Smartphone (Apple vs Google): And the Winner is...

So the new iPhone 5 is out. Despite its less satisfying native maps application (and uncharacteristic apologies from Tim Cook), the review and reception have been stellar and is now widely claimed as the best smartphone in the industry. Apple had made a strategic decision to enter the smartphones industry with the debut of iphone, in a market where incumbents such as RIM with a popular Blackberry line for largely enterprise users claimed the interim victor of the then nascent smartphone market. The advent of smartphone, while initially seemed like a natural evolution from past basic and feature phones drastically changed the landscape of the digital world. Smartphone is not an extension of a phone, but an evolution of netbook with the addition of phone function that puts a small computing device, web-connected, no less in many pockets. With the help of applications, this makes web and connectivity ever more important in our daily lives and forces traditional industries to adapt to the changing behaviour of the consumers and enterprises.

Traditional retailers should be ready to combat Amazon and its price comparison function, which make retailers compete on something more such as services, ambience, etc. than just the price tag. Intermediaries industries, as I call it, includes industries such as real estate and travel, and are subject to large scaled disruption in their business model when the access to information becomes no further than one’s pocket. The advent of smartphones will disrupt many industries – a concept well summarized by Joe Kraus, a partner at Google Ventures. Kraus predicts that “in five to 10 years, your smartphone will replace your car,” implying smartphone’s deep impact on change in consumer behaviour. Companies such as Uber is already hard at work to make his prediction a near term reality.

So who is winning the battle to dominate the smartphone market? The popular answer would be Apple with its invincible iphone series, and I don’t disagree. However, in the long run, because smartphones market is too broad and important of a market to miss out on, intense and bloody competition to gain a foothold will likely to ensue, and despite its track record, there is no guarantee that Apple will continue to stay on top. Google for one has created a mobile OS that makes it the most formidable competitor in the smartphones industry. And despite my respect for Apple’s ecosystem, I am believer of a more open system and that in the end, large numbers have a good chance to prevail. If Google can maintain the minimum interoperability of the Android system, (which may not be the case already) Android could become the most powerful competition to Apple.

Are tablets just larger smartphones? While the technology behind them is similar, they belong in two categories serving different purposes. Tablets, with larger screen allows for a much smoother execution of productivity applications and for reading/viewing contents.  Therefore, tablets are functionally closer to notebooks and computers than smartphones. Again, Apple was the innovator in this product category by virtually creating it by introducing the iPad. While some maintain a view that iPad is just a larger iPhone and that it is really a “toy”, iPad enabled a unique medium for content consumption as well as creation and further decreased the necessity of a desktop or notebook computer. Understanding the implication of a new product category and its potential, many companies including HP and Dell are jumping into the tablets business, with minimal foothold. Despite intensifying competition, I believe that the winner in the tablet market will continue to be Apple thanks to its robust ecosystem that supports numerous developers and content creators. 

Can Microsoft re-Surface?

Just a couple weeks ago, something that was believed to be true for a while has surfaced with Google’s chairman Eric Schmidt quite publicly dismissing Microsoft as a well-run, but irrelevant company. In his view, there is a “gang of four” technology platform leaders – Google, Apple, Amazon and Facebook. While I largely agree with Eric Schmidt’s view, I am reluctant to just write Microsoft off. Yes, Apple has its formidable ecosystem, or “walled garden”, Google owns search and Android market, Amazon owns digital market and Facebook owns one’s digital identity. But what about those millions of PCs installed and running Windows at the enterprise level? It’s not necessarily true that corporate America has been migrating to Apple’s ecosystem for its everyday use. Although that day may come where macs are in the office and syncs with iPad seamlessly (which would be cool), for a foreseeable future, Microsoft’s core products are intact. But it is in decline.

This year has been very important for Microsoft. It is releasing Surface, Windows 8 and trying to revive its weak mobile presence with its partnership with Nokia. In my view, MS is betting on two things; that consumers would want to interact with all their devices, include PC to run on a same OS and that Windows 8 will be success. And if either of these go wrong, I think Eric Schmidt will be proven correct. As argued in the last article, I believe that MS is trying to build its own ecosystem with Windows 8 in the center and success or failure and how customers accept Windows 8 will be critical to MS’ future. If things go well, it could be that MS can take some share away from Apple in terms of PC and OS sales growth, mobile and tablets ecosystem and become a legitimate fifth member of the gang. If things turn south, MS will have an unsuccessful OS (without much backup other than putting together another version) on its hands with tablets that don’t sell and very weak mobile presence with small appstore.

