What could Google do with Motorola Mobility

Google has recently acquired Motorola Mobility for US$12.5 billion. It is very clear that Google has acquired primarily for the 24K+ patents the company had in the wireless space. The patents are important for Google to protect the Android adopters from the lawsuits of the likes of Microsoft. In this post I will examine ways in which Google can make the best of the investment in the near term, medium term and long term.

Near term: Atleast for another year till the regulatory approvals are through, the business has to be as usual. Also for all the phones Motorola Mobility has sold they need to support for a minimum of 3 years (typical life of phone). Motorola's smart phones are primarily Android based, so they can continue without any issue. Google should let Motorola continue developing their LTE (3.9G) and 4G solutions. Google can also look at potential acquisitions and agreements for the missing pieces of the phone platform.

Medium term: In the next 2-3 years Google should focus on coming up with an entire platform integrated from the RF (antenna) all the way upto Android OS. Google could make use of their software design capabilities and ensure that any small vendor can quickly make an Android phone with that platform. The platform should have completed the operator acceptance and GCF type approval tests mandatory for launch in several markets. The idea is to essentially accelerate the commoditization of the mobile handset industry. As mentioned in another post in the same blog, Mediatek is doing something similar for GSM. What would be important at this point of time is to reduce the Motorola portfolio of mobile devices to probably something like the nexus series and transfer the brand equity to the platform developed. So the mobiles apart from the vendor name could also sport things like Powered by Motorola. There is however a big risk of competing with the likes of Intel Mobile and Qualcomm. Unless Android gets as big as the current Windows for Desktops and Laptops, it may not be very easy to fight the likes of Qualcomm and Intel.

Long term: In 5+ years, Google could continue investing in the next generation wireless technologies, include the hardware that enables more secure and seem less cloud experience in their platforms and support localization and customization of handsets. Google has to evolve Android such that substantial customization is possible and yet apps developed for one version of Android run across the customizations. By enabling smaller players to enter mobile handset development Google can ensure that they retain control over the Android version that goes into the market, for rarely do small vendors have the where withal for major Android abstraction development. The entry into the platform business will allow Google more flexibility to evolve systems to suite the next generation services (for example the GPS chip on phone can communicate better with the services running on Android).

Thus in my opinion it is important that Google should continue acquisitions in this space if they have to maintain their customer reach.

PS: No strategy can be made in isolation to the environment. Especially in this space where all the big names with deep pockets are operating. Also every action of Google will be observed and analysed thoroughly. For example, Apple may decide to become more open or if Microsoft-Nokia's third ecosystem clicks they can present a different set of challenges all together.

Non Linear Revenue Models - Indian IT Sector

Introduction

One of the biggest threats faced by the Indian IT industry is the linearity in the employee count and revenues. As of 2011 the top five Indian IT outsourcing companies have around 100,000 employees on board (some less and some more). One can see a direct proportion between the revenues and the employees and typically over the years the ratio has been 35,000 US$ to 45,000 US$ per employee per year [source: annual reports of the companies]. Gowing byt he current gowth trends of the top five IT services companies from India, for growth rate to continue each of the companies would need a workforce of more than two million (same as the current strength of Peoples Liberation Army, China the largest Army in the world) by the year 2031 - which is an unlikely solution.

Nonlinear Revenue models (Service Providers Perspective)

There has been a strong drive among the IT service providers especially from India to unlink revenues and the head count. The top companies have been trying several ideas with varying degrees of success. In this section I describe five of the broad changes needed from a Service Providers perspective.

1. New Approaches
   While the two approaches discussed here are not entirely new but not many companies make significant revenues in these models compared to their time tested Time and Material and Fixed Price models.
   
   First, Creation of IP Blocks - There is a possibility of companies to create IP blocks which could be sold to / integrated with the products of several clients. In the telecom sector the IP block can be a simple codec implementation to a complete protocol stack for some of the emerging technologies. Another example could be in the Cloud space - companies can invest in IP blocks for rapidly rolling out the internal clouds. One strategy for the choice of the IP block could be something that the customer sees as good alternate option. For time to market and or for matching the competitor offering reasons clients may be willing to pick the IP block.
   Consider the case of Samsung - it was a part of both Open Handset Alliance (Android) and Symbian Foundation as well while having its own BaDa Operating System. There are several hardware platforms in the market each of which takes several months of effort to integrate with a particular mobile OS. The platform vendors also can not integrate their solution with each of the operating sytems. While Samsung as a part of its strategy may invest in several competing Operating systems- keep the one that does well and dump everything else that doesn't, not every company has the business strategy or deep pockets of Samsung. Services companies can partner with some of the phone platform vendors and integrate the platform with some of the Operating systems. If the investment pays off the handset OEM will be willing to agree for a royalty based payment structure, if not the services company can always showcase it as a part of their capability demonstration in bidding for the usual T&M / Fixed Price projects.
   
