Is Google’s acquisition of Motorola Mobility is good for Android, or an expensive mistake for Google, made in a moment of irrational panic. Columnist Matt Asay thinks it “spells iPhone doom“, and he’s not alone. John C Dvorak thinks it’s “pure genius“. This supposes that Google performed a cost-benefit analysis and calculated that the cost of not buying Motorola’s phone and set-top box division was greater than $12.5bn.

I beg to differ. Not all business decisions, made in the pressure cooker, are as rational as they should be.

On Monday, I explained that Google hadn’t bought what it thinks it has bought. Since then some very interesting new detail has come to light. This suggests that the Chocolate Factory really doesn’t understand the value of its proposed acquisition, and snapped up Motorola not merely in a hurry, but a blind panic. Pulling out of the deal may now be sensible – but also costly for Google. The deal carries a $2.5bn break-up penalty, which is smaller than AT&T’s penalty for failing to complete its acquisition of T-Mobile US, but is still a hefty sum of money. Should this happen, Google will have paid almost as much to buy nothing as it did to buy Doubleclick, its largest ever acquisition.

Let’s look at some evidence.

Bidding against The Beast

Two separate reports are suggesting that Google entered negotiations to buy Motorola Mobility only after it heard that Microsoft was talking to the company with view to an acquisition. This may give you deja vu. Remember that four years ago, Microsoft was about to acquire DoubleClick for about $2bn, which a lot of analysts thought was too much money.

Then, late in the day, Google joined the bidding war and sealed the deal for $3.2bn. (Google has only just updated the creaky Doubleclick infrastructure, much of which was a decade old.) So both rivals have form here. Microsoft knows how to raise the price of an acquisition target, and Google has form for paying over the odds for something it thinks it needs, but might actually be able to build better and more cheaply in-house.

Google spurned the chance to acquire up to 18,000 relevant mobile patents by acquiring InterDigital. Reports said the two were in talks last month after Google lost the Nortel auction.

Now these really are worth something: In 2005, InterDigital took Nokia to the cleaners for over $252m in a favourable patent settlement. To get one over on Nokia is quite an achievement – and not something Apple was able to do; Apple’s settlement of outstanding litigation saw it pay money to Nokia. InterDigital’s IP was apparently for sale for $2bn – $10bn less than Google wants to pay for one of America’s oldest manufacturing companies. And there’s a lot less baggage, of course. That would certainly have made sense.

The other area, explored in great depth by Florian Mueller at FOSSpatents, looks at the relevance and therefore competitive value of Motorola’s IP. Florian knows how many beans make five.
Feel the quality, not the weight

Patents are often compared to nuclear deterrents: something you need to have to avoid aggression, but don’t ever want to use, if at all possible. You build up your deterrent by building up IP. But as Florian (and others) point out, the volume of one’s patent arsenal becomes irrelevant once the shooting starts.

Patent litigation isn’t won by weight: the war is not one of endurance, with one side running out of bombs to throw. Patent disputes are fought over small numbers of infringing claims, rarely more than a few dozen patents. So the deterrent value is already gone once you’re in aggressive patent litigation. It is nice to have something to throw back, of course, but it merely has to be relevant. It matters far more how deep your pockets are. Google has deep pockets. So again, InterDigital would have done Google just nicely.

Mueller emphasises some of the issues I raised earlier this week – that Motorola’s IP doesn’t help Google with the current litigation it faces from Apple and Oracle. He adds that this litigation is already well advanced, and will commence in earnest this autumn, before the acquisition has been completed. For legal reasons Google had to agree this week, the IP doesn’t come into play just yet. Mueller has also looked at the relevance of Motorola’s IP, and here it gets really interesting. It is much less scary than the mobile industry thinks.

Motorola’s IP has not deterred Apple from striking.

“Apple truly wasn’t deterred by Motorola Mobility’s grossly overestimated portfolio,” writes Mueller. How does he know? Because Motorola said so, in a move to get a declaratory judgment (a patent-holder’s pre-emptive strike) made last October.

“Motorola Mobility’s portfolio has failed to deter, and it has so far failed to make any meaningful headway in litigation,” he wrote. “Motorola Mobility is on the losing track against the very two companies Google says those patents will provide protection from.”

Wrong patents?

Motorola itself says its patent strengths are in “video compression, decompression and security tech”, which again have little deterrence value, as GigaOM’s Darrell Etherington argues. When the shooting starts, and Google finds itself facing retaliatory patent lawsuits, “video compression, decompression and security” could cause real harm to significant parts of its business. And several analysts have pointed out that Motorola’s IP is already broadly licensed, thus reducing its deterrent value. Doubtless there are trivial-sounding patents from which a resourceful legal team could create a feast, but retaliation simply invites more retaliation.

“Now that I see the break-up fee and have thought some more about the overall situation, I’ve reached the point at which I simply don’t buy the ‘protection’ theory anymore,” writes Mueller.

No, I don’t either.

