Categories

Resetting Motorola

Motorola—like HTC—is thus a bellwether for makers of Android phones, whose sales have now caught up with those of the iPhone—about 300,000 a day worldwide. Some industry analysts doubt that it will be able to create a big market for its devices and make enough profits before cheaper providers move in. If they are right, the smartphone market may eventually become like that for personal computers: a handful of huge competitors with tiny margins. The difference will be that these firms will hail from around the world rather than being mainly American.

via Motorola: Breaking up | The Economist.

When I argued that the meek shall inherit Android, the profitability data was the core evidence. That argument, made in August, was:

So here we have the real challenge to Android:  partnership with defeated incumbents whose ability to build profitable and differentiated products is hamstrung by the licensing model and whose incentives to move up the steep trajectory of necessary improvements are limited.

In other words, Android’s licensees won’t have the profits or the motivation to spend on R&D so as to make exceptionally competitive products at a time when being competitive is what matters most.

The surge in emerging market Android entrants has been the latest setback for branded Android vendors. What should be the long term strategy for companies like Motorola and Samsung?

Paradoxically, Motorola, being the weaker, has the best chance for successful recovery. The clue lies in both what Palm (now HP) and Microsoft did: starting with a clean sheet of paper and building their own platforms.

This might seem futile given the network effects that current platforms are gaining, and there is a big execution risk, but the alternative is no alternative at all. The big incumbents cannot fight against the clone makers.

Technically, building a new platform is not as daunting a challenge as it used to be. Palm, a small company, managed to do it in about 2 years. Microsoft, a large company, took 18 months. Google built theirs in about 2 years.

They all took advantage of existing code bases (Linux or Windows CE). They also rely on web standards for their APIs (.NET or Java or HTML5).

The challenge is bigger in attracting developers, though again, some core set of apps and developers can be obtained on the promise of brand power alone. Intel and Nokia is using this power for MeeGo.

Motorola’s advantage today is its new autonomy and singular focus on mobility. It has hit the reset button. There is no better time to be courageous and there are no sunk costs to confuse investment priorities. Android was a necessary stop-gap measure and the Droid timing was very good (before the clones and before iPhone distribution expanded). However, now would be a good time to start building a Motorola platform for the future.

  • Pingback: Friday links: momentum effects Abnormal Returns

  • timnash

    So much of Motorola's progress in the past year was due to being selected twice as Verizon's Droid supplier. Without those sales how much would Motorola be part of the smartphone conversation?

    As Android moves to what is now the feature phone market, it is difficult to see how Motorola will have the volume sales to compete when it has little presence outside the US. For companies like Samsung and LG, Android is another way to sell their components but while Motorola only offers a different skin its chances of longterm success are slight.

    • r00tabega

      Good point… VZ (and carriers in general) are the invisible elephant in the room when talking about the future of manufacturers who don't control their OS.

      A good part of Moto's recovery was due to VZ switching from BB to Droid as their answer to AT&T's exclusive iPhone.

      When VZ gets their iPhone, I wonder if they'll even care about Android as the answer to the iPhone.

      VZ: You cant afford an iPhone? Here's a gimped, NASCAR and vCast-store encrusted feature-droid by Moto/etc".

    • dchu220

      Great comments timnash.

      I think that's part of the point. A company usually needs to have a 'brush with death' before they can get the courage to abandon their old business model and to take the necessary risks to survive. I don't think Horace is suggesting that Motorola will survive… only that it has a chance since it really has nothing to lose.

  • Adam

    I agree that this is really the only hope for these companies in the long run. Slim likelihood of succeeding at this point though, in my opinion. Attracting developers is paramount, and very daunting. Developers just don't have the time and resources to support every mom-and-pop platform.

    I think Motorola, HTC, et al., should create their own unique platforms and development environments, but implement a compatibility layer for Android applications. They could do this by providing a full sand-boxed Android runtime environment (somewhat like Mac OS "Classic" mode), or by providing their own implementations for the Android APIs, so that developers can easily cross-compile their Android apps for the new platform. Now THERE'S a good test as to whether Android is truly "open"!