   Second, Creation of Platforms - A platform is by itself is unsaleable and needs associated customization to meet the needs of clients. Large software companies are in a better position to create platforms. One of the possible approaches could be to work with a client to develop a solution on top of a platform and negotiate the pricing such that the Services firm keeps the rights of the platform and the first client keeps the rights of the solution built on top. Client may be preferentially billed for the support provided in IP creation. It is however very important to invest in the right technology / project to be chosen for something like this. Typical examples could mean features not really creating competitive advantage but are mandatory for running the business such as billing, policy compliance etc (in case of telecom companies). The clearly fragmented OSS / BSS market makes it a potential case for this. The availability of a platform for rapid application development will reduce the switching costs for network operators - thus keeps them in a better bargaining position with the OSS/BSS vendors. As a matter of fact there are already several Cloud offerings in this space. For the app stores, the Infosys Flypp story is another example for good platform idea.
   
   
2. New Markets:
   Services companies still have their structures, business models and policies aligned to doing business with North American and European corporations and governments. There are several other markets especially the emerging one which may need a completely different set of business model for them to succeed. Services companies choosing to invest in the new markets have a native advantage as the market grows. One example again in Telecom could be the switches of less than 100,000 lines capacities C-Dot (a government company) exports to several emerging economies. And the reselling old GSM network equipment to emerging economies when countries adopted 3G is another example. While most of these cases may look like potentially less profitable avenues - they can be easily converted into royalty based revenue streams by enabling smaller local businesses to work on these in their cost-structures while providing only the technical / managerial capability. FabIndia's business model may have takers for instance.
   
   
3. Pricing Models:
   Apart from the pricing aspects of Fixed Price and Time & Material models companies may consider the following models as well.
   Business Outcome based model - For projects in which the services companies have strong experience and cases where the companies have caused clear business benefits in the past make a case for this. A portion of the benefit provided can be claimed as the fees. Companies should be careful while choosing such projects. Projects causing head count reduction / highly transformational projects with significant people interaction of employees of the client companies may be avoided. Projects that simply convert capital and fixed costs into variable costs such as implementation of Cloud etc could be potential example candidates. Such projects when coupled with the IP blocks and Platforms described in the earlier sections make a cohesive strategy. Highly specialised services in the domain of business intelligence helping companies plan their production, supply chain and pricing could also be another class of example. While there are consulting companies to advice - there are n't many to take a share of both Profits and Losses and at the same time follow the execution.
   
   Taking complete / partial ownership of Client Product / Service lines: Companies exiting businesses have an obligation of support for the agreed product lines. There have also been examples where larger companies lend their brand to the right offering. While white lable manufacturing is not considered very lucrative, picking up the right project inline with the competencies and existing IP may give rise to a non-linear revenue possibility. In fact, companies can specialise in taking up complete / partial ownerships for products in mature or decline stages of the lifecycle. Companies can use their market reach if they are present in markets other than the client's strong / choice markets. Again caution should be exercised in the choice of the product and the market so that the company can leverage its strengths for those incremental revenues. One example in the media space could be partnering with clients operating in the internet space unwilling to cater to specific markets, if the market segment could be profitably served by the company.
   
   
   
4. Incentives and Measurements:
   Stock Market expectations and Senior management incentive structures linked to them are considered one of the strongest reasons for risk averse nature of companies. I was told that there are sales teams that prefer selling a client's product over in-house product due to incentive structures.
   Measurement based on quarterly or even annual revenues and profits may not work well if investments have to happen in the non-linear revenue generating businesses. It is certainly not an easy task to device proper incentive structures but is a very important aspect. Certain exponential returns may be considered on business success which ensure that there is appropriate reward for the risk taken. It has been experienced by companies that it is difficult to attract talent across the experience levels for risky ventures. OB researchers may attribute it to the lack of social security in the Indian context. Creating subsidiaries with P&L responsibilities may be considered after the incubation period. The companies may need to start operations outside India if the availability of talent with the required risk appetite is available. Here the intention is not to typecast Indian work force as risk averse but to see in which geography can results be achieved in the most cost-effective fashion with the least business risk.
   