Buying IP without buying Motorola Mobility was the rational thing to do for Android. It would have made sense. The risk of duking it out in court was risky, but might also have been plausible: patent settlements rarely go into the billions. So losing to Oracle may prove costly, but still cheaper than the acquisition cost and hidden opportunity costs (eg, losing Android partners) of acquiring Motorola Mobility. Google’s risks in many areas have just increased. What it has really done in this ill-advised move is grab the shooting target from the corner of the field and hold it over its heart, saying: “I dare you to shoot now”.

If this strikes you as a rational business decision, then good luck. ®

Pundits this week are describing Nokia’s fall from grace as one of the greatest corporate car-crashes of all time. But here’s an unfashionable view. Nokia’s problem is not Stephen Elop, or his strategy. Its problem is it didn’t have Stephen Elop, or his strategy, in place two years ago.

And while we are certainly watching a dramatic destruction of shareholder value – this will be a terrible year for Nokia – it’s worth remembering that three bad quarters are not necessarily fatal to a company. I’ll admit, this is not a popular opinion this week.

Five years ago, Nokia was a market maker and a global consumer brand, comparable perhaps only to Sony for its influence and reach. This week shares are back at 1998 levels. Elop was forced to rip up the revenue and margins forecasts he made for the entire year in February, announcing Nokia’s “big switch” away from developing its own Meego and Symbian platforms, to paying royalties to use Windows Phone. Sales would be significantly lower, and margins weaker, than the company had predicted back then. Nokia said it wouldn’t make any more forecasts for the year, which is very unusual. In other words, it was already over the cliff edge, but didn’t know when it would hit the ground.

Headline writers blamed the switch to Windows – creating an “Osborne effect”. This popular catchphrase describes the falling sales of existing products caused by pre-announcing successors that are not yet available – and it’s actually a myth – pre-announcement didn’t kill the original Osborne Computer.

But, still, it’s pretty bad, and not going to get a lot better. At least eight analyst firms cut their ratings for the stock, with Bernstein Research cutting the price target to $4.

Bernstein’s estimate puts the enterprise value of the company – the market value minus the cash pile – at €11bn, and that includes the networks division and Navteq. It led one pundit to speculate that Nokia was now worth less than Skype. The Windows effect at work?

Now just because two things happen together, does not imply a causation. If you look at Nokia’s explanation, you’ll see that’s only part of the story. The message is opaque, but we can read between the lines.

Nokia said that “competitive dynamics … across multiple price categories”, were to blame – which simply means the competition makes cheaper, more attractive phones across the board. This is exactly what Elop warned of in his “Burning Platforms” message. In addition to Android and the iPhone, Nokia faced a new threat of very cheap phones in Asia from companies you’ve never heard of – Micromax, Carbon, Lava – which can take advantage of a new generation of packaged hardware. Elop identified MediaTek as one of these companies. A few years ago, it wasn’t possible for a new entrant to grab an off-the-shelf reference design. Now it is.

This was one of the three factors in his “Burning Platforms” internal blog post. The third was the competition from featurephones in Europe. In Europe, the competition – such as Samsung – make better, cheaper featurephones, thanks to their faster release cycles, better design, and better use of innovation.

“They are fast, they are cheap, and they are challenging us,” wrote Elop.

None of these problems can be pinned on the CEO, whose competitive analysis really can’t be bettered. Nokia’s problem is that it only started looking for a new CEO in April 2010, and Elop has only been in the job for nine months. He quickly identified that neither of Nokia’s high-end platforms were competitive and could not have moved any faster to ditch them for an alternative that is competitive.

Elop was caught between a rock and a hard place. The fact is that the product pipeline Elop had been bequeathed was so lacklustre, and so inadequate, that Nokia’s valuation would be exactly where it is today – or probably even lower – if he hadn’t announced the Windows Switch when he did. Imagine four more months of 24-hour news reporting on delays to Symbian and Meego.

The pipeline was the result of a paralysis that choked the company from 2008 onwards. By 2009 the competition had been given two years to polish its touchscreen products. Apple was able to add many missing features, some considered essential such as UMTS and MMS, to its iPhone. In 2009 Apple dropped the exclusive carrier deals and the sales rocketed. Google had the time to turn Android around into a fairly slick, iPhone-like UI.

Yet Nokia stumbled on with poorly specified hardware and still unable to put a modern UI over Symbian, despite thousands of man-years of labour. Even more importantly, competitors were adding value at the application layer, so that, for example, every phone can get the user to Facebook very quickly and easily. Nokia’s engineers were still squabbling over which toolkits it might want to use.

Nokia’s entire software engineer capability was created by Jorma Ollila and built around the idea of a “software factory”, with teams creating a base platform from which product managers could pick their components. When Nokia was churning out 30 Symbian phones a year, all largely the same, it had some merit. But it was unsuited to the rapid development of distinctive, individual products.

On 25 May, Nokia announced it was bringing its first dual-SIM products to the Indian market – where dual-SIM phones are now almost a third of the market. Again, the lack of competitiveness has been a problem.

This is the legacy of the previous management – and it left Elop with little choice. The Microsoft decision effectively bypasses the remaining Nokia engineers. He’s got rid of, or sidelined most of the “Indians”. But what about the “chiefs”? Elop still has most of the executive management around him that got the company (and its shareholders) into the tank.

