The End of Licensed Operating Systems As A Viable Model

  • Posted: 15 August 2011 02:31 PM

    The acquisition of MMI by GOOG may signal the end of licensed operating systems as a viable model for handset makers. It’s clear MSFT desires to wed its mobile OS with Nokia and the acquisition of MMI by GOOG isn’t good news for Samsung and HTC. But long-term the model might not have worked anyway.

    Absent a means to create post-purchase revenue on handset sales through the sales of apps, content and ads, the market isn’t an attractive one, leaving handset makers to fight for market share on this margins and forcing price capitulation as a means to gain share or a competitive advantage. It’s nothing more than a frantic race to the bottom.

         
  • Posted: 15 August 2011 03:01 PM #1

    I take this post to mean, the end for the big volume smartphone players.  All sorts of small and medium-sized tech firms have no choice but to license.  For Samsung and HTC, we should expect them to be in forced denial for quite some time.  I don’t see them exiting the business, even if it clear to everyone else that handsets are a crappy business.  They are no-where with in-house OS’s, so they have no choice but to license.

    Funny how the world changed overnight:

    Android - Friday - the beacon for the “open wins” crowd.  Monday - closed, even though Google naively claims it to be still open.  Voted with their feet to say open loses and integrated ecosystem wins.

    WebOS - Friday - integrated ecosystem with apparent designs on maybe being opened.  Monday - just as muddled as they were on Friday.  Why would Samsung and HTC switch from one partner they just found out cannot be trusted, to another one that wants to play both sides of the fence too?

    RIM - Friday, doomed.  Monday - doomed.  Maybe a cheap buyout candidate for someone, but their OS postion is so weak, to make a great outcome unlikely.

    Microsoft - Friday - doomed in mobile.  Monday - the new hope for the spurned.  Ironically, they are now the beacon of the “open” ecosystem.

    Apple - Friday - the kings of mobile, but with doubts out there on the long term viability of holding back Android and the hordes.  Monday - hordes are in disarray, and Apple model validated by the biggest enemy - Android.  Supreme irony.  Kings of Mobile title assured for the long term.  Fuddites in tears.

         
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    Posted: 15 August 2011 03:20 PM #2

    DawnTreader - 15 August 2011 05:31 PM

    Absent a means to create post-purchase revenue on handset sales through the sales of apps, content and ads, the market isn’t an attractive one, leaving handset makers to fight for market share on this margins and forcing price capitulation as a means to gain share or a competitive advantage. It’s nothing more than a frantic race to the bottom.

    HTC is doing well. Samsung would do well if they jettisoned their low-margin feature phones and stuck with the high-end smartphones. (and if they can escape the lawsuits without severe damage) Apple’s profit on iPhone hardware dwarfs any from “post-purchase revenue”.

    I’m not certain that the whole vertical vs horizontal integration distinction is all that critical. Yes, it helps to have control over the OS that will go into the phones, but we’ve seen how that has ultimately helped Nokia, RIM & Palm. Vertical integration alone does not guarantee success.

    I think at least HTC can continue to do well licensing WP7 & Android and possibly paying royalties to Apple. It’ll cut into their margins, but their phones are attractive enough that people will keep on buying them.

         
  • Posted: 15 August 2011 03:25 PM #3

    Drew Bear - 15 August 2011 06:20 PM

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    I think at least HTC can continue to do well licensing WP7 & Android and possibly paying royalties to Apple. It’ll cut into their margins, but their phones are attractive enough that people will keep on buying them.

    Please remember the bulk of phones sold are sold through carriers and price is the driving force in what’s made available to customers when a multitude of handset makers are producing similar product and competing with one another.

    Neither Samsung nor HTC can do well until their respective issues with Apple are resolved and Google’s acquisition today does little to resolve those issues. It will take billions to make Android viable for the numbers of players in the market and Google choosing to compete in the hardware business is not good news for the other OEMs.

         
  • Posted: 15 August 2011 03:54 PM #4

    Drew Bear - 15 August 2011 06:20 PM

    Yes, it helps to have control over the OS that will go into the phones, but we’ve seen how that has ultimately helped Nokia, RIM & Palm. Vertical integration alone does not guarantee success.

    No, it doesn’t, not when the Company’s innovation becomes nothing more than changing the color of the lipstick on the pig.

    Funny how Apple’s competitors have derided Apple as being the master of design, when design was the only real innovation in their aging platforms.

    Neither Nokia, RIMM, Palm or MSFT did anything unique with their operating systems for the previous 6 - 7 years.  They left a huge whole for someone like Apple to fill, and Apple did.  All of them have been scrambling to “modernize” their platforms since the iPhone, but that leaves them upwards of 5 years behind Apple (none having really achieved what the iOS was in 2007).

    Vertical is the key, but not without continued innovation.

