Innovation can be defined as a process of converting opportunities into new ideas and of the wide application of these ideas in practice (Tidd, Bessant, & Pavitt, 2005). The past decade saw constant innovations in ICT aimed at increasing self-efficacy of the end users of communication devices. Elements such as miniaturization and ubiquitous computing (Open Handset Alliance, 2007a) have literally brought the personal computer to the palm of the consumer, in the form of a smartphone. The smartphone is rich with features such as internet browsing, touch screens, mobile-camera, improved connectivity and entertainment with the capability to adopt new applications (Burgelman, Silverman, Wittig, & Hoyt, 2009). Recent years witnessed an explosive growth in mobile subscribers, where in 2008 alone global shipments rose 28%, as the smartphone gained momentum in the mobile phone industry (Canalys, 2008). The next few years are predicted to show a compound annual growth rate of 13.5% in handset shipments leading to 1.9 billion handsets at the end of 2012 compared to 1 billion in 2007 (DataMonitor, 2008). Today, due to its portability and versatility the smartphone is a key player that facilitates the integration of technology with modern consumerism as the end user is given the capability to engage many computational devices and systems simultaneously (Tsai, Wang, & Hwang, 2008). Mark Weiser (1991) refers to this as Ubiquitous Computing.
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The demand for smartphone has been the key driver for innovations (such as the touch screen, internet browsing, Wi-Fi) in the mobile industry in the past decade and the Open Handset Alliance and the Android platform are recent products of such pursuits. This study analyses how the OHA and Android has and will alter the terms of competition in the mobile industry, with relation to Porter’s five industrial forces.
The Smartphone Industry
Analysing the industry value chain of the smartphone the key components can be identified as chipset manufactures (Intel) , infrastructure developers and platform manufactures (Microsoft, Palm, iPhone) who provide the hardware and software components for handset manufactures. Application developers produce the applications that run on the operating platform whereas content providers such as Google provide the information for these applications. Mobile operators such as AT&T and T-Mobile distribute handsets and provide the subscribers with network connectivity.
In 2006 the global handset market was an oligopoly dominated by 5 companies which accounted for 85% of the market where Nokia and Motorola together accounted for 58%. Traditionally manufacturers competed through design. The entry of iPhone 3G to the market in 2008 created a new standard by combining design, performance, utility and functionality (Burgelman, Silverman, Wittig, & Hoyt, 2009). It is considered by some industry analysts to be a blockbuster where Apple’s market share increased from 3.6% in 2007 to 17.3% in 2008, making it the now second largest player.
Google’s Entry into the Smartphone Industry
Established in 1996 as the brainchild of two Stanford University computer science graduates, Google is now considered to be a blockbuster concept that has expanded beyond its core business as a search engine to a portfolio of products and services (Bhattacharya, Gopal, & Samad, 2009). Today, a vast majority of Google’s revenue is generated through the company’s advertising products, Adword and Adsense (99% in 2007 and 97% in 2007) (Burgelman, Silverman, Wittig, & Hoyt, 2009) that provide targeted advertising on its search pages, by placing advertisements relevant to a search on the results page.
Google’s entry to the smartphone industry was facilitated by its acquisition of the start-up open source software firm, Android in 2005 (Business Week, 2005). This event was a result of Google identifying the future growth potential of the smartphone and its capacity for mobile advertising. Eric Schmidt, the Chairman and CEO of Google stated ‘You carry your phone everywhere. It knows all about you. We can do a very targeted ad. Over time we will make more money from mobile advertising.’ (Schmidt, 2010).
Open Handset Alliance and Android
In November 2007 Google unveiled the Open Handset Alliance, a consortium of 34 companies in the mobile industry representing the industry value chain (Fig 1), consisting of multinational companies such as T-Mobile, HTC, Intel, Qualcomm and Motorola. The objective of the alliance was to create an ‘Open Software, Open Device and an Open Ecosystem’ (Open Handset Alliance, 2009b) fostering open innovation for development of mobile technology based on the open source platform. Today the OHA has expanded its membership to 65 companies.
Fig. 1: The Wireless Value Chain (Hendrix, 2009)
In November 2007 OHA released Android, an integrated software pack consisting of the Operating System, middleware, user-friendly interface and applications and the Android SDK free to the development community.
Open Innovation and Open Source
Open innovation is innovating through the collective creative input and knowledge of internal and external resources (Chesbrough, 2003). Open source technology is one method of open innovation (von Hippel & von Krogh, 2006). It grants the developer the ownership of the source code without a cost of license fee or royalties giving them the freedom to further develop and distribute the product free or at a fee (Open Source Initiative, 2010). The openness of the platform creates more advance and cheaper innovations with shorter time-to-value, improving R&D productivity and creating better value for money for the end user (Open Handset Alliance, 2009b). The OHA was a value network fostering open innovation by pooling of knowledge and Intellectual Property of the members. Android, was its first product built on the Linux open source kernel (Open Handset Alliance, 2007a).