None of this was a secret, and it’s a poor reflection on the analyst community who only just cut their formerly bullish ratings on Nokia.

This week Elop pledged to bring a Windows Phone to market sooner rather than later, suggesting it would most likely appear in 2011 after all. But why rush? Nokia will have two more bad quarters in 2011, and this may turn into three or four. In the 1990s, Apple saw its revenue halve, and in one year endured losses of 15 per cent of revenues. A company can crawl back from the brink. But a poorly differentiated or buggy range of new products will have much direr consequences for Nokia, and make it very difficult to tell any kind of “comeback story”.

The idea of Windows-on-Nokia has great support from the operators, who have already counted out RIM, and don’t wish to be faced with a duopoly of Android and Apple. Pundits should be more concerned that Microsoft, now Nokia’s most important supplier, can maintain a reasonable place of development.

It’s only taken a year for Microsoft to bring support for obscure languages such as Russian, Japanese, Brazilian Portuguese and, er… Finnish to Windows Phone. When the Chinese can produce an iPhone knock-off overnight, that should be worrying somebody

Is everything going touchscreen?

It’s evident that the effects of Apple’s dramatic entry into the mobile business are still being digested. The importance of the user experience is regarded as the difference between success and failure, and merely having a touch screen isn’t enough. Almost four years ago I expressed some reasons [1] why Apple’s entry into the business should be a Good Thing. The established players had become “lazy and complacent, [gone] down blind alleys, or [standardised] on horrible designs and feature sets.” The iPhone should raise the bar for design.

Well, there’s a rare mobile prediction that comes true.

Just as I’d hoped, the iPhone increased the standard of design and ease-of-use across the board. Along the way, not everybody had been able to keep up.

Not just a shiny new thing

Phone designer Nick Healey said he thought the iPhone was the first smartphone that people could actually use. He’d attended smartphone conferences for almost a decade. Until the iPhone appeared, people had always predicted a mass market was 18 months away.

As for the Android UX, views were decidedly more mixed. No one disputes Android’s phenomenal success. It has gone gangbusters throughout 2010, toppling Apple from No 1 spot in the UK in September, on one set of stats I saw presented. Symbian’s share has crashed from 40 per cent to 12.9 per cent – putting it in fourth place behind RIM. But you will probably have guessed that just from walking into Carphone Warehouse at any point in 2010. The figures are monthly, and may reflect an empty product pipeline – since refreshed with the new Symbian^3 devices.

But was the vanilla UI good enough? Some said it was good. Others said it needed the OEM-added layers such as HTC Sense. Others maintained that even with the manufacturer’s UIs it was still too “geeky” for the mass market. Healey gave me an example of HTC’s Sense UI.

“HTCs have a ‘Favorite people’ widget on one Home screen – you swipe up and down to scroll your list of people. Great. But if you tap on it, but happen to pause a fraction of a second before the swipe down – a normal user will be thinking ‘is Fred Up or Down, oh yes, Down <swipe>” – the widget itself vanishes.”

Ken Ken Johnstone from INQ said he really thought it a bit of shame that essential tasks – such as hanging up a call – were harder than they were 10 years ago.

What about other users?

There was much collective chewing of the cud over what would happen to the rest of the market – the 80 per cent of people who don’t buy flash touchscreen bling. This poses a bit of a problem for designers – these are really phones that also do a bit of data. (Or none at all). By contrast an iPhone or an Android phone is a computer that does a bit of phone. Would everyone succumb to the touchscreen? Not if they were only interested in making phone calls.

INQ’s Chat is already a Facebook phone, and bears the Zuckerberg seal of approval

INQ has been linked with reports that it would create “appliance”-style devices based around a particular service, or use. A few weeks ago it was Facebook [2]. More recently rumours have circulated that INQ is creating a Spotify phone. (Hutchison, which owns INQ, has invested in Spotify; INQ’s CEO sits on the Spotify board).

Ken Johnstone didn’t comment, but there’s a precedent. The Japanese market already caters to service-branded or appliance style phones, and a few attendees thought it might be tried here, to unlock a few more pennies of value from punters who are fans of a service, but find the mega-touchscreen devices overkill.

For my part I thought fashions might be cyclical. Today, there’s terrific consumer excitement about smartphones – so much so, that punters are prepared to overlook issues such as battery life and call quality. It’s all shiny and new. But I for one have forsworn the picking up any of the current generation of smartphones – amazing as they are – because of battery life and call quality issues. Not one model has a compelling feature over last year’s iPhone 3GS, and for phone calls I’ve reverted this battered old Nokia [3].

One participant quoted research which showed that 60 per cent of iPhone users never downloaded an app. If people get more stroppy about demanding the smartphones do the basics, things could get complicated (for the vendors, not for us).

Industry attendees agreed that battery life was only going to become more of an issue. The telcos had encouraged us to pick up cheap 3G dongles – only to throttle back when we actually started using them. One mobile network executive said games were the biggest sleeper issue. Games would only become more bandwidth-intensive.

At around this point Healey pulled out something from his pocket, as a reminder that network speed is every bit a “user experience” issue as eye candy.

