop. Consider these numbers, though: In the year ended Sept. 30, during which Apple introduced the iPad and the iPhone 4, the company spent $1.8 billion on research and development. Over the same period, Apple's revenue increased by $22.3 billion. Nokia spent three times as much as Apple on R&D—$5.86 billion—and increased revenue by just $1.5 billion. No wonder that Apple, whose share of total global mobile-phone sales is only 4.2 percent, gets more than half the industry's profits, according to research firm Asymco.
Even Google, Apple's mightiest rival, got only a $5 billion increase in sales on its $3.4 billion R&D budget. It does have plenty to show for its efforts, though: Its Android ecosystem is growing at a blistering pace. In the fourth quarter, according to research firm Canalys, twice as many Android devices shipped as iPhones. "Google is being far more aggressive in building its platform than Microsoft ever was," says Bill Gurley, a partner at Benchmark Capital.
Barring big surprises, the other contenders—RIM, HP, and Microsoft—are in for a slog: too dependent on mobile devices to give up, yet lacking the tools to make much progress. All lost share in 2010 and have orders of magnitude fewer apps available for their devices. RIM still has legions of loyal BlackBerry fans, though developers routinely complain it's more difficult to create apps that run on those devices; that would help explain why RIM may be working on a technology so its devices can also run Android apps, as Bloomberg News recently reported. HP has the opposite problem: sweet technology and little foundation to build on. The company wowed the standing-room-only crowd that came to its Feb. 9 smartphone and tablet unveiling; attendees oohed when former Palm CEO Jon Rubinstein showed how to move a song or contact between phone and tablet just by tapping on the glass. Still, HP has spent years being a member of ecosystems—in particular, Microsoft's—rather than building its own.
Then there's Microsoft, a company that knows from platform wars. Millions of Nokia handsets will someday come with Windows Phone 7, the first model perhaps by the end of this year. Windows Phone 7 wins nods of approval from techies around Silicon Valley. Yet in a poll of developers by brokerage Sanford C. Bernstein (AB), not one named it as their first or even second priority. Nor are the carriers quivering with excitement. "I do want a third strong OS out there," Verizon Communications (VZ) Chief Technology Officer Anthony Melone recently told CNET. "But I still have doubts whether Microsoft will get the traction they are hoping for with Windows Phone 7."
The best hope for the mobile also-rans is that Apple and Google get greedy. On Feb. 15, Apple announced a subscription service that could force companies with hit apps, such as Rhapsody's music-streaming service, to share some of their revenue with Apple. The same day, Vodafone (VOD) CEO Vittorio Colao complained that Apple and Google needed to absorb some of the massive bandwidth costs required to handle all those iTunes downloads and YouTube clips.
Even with a little overreaching, though, Apple and Google will be hard to beat. And it's not just they, says International Strategy & Investment's Whyman. "It's the whole ecosystem. You're competing with all the companies who have a vested interest in those platforms."
The bottom line: Apple and Google dominate mobile. The other big players—HP, Microsoft, and RIM—will have a hard time catching up.