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    Posted: 15 August 2011 03:55 PM #5

    I think HTC can still do well even if they have to pay Apple back & future royalties. That’s the worst case scenario for them. I don’t know the exact product mix for them, but my impression is that HTC focuses on high-end smartphones. They have some mid-range stuff, but very little in the lowest margin range. Their margins are healthy enough to handle some royalty payments.

    Licensed mobile OSes have not been a very viable model for many manufacturers, but neither has un-licensed mobile OSes. Again, I point out Palm, Nokia & RIM - all own their OS. They are all equally getting clobbered by iOS. The viability question is not dependent so much on whether the OS is licensed or not; it’s dependent on whether the company makes products that people want.

    You would think that owning the OS would help companies make a better product, but that simply has not been the case. That’s why HTC’s and Samsung’s Android phones are easily outselling anything put out by Palm, Nokia or RIM.

    Viable or not, licensed mobile OSes are not going away anytime soon. The license holders (MSFT & GOOG) are too big to give up their efforts and the licensees have little choice if they want to play in the high profit margin smartphone category.

         
  • Posted: 15 August 2011 06:23 PM #6

    Drew Bear - 15 August 2011 06:55 PM

    Viable or not, licensed mobile OSes are not going away anytime soon. The license holders (MSFT & GOOG) are too big to give up their efforts and the licensees have little choice if they want to play in the high profit margin smartphone category.

    I don’t see a way to play in the high margin smartphone business without direct influence over the development of the OS. This is signaled by Microsoft’s close relationship now with Nokia and Google’s acquisition today.

         
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    Posted: 15 August 2011 06:49 PM #7

    DawnTreader - 15 August 2011 09:23 PM

    I don’t see a way to play in the high margin smartphone business without direct influence over the development of the OS. This is signaled by Microsoft’s close relationship now with Nokia and Google’s acquisition today.

    What do you foresee for HTC? They are arguably the most successful of the Android & Windows Phone/Mobile licensees.

    What do you foresee for the big 3 that currently DO have direct influence over their OS: HP/Palm, Nokia/MSFT (close enough to “direct”) & RIM?

    The really broad question is who does have a viable model to compete with Apple?

         
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    Posted: 15 August 2011 07:06 PM #8

    Drew Bear - 15 August 2011 09:49 PM
    DawnTreader - 15 August 2011 09:23 PM

    I don’t see a way to play in the high margin smartphone business without direct influence over the development of the OS. This is signaled by Microsoft’s close relationship now with Nokia and Google’s acquisition today.

    What do you foresee for HTC? They are arguably the most successful of the Android & Windows Phone/Mobile licensees.

    What do you foresee for the big 3 that currently DO have direct influence over their OS: HP/Palm, Nokia/MSFT (close enough to “direct”) & RIM?

    The really broad question is who does have a viable model to compete with Apple?

    I think all of the mentioned OS’s have a chance to compete with iOS but not in all segments.  The high end of the smart phone business is Apple’s to lose but that segment is currently the most contentious and all the manufactures are battling to get their flagship device recognized and anointed by consumers.  Apple due to their advanced ecosystem and excellent customer support has proven they can create repeat customers who are loyal to the Apple brand.  The rest of the players are struggling with their branding and the recent move by Google muddies the waters for the manufacturers like HTC, Samsung, LG, Sony, who thought Android was there best opportunity to create brand awareness.  They will now play second fiddle to Google’s preferred brand MMI.  If Apple brings a mid range smart phone to market to close the price umbrella and continues to add carriers, it will be a rough 2012 for the Non google Android manufactures.

         
  • Posted: 16 August 2011 01:12 AM #9

    DawnTreader - 15 August 2011 05:31 PM

    The acquisition of MMI by GOOG may signal the end of licensed operating systems as a viable model for handset makers. It’s clear MSFT desires to wed its mobile OS with Nokia and the acquisition of MMI by GOOG isn’t good news for Samsung and HTC. But long-term the model might not have worked anyway.

    Absent a means to create post-purchase revenue on handset sales through the sales of apps, content and ads, the market isn’t an attractive one, leaving handset makers to fight for market share on this margins and forcing price capitulation as a means to gain share or a competitive advantage. It’s nothing more than a frantic race to the bottom.

    Robert, I saw you post something similar on Apple 2.0 today and I wanted to ponder on it before replying.

    I’m not so sure that this is a question of open vs. closed or integrated vs. licensed. I think this might just be Apple.

    Right now Apple is hitting on all cylinders. You can’t compete with them if you’re using a licensing model (Android, Windows Phone 7). You can’t compete with them if you’re using an integrated model (RIM, Nokia, HP). You just can’t compete with them.