His other phone was an iPhone, but because it was on the O2 network, and the O2 network sucked, the iPhone may as well be one of these half the time.

A UPG

This is a UPG created by Stuckist artist Richard Conway-Jones. UPG stands for useless palm gadget.

For all the talk of appliances, there are so many everyday things that are still impossible or really hard to do on a mobile. Like shopping, or sharing music legally. A bit more design effort to optimise the phone around one of these (say shopping) might pay dividends.

That’s if Apple hasn’t got to it first [4]. Apple does of course occasionally claim to have invented something that’s been around for ages – like video conferencing. But it also has a knack of cracking on, and implementing something the rest of the industry sits around and talks about for years. And Nokia, yes – I’m looking at you. ®

Links

1. http://www.theregister.co.uk/2007/01/10/iphone_where_is_the_market/
2. http://www.theregister.co.uk/2010/09/23/facebook_phone_again/
3. http://www.reghardware.com/2007/12/20/nokia_breakthrough_phone/
4. http://www.theregister.co.uk/2010/11/02/apple_nfc_again/

Nokia has also torn up the OS roadmap, and will speed up the delivery of new functionality to users in chunks, as and when it’s ready, instead of in milestone releases. In less prominent statements, Nokia has clarified what had become a very confusing development picture.

Eighteen months ago, the Symbian Foundation’s David Wood (who has now left the organisation) announced that Nokia’s Avkon code, the UI for S60, would be deprecated and a widget library called Orbit for Qt would take its place. A comment left on Nokia’s official blog here, says it is dropping the Orbit in favour of Qt Quick. Qt Quick is a declarative language for describing user interface layout. But Avkon will be retained for backward compatibility.

Sun’s Java boss Rich Green joined Nokia in May to try and sort out the mess. It’s much less of a mess now, and the decision to step off the milestone treadmill should fulfill the long-standing criticism that Nokia works too slowly. That’s a valid one – it’s almost two years since Nokia acquired Trolltech, and shortly afterwards declared Qt as the API to write to across its two platforms. Only last month did developers receive the tools with which they could (kind of) do the job.

Elsewhere, as we reported, Nokia is taking an axe to its Ovi and Symbian development, promising to streamline it and implying that more work will take place in house. There are cuts, and the future of the Foundation must now be debatable.

As for the Symbian APIs being cruel and inhumane? After I described Symbian as “good system design”, several people emailed to tell me that I was very, very wrong.

One experienced industry source pointed out this example.

“Symbian is the only platform that has to spend one day teaching people how to use strings before they can code in it. The approved method is that you create an HBufC (a Heap allocated, BUFfer that is Constant), then Call Des() on it (which returns a TPtr – a pointer to a writable descriptor),” he says.

“So writable strings in memory, and constant? Blows your mind.”

Related Stories:

Symbian’s Utopia – and why it was an impossible dream

Why Symbian failed: developers, developers, developers

The report is very long on detail and short on opinionising – and for those of you fascinated by technology and bureaucracy, something quite interesting emerges. What we learn is that the company’s current predicament was fated in 2003, when a re-organisation split Nokia’s all-conquering mobile phones division into three units. The architect was Jorma Ollila, Nokia’s most successful ever CEO, and a popular figure – who steered the company from crisis in 1992 to market leadership in mobile phones – and who as chairman oversaw the ousting of Olli-Pekka Kallasvuo this year.

In Ollila’s reshuffle, Nokia made a transition from an agile, highly reactive product-focused company to one that managed a matrix, or portfolio. The phone division was split into three: Multimedia, Enterprise and Phones, and the divisions were encouraged to compete for staff and resources. The first Nokia made very few products to a very high standard. But after the reshuffle, which took effect on 1 January 2004, the in-fighting became entrenched, and the company being increasingly bureaucratic. The results were pure Dilbert material.

For example, have a look at the section which starts here, with “A novel application or feature has been dreamed up that should end up installed in a phone a year from now. This is the beginning of a long day’s journey to nowhere.”

Innovations produced by the R&D department and designers could no longer be implemented quickly – one example should have taken just a couple of weeks, but instead took months to be incorporated into phones.

Executive managers interviewed note how the result was a large number of indifferent products.

Another consequence was also predictable. It’s what political writers call the most morally corrupting effect of bureaucracies: nobody takes responsibility. With the three divisions covering their own backsides, nobody wanted to make the long-term strategic investments necessary to keep platform software up-to-date. This resulted in the Symbian user interface being neglected. Nokia had developed a touch screen UI called Hildon, which became Series 90, starting in 2001 – and that should have been the basis for Nokia’s iPhone competitors today. But it was canned in 2005.

“We produced a quite enormous number of rather average products. It would have been smarter to make fewer – and better,” says one interviewee.

The masterplan was ripped up by Ollila’s successor, Olli-Pekka Kallasvuo, in 2007, but by then the units had become enormously wealthy fiefdoms, and many of the problems remained. Lots of people could veto a decision, but the leadership required to drive one through was absent. Nokia’s product pipeline all but dried up in 2009.