Current state of affairs seems to be pointing closer to south. Various reports suggests that Surface pre-orders has sold out (but the actual demand has not been released) and that close to 10,000 apps are ready to go for the Windows 8 phones and tablets with 500 apps being added a day for two days prior to launch (but didn’t reach MS’ goal of 10,000 apps by launch date). Despite MS’ effort, it is still much behind its competition. iPad users have about 700,000 iOS apps in the App store with 250,00 of them written specifically for the iPad and there is currently over 550,000 Android apps available, with more than 20,000 being added daily. So where does this leave MS?  

MS is unlikely to be a completely irrelevant company when it comes to enterprise customers and its continuing dominance in the world of PC. And its current efforts are likely to result in MS remaining a name to be at least concerned with for the other four tech giants. However, without a significant breakthrough and innovation in any particular part of the ecosystem (perhaps X Box has the best chance? Not sure if returning to keyboard style tablet is a ground-breaking innovation that will won over consumers) MS is likely to become a diminished giant whose name was once feared when its dominance manifested in phrases such as “Minding Your Microsoft Manners”. I personally don’t believe that the gang of four are particularly mindful of Microsoft manners in these days.

On Vertical Integration of Tech Giants

 Apple is generally believed to be the first tech giant to really understand the value of vertical integration, by maintaining control tight control over hardware, software and online stores and more. iPod’s system, especially is heralded as the poster child of such idea, which includes the online iTunes music store, iTunes software on PCs and iPod hardware, creating a powerful ecosystem that helped Apply handily beat competitors such as Creative Labs and Microsoft’s Zune. It seems like many of Apple’s competitors are embracing its vertical integration approach. Microsoft is rumored to be making its own phone hardware, despite its partnership with Nokia, Samsung has always been a manufacturer of chips as well as hardware and there is a recent news that Amazon is in advanced negotiation to buy Texas Instruments’ smartphone and tablet oriented OMAP chips, which happens to power Kindle’s competitor Nook.

I believe that there are some clear advantages to vertical integration. First is the company’s ability to control costs. By being in firm control of the costs and design of key component such as chip technology, it gives cost advantages to the company employing vertical integration. Secondly, vertical integration gives the company freedom from being tied to key suppliers of such key component, resulting in greater negotiating power. Lastly, it gives the company ability to create an ecosystem where it can directly control the user experience within the network. iPhone’s seamless integration with Mac family, iPad, iTunes and iTunes stores is a great example of a closed ecosystem with wonderful user experience that creates brand loyalty and a moat around its business.

Obviously, there are costs associated with pursuing vertical integration, which is why many tech giants stayed out of it. One of the downside is the lower motivation for excellence in quality as sales is pretty much guaranteed. Apple steered away from this by outsourcing aspects of hardware production to companies such as HonHai and Samsung and creating a strict bar for quality. Another cost is the increased complexity in coordinating different activities to create a seamless experience for the end user. The opportunity cost should also be considered. If you are excellent in certain channel (online sales or Kindle software for Amazon’s example), should you go into direct publishing or chip manufacturing? Either you can license your technology for a much wider audience or you lose efficiency or corporate focus by expanding vertically where you didn’t have core competency to begin with.  

Current trend seems to suggest that several tech giants believe that Apple’s vertical integration model was correct and that they can execute as well as Apple. Another recent example is Microsoft’s effort to utilize its existing user base (Windows Phone, Windows 8 Tablets, PCs) to create a music network and thus an ecosystem away from Apple’s iTune by introducing xBox Music. Kindle’s business model of not making profit off hardware (as widely reported and confirmed by Jeff Bezos) and instead aiming to profit in content and online marketplace, especially in books, is another effort to create an ecosystem by being a provider of both hardware and software. Buying Texas Instrument’s smartphone and tablet chip business could certainly make Kindle hardware business into a profit generating proposition in its own right, which might explain why Amazon is interested in such a deal, especially given Amazon’s scale at this point. I believe that with the right scale, strategic goals and ability to coordinate the operation internally, vertical integration and creating a defensible ecosystem could be a winning strategy. Without such focus and determination, however, vertical integration could well be not much more than an amalgamation of businesses that you didn’t really need to own to “kill it” in the industry.