   
   
   
5. Organisation Structure:
   The Organisation Structures should be aligned to properly take up the non-linear initiatives. There have been debates if the Finacle model is better or the OnMobile model. Irrespective of the model the structure of organisation should try to get the best of both worlds - Firstly, the creation of subsidiaries which are smaller and nimbler allow quick response to the opportunities and convert them into profitable business without the bureaucratic delays unavoidable in the larger parent organisations of today. Two, it would be unfortunate and injustice to the vast amount of knowledge of customers and markets built by the wider organization is not utilized. This brings a challenge that while the smaller subsidiaries have the necessary autonomy, it should also be ensured that they are not operating in silos.

Acknowledgements

Some of the ideas in this blog are result of the discussions I had with faculty, peer group and industry veterans during the CSITM Participatory Research Workshop conducted at IIM Bangalore in May 2011. While there have been several interesting ideas and concepts discussed - this post is dedicated to the Service Provider's perspective (the sub-group in the work shop in which I have contributed my thoughts). Errors, omissions and interpretations of examples from the Telecom Sector may be entirely attributed to the author.

The mobile handset industry

INTRODUCTION

In this blog I will first attempt to explain the mobile handset industry as I see it in 2011. After some serious thinking of creating my own framework, I felt probably keeping it simple by using the very popular Porter's five forces frame work taught in my first semester MBA course makes more sense, afterall Mr. Porter is not popular without a reason.

In the end I will attempt to give some possible future directions of the industry and certain strategic choices the players have. I will use examples from the Indian handset industry but I think in this globalised world it can be applied to several similar markets (more precisely similar distribution channel structures primarily dominated by retail and not much of operator subsidy).

I have been reading a lot about the mobile industry (I can call myself an industry insider with 8.5 years of experience developing software and systems across handset, chipset and network infrastructure companies ) so some of my statements which are very obvious to me may not be so much to outsiders. One aspect MBA teaches anybody is to always have supporting data - I have given credit to the data sources towards the end of the post.

PORTER'S FIVE FORCES

So here are the five forces that I am using to evaluate the attractiveness of an industry

(1) Threat of Entry

(2) Bargaining Power of Buyers

(3) Bargaining Power of Suppliers

(4) Threat of Substitutes

(5) Intensity of Rivalry

(1) Threat of Entry

This is one area which has seen a dramatic change just over the last three years. When I along with a couple of my classmates worked on the same topic in 2008 - we termed the Threat of Entry to be low. At that time there were only these huge companies Nokia, Samsung, Motorola, Sony Ericsson, RIM (Blackberry) and Apple. Then there were huge capital requirements, economies of scale advantages in production, distribution and after sale service, brand and technical knowhow to integrate several hardware and software bits which prohibited several players from entering the market.

The reduction of entry barriers is evident in the Global handset market share. From the Strategy Analytics data on the Market shares one can see that the share of other handset vendors after the top 8 globally has raised from 16.3% in 2009 to 22.7% in 2010. The share of other handset vendors is highest in APAC (Asia-Pacific) at 31.2% in 2009 and grown to 36.5% in 2010. Latin America, Africa and Middle East regions also have more than 20% other vendor shares in 2010 whereas North America, Europe have less than 10%. One of the possible reasons is the relative weight of distribution channels in these markets[2].

Cases from India (Micromax & Karbonn):

Micromax, which has started its mobile operations in 2008 is close to the second largest handset vendor in India Samsung. Started around the same time Karbonn sold an average 60o,000 phones a month in 2010. The figures are not very far compared to the market leader Nokia's approximate 4 million phone a month. From the Draft Red Herring Prospectus of Micromax [3] - one can see that while the comany's revenues grew from 375 Crore Rupees (83 mil US$) to 1662 crore Rupees(369 mil US$) an astounding 345% growth the net profits are at around 12% of revenues for 2010. The company depends for every thing including the hardware, software and service on third party vendors.

[Side note: Micromax is a great success story. Though the PAT is not great, on their meager asset base and share capital they have delivered an amazing RoE. The ease of entry and lesser profitability do not give a feel that even 20-25% growth rates are sustainable]

One of the companies enabling this entry of new OEMs is Mediatek. Mediatek has about 35% market share in the baseband chips used in the GSM phones. Over the years Mediatek has developed a set of baseband SoC (system on Chip) solutions with internal R&D and by acquisitions (Cellular Divison of Andalog Devices) and licensing agreements (Protocol stack of Sasken) Significant portion of MediaTek's work force support the smaller OEMs with software and integration services allowing them to cut down the time to market and the investment needed.

The role of brand and distribution network as key success factors has reduced significantly.

To summarise one can say that the Threat of Entry is high.

(2) Bargaining Power of Buyers

Globally it may be visualised as three broad categories of buyer groups with differing levels of influence

- Network operators - Significant share of buying especially in North America and Europe happens through the Network operators. In most of the cases the network operators have good bargaining power over the handset manufacturers.