There’s plenty here that will ring true to Nokia loyalists over the past five years. As the journalist Mikko-Pekka Heikkinen notes, Nokians fought each other harder than they fought the competition. One example we commented on at the time was the battle between N and E series, each the output of competing MultiMedia and Enterprise fiefdoms.

Until OPK finally called time on the scrap, the enterprise E series phones were denied the best imaging features of the consumer multimedia range. The N series users were denied MailForExchange, and SIP functionality. Yet many N series customers also used their phones for business, at enterprises with Microsoft Exchange corporate email, and they made use of VoIP.

Nokia’s core best-selling line S40 was neglected. Several Nokians have pointed this out to us – in internal commuications, the company lauded its high-end Symbian multimedia devices but barely acknowledged the success of its feature phones, which brought home the revenue.

One wrote to us recently:

“About four years ago one of the S40 ‘phones achieved a major feature milestone and got one lacklustre paragraph in the internal newsletter; by comparison an S60 offering had been reduced from a ridiculously high Field Failure Rate to something just risibly high. But from the pages of congratulatory wanking you’d have thought that the damn thing had achieved sentience.”

It’s telling how many products Nokia released during 2006 and 2008 which were almost great, but which had correctable flaws – and how these died of neglect once on the market. Many of these devices had one feature in particular that could have brought wider success with just a small revision. A product-focused company would do this, but a matrix-focused one wouldn’t – it was an extra cost.

One example is the Symbian-based 6220 Classic phone. This was a small, fast, functional and competitively priced phone, and also had a Xenon flash, giving much greater depth and quality in dark conditions – a rare feature that imaging customers cried out for. But it also had a hard-to-use and unreliable keypad, which broke frequently. A tweak to the keyboard would have helped – and would certainly have been introduced after a few weeks in the old Nokia organisation, based around product teams who took a real pride in their work.

The portfolio culture has also resulted in some inexplicable design decisions that ripple across today’s handsets. Between the end of 2007 and autumn 2008, two of Nokia’s most successful and popular enterprise phones – the E51 and E71 – were released. The design was a large part of their success. But for an encore, in 2009 Nokia released successors with a severe design defect, the E52 and E72.

Both phones feature a “Backspace” key perched precariously over the right softkey on one side, and the “Terminate Call” key on the other. It looks elegant. But the Terminate Call key forces the phone to Terminate the application in use. All but the nimblest fingers would hit the key by accident. If you were writing a text, then, and made a tiny slip, you were catapulted back to the home screen, without warning, with the text or email message several clicks away in the Drafts folder. I use an E52 – and it’s almost the perfect candybar business phone.

But because the flawed key design, with the floating backspace, is part of Nokia’s 2010 “design language” for 2010, the flaw is replicated across several devices – including, now, the C3 and E5.

There are exceptions to the matrix. Nokia’s N95-8GB is the best example of what Nokia can do when the gears mesh, and the organsation focuses on product quality – although it followed a painful time with its predecessor the N95, which took over six months to stabilise. The 8GB was brought to market quickly while it was still ahead of the competition, and saw improvements in almost every department; the phone’s robust design gives users terrific service even today.

Maemo and the Nokia Internet Tablet devices were subversive projects that also managed to survive the infighting – and might possibly save the day. (And they must – as I wrote last week, there is no Plan C.)

The article also notes goodwill towards Nokia’s new CEO, Stephen Elop, to restore Nokia’s competitiveness. As he doubtless knows, a savage axe will accompany the restructuring. But as the Con-Lib Coalition is discovering, bureaucracies are much harder to dismantle than anyone realises, and you need a positive vision to go with the bloodshed.

Related Link

Helsingin Sanomat [in English]

Apple will continue to rule the roost, dictating terms and charging eye-watering prices to punters. The punters will continue to be delighted with Apple, and will clamour for more; while BlackBerry has an ace up its sleeve – probably the biggest mobile sensation of the year.

When the crystal ball lies

But first things first. It’s sometimes useful to revisit why you’ve been wrong, because it can tell you a lot about the future.

Ten years ago, I thought the European advantage of GSM combined with the Nordics’ technological and market advantages would eventually result in a real shift in power away from the United States. Nobody dreamed that RIM and Apple would pocket most of the profits. Back then, RIM was a maker of ugly corporate pagers that depended on a complex and expensive proprietary messaging server. Surely Microsoft and Exchange would soon demolish that advantage. RIM had the added disadvantage of being Canadian.

Meanwhile Apple was a boutique, recovering computer company. Its first foray into mobile devices since Jobs returned came in late 2001, and was widely derided by lots of clever people. The iPod was hugely expensive (almost £600 here in the UK), and only worked with the Mac over Firewire.

In 2002, at the first of what became annual "Apple makes a phone" rumours, I pointed out that integration was extremely difficult – integrating the hardware, integrating the device to play nice with the networks. Creating a balsa wood mockup in the lab was easy, but in the wild mobile phones presented lots of complex challenges, and the Nordics’ experience would win out.

I also thought mobile data services would be hugely popular, with the established players learning from the WAP and walled garden mistakes. They never did, and must now join the queue to implement other people’s mobile-unfriendly protocols, such as the angle-bracket stew on offer from Facebook and Twitter.