    If they were able to legally do this (unlikely), it would allow them to differentiate with their own unique OS, while at the same time have that most critical of assets — a huge catalog of apps available to their customers at launch. As their platforms grew to scale they would be able to attract more developers to their own "native" APIs. Apple is employing a form of this strategy by allowing Windows to run in virtualization modes.

    • http://twitter.com/aegisdesign @aegisdesign

      WeTab have already done this. Their tablet product runs MeeGo with an Android sandbox.
      http://wetab.mobi/en/

      So yes, it's legal. I'm not sure it's desirable though as surely developers would just continue writing Android apps. If Moto came up with entirely their own OS then they'd have to attract developers somehow. or tap into an existing pool such as Qt developers. That's what Nokia is doing.

  • Christian

    What will be the benefit of building yet another platform? Differentiation with the only scope of being different is not enough, the new platform should add value and not just add another touch UI in a monoblock form factor.

    The ecosystem story, the experience of different Internet services (the cloud included), the brand are more important than the OS and UI, in my opinion.
    The HW, the OS and the UI touch experience are now commodities thanks to Android. It is time to look ahead and find new opportunities. Can a Motorola can add value with its own platform in this context?

    The smartphone industry is following the path of the PC industry and the fragmentation of OSes, in my opinion, will not bring advantages to companies, users and 3rd party ecosystems.
    Time will tell.

    • WaltFrench

      The idea of a distinction without a difference indeed seems a guaranteed dead end for a firm with MotoMobile's rather modest resources. What solves the chicken-and-egg problem of developers? Even Microsoft has been unable to buy enough apps.

      The vids of their new tablet look exactly like the Playbook, plus Tron effects for the hyper-caffeinated, under-21 set. An nVidia CPU, some RAM, and all the other usual suspect components, integrated by … well, off-the-shelf Android. I get this sells a fair number of Droids, but this demographic outgrows itself before you build long-term relationships. Horace, are you proposing that they can build a lasting identity out of this?

      So taking @Christian's logic a step further, MMI might succeed if it can carve out functions that it can perform much better than others. Some new form factor? … integration with autos, e-commerce? I'm not seeing this, and if the tablet space is becoming saturated more quickly than we realize, making a major investment into a tiny market will be a fast way to LBO Hell.

      • asymco

        I don't think using Android can be a foundation for a long term identity. MMI is doing well being the pioneer in new product launches with Google. But that privileged position will not last. It's entirely due to tactical positioning.

      • WaltFrench

        “I don't think using Android can be a foundation for a long term identity.”

        Agree totally. OTOH, I don't think it's necessary to replace it to have an identity, and Moto has a very modest track record with major software projects; it's a Hail Mary plan won't pay out for 3 very dynamic years.

        So I think the future identity somehow comes from iconic hardware, and not just more gizmahertz or bigabytes. Perhaps their hardware can run Android, but with unique modules for insanely great hardware features. Perhaps they put Android into George Forman grills. Hondas.

        For instance, imagine a keyboard that recognizes pressure in some fashion. It would allow real touch typing. Stylus and/or brush input or even variable-width finger lines, for more realistic artwork. You oughta be able to wrap some heavy duty patents around that, or at least lock up market perceptions that you're the high-end player. And presto, you have a real corporate device instead of that greasy kid stuff, PLUS the device to beat for consumers.

        Yes, Apple could do that, too. (I still think that Apple is the most likely to push the envelope in hardware.) But this is something that an engineering-focused firm like MMI might do if it really is going to get in the game.

      • Fred

        I agree. Developing or buying a new OS is a three year project with high risk. Mustering partner relationships with developers, operators, and EMS contract manufacturers absorbs enormous energy and time. Palm tried to go it alone; it didn’t work.

        Meanwhile Google wages an all out mobile OS standards war. By giving the Android OS away for free, they’re ramping up mobile and tablet OS to critical mass as quickly as possible, to make their search/advertising business model work. Apple will survive the Google onslaught in mobile, but others already face severe challenges from Android, including RIM, Nokia, and Microsoft.

        In three years in developed markets, smartphone and tablet penetration could approach saturation (top of the S curve), which means fighting in replacement markets for share. Sticky HW/SW devices – integrated network-effect devices, for example Apple – will be tough to dislodge.

