Friday, October 9, 2009

Mobile phone industry calls for systems thinking - SDM Pulse Fall 2009

Ofri Markus, SDM 08, Senior Technical Account Manager, extensionEngine

Editor’s note: In his SDM master’s thesis, The Mobile Common: A Guide to Mobile Open Source and Its Effects on Mobile Device Manufacturers, Ofri Markus examined the mobile phone industry from a systems perspective in order to provide product managers with a guide to influences and developments likely to affect the industry’s future. In this article, Markus (who currently works as a senior technical account manager at Extension Engine) summarizes his findings.

I entered MIT’s System Design and Management (SDM) Program after working for 10 years in software development and telecommunications, first for the Israeli Air Force and later for Tadiran Telecom, a private telecommunications company. Although I already had a depth of understanding in my field, SDM appealed to me as a way to broaden my outlook. In fulfilling SDM’s requirement for a master’s thesis, I chose to examine the mobile phone industry from this broad, systems perspective, hoping to gain an understanding of ways in which product designers within the industry could prepare for the uncertain future.

To date, the mobile phone industry has experienced both slow, steady growth and giant leaps. Although the first public telephone call placed from a mobile device was made in 1973 (by Martin Cooper, who is considered today to be "the father of the mobile phone"), it took more than two decades for cellular phones to become widespread. What enabled the change was the transition to digital network technology (aka 2G networks), which allowed not only improved features and computing power, but also enormous cost reductions at all levels of the industry. In 1995 there were less than 90 million mobile subscribers in the world; by 2000 that figure had risen to 700 million.

For years, the mobile industry value chain was dominated by the mobile phone carriers. Stringent regulatory environments and high initial capital costs of infrastructure erected high barriers to entry for new players, leaving a handful of carriers in each market to compete for the business of several million customers. Carriers were therefore able to control the type of devices that would work on the network (in many cases, these were sold only by the carriers), applications for mobile devices, and the content that users could access via their mobile phone.

However, as customer demands grew, the mobile phone began to be perceived as not just a device for communicating using voice and text, but as a multimedia device, useful for entertainment, research, and information storage. At this point, the industry’s main players discovered what their colleagues in the PC industry realized years before—that versatility is the key to winning the hearts of customers. Platforms that provide the most features garner the most users.

In an MIT class called User-Centered Innovation in the Internet Age, Professor Eric Von Hippel discussed switching from "manufacturers’ innovation" to "user innovation," a recent trend in which companies abandon efforts to understand user needs fully themselves and choose instead to outsource innovative tasks to users equipped with appropriate toolkits.

That’s exactly what telecom carriers and manufacturers did. In order to cope with the massive need for innovation and understanding of user needs, industry players turned to their users, promoting an open operating system that allowed third-party software development.

In June 2001, Symbian released the first "open" operating system, which ran on the Nokia 9210 Communicator. In 2002, the first smartphone running Windows Mobile debuted. Both platforms provided open application programming interfaces (APIs) for software developers.

iPhone—Open or Closed?
Initially, open operating systems had little impact on the industry at large, affecting neither the business ecosystem nor customers’ expectations. But that changed in 2007, with the release of the iPhone.

Figure 1. Mobile phone subscribers per 100 inhabitants 1997-2007.

Although the iPhone is a closed source system, it had a profound impact not only on the dominant design of smartphones and on consumers’ expectations, but also on the balance of power in the mobile industry, changing the dynamic that existed among network operators, mobile device manufacturers, and software developers. For the first time, the device manufacturer had the upper hand: Apple (maker of the iPhone) was able to dictate terms to the carrier, AT&T.

AT&T gave up the power of dealing directly with applications developers, determining which applications go into the devices, and charging fees for that. Instead, Apple maintains these relationships and captures the resulting revenues.

The iPhone capitalized on the biggest advantage of open-source systems—third-party software development—by introducing the Application Store, a completely new ecosystem that allowed software developers to quickly and easily develop beautiful applications for iPhone, and sell them instantly to millions of iPhone users all over the world.

It seems that Apple has found a winning formula, gaining a high level of control of the design, features, and content in its devices, while maintaining enough openness to foster innovation and build a community of developers. Apple’s ability to gain control can be partly explained by what is perhaps its greatest resource—a brand name known for innovation, quality, and hype. While other reasons are less clear, Apple has been able to balance control and innovation to some degree with other products as well.

While some companies, including Palm and RIM, have tried the same tactics, other players have opted for an open source strategy.

Open source initiatives

Companies that make closed source products usually make money by selling the products. Since open source products are free to the public, companies that make and promote these products have to generate revenues in other ways. The most notable example is Android, an open source operating system for mobile devices based on the Linux kernel. Announced by Google in late 2007, Android has been adopted by many of the world’s leading device manufacturers as the future operating system for their devices. The main incentive for Google to release Android is expanding its advertising into the mobile arena and ensuring the availability of Google services on multiple devices.

Nokia, as a response to the Android threat, decided to open source its operating system, Symbian, and release it to the public. Although Nokia is a hardware manufacturer that is very good at making and selling devices, management realized that in order to stay in business the company needs to transform into an Internet company, providing additional services and complete solutions around mobile devices.

A changing industry

Now that consumers have gotten a taste of open devices and access to a variety of services, there’s no going back. It’s clear that the industry will need to accommodate more and more openness, from applications to operating systems, to meet consumer demand for total flexibility. The result is a profound shift in the current business ecosystem at all levels.

Mobile carriers risk losing control over the devices, applications, and content on their networks, ultimately becoming dumb pipelines. In spite of their awareness of this risk, the world’s leading mobile carriers are openly and broadly supporting open source platforms, hoping to gather consumers and manufacturers around them, and to create opportunities to provide unique content and services.

Application developers are currently enjoying an explosive demand for their services, as creators of potentially killer applications for device manufacturers and carriers. There is a risk, however, that this is a bubble that may burst.

New entrants are expected to join the mobile industry as device manufacturers using open source platforms. Many, however, are skeptical about their ability to create and capture value, due to the high barriers to entry beyond the cost of developing an operating system.

Although not all device manufacturers consider openness as a “strategy changing” trend, nearly all I spoke with during my research agreed it brings two major changes to the design and development process.

First, openness affects design, because working with open source components requires careful modularization of the products. Both development and maintenance processes need to be simplified because, if open source is used, these tasks will be decentralized among thousands of people and distributed over multiple locations.

More importantly, openness has changed the context in which mobile devices are operating. This context is evolving rapidly, and that is why systems thinking is so important in this arena. Companies—and in particular, incumbent product managers—must not think of their products a standalone devices or services, but as parts of larger, highly integrated systems that deliver value to users and fit into business ecosystems that support value creation and capture of value by players at all levels.

Could openness cause such vast changes in other industries as well? In light of the recent movement toward open source and open innovation in the academic and business communities, it is interesting to consider what advantages might accrue—particularly to such service oriented industries as health care and energy. These industries are facing great challenges and are in desperate need of innovation. Openness might help to foster solutions.

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