The networks’ lack of innovation stands in stark contrast to their GSM glory years. It means they have little option but to deal with Apple and RIM on Apple and RIM’s own terms – this will become increasingly important, as we’ll see. In short, Apple and RIM have succeeded where Nokia and Sony Ericsson failed, in making mobile data popular.

Apple’s still got what everyone wants

Apple and RIM’s success will continue, and Android will march on, I believe – but the rhetoric doesn’t quite sit right. The mobile market is too diverse to see a replay of Microsoft and the PC. The triumphalism behind Android now reminds me very much of the Symbian-Microsoft smartphone wars a decade ago.

Android is new. It hasn’t experienced the problems that Symbian experienced, because manufacturers are throwing new models out of factories as fast as they can, and haven’t really noticed where they land.

My confidence in Apple rests on its comparative advantage in the user experience (UX) – it’s still streets ahead of the rivals in ease of use. If you don’t believe me, try a test with someone who has a new, rival touchscreen phone; invite them to change the wallpaper or the ringtone.

I’ve been actively using S60 for much of the past eight years, and I still had to consult the manual recently (when reviewing the X6) to find out where Nokia has stuffed a particular setting this year. I don’t think this is something a newcomer to BlackBerry or iPhone has ever had to do. Nokia and Sony Ericsson – the two dauphins of smartphones ten years ago – have cranked out some really impressive hardware over the past decade, which often succeeded in spite of the user experience, not because of it.

Android will fail to live up to the lofty expectations because the manufacturers are still at the "Wow!" phase with it, bless them. They think that by simply adopting Android and hiding some of the rougher edges of the UI, success will follow. That’s not the problem, and Android isn’t the solution.

The entire "platform" premise behind Symbian, and the many Linuxes such as LiMo, now looks (with the benefit of hindsight) extremely dubious. The idea was that you’d get a common standard, and a network effect. The idea behind Symbian was that the platform company would do the heavy lifting, and because it’s cheaper across a portfolio range, you could do lots of phones more cheaply.

The Android licensees think that today – but throwing out lots of mediocre products isn’t necessarily profitable. The lucrative end of the mobile device market is a product culture, and it pays to put more of your wood behind one arrow, or just a few arrows; the more you make, the less distinctive each one is. Android doesn’t really do anything to encourage the development and marketing of distinctive products, must-have phones that people talk about in the pub.

The economic consequences of the Android approach are also dubious, as Horace Dediu concisely pointed out. It leads to a low-margin, bargain basement culture.

I agree that the supply of Android devices to the market will increase, at least in the short term, and that the usability of the platform will improve. But demand doesn’t necessarily rise to meet supply. If it did, we’d still be WAP-ping away. Or… and insert your favourite technology failure here.

And in a scrap for the scraps in a bargain-basement fight, the winners can only be the companies with huge economy of scale advantages, which means Nokia, or ultra cheap, corner-cutting no-name manufacturers we’ve never heard of.

The BBM Factor

The perception of RIM has changed enormously here in the past five years. It’s a compulsory corporate item in the US, where it’s to the white collar cubicle dweller what the loin cloth was to the cave man. (I get all my history from Hollywood – in this case 1 Million Years BC; I challenge you to prove me wrong).

But in the US, as soon as the "cabin doors to open" announcement is made, out come the ugly, chunky BlackBerrys. Most of them are still monochrome. In Europe, however, a BlackBerry is now what you buy if you don’t buy an iPhone. (I know many people who have both.)

The BlackBerry isn’t the best voice phone in the world, but neither is the iPhone. It does have a reputation of getting one or two things done very well, and of handling the rest (photos and music, and a bit of web) adequately. RIM never skimped on high quality screens and keyboards; there’s a real assurance to that. As with the iPhone, its high word-of-mouth reputation does the marketing.

The ace that BlackBerry now has is BBM, the UI which for devotees is now the gateway to the entire phone. To see a BBM user in full flow, typically with a wired headset, scrolling away, is quite something. It makes you wonder why the phone giants have never done this properly, instead of focussing on all the cruft that comes with "personalisable Outlook screens". (Actually, the last few years of smartphone UI development pre-2007 were devoted to taking out UI features, and optimising one-handed use, which left the cupboard bare when Apple came along.)

While BBM was originally sold as a business tool, it’s the ordinary people who are now the greatest users. Even only using a fraction of features in RIM’s one minute demonstration video takes you quite a long way.

Ironically, Google sort of had the right idea with Nexus One, which was to make a stand-out product that got people talking. The error was insisting on doing Nexus One itself.

In short, Apple and RIM will continue to prosper because they focus relentlessly on user experience, and because they do one or two things well. This is a Good Thing.

One of the oldest mottos at Vulture Central is Show Us The Money. There’s one even better, I think, which is Show Us The Profits. Are there any? If there are, where are they going? At a stroke, this cuts through huge amounts of hype and puts entire industries (and, for good measure, almost anything WiReD magazine has ever endorsed) in a much clearer perspective. So have a gander at the following analysis of the mobile phone business – it’s quite startling.