        So MMI should embark on Android extensions into other vertical markets…cable television and homes (which they are already doing) and others. Toothpaste serves as an example.

        Toothpaste? Yes, Android on a toothpick. Not a wooden toothpick but an electronic toothpick, which can sense bacteria, cavities, gum disease and recommend toothpaste types, quantities, or visits to the dentist. Partnering with toothpaste marketer could brighten teeth around the globe and make shareholders smile.

      • Guest commenter

        "The vids of their new tablet look exactly like the Playbook"

        One could say the vids of playbook look like this. or do you always bet on who shows the first movie of phantom hw? consumers dont use rim now and they are the #1 smartphone. what users want is ease of use and uniformity, aka Android maybe WM, and great HW to run it. Thats way it is, unless palm and rim and andoird and nok are unifrom there can be only one (+appl)

  • Ziad Fazel

    Couldn't agree more. Android is both a lowest common denominator AND a highest common numerator. Device manufacturers cannot differentiate themselves too much with hardware capability if the OS cannot reliably and quickly be modified to exploit them, or developers do not write apps to exploit those differentiators. Android smartphones and tablets will quickly become commoditized with the profit going to those with the lowest cost at each price point. Further lowering the numerator.

    I suspect the price points will cluster by screen size (3, 7, 10) wireless networking options (Wifi, mobile) and features (premium = high res cameras, screen and video out; basic)

    Only by controlling both the hardware and operating system of the device (plus the synch/media management tool on the computer usually required) can a device manufacturer escape the price-cutting commoditization that desktops, laptops and netbooks are still spiralling downward.

  • http://tmenguy.free.fr/TechBlog Thomas

    You don't see it a lot from the US but Samsung is pushing HARD its own Bada platform, a major hit here in europe with the samsung wave.
    So yes they've learned the lesson, and we can count on Samsung to execute well following their mantra "make it better, cheaper, faster".
    No escape here, competing against low cost oem on margins only is not viable….waiting for the Moto OS!

  • Nate

    "Paradoxically, Motorola, being the weaker, has the best chance for successful recovery."

    Horace, I'm curious why you say this, given that Samsung already has a pretty full head of steam going with Bada — is it because you think they have too much momentum going with their Android and WP7 phones?

    • asymco

      Bada is half-hearted. It's akin to Nokia's lukewarm effort for legacy and for new platforms. The way I understand Bada is that it's for low-end devices while they split resources between Android and WP7 for the high end. This is misguided and shows a lack of understanding of platforms and the role of portfolio theory when it comes to mobile computing. The first rule is to have *one* platform. The second theory is to keep device form factors to a minimum so that developers have a clear target. Samsung is breaking both these rules. I am suspecting that they still believe having 100 phones in the market is better than having 10 and 10 is better than 1.

      • O.C.

        How do you belief Meego will do in 2011 since the N8 was Nokia's last N-series phone with Symbian?

      • asymco

        Meego (or its predecessor Maemo) should have been Nokia's primary platform three years ago. Linux development was started years before but it was always held back by the Symbian strategy. Meego is the right strategy, but because Nokia is not facing an existential threat (yet) it has a hard time making the commitment necessary for success.

        It's hard to predict performance in 2011 due to lack of visibility, but I think Nokia has been beaten down so much that it might surprise a bit to the upside.

      • dchu220

        That's what happens when you have a company trying to develop a software platform with a hardware mindset.

        Apple has built up an immense amount of knowledge in software and hardware over the years. All that experience is funneled into every design decision. Beyond iTunes, it's one of their strongest advantages over their competition.

  • kaveman

    asymco, I agree that the Bada effort is half-hearted from the perspective that a pure platform play is the winning way in mobile handset space. However, I believe Samsung sees Bada as an "insurance policy" to maintain a certain margin especially as smartphone goes down the feature phone segment. To Samsung, Bada is yet another OS platform to keep its consumer electronic brand relevant and help funnel its display, memory (and hopefully its SoC) component business.

