Microsoft has finally raised the white flag in the battle for smartphone dominance. Microsoft announced that the company will be scaling down its mobile phone business it acquired from Nokia laying off 7,800 employees and writing off $7.6 billion (this is almost the entire value of the Nokia Devices and Service business minus the cash it came with).
The decision is dramatic, but hardly unexpected. David Pierce writes in WIRED:
“Give Nadella some credit for seeing the writing on the wall, though to be fair it was basically written in huge letters and lit by floodlights.”
The writing on the wall is still there and can help us see where Internet of Things will be in a few years.
Lesson 1. Business model, not product features define your destiny
In my analysis from 3.5 years ago on the VisionMobile blog I argued that the paramount challenge for Microsoft and Nokia is a broken business model, not product features, user interface or integration of software and hardware. (A business model describes how a company creates, delivers and captures value.) From my 2012 blog:
“The basis for competition in software and mobile has changed – the once-successful business models of Microsoft and Nokia can no longer ensure profitable growth. Combining two business models of the 1990’s won’t help the two companies regain their positions in the new world order, dominated by companies with Internet-age business models, like Apple, Google, Amazon and Facebook.
Looking at the industry through the lens of software-defined business models has helped us to accurately predict years before the story unraveled the duopoly of Apple and Google (2009), the demise of Palm (2009), the outcome of HP’s foray into mobile with WebOS (2010), BlackBerry’s meltdown (2010), and the failure of Windows Phone (2012).
The story repeats in Internet of Things. Much like in mobile, [tweetable]software-defined business models cause deep shifts in how value is created and delivered[/tweetable]. The IoT winners will be decided by business model innovation, not by technology, product features or standard committees. VisionMobile’s Stijn Schuermans wrote about it here – What the Internet of Things is not about.
Lesson 2. Skate to where the money will be, not where it has been
The mobile industry continues to change. In 2013 we wrote, together with Sameer Singh, in the The evolution of the handset business models:
“A third wave of disruption will again reshuffle the deck for all [mobile] industry players. We will see growth in a new class of business models, where handset hardware is no longer seen as a source of profits, but is treated as a distribution channel for digital products and services. As price competition increases, commoditization pressure in the smartphone industry, variations of “hardware as distribution”, could become one of the primary drivers of profitability.
In 2014 Xiaomi became the most valuable tech startup in the world by executing on “hardware as distribution” business model and creating a new e-commerce market for itself. From “Only for fans, or why Xiaomi is not what you think it is”:
“Comparing Xiaomi with other traditional smartphone makers is like comparing Apple with Orange (a mobile network operator). The two happen to be in the same industry, but they are really in different businesses. Apple, Samsung, Huawei, Lenovo sell phones to make profits. Xiaomi sells phones to seed competitive e-commerce business that goes far beyond mobile.
Nokia and Microsoft focused on chasing today’s competition and missed the market transition that turned their strengths into weaknesses. The same will be true for the Internet of Things (IoT): five years from now the IoT market will be very different from what it is today. The future IoT winners skate to where IoT is going to be, not where it is today.
Lesson 3. Follow developers to find future winners
Microsoft and Nokia spent a fortune trying to attract developers to its Windows Phone platform. But it was too late. Google and Apple understood the importance of developers much earlier and had established thriving developer ecosystems. VisionMobile’s Andreas Constantinou wrote in “The Dead Platform Graveyard”:
“You can’t buy developer love. You can only plant the seeds.”
The data from the VisionMobile Q1 2015 survey of 8000+ developers shows that the majority of developers, including most valuable innovators, make apps for the Android and iOS duopoly (71% and 54% of developers respectively). The story of Windows Phone proves that distant 3rd place is not viable in the ecosystem race. Moreover, as we argued earlier, ecosystems create “Black Oceans” that make competition impossible for late comers to the ecosystem party.
Software developers emerge as a driving force in industry after industry, not just in mobile. VisionMobile’s Stijn Schuermans writes in Developer Megatrends 2015:
“Developers are conquering the wrist, with 3,500+ Apple Watch apps and 2,300+ Android Wear apps. They’re conquering the car. Android Auto and Apple Carplay will be available on dozens of car models this year. 250+ OBD apps provide aftermarket solutions for car data, with growing support from big players in telecom and insurance. Developers are conquering the home, taking advantage of new technologies and platforms like Samsung SmartThings, Apple HomeKit, Google Weave, Eclipse Smart Home or dozens of device APIs. Developers are even conquering the sky. Major drone players like DJI (from Phantom fame), 3D Robotics (dronekit.io) or Airware are providing SDKs for drone apps, helping developers to put drones to use in industry, agriculture, construction or mining. Cities, healthcare, clothing, factories, … – They’ll all fall to the wave of innovation by developers.
Much like in mobile, [tweetable]IoT competitive battles will be decided by attracting developers, not by standards committees.[/tweetable]
There is a lot to learn from how the mobile industry was reshaped by software-defined business models, market-creating innovations and developer ecosystems. The lessons are in the plain sight. Microsoft and Nokia ignored them at their own peril. Who will be next?