Continued Explosion of Mobile, Mobile, Mobile

At the risk of repeating what many believe, mobile is likely to be new battle field of the internet giants. The key advantages of mobile seem to twofold: the reach and frequency. Although not everyone, especially in developing countries, will not have personal computers or laptops, most you see in developed or developing countries have or have access to mobile phones. The sheer number of population reachable by mobile phones is greater than that reachable by PC, in an aptly named post-PC era. The frequency (or intimacy) of using mobile to access internet is also the reason why mobile remains very attractive. After all, mobile phone is almost always with you. I believe that mobile will be the platform of choice for the generation to come for accessing information and staying connected to the increasingly digital world.

In the battle for mobile, for hardware and software, I believe that the market will not be a winner takes all, but rather a fragmented one with a handful of significant players such as Apple and Google retaining a strong grip while other players such as Microsoft, Nokia and Samsung make up the rest. I also believe that Facebook would have a meaningful role in the mobile era (and Mark Zuckeberg apparently typed the entire letter to shareholders in preparation of Facebook's IPO on his phone), and benefit from the secular trend towards mobile.

Apple, with its vertical integration, loyal customer base from invention of the first great smart phone, app store and strong Apple ecosystem will likely to continue its dominance in the mobile industry. Its advantages allow it to retain a greater profitability profile than its competitors and its most recent iphone 5 release seems to be on the way to break its preceding records after being hailed as the best smartphone ever by several critics. The challenges from Samsung in putting forth Galaxy series as strong competition to iphone has somewhat been thwarted by Apple's successful litigation against Samsung. However the future of this competition (i.e., iphone vs Galaxy) will be worth watching for some time to come.

Google, with its free Android platform offered to phone manufacturers, will likely to continue its strengths in the mobile OS segment. I believe that Google's free offering and strong developers network will continue to eat away Symbian's established subscriber base as more and more feature phones are converted to smart(er) phones. Nokia's Symbian plan to open it may decelerate the power shift in, but I believe that Nokia woke up to the game too late and that it will struggle to retain its leading market share of Symbian base users.

Similarly, I believe that Microsoft is too late to the game (their Windows 8 phone is slated to be released by end of 2012, five years later than iphone's first release) to materially shift the power balance of the mobile landscape. Alongside with Nokia, it will retain some share of the market, but will not be the leaders or standard setters in the field. I view RIM, the maker the blackberry, to be in a significant danger, and believe that they will only retain a small percentage of the market by holding on the its enterprise niche, where its security and keyboard typing can serve as strengths. Even such strengths will need to be carefully guarded and developed as a killer security application that makes other devices just as secure and easy for the corporate network may become its final blow.

While traveling in developing countries, I noticed that many on the street/restaurants continued to use feature phones made by Nokia (or Samsung/LG) and that the deployment of smartphones were far from being mature. Whether the end user chooses iphone, android ran phones or Nokia, many will convert to smart phones in the next couple of years and the internet giant with the most to provide (iphone and android phones in my rather US centric view) and the market for the mobile will only get bigger.

One anecdote: I remember the days when I lived in Korea that no phone other than Samsung was even worth considering. iphone changes all that and it is interesting for me to see more people outside of Korea adopting Samsung readily as Apple eats away at Samsung's once super loyal customer base in Korea...

A Disgruntled Nod to Facebook

The notion of social or social network did not begin with Facebook. It in fact existed for a while, with the likes of Myspace, Friendster or Cyworld, a once sensational destination for Koreans. I believe that the difference was eventually in the sheer number of members that started an irreversible and impenetrable network effect as well as the emergence of the notion that many eyeballs or members (say more than a billion people!) were enough to create a sustainable business on the basis of advertisement serving model. I also believe that Facebook has intentionally or accidentally employed a brilliant marketing and expansion campaign that made prospective members want to join due to the initial aura of exclusivity. As one might have guessed, I am not a fan of Facebook. Such emotions notwithstanding, I am a member of Facebook, have been since the first year of its emergence, and log in at least once a day.

Most of the school activities and updates revolve around social network and in the fear of missing out and in my effort to remain “social”, I stay on the network, which represents perfectly the power of its network effect. When everyone else is on it, you cannot afford to ignore it. I do acknowledge its benefits – easier communication with various friends and maintenance of friendship in the era of internet and mobile. The downside, at least for me, is the lack of privacy and intimacy (call me analog) as well as the uncontrollable desire to window dress yourself online and compare oneself with hundreds of updates from friends a day. The power of network, however, is a difficult one to resist. Based on such premise, Facebook has emerged as a winner, boasting close to a billion users and the private and public market assigned a rich valuation to social network giant assuming that it will produce extraordinary revenue based on its user base.