The Competitive Industry Forces
Michael Porter (1979; 2008) defines five forces that define the competitive dynamics of an industry by shaping the interactions within that industry. These forces can be defined as bargaining power of suppliers and customers; the threat if new entrants and substitutes and established industry rivals (Fig.2). These are the figures that drive the profitability of the industry in the short and long terms (Porter, 2008). Analysis of these competitive forces and their drivers will provide insight into the basis of the industry’s profitability and future growth potential.
The entry of Android and Google into the smartphone industry has significantly affected its competitive landscape. Through the creation of an open ecosystem and a wide developer community it has created a sustainable competitive advantage against non-Andriods.
Fig 2: The Five Forces that Shape Industry Competition (Porter, 2008)
The Five Forces of the Smartphone Industry
Bargaining Power of Suppliers
There are a number of players in the smartphone Operating Systems (OS) market, led by Nokia’s Symbian, followed by Apple’s iPhone OS X, RIM’s (Research in Motion) Blackberry, Microsoft’s Windows mobile, Linux and Palm (Hashimi & Komatineni, 2009). These OS developers charged a license fee from handset manufactures, which was usually a variable cost of $0.50 to $25.00 per handset shipped. Further, in order to build applications on a specific OS, developers required SDK (Software Development Kit) and an API (Application Developer Interface), essential support tools for which they paid expensive certification and at times high membership fees (Burgelman, Silverman, Wittig, & Hoyt, 2009). Due to the high bargaining power of these OS developers the cost to handset manufacturers was significantly high.
Porter (2008) identifies standardization as an avenue of reducing the bargaining power of suppliers, and it is essential for innovation in the mobile telecommunication industry (Tilson & Lyytinen, 2006). In the past collaborative R&D and sharing of intellectual property were means of standardization in this industry (Bekkers, Verspagen, & Smits, 2002). Android was developed to achieve an industry-wide standard in open source code making it freely available to all. By establishing OHA for this purpose creates an environment for open innovation reducing development, distribution and time costs of parallel innovation. The open nature of the Android platform makes it fully adaptable on any handset which triggers a high demand for the Android OS, which in turn reduced the bargaining power of the suppliers of OS.
Bargaining Power of Distributers
In the smartphone industry the distributers mainly consist of the network carriers who sell the phones to subscribers as a part of a mobile service plan. The bargaining power of the distributers is high since they have a large variety of handset manufactures with different features to select from. Although the failure of the Google Android may be due to a multitude of factors one key reason was their decision to sell the phone in their own web store independent of a carrier, in an attempt to ‘shake up’ handset retailing . They changed this strategy by introducing the Nexus One in Vodafone (UK) in April 2010 (Parker & Waters, 2010).
Handset manufactures try to gain leverage through branding, networking and advertising to generate brand loyalty. iPhone for example has a very strong brand community. However the entry of the Android phone has created a new ‘buzz word’ among subscribers, which gives members of the OHA a higher bargaining power over other handset manufactures.
Another key aspect that affects carriers is the new avenue of voice communication that is available in the smartphones due to the Wi-Fi capabilities and applications that are provided such as Skype and Google Voice. With time this would reduce talk time over the carrier’s network impacting their revenue. Recently iPhone blocked Google Voice on its platform (Menn, 2009).
Through collaborative innovation OHA has built a standard platform (Cusumano, 2010) and reduced R&D costs of parallel innovation and increased time efficiencies. These economies will eventually flow to the end user creating higher value for money giving Android phone makers a better bargaining power over their subscribers compared to their competition.
Rivalry between Incumbents
Within a few years of entering into the market the mobile phone became a commodity due to the competition in the market and the fast innovations that resulted in similar phones competing on price. When the smartphone entered the market it required a premium price for the added functionality of the phones. Now the creation of a standardized OS platform through Android has the potential to commoditize the smartphone.
Since it was introduced to the market Android has emerged as a strong brand whereby every smartphone running on the Android platform is co-branded as an Android phone. The very 1st Android the T-Mobile G1, Motorola Droid and the latest HTC Magic are few such examples. This creates a convergence in branding between the members of the OHA further consolidating the smartphone industry through the alliance.
The value network and open ecosystem that is OHA has a large potential for future developments in the smartphone industry due to the knowledge pool they have created. This is a critical asset for the members of the OHA over the other players in the industry. Further, having Google as a strong leverage in terms of branding, information and human resources adds to the benefit of the OHA.
By introducing a standard platform for smartphones Android has reduced any competition between handsets over the OS, opening a new avenue of competition, which is applications.
One of the key issues that arise between incumbents in the industry is the Intellectual Property violations. Apple recently sued HTC for 20 patent infringements over HTC’s Android phones (Gelles , 2010).
Barriers to Entry
The main barrier for the smartphone industry for a new entrant was the significant fixed costs of R&D and advertising. The introduction of Android has reduced these barriers significantly. First, by freely providing the SDK to the development community any new entrant can use this OS without a cost. Further the applications that are developed for the Android phones are highly adaptable and open. Therefore they can be adapted by any new entrant. Similar Apple’s Apps Store, there are multiple applications that are available with no cost.
Further the Android brand is a powerful platform upon which new entrants can leverage their marketing.
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