    Apple is the new Rome. There is a military saying that amateurs focus on strategy but professionals focus on logistics. When some Country wanted to attack Rome, they got their army together and marched on Rome. When Rome wanted to attack your country, they built a road right to your front door.

    Apple is they new Rome. Nearly invincible in battle but supported by an army of business savvy engineers. Gruber calls this the “New” Apple. They build better products. They sell them for less. They make insanely high margins.

    How the hell can anyone compete with that?

         
  • Posted: 16 August 2011 03:31 AM #10

    My point is in a highly competitive market in which there are no conspicuous differentiators between products running the same operating system market share is gained primarily by price capitulation. There isn’t enough profitable share in the Android market to support a large numbers of players.

    Post-purchase revenue opportunities are essential to sustain a viable economic model. We could see no more than three viable players in the Android market. Samsung and HTC might survive due to their own form of integration and Moto will obviously survive as a unit of Google. Any other players will be fighting for the bottom with commodity-grade product that delivers nothing for developers and nothing for the platform.

    To sustain the viability of the Android OS for Google’s own purposes being a major hardware maker may be essential to that outcome.

         
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    Posted: 16 August 2011 10:42 AM #11

    The only way WebOS will survive is if HP licenses it to the big handset makers who are suddenly stuck between Microsoft-Nokia and Google-Motorola.

    Read more: http://www.businessinsider.com/its-time-for-hp-to-throw-the-long-bomb-and-license-webos-2011-8#ixzz1VCPPydzj

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    Posted: 16 August 2011 10:45 AM #12

    DawnTreader - 16 August 2011 06:31 AM

    My point is in a highly competitive market in which there are no conspicuous differentiators between products running the same operating system market share is gained primarily by price capitulation. There isn’t enough profitable share in the Android market to support a large numbers of players.

    I think there could be room for differentiation though. HTC or Samsung could conceivably add unique hardware, and write a custom app to support that feature (I.e. pressure-sensitive stylus for a artist’s tablet, NFC payment for a phone, hardware encryption for memory cards, etc). That would add unique value to their product, and do so in a way that would keep those features locked to their phone. If every licensee had a different unique feature, then the field as a whole would be more competitive against the “base model only” competition. That was the major advantage of Microsoft in the late 90’s, and is what keeps the MS PC a major force in today’s market.

    Still, in many ways the Microsoft model is an anomaly, and only it’s success makes it appear the norm. The PC boom was hardware driven, so the open platform of Microsoft was uniquely poised to take advantage of it. They had a big enough piece of the pie that licensees were satisfied with their small slices.

    But you can’t build a cel phone like a PC; there’s no Creative or 3dfx to push the envelope through expansion cards. The revolution is all software driven now, stability and market-share have more value to the developers driving that change, and Apple provides it.

    *edited to add to first para.

    [ Edited: 16 August 2011 10:53 AM by KitsuneStudios ]

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  • Posted: 16 August 2011 10:58 AM #13

    pats - 15 August 2011 10:06 PM

    If Apple brings a mid range smart phone to market to close the price umbrella and continues to add carriers, it will be a rough 2012 for the Non google Android manufactures.

    If past is prologue Apple already has a lower priced model of the iPhone.  When the next generation iPhone is released the current iPhone 4, arguably the best Smartphone on the market today, will be offered for ~$99 (subsidized).

    Having this lower priced model available has not significantly lowered the iPhone’s ASP. From that tidbit, it would seem that consumers aren’t anxious for a lower priced iPhone.

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  • Posted: 16 August 2011 11:02 AM #14

    afterglow - 16 August 2011 01:42 PM

    The only way WebOS will survive is if HP licenses it to the big handset makers who are suddenly stuck between Microsoft-Nokia and Google-Motorola.

    Read more: http://www.businessinsider.com/its-time-for-hp-to-throw-the-long-bomb-and-license-webos-2011-8#ixzz1VCPPydzj

    That’s what all the ‘smart’ people were saying about Apple back in ‘95.

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  • Posted: 16 August 2011 02:04 PM #15

    Gregg Thurman - 16 August 2011 01:58 PM
    pats - 15 August 2011 10:06 PM

    If Apple brings a mid range smart phone to market to close the price umbrella and continues to add carriers, it will be a rough 2012 for the Non google Android manufactures.

    If past is prologue Apple already has a lower priced model of the iPhone.  When the next generation iPhone is released the current iPhone 4, arguably the best Smartphone on the market today, will be offered for ~$99 (subsidized).

    Having this lower priced model available has not significantly lowered the iPhone’s ASP. From that tidbit, it would seem that consumers aren’t anxious for a lower priced iPhone.

    Apple will again struggle to keep up with demand for the iPhone 5. There’s no reason to divert resources for a lower-price model with the iPhone 4 as the entry level handset. As it is the iPhone 5 (and the iPhone 4 in the entry spot) will sell on a scale not seen before.