Recent news has, as often is the case, interjected itself into our research and analysis: Nokia and Microsoft’s announced partnership changes the trajectory for both company’s developments in OS environments and the devices that run them.  Work on this article We preceded the news.  Rather than do a complete re-write, we thought it would instructional to keep the bulk intact and follow with an update.

We recently participated in discussions regarding handset suppliers’ choices for operating systems, with a focus on emerging market suppliers in India.  Mohit Agrawal, Senior Manager, Nokia, and a veteran industry analyst centered in New Delhi, points out that handset vendors have reasons to consider that weigh against adoption of Android:

1. Commoditization – “Vendors who adopt Android find it very hard to differentiate themselves from other vendors using Android,” said Agrawal. This also can be said for adoption of any open OS, part of the attraction of which is being outside the majority control by a single handset supplier.

2. Shorter Life Cycle – According to Agrawal, “due to waning differentiation, the product life cycle gets shortened for Android based handset vendors. Imagine a situation where HTC launches an Android based phone with certain features and within a month Motorola launches a better looking phone with similar or better features on Android.” 

Perhaps the pace of cyclical innovations of handset features and applications will moderate to a less stressful level that allows a longer period to recoup investments. However, we think that the industry is experiencing something akin to the early days of the PC revolution, during which much innovation and change occurred. Competition among open, contributory OS and hardware developments is fueling a more rapid rate of product design cycle turnover. It is unreasonable to resist this because it is driven by market demand – there is no way to divert the market other than to deny the pace and fall behind on innovations that will occur regardless. That alternative leaves competition primarily to price.

3. Low Retention – Agrawal argues that all suppliers offer a similar experience due to the use of the same OS environment. “There would be no barrier for a consumer to shift from Samsung to a little known Chinese vendor, as the functionality and experience is likely to be the same.” This is a further reason the market has shifted to an emphasis on rapid pace of innovation: it may appear undesirable but it is the current structure into which the device market has evolved.

4. Services and Applications – Agrawal argues that vendors with their own rich service portfolios should not adopt Android because “Google provides and control most of the services like messaging, navigation etc. on any Android device.” Nokia has invested broadly in BPS/mapping, LBS, mobile payment systems, etc., and must now stand these up on a competitive basis against all competitors including those running on Apple iPhone and Android.

The introduction of the Apple iPhone changed the focus of handsets from device design with tightly controlled/walled applications to the choice of open applications and related services environments. Apple obviously will stay with their proprietary device OS/open developer environment, consistent with their long history of PC world developments. The problem for all other handset suppliers, including mobile industry leaders Nokia, Motorola, and Samsung, has been the challenge of paring the phone, pad or other mobile device with a competitive software environment that provides the needed benefits of rapid innovation, low barriers and cost, and an even playing field for competition.

The lead that companies once had in not-so-smart SmartPhones has proven inadequate to compete with Apple. Samsung and Nokia’s efforts to compete with their own open development environments have largely fizzled. The development of software environments has moved beyond efforts that can be undertaken by Nokia-Intel (Meego), Samsung or Motorola; market momentum has been overtaken and the acceleration in developments has become a ramping juggernaut.

The software environment is highly leveraged by the multitude of hardware and software developers that compete in the space. While committed to their own efforts to develop programs and devices, they contribute to open development, market awareness and sales momentum that no single company is capable of developing.

This is a similar problem for Microsoft Windows Mobile 7: many reviews say the software has several strong points, user surveys show a 44% favorable level of satisfaction, response by MS Mobile 7 users. The integration with MS Office and server software that is still widely used pleases many in government and corporate settings. Nonetheless, the expectation of most analysts is for Microsoft to do no better than continue to hold onto a small percentage of the handset OS marketshare. Meanwhile, their mobile search and portal efforts fare even worse than in the wired world.

The choice is often not whether handset suppliers will use Android, but if they will use it exclusively. Our studies show devices’ wide range of ability for suppliers to enhance beyond the baseline of the Google OS. Indeed, the ‘Apple factor,’ if boiled down, is to deliver a high level of finesse that goes beyond what Google delivers as the foundational applications. Supplying this requires a deep level of understanding about how to make the device supplier security features, hosted services, interworking between apps and hardware drivers, component choices and device features, innovation in size and adapters, and all other segments of design. This level of attention to finesse can achieve the difference between just having good technical specifications and the “now that’s cool!” wow factor balance between ease of use and functionality. How do suppliers know they have achieved it? Of course sales and margins determine financial success, but before that the difference between any old app or device and an app or device that will end up selling is the extra effort that results in “I know it when I see it” quality. 

Recent surveys reflect Android’s gains in market share that stem partly from previous user satisfaction.

Source: Zokem #

Standing out from the most recent surveys of consumer intent for repurchase is the high level of intent by owners of Google Android to repurchase Android, 89%, or purchase an Apple iPhone, 11%. This figure is skewed by the high degree of Android ownership in North America. However, the phenomenon of high growth in WebPhones has been led by just a few markets and is rapidly spreading. Furthermore, we believe that Android will experience very rapid growth in emerging markets due to the commitments for device development and prospects for reaching lower price points than the iPhone. This is already a factor in the numbers of Android vs. iPad notepad sales in China and other Asian markets outside of Japan. While Android is open to be used in both good and faulty device implementations, the open nature of the supply chain has led to rapid adoption in price sensitive markets. 

Meanwhile, 92% of Symbian S60 device users express an interest to shift to iPhone (33%), Windows Mobile (25%) or Android (25%). We are surprised by the showing for Windows Mobile and low percentage for Symbian among its users. These numbers should be considered to be transitional and only rough yardsticks. However, the trends of this survey generally fit with what might be expected from recent share gains and similar survey trends.  

