Building the Next Network Platforms

With the rise of touch screen smartphones two industries are being disrupted at once. Personal computing is moving rapidly beyond the PC, and mobile communications is now as much about social networking and other internet applications as it is about voice and texting. The disruption, in both cases, is being led by the general-purpose computing platform known as the smartphone. This smartphone shift is playing out remarkably quickly, creating dramatic change in the mobile communications value chain. The competitive battle for the mobile service provision platform that extracts maximum value from network effects is ongoing. Although still a fragmented market, the main contenders are a handset-centric service platform (iOS), an aggregator-centric service platform (Android), and the changing operator-centric platforms.

iOS

Apple developed iPhone, the hardware platform and App Store, the software platform for third party developers, based on its iOS operating system. With the first iPhone, Apple demanded a revenue share in return for operator exclusiveness and highlighted how a strong device brand trumps that of the mobile operator’s connectivity service. In a world where network access is increasingly open and transaction costs to churn are low, iPhone strengthened the operator lock-in, at least for those operators who negotiated contractual exclusivity with Apple.

According to some reports that appeared a year ago (e.g. Godeluck 2010), a new risk is that Apple could disintermediate the mobile operator by introducing a soft SIM hardwired into the phone and activated over the air by an SMS or PC connection. The corresponding patent, filed one year ago, was recently made public by the US Patent and Trademark Office (Clark 2011). Under this scenario, Apple could be selling iPhones directly through iTunes, rather than through the operator’s retail (and Apple’s own retail franchises – though these lack physical distribution scale), effectively turning Apple into a global MVNO. Google tried a similar online retail channel with the Nexus One (but without soft SIM) and failed.

Apple’s rationale for introducing soft SIMs is:

  • To save on handset real-estate for other design features
  • To allow for a more seamless customer experience when activating or churning a subscription to a network (it would even allow for multiple soft SIMs per device, significantly reducing the transaction cost for subscribers moving from one network access to another)
  • To take full control of the handset experience, effectively becoming an MVNO and degrading the operator to provider of undifferentiated network coverage and capacity

Further paving the way for Apple to become an MVNO is the dynamic carrier selection patent (US Patent Nr 7885654) granted to Apple in February 2011, which can involve storing a network address on a mobile device and sending a request for network operator data from the device to a MVNO server associated with the network address. The subscriber or the handset can select which network to use based on information such as price of minutes that is received from various mobile operators. Negotiations can be conducted with a variety of operators for the purpose of making a call.

Pursuing such strategy holds considerable risks for Apple: the operators’ strategic response could be to balk at Apple and shift handset subsidies from iPhone to Android, Nokia/Microsoft, or other handsets. Furthermore, Apple lacks the core competences to manage an MVNO service, including customer support, service provisioning, billing, service quality management etc (Bienenstock et al. 2010).

Android

Google on the other hand, entered layer 1 of the value chain [1] through the acquisition of Android Inc and subsequent development of Android OS. Google uses an open source license for Android’s public source code (like Symbian, MeeGo), and an open governance model that determines Google’s access and influence into the interface and complementary product (handsets and tablets). Google has made the tradeoff between adoption and appropriability (Varian & Shapiro 1998) in favor of the openness of Android OS. Google’s objective is to spur adoption by harnessing network effects, reducing users’ concerns about lock-in, and stimulating production of OEM handset portfolios as complementary differentiated goods that meet the needs of user segments. On the other hand, opening Android OS reduces users’ switching costs if there is choice in the market (to e.g. Windows Phone), making it more difficult for Google to appropriate rents from the platform. Recently, Google has been exercising more control over the platform’s applications, to avoid fragmentation that might hamper broad adoption.

Google is not licensing Android directly, but is rebuilding its traditional two-sided platform business model in the world of mobile computing. The business model used for Google’s software platforms, including Android and the Google apps on top of the OS, is a model of matchmaking between consumers of ubiquitous free software on the one side, and advertisers on the other (paying) side. Barriers to entry are low in an unbundled industry, and any OEM can build products on Android OS. Competing on Android is not an attractive outlook for most OEMs, and opportunities for differentiation are poor (e.g. Sony tries with Xperia Play which is “Playstation certified”) . Price competition will increase without doubt. Android is the new Intel Inside.

Operator platforms

How operators should respond will be covered in a future post.

Bienenstock R. et al. (2010). European Telecommunications Operators v Apple: The First Salvo in the Value Chain Wars. Bernstein Research.

Clark S. (2011) Apple patents ‘SIM within’ secure element technology. Near Field Communications World. November 9, 2011

Fransman M. (2002) Mapping the Evolving Telecoms Industry: The Uses and Shortcomings of the Layer Model. Telecommunications Policy 26(9-10):473-483

Godeluck (2010), Apple tente de prendre l’ascendant sur les opérateurs télécomsLes Echos. October 28, 2010.

Shapiro C., Varian H. R. (1998), Information Rules. Harvard Business Press. 1998

 


[1] I am referring again to the value chain based on Fransman (2002). Layer 1 is the equipment and software layer.

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