Asymco is a one-man analyst company operated by Horace Dediu, a former Nokia manager in Helsinki, erudite and informative with a good eye for history. Earlier this week he looked at the profits of the largest seven manufacturers, responsible for 80 per cent of the phones sold, over the past three years. The trend indicated last year is now quite clear, with two North American companies capturing the lion’s share of the profits. In Q2 2007, Nokia pocketed 63 per cent of profits; Apple and RIM just seven per cent between them. Wind forward three years, and Apple and RIM snag 65 per cent of the profits, largely at the expense of Nokia, but helped by the collapse of Sony Ericsson and Motorola, who are a tiny shadow of their former selves.

There’s a conclusion to be drawn for Google and the Android licensees, thinks Asymco. None of the three leaders are likely to abandon their in-house platforms for Android, it’s either inferior (to iOS) or (as with BlackBerry OS, Symbian or Meego) switching simply isn’t worth it. So Android is left to target the very manufacturers who have been squeezed. And that in turn leaves them with some tricky choices to make. Android is becoming a commodity platform, so they need to differentiate themselves from the rest of the Android rabble: we’ve seen Sony Ericsson, HTC and Motorola invest heavily in their own UIs. But because Android is a commodity platform, this investment isn’t worth it.

Dediu reckons:

“The real challenge is that 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.”

Their fate, predicts Dediu, might mirror something quite familiar:

“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 same lack of symmetry with licensed software vendor Microsoft is what led the failure of the same incumbents to make a dent in the industry with Windows Mobile [2003 to 2010].”

Ten years ago, this was always the fate that Symbian dangled in front of licensees tempted to follow the Microsoft path. Look at the PC business, they said, nobody makes any money. (Today, we know the PC business is an illusion, a polite fiction that behind the curtain is funded by Intel and Microsoft themselves.) Symbian’s proposition was that manufacturers could differentiate themselves at the UI level – similar to what Google preaches today. But this never really solved the profits conundrum either. Maybe no platform company can ever offer a solution – today’s bling, high-margin high-end phone will always going to be tomorrow’s throwaway low-margin commodity, and the only way to keep profits coming in is to keep creating cool innovative things people want to buy. 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. An analysis of the smartphone business seems to put things in perspective quite nicely. Related Link : ‘Android’s Pursuit of the Biggest Losers’ – Asymco

It’s very, very timely – and even if you don’t follow Nokia, mobile or telecomms it’s a fascinating exercise in business analysis and organisational studies. Enjoy.

Read more at The Register…

It seems absurd, at first – Nokia is still turning a profit in the billions, while Apple’s annual loss was in the billions of dollars. But one thing should focus minds of executives and shareholders for one reason that’s never mentioned – the Sudden Extinction Event.

A recent theory suggests that life on Earth is extinguished and starts over every 27 million years. Coincidentally, 27 million years is how long it takes the Dave TV channel to show every repeat of Top Gear without showing the same repeat twice [*].

Businesses suffer Sudden Extinction events too, and we saw one in the past 12 months right in Nokia’s backyard: the rebirth and crash of Palm. Some businesses are much more vulnerable to Sudden Extinctions than others, and I’ll explain why by using Apple’s pre-Jobs quandary to illustrate it.

Nokia’s huge asset today is cash. It turns over a lot of cash, and it still makes a tidy profit. The most recent financial year saw a profit of around €9bn gross, with a net profit of €3.3bn for its devices and services division. Maintaining profitability is a decent achievement. Nokia also has around €8.8bn cash in the bank.

Back then Apple was smaller, of course, and it was hit harder. It saw revenues fall from $11bn in 1994 to under $6bn in 1998. Unable to respond to falling demand quickly, Apple lost $1.8bn over two successive financial years. (It took a decade, and the iPod, for Apple to rescale the peak of its 1990s income.)

But Apple had two great advantages.

The replacement cycle for Apple products was much longer than it is for Nokia’s products today. It varies in each market and each age group (and on who you ask) but it’s around 18 months. Apple’s kit back then was replaced every few years – and it didn’t help that they were built like tanks.

Much more importantly, Apple had a “network effect”. It had lost the IT productivity market to Windows, but in education and particularly in professional content creation, it was the dominant system.

Repro houses took Apple files. The publishing systems were Apple. They were usually tied together using AFP and AppleTalk networks. The workforce of contractors knew Apple products. (I recall how difficult it was to find Photoshop or Quark contractors who knew the shortcuts for the Windows versions in the mid-1990s – the Apple shortcuts were so deeply ingrained.)

And in this market, Apple’s computer continued to work. The PowerPC chip was still pretty fresh, and looked to have plenty of life in it. So making the move to Windows would have been costly.

Even for individuals, moving away from the Mac was much more problematic than it is today – valuable data was trapped inside extended attributes (or in Apple parlance, resource forks), that Windows had problem reading. Better to sit tight than move.

Despite its terrific brand, particularly in Asia, Nokia has no such network effect. Customers can choose to switch from a Nokia phone quite painlessly. They copy the address book to a SIM, and off they go. Given a bad experience, customers can stay away a long time.