An Example that Helps Quantify Androids Success

The HTC Desire HD is expected to be introduced into India next week. A glance at HTC website product information reveals the rapid pace of advances. We think HTC is likely to be met with success, gaining market share on Nokia and Samsung if the pricing is competitive.

What stands out noticeably is a lack of emphasis on Google Android, which is mentioned as the OS on the specifications page but not nearly as strongly as in the past. When HTC and Motorola first entered the market with Android devices, emphasis on Google brand names was more directly needed as a wedge to enter the WebPhone market and establish brand recognition against Apple’s iPhone. Motorola’s ‘DROID’ branding reflected their stronger brand equity position in the nascent WebPhone market. HTC still lags in recognition in many markets compared to Nokia, Motorola and Samsung. However, what drives markets has increasingly become what you do with the devices, which hinges on apps, cameras, screens, etc., and not the OS explicitly.  

HTC is gaining market share because they are coming out with a rapid succession of improved devices. If they were not upping the ante in processing speed, GPS signal acquisition, screen resolution and acuity, front and back facing high revolution cameras, agility of the touch-screen, and integration finesse, HTC would quickly fall behind in the ongoing race for market share. The way vendors must differentiate themselves appears in how well they make all of the above features of hardware and software work well together without the user having to serve as the debugging guinea pigs, or face more than casual learning curves. 

Samsung, Motorola and HTC are further differentiating their companies and devices through integration with hosted and managed services and extended feature sets. For example, security extends from device to web portals accessed by individuals and managed corporate portals. Google GPS mapping is being extended to LBS in ways that are increasingly seamless between applications. While this capability owes itself to the framework provided by the Google applications environment, how well it is ‘finessed’ to deliver a wow factor is up to the individual supplier.

We are likely to see similar de-emphasis of the Android brand name as suppliers come fully up to speed in adopting it, and that sets the tone for consideration of alternative OS. Apple is unlikely to let their OS slip into open use. Meego and similar efforts seem unlikely to get a jump-start. The decision to go with Android can be less of a conflict if it plays out as the open source OS that does not lock the market into a branding scheme that undermines device suppliers’ own recognition.

Operators are not left out of the equation, but at this point we do not think they can be decisive in terms of choice of OS environment used in devices. Operators have expressed a desire to ‘take back’ control of forces driving device developments through operator branded stores, applications and services. However, outside of individual applications and services these have little chance of coalescing into an ability to take back the environment. At this point the Android and Apple OS have continued to gain downhill momentum such that operators must try to keep up with the rapid pace of innovations. Our reviews of operator applications, stores, the literature surrounding their acceptance, and our own limited survey of users, shows a low level of use and satisfaction with these offerings, with a few rare exceptions. For the most part we think the pace of the race for OS environments and what springs out of them is already engaged: Google and Apple provide the compelling environments. To unseat this will take a monumental and brilliant effort.  

Update:

Nokia’s CEO, Stephen Elop, and Steve Balmer, Microsoft CEO, announced that the two companies will align efforts in operating systems environments, mapping/GPS. The degree of the participation amounts to a restructuring of Nokia and a forced moved by Microsoft to inject the company into the mainstream of mobile and converged ICT/Cloud 4G.  The news hit the financial community, media and blogosphere by storm. To summarize much of the reaction we need look no further than what happened to Nokia’s stock price: NOK (NYSE) was jolted down as the consensus of financial analysts and investors voted a thumbs down.#  Articles in mainstream media were also chagrin: the New York Times characterized the match as, “The alliance is a gamble, perhaps a last-ditch effort for both Nokia and Microsoft to gain a lasting foothold in the booming market…”.#

Our view is that the match makes for a good fit on the basis of leveraging of two awkward, slow industry giants who now find themselves out of step with the meteoric rise of the Web device environment.  

There is a basic miscue. What is changing rapidly is the mode of the business environment that coincides with the structural differences of distributed Internet and applications. The ‘right formulation’ for doing business is not just about putting together the right pieces, but about being structured to be flat and response to the heightened degree of innovations and interactions that are now in the driver’s seat.  The large amounts of capital, or huge armies of developers under their roofs, valuable technologies and manufacturing muscle have a degree of importance. However, as recent history has taught, these can be upset by the ability of the new technology, market evolution and device connectedness to reform modes of business to the flatter, web-centric, simplified open OS environment that the industry now plays within. 

 We had thought that Nokia’s best choice was to embrace the level of innovation needed by embracing both Google and Microsoft OS.  The company found itself in the difficult spot of needing to leverage expensive assets including mapping, while leveraging their still large numbers of handset sales.  The agreement does provide Nokia with billions of dollars US in return for  mapping and other assets, however, these can only be leveraged to the extent that MS Windows Phone 7 is successful.

Nokia and Microsoft will likely have a degree of success in enterprise markets where Microsoft’s office suite reigns supreme and where server products have market leadership.  The problem as we outlined in the section written before the news, is one of their speed of delivering innovations: We have pointed out the slow rate of innovation vulnerabilities of each of these companies separately.  While the proof is up to them, we think that merging of the two slow giants is unlikely to result in a restructuring of the basic problems.  

The reason Google and Apple OS environments are such juggernauts are because they precipitate innovations to occur at a pace that thwarts competition.  The problem for Nokia and Microsoft is that this is due to the flatter, less top-down and faster-paced business climate in which there is little place for applications and content that finds it impossible to compete as independent contributions. The control of apps stores, subscribed content comes only after capturing the volume and momentum of the open environments.  While Microsoft and Nokia retain marketshare segments, these are about to be pressed by that rapid convergence of markets.

MARAVEDIS is a leading analyst firm focusing on 4G and broadband wireless technologies and markets.

Author: Robert Syputa, Partner & Strategic Analyst