Although it has failed to reach its commerce potential of Facebook (known as f-commerce) by some account, Facebook has produced respectable revenue based on its advertisement serving, and noticing such developments, other internet giants such as Google jumped in the business of social with Google +, hoping to chip away at Facebook’s existing user base. It has garnered a moderate success in my view with some hundreds of millions user base, however, the majority views Google + as a weak competitor to Facebook. So where does the future of Social lie? There are many companies working on the contingent land of social, such as social gaming (e.g., Zynga), social discovery, Social-Local-Mobile, as well as a more professional version of social (e.g., Linked In). Many of these services are built on top of Facebook and this Facebook’s ecosystem will make Facebook a more difficult company to beat for Google + or any future competition. I believe due to such strong network effect, Facebook’s domination will continue to hold up in the social industry for the next 2-3 years.

In terms of f-commerce, I believe that the efficacy of various ads, whether mobile or web-based will be in question by the advertisers/brands as the reason for people going on the social network tends to be different from going to Google to search for something. People going on the network to check their friend’s new relationship status is less interested in clicking on an ad than someone who is searching for “best socks for men” on Google. Facebook or any other social networks will have to search hard for viable and attractive revenue streams (and Facebook is doing exactly such searching – almost on a daily basis) and at the end, it is difficult to predict whether Facebook will continue to grow at a breakneck pace in 2-3 years, due to Facebook fatigue and its coolness status as the presence of advertisers and brands becomes stronger on Facebook.

It is suffice to say that Facebook, despite its strengths and weaknesses, has certainly changed how the world communicates and connects and its influence will be felt through a decade to come. And although there is a possibility of its valuation level being reduced to correct for grand expectations and users looking for the next cool thing, thanks to its gigantic and active user base, the network effect it creates, and multitudes of platforms built on top of it, Facebook will most likely remain as the victor of the battle for social for some years to come.

Where is Search Going?

Google’s mission is to “organize the world’s information and make it universally accessible and useful”. In the era of exploding digital content and incredible amount of information made accessible by the World Wide Web, Google’s mission summarizes why the “search” is so valuable. The amount of data is only as valuable as the access to it. And while the business of search was not understood well by most tech giants at its infancy, as good search translated into less time on the portal, Google’s business model, adopted and refined from Overture has proved that the business of search can be immensely profitable by bringing in advertisement into the equation. Such important, yet profitable business obviously attracted intense competition – including efforts from Microsoft and Yahoo. Judging from recent comments by Mark Zuckerburg, it seems like Facebook is also planning to expand into search business. This obviously excited investors of the social network as this represents an entire new business for Facebook. It is also interesting as Facebook’s search will likely to be differentiated from Google by adding social aspects to it (e.g., instead of searching for sushi restaurants in the neighbourhood, one might search the restaurants that friends have been to and “liked”).

What does all of this mean for the battle for search? I believe that baring extraordinarily inventions or functions by Microsoft or Yahoo, catching up with Google in the business of search would be difficult. A generation of people are wired to opening up Google for active search and it would require quite an innovation or social engineering to change such behaviour. The exception is Facebook (and Apple to some extent), which has the social angle and could steal some user mindshare away from Google, and its partnership with Microsoft’s Bing may prove that a more social-aware search is the next big thing in the current social era. However, as the search business is largely supported by ad dollars, the money will likely flow to the most effective place or where people go to for information. This remains a search tool instead of a social network and likely to stay that way – so I believe that Google, with its current services and on-going innovation such as Google Glass, will maintain its leadership in search.

Having said that, I do believe that the future of search is far from certain and I believe in two big trends. We perform search for information, but we also like simplicity. Google or Bing + Facebook’s search will likely continue to offer options after options based on your keywords inputted. Eventually, however, there will be a shift to a more one shot, one kill approach – that is, you will get one exact answer for what you are looking for. Apple’s Siri is a good example for what may come in the future. When you “ask” Siri, you get one most relevant answer instead of pages of website, advertisements and irrelevant information. On that note, the second trend I believe in is the innovation in the way we perform search, regardless of which company or engine is behind it. Again Siri is a good example, as we can speak to Siri through iphone to perform a search. Google Glass, can also serve for search engines when you look at objects, shops, merchandise, etc. In the end, I believe that the battle for search is hardly over. There are still much innovation and developments to come and it will continue to change the way to look for and consume information.