A recent poll by YouGov showed that only a third of smartphone owners would even consider a Nokia as their next purchase, a drop of 12 per cent in just six months; only 15 per cent would recommend a Nokia, another number falling.

Today, Nokia cites amongst its great advantages its scale and logistics, and in particular its manufacturing assets. But there’s no point in having manufacturing if the demand isn’t there – the factories become a costly overhead. Without high-margin products of its own, Nokia may as well become a contract manufacturer.

Cash is still King

Opinion is pretty unanimous why Nokia is getting beaten up by analysts and pundits on a daily basis. A little may be American triumphalism, but most of it is sound. Nokia isn’t making high margin products, and its lower margin products aren’t significantly better than the competition, which gets better every year.

Ten years ago, a low-end Nokia was still much better than a low-end rival – it was easier to use, had better battery life and reception, and often had better build quality. Today, Samsung makes very good ‘cheap Nokias’, and Apple and RIM have stolen the ‘aspirational’ bit of the market. With two billion new members of the middle class looking to make a statement, this is quite ominous.

In recent years Nokia has become so used to splashing the cash about that it’s rare to find a marketing consultant who doesn’t or hasn’t worked for the Finnish giant. It single-handedly keeps parts of the economy going – particularly the Strategy Boutique sector – people who dream up segmentation strategies or demographic shorthand. It funds entire branches of academia. But Nokia’s cash cushion isn’t so great that it can afford that anymore.

For example, this means it can’t afford too many splurges like the Navteq acquisition, which will never recoup the mind-boggling €8.1bn investment but has yet to be turned into a differentiator. In under three years, Maps has been Ovi-fied into near-oblivion, and Nokia needs to turn it into an asset that retains existing customers and attracts new ones. Nor can it afford to fail as it did with games, another expensive adventure it embarked upon with N-Gage in 2002 and finally abandoned last year.

With a network effect, Apple could afford to annoy partners and customers as it fought its way back to profitability. It did so again with the move to Mac OS X, before it was ready. Each time Apple gambled that customers could endure a bit of temporary pain. That’s not the Finnish way – it still talks in terms of ‘eco-systems’ and about generating opportunities for partners, who increasingly realise they can seize them without Nokia’s help.

Without a network effect, it’s not a luxury Nokia can afford. Its responsibility is to shareholders, and it has to be pretty brutal.

Footnote

You can view Steve Jobs case-study keynote at MacWorld in 1997 explaining Apple’s recovery strategy here. The segment identifying the market starts at around 18m:30s.

What can rescue the Pre, then? All is far from lost, since it’s still early days. In fact, the 2009 shortfall was more predictable than shocking. After wowing critics with a ‘better iPhone than the iPhone’, Palm chose to launch with a marginal, cash-strapped carrier, Sprint. Since Sprint is fourth in the marketplace and committed to WiMax for 4G, this is a barking mad decision that few outside Intel HQ expect to turn out well. Only in the autumn did Palm go to market with a significant US partner, in the shape of Verizon. And Verizon now admits it ballsed it up.

Add O2 to Palm’s coalition of the apathetic. Bloggers have noticed how its site renders it invisible, and Carphone’s isn’t much help either. Palm isn’t listed as one of its suppliers in the main navigation (where the potential punter can opt for Apple, BlackBerry, Nokia, and others). A few of O2′s own stores have Palm Pre models on display. O2 insists that sales are good but won’t give out figures.

Palm Pre Pixi:
still pretty nerdy

Usually three things are identified when a company gets its forecast so badly wrong. It needs to make the product better, it has its go-to-market strategy wrong, or else it’s not promoting the phone adequately. Which is it here?

Well, the latter is blindingly obvious, for a start. In the UK, this outstanding phone has been lost in the noise. The UK market now has lots of cheap but perfectly serviceable touchscreen phones, by Samsung and LG, from which to choose. Operators are carpet bombing us with Android devices, which come and go, but are well promoted. While they’re visible, they’re very visible, but the all-conquering Apple and Blackberry call all before them.

Palm’s chief asset remains webOS, and it needs to realise that asset. Palm’s webOS can go into a lot more different kinds of devices. In the US, the company appears to have made the conservative BlackBerry-style keyboard mandatory. This isn’t necessary in Europe – where sliders and pure touchscreens have sold well. In Europe too, it should make more of the well established operators’ subsidies that Apple has done so much to upset. It may need more low cost (the Pixi is now $79 on Sprint). If you’re in the business of selling phones, go and sell some phones.

Much of the US ad spend has been spent on very expensive and pointless ‘rebranding’ ads, allowing Motorola and Verizon to go aggressively head-to-head with the iPhone. Check out this – although you’ll probably wish you hadn’t.

Expensive and pointless, and saying what exactly?

A phone is just a tool, and it can be a useful tool. When I first saw the Pre, in launch week in DC, I thought it had got so much right, in many ways what the iPhone should have been, and made Nokia’s S60 edition look prehistoric. Surely success was assured.

Maybe Palm thought something similar, too, and believed the market would beat a path to its door, simply because it wasn’t Apple. It knows it’s in a fight now.