- Large electronic stores - Large chain stores exert medium bargaining power over the handset vendors due to the limited shelf space and the number of models of handsets available.

- End users- End users though individually have relatively less bargaining power, the availability of choice and the overall drive towards commoditization allow the customer get more value for the price.

In summary it may be said that the Bargaining Power of Buyers is Medium.

(3) Bargaining Power of Suppliers

The handset / tablet parts can be seen as 5 major cost components

1) Baseband, application processor,RF and amplifiers

2) Connectivity solutions like Wireless Lan(Wi-Fi), Bluetooth, GPS, USB, HDMI, DLNA etc.

3) Display

4) Memory

5) Operating System

1) Baseband, application processor etc

The market leader (Qualcomm) has just 20-25% market share in volume. This may make one mistake that the bargaining power of Qualcomm may be less. But Qualcomm also has a revenue share in upwards of 40-45%. Even after discounting the IP royalties from their CDMA technology, the revenue share is still high. The close second MediaTek has 35% share in all GSM/GPRS/EGPRS shipments. Even though the revenue share of Mediatek is less , as a company Mediatek has been posting net profits around 20% every year. So it can be said that the bargaining power is with the suppliers in some cases and with the OEMs in some other cases.

2) Connectivity solutions

The solutions are already extremely commoditized and the end user is certainly not aware of which one is the supplier of the GPS, Bluetooth, WiFi components. There were times in the past when CSR (Cambridge Silicon Radio) used to have a near monopoly in Bluetooth solution (about 60% market share) but it no longer is valid.

So here we may say that the bargaining power of the supplier is less.

3) Display

Here again some display companies and technologies such as AMOLED have demand outstripping supply. So in high end smart phones where AMOLED finds its use majorly the bargaining power is with the suppliers. Otherwise it is with the OEMs.

4) Memory

Due to heavy competition in the Memory industry and crashing of prices by the Korean manufacturers one may say that as of now the bargaining power lies with the OEMs in this space.

5) Operating Systems

Two of the major operating systems (Android and Symbian) are free. While Apple iOS is closed, Microsoft has a very less percentage share. So one may say that purely in terms of cost measures there is no question of bargaining power.

In summary it may be stated that the bargaining power of the suppliers is medium.

(4) Threat of Substitutes

There are no real substitutes if we consider Tablets (iPads, Samsung Galaxy Tab etc) as a subset of Smartphones.

(5) Intensity of Rivalry

The industry has seen new comers competing on price and some new comers competing on differentiation and the incumbents are facing pressure. Especially for instance Nokia which has offering across the price points is hit by new comers (offering sub 100$ phones based on MediaTek chipset) in the low end and by the Apple I-Phone and other Android smart phones in the high end.

Even if one takes the profitability of the OEMs, except Apple no company has profitability around 20% which used to be the case during 2001 - 2005.

There is also this new influx of laptop vendors entering the smart phone arena with their own distribution networks and existing clientele.

SUMMARY

In summary it can be said that the mobile handset industry is loosing its attractiveness over the period. It appears to be entering a periods of commoditization where there are no significant differences between offerings at any price point.

Thanks to the number of discrete chips that go into a mobile phone, there is still a significant quality vs price vs brand equation at play. For example one can get a GPS solution across the price bands and certainly the GPS chip used in a sub 100$ phone takes visibly longer time to latch onto a GPS signal than a 400$ smartphone. Similar things may be said about the receiver performance, appeal of the screen and so on.

However for a given price point there is very little difference between offerings containing the same features. So the value customers willing to pay to a specific brand over other has been reducing.

Derived products by customizing the base product to wider groups, Designing Value Adding Services around the product and offering a solution are some of the methods that have been widely adopted to beat the commoditization spiral. For example - companies making sugar cubes made more profits than the companies selling raw sugar. OEMs now have a compulsion to communicate and deliver value to their customers and thereby differentiate their products. While there have been some efforts in the past (for example Nokia's Supernova series with a mirror finish home screen targeted to women) which were received well by the market. But it is high time OEMs make more customized products for individual customer groups and provide the appropriate value. It does reduce the economies of scale advantages but it is probably need of the hour to differentiate.

REFERENCES

(1) Porters Five Forces - http://en.wikipedia.org/wiki/Porter_five_forces_analysis

[For my love for Wikipedia :) .

The original HBR link - http://hbr.org/1979/03/how-competitive-forces-shape-strategy/ar/1 - if you are in (or alum of) a B-School you may already have access to this article]

(2) Strategy Analytics - http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6451

(3) Micromax - DRHP - http://www.sebi.gov.in/dp/micromaxdraft.pdf

(4) Invasion of Price Warriors - Business Today - 16 May 2010.