    • asymco

      I hear the story of Samsung's components business as somehow being synergistic to their device business. I cannot justify this as a sound strategy in my mind. Samsung is "integrated" with respect to components (i.e. in-sourcing) but "modular" with respect to software (i.e. outsourcing). That's setting up the wrong boundaries. Their components are made available to competitors and don't offer much or any advantage while they don't have sufficient differentiation on software.

      Samsung is a conglomerate. That's different from being an integrated company.

  • Kristian

    Ruins. Motorola is no more. They are now in 3 pieces.

  • FredFreeloader

    Motorola Mobility has about $3.5 billion in cash. Assume $1 billion is available for acquisitions. To differentiate, what types of companies and technologies should it buy?

    • asymco

      Systems software. Danger, QNX and Palm are gone but there must be others.

  • Sevket Zaimoglu

    Have you seen Tegra powered Motorola Atrix 4G and Xoom tablet at CES? The laptop dock for Atrix is brilliant and shows that we are entering a new paradigm in computing where barriers between different devices (smartphone-tablet-laptop-desktop) will not mean anything. From the user's perspective, the device is just a front end towards productivity and what matters is access to data and the ability to work on it. Ever used Evernote? I have it installed on my laptop and my android phone and I can access my notes from any internet-connected device (was gonna say "computer" but, remembered the controversy about iPad's status:)) using the web interface.

    Atrix is a perfect gadget for that type of work. Made by Motorola, running android. I love my HTC Desire, but if Atrix was available in the UK today, I would immediately buy it, because it will not only replace my Desire, but my netbook, too.

    Similar considerations for the Motorola Xoom tablet. It is true there are countless cheap android tablet alternatives, but Motorola tablet is a well-made tablet, equipped with the most powerful mobile processor today, Tegra.

    As long as Motorola produces high quality, reliable devices with such innovative ideas as Atrix laptop dock, it is safe. It does not need yet another platform of its own to tout.

    • Hamranhansenhansen

      Hardware is 10% only. Software is much more important. If Motorola doesn't make software then they are expendable. Mobile and PC hardware is generic, commoditized. The software is everything.

      • kwyjibo

        Only, the software isn't everything, because the software is largely interchangeable. Android, iOS, or WP7 – they're all competitive and cover all the features. The average consumer does not give a shit about the software, they're not going to buy a phone because its running MotorolaOS.

        Now that the other OSes have caught up to speed, it's back where we were with featurephones. Motorola need to make appealing hardware like they did with the RAZR.

      • TomCF

        You're both wrong. Consumers don't really make even the distinction between hardware and software. More consumers are choosing based on how many hoops they have to jump through to get a task done.

      • asymco

        You're making two assumptions: that integrated devices cannot be improved and that the RAZR was a valid strategy for Moto.

        If you go back to 2006, you could argue the same things. What the iPhone brought to the table was a new input and UI metaphor (capacitive touch and a physics engine for the UI) which required an integrated SW/HW implementation. Nobody saw that coming. Why do you think that nothing new could emerge again?

      • hahnchen

        The jump from phone to smartphone was big. Android and WP7, with the backing of software giants could not make a big leap (if any) beyond iOS. Sure, they're not "integrated" devices. But Motorola would have to go significantly beyond that if they're going to launch a new platform. Unlike Nokia, they don't have the massive volumes which could effectively force developer adoption.

        "Nobody saw that coming. Why do you think that nothing new could emerge again?" – A faith based strategy is not a strategy.

  • hahnchen

    Motorola does not have the skills or conviction to launch their own platform.

    They are not a software company, Motoblur is a clear example of that. If Palm couldn't do it, and Samsung (with bada) couldn't do it, then there's no way Motorola can.

    How can they possibly build up another platform? There's no way they can compete on software, in fact, there's no need for them to compete on software now that WP7 and Android are up to speed with iOS. They're going to have to compete on hardware, it's going to about low margins and high volume, a game they know how to play, and have played successfully before.

    • simon

      "it's going to about low margins and high volume, a game they know how to play, and have played successfully before."

      Agreed on the first point, disagreed on the second point. Can Motorola really beat Samsung and LG in high volume and low margins? Plus there will be Nokia and a number of determined low cost providers from China such as Huawei. I just don't see how Motorola being particularly successful against that onslaught in long term.