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As an interaction designer working in the mobile space and as someone who follows Apple’s products with interest, the iPhone announcement has been something that I have been eagerly anticipating ever since rumours of its existence started to circulate. Given Apple’s reputation for innovation, I was excited to discover whether Apple could bring some fresh approaches to tired old mobile device UI paradigms and the announcement has certainly not disappointed. Not only was the much-rumoured full touch screen present, but here was a genuinely disruptive UI that was optimised to finger gestures, one that incorporated several sensing technologies and that brought the graphical elegance of Mac OS X to the mobile device. Apple’s introduction of a solid-state scroll wheel to the iPod in July 2002 helped to stimulate a debate on the use of touch technologies for mobile phones. Capacitive sensing technologies brought the promise of adaptable UIs that could dynamically change touch controls to fit different contexts and thereby remove the need for physical buttons, evolving into concepts such as Synaptics’ Onyx phone. It is fitting therefore that the concept has reached its full realisation in the iPhone. For the first time on a mobile device, we have seen multi-touch input put to use to allow users to intuitively zoom the UI without the need for zoom buttons or other controls. Steve Jobs said during his Macworld keynote to much cheering that multi-touch gesturing is part of what provides the magic to the iPhone and that it has been patented, but it is worth noting that Bill Buxton, one of Human-Computer Interaction’s father figures, has been encouraging exploration into multi-touch input for over 20 years, and the technology has been demonstrated to impressive effect already in this video by Jeff Han. Another strikingly intuitive interaction in the iPhone’s UI is in the use of the device’s accelerometer to detect the orientation of the device and to rotate the UI accordingly to allow users, for example, to view a landscape image fullscreen by simply rotating the device to a landscape orientation. This is a classic example of how Apple humanises high technology to cut away needless interaction and provide highly accessible and delightful user experiences. Redefining the rules of operator engagement But, speaking as a designer of mobile devices who has had to trawl through reams of operator requirements, perhaps the most pleasing aspect of the Macworld keynote was to see how the iPhone is pushing operators to meet its design vision rather than the other way around and refuses to be tied to requirements can befuddle the UI and lead to an incoherent user experience. Stan Sigman (CEO of Cingular) revealed that Cingular had entered into a contractual agreement with Apple two years ago without ever seeing the product, based purely on the strength of the design vision. This is unheard of – Apple have truly struck a blow by mobilising the value chain in their and the end user’s favour. It remains to be seen if other manufacturers will be able to follow suit. Since the iPhone’s announcement, reactions to it from people I have spoken to and from across the web have been varied and interesting. Some have been unfazed by the hype and argue that the device contains nothing truly new or innovative either technically or in the UI. However, to have this view is surely missing the point. When it was released back in 2001, the iPod was not particularly revolutionary in terms of its specifications either, as other mass storage MP3 players were already on the market. The innovation came in its commitment to delivering an uncompromised design vision by focussing on the total user experience of the product. The ripple effect caused by the iPod’s success on raising the profile of user experience in the industry has been truly significant. Hopefully, the iPhone’s announcement will also bring about a change in attitude that will allow UI designers to unleash their creativity.

Another idea for mobile phone retail stores is selling hardware features – imagine buying a phone and then adding an FM radio capability to it at the point of sale for a modest surcharge. Although feasible, this concept can be realised mostly in the long term. For more here-and-now ideas on retail stores see previous posts on a visual approach to selling data services and differentiating at retail with a mobile phone health index. Selling hardware features The consumer purchase criteria for handsets today are the style & design of the handset, the price, the features and the bundle offered by the mobile operator (in order of importance) – the importance ranking of these criteria is roughly the same globally. When it comes to features, the consumer will often ask how good the camera is (the more megapixels the better!), whether the handset can play mp3, whether you can use a stereo bluetooth headset with it, whether it has FM radio on, etc. Business users might ask for HSDPA capability or hardware-based security. Often the over-segmentation of handsets and features based on the manufacturer market segmentation plan will mean that one particular handset may appeal to the user in terms of style, but may lack some important functionality. OEMs today are pretty sophisticated when it comes to figuring out their lifestyle-based segmentation plans (with 50+ segments in the case of Nokia), but then again you can’t fit everyone in the same box and give them a label. In addition, consumers in developed markets are pretty demanding and could easily be spoiled for choice. Software-only add-on features like games, ringtones and wallpapers are pretty commonplace today – you can grab them at the point of sale, through WAP, web or even SMS (and they make a several billion dollar industry). But what about selling hardware features at the point of sale ? Why ? Because post-sales activation of hardware features can mean money for the operator or manufacturer who can charge the user for activation. Hardware flexing One technology that can be used to enable selling of hardware features is hardware flexing. This topic was discussed at a meeting organised by the OTA Flash Forum (OTAFF) in Athens in October 2006, where I was invited as an independent analyst. This article is based on the discussions at the OTAFF meeting. So what is hardware flexing? Handset manufacturers today tend to use a single hardware platform for a series of handsets, with some of the features flexed off (i.e. embedded but disabled). The reason is that by using a single hardware platform for multiple market segments with differentiated products, manufacturers can exploit economies of scale, tighten supply chain management and repurpose handsets for different regions. A single hardware platform keeps costs down and allows manufacturers to finalise handset hardware features just-in-time. Naturally, the handset software has to support in-life activation of hardware features. If the necessary software is already ‘baked’ into the handset, this is fine, otherwise firmware reflashing has to be involved (either over-the-air or over-the-cable). To avoid having to manage countless permutations of software images for each combination of hardware features, updating of specific software features can be used. On mass-market (non-modular device software), the only company claiming a solution to this is Red Bend as far as I know. Practicalities Let’s look at some practicalities, in particular, which features to sell, how to make money, and the barriers to adoption. Post-sales activation of hardware features has to deliver a tangible benefit to the end user. Boosting the camera quality is somewhat suspicious (were you trying to sell me a sub-standard product before?), but enabling video playback, mp3 capability, FM radio or bluetooth is ok. In other words, post-sales activation of hardware features must deliver features which are ‘on-off’ or are otherwise clearly perceived by the user as an add-on. How you make money? There are two options: a) The manufacturer makes money from selling the feature, while the operator makes money from airtime traffic, or b) The manufacturer sells the device to the operator/distribution channel with the option to enable a hardware feature. The operator then sells the handset and optionally sells the feature. As for barriers to adoption, there are a few issues although not critical. The cost of equiping a hardware platform with additional features is not great (at least it’s cheaper than having to create a new hardware platform with the extra features). Commodity hardware capabilities are pretty cheap today with bluetooth coming at a cost of sub- $0.5 and FM radio at sub- $0.2. An important challenge I can see is that post-sales features have to be incorporated into the manufacturer’s strategic plan for each platform, which requires long-term planning (12-15 months) and thus carries execution inertia. The retail processes and the mobile operator channel strategies will have to be adapted to handle this capability. If you want to also sell hardware features OTA (via web, WAP and customer care) the process complexity increases. The benefits to mobile operators, handset manufacturers and users alike would be substantial though. For operators it’s an extra source of revenue, as it is for manufacturers who are today redeveloping their strategies for post-sales incremental revenue (for example see Nokia’s Loudeye acquisition and Nokia Content Discoverer). As for users, they would be much less restrained in their choices . Why not pay a bit extra for the handset with perfect style and the perfect feature set ? Thoughts ?

The jury is still out on whether convergence will continue and mobile phones become the ultimate in-pocket-Swiss-army-knife-machine. I believe that the form factor will be what sets the limits and determines whether the functions should be split into separate devices, and nothing else. ..then you break it! But it is time to think differently. These disparate functions crammed inside the phone should of course fulfill the basic rules the converged paradigm, but not all the rules. Look at the ‘take picture’ function of the camera. Does it have anything to do with the mobile phone and all its list menus? No. Then don’t force it to look and feel like one. Sony Ericsson has made an excellent choice in their new CyberShot series! The camera application looks and feels lika a camera, and not a mobile phone. This takes time to adapt to; the first Nokia with camera even had a menu you could fold up and select ‘take picture’. The more there are established paradigms out there the less reason there is to invent a new one. The UI can be the same, but adapted to add the benefits you have from the other functions, for example a context menu with ‘send to blog’ or ‘send as MMS’. These adaptations make the functions add to each other in a 1+1=3 kind of way. I believe we will have devices divided into these functions pretty soon, all looking part mobile phone and part their own: Talk (the most fundamental function and still the king) Organizer (calendar, timer, alarm, etc) Media (music player, picture browser, etc) Share (messaging, blogs, etc) Camera (looking just like any point-and-shoot camera, plus the adaptations) Web (looking just like on the PC – just the web, again with adaptations) Downloaded Applications (which will look like the service on the web they represent, but inherit the basic UI-paradigm of the device, for example a picture browser with Flickr content sown into it.) Comments ?

Mobile phone retail shops are under-utilised today. They could be used to sell not only phones, but mobile data services as I argued previously, as long as these services are presented in a visually familiar and ‘tangible’ form. Another idea for making a difference at retail shops is this: the mobile phone health index. The idea struck me when I was using my new Nokia N73 without a hands-free and was worried about how much I was microwaving my brain. I wasn’t sure what is the SAR index of the phone (SAR = Specific Absorption Rate, the quantity that describes absorption of handset radio waves by the head) and I thought it would be nice if I had known that before buying the phone. Turns out that the N73 emits a maximum SAR value of 0.92 or 1.13 watts/kilogram (depending on the version) according to Nokia’s website, compared to the maximum value of 2.0 permitted in Europe and 1.6 permitted in the US. It’s not that bad, but it could be worse. What if I could find about the SAR values before buying my phone? What if the retail shop where I bought my phone showed me information on the health index of all the phones ? Most people I ‘ve spoken to about their phone use are concerned about the health risk from a micro-microwave next to your head. It’s not that easy to find the information and interpret it. All handset manufacturers certifying their phone through regional authorities (e.g. FCC) are required to compute the SAR index. From a quick search, both Nokia, Motorola have dedicated webpages listing the SAR value of all handsets. CNet has a section of its website dedicated to cell phone radiation levels, including SAR levels for phones from major handset manufacturers selling to the US and a list of the 10 phones with the highest SAR values. The Health Protection Authority in the UK also has an excellent explanation of what SAR is and what it means in layman’s terms. By displaying the mobile phone health index (based on SAR values), handset retail shops could indeed make a difference in the eyes of the consumer. If I ‘m concerned about my health when using my phone, I ‘ll go to the retailer that can educate me about what phone is safest for me to use. Here’s a sketch of what it could look like: an information card next to each phone, displaying a ‘mobile phone health index’ (the higher, the safer the phone is), based on the inverse of SAR values. Naturally, the retailer can never tell you whether your phone is safe or unsafe (they ‘ll need to hire many more lawyers for that), but they could indicate how safe your phone is based on the internationally agreed and readily available SAR index. The health index would make a major difference to retail shops (both operator-owned and independent shops), which currently have little differentiation among them beyond price and brand colour. Over time, displaying a health index for phones may become commonplace, but for the first 6-12 months it would make a major difference in the eyes of consumers, and a major ‘first’ that a retail store chain can brag about. Thoughts ?

Open source software has existed in mobile phones since Motorola’s Linux-based A760 was launched in early 2003. Open source has come a long way, from an early experiment in mobile Linux three years ago, to an accepted strategy today for increasing product value by engaging external communities. Linux-based software stacks for phones are the leading form of open source software (OSS) today. An array of vendors has crowded the marketplace with Linux software offerings, including MontaVista, WindRiver, Trolltech, Purple Labs, Open Plug, A la Mobile, Aplix, OpenMoko, and Mizi Research. However, OSS stretches way beyond Linux. Recently Sun, Microsoft, Nokia and Adobe have announced or renewed their commitment to open source, too. One could say that open source software has been making waves in the last few months. Aside from Informa’s Open Source in Mobile conference that took place in Amsterdam in early November, there has been a recent flurry of announcements on open source software: On November 28 Trolltech announced that it would provide software productisation services to OEM and ODM customers in the form of Greensuite. Specifically, Trolltech’s professional services division will be providing full integration and testing services on a complete stack of software components, whilst offering a choice of components and UI customisation. The stack will comprise of Trolltech’s Qtopia software as well as select third party applications including browser, messaging, multimedia, DRM, VoIP support, Java, office and synchronisation components. Trolltech will be acting as the single point of contact, responsible for software integration, as well as pricing, marketing, legal and commercial issues. The Greensuite partners will be announced over the course of the next few months leading to 3GSM. The proposition is very similar to that of A la Mobile, and Aplix’s BTO offering. ALP is also a complete stack as is OpenMoko, Mizi and PurpleLabs. Nokia‘s Maemo project is continuing to grow and Ari Jaaksi (Nokia’s Director of open source operations) announced at the open source conference the Sardine device which would follow the 770 Internet tablet, both based on the Maemo stack. In July Motorola pledged that more than half of the manufacturer’s mobile phones will use Linux within 18 to 24 months. Motorola has further open sourced their implementation of MIDP3, i.e. next-gen Java for phones. At the open source conference, Christy Wyatt (VP ecosystem development) also said that sales of Motorola’s Ming have reached 1% of total phone sales in China, an impressive feat. In early November Sun announced details of how it is going to open source J2ME and J2SE implementations, marking a major twist in Sun’s Java saga. By open sourcing Java, Sun hopes to leverage community momentum around Java (especially from Vodafone, Nokia and Motorola), sustain the growth of Java and alongside its own engineering services business, and steal the thunder from the competing Flash application execution environment technology. Earlier in November Adobe announced it has open sourced ActionScript 3, a core part of Flash, which is now hosted by Mozilla and will find its place into future Firefox browsers. Adobe’s move may intend to replace Javascript with ActionScript, as its Flash environment moves to a full application execution environment, in the form of project Apollo. Handset manufacturer FIC announced OpenMoko, the first fully open source Linux phone software platform, that competes with Purple Labs, Mizi, Aplix, A la mobile and Trolltech. In late October Access Linux Platform announced it is open sourcing its application framework, a critical part of the phone software stack responsible for managing application lifecycle and communication on the handset. Linux tools vendor Open Plug announced it had secured a $15m Round B funding in early October. A la Mobile was started in June by entrepreneur-in-residence Pauline Alker with $3.5m seed funding and is believed to be looking to secure another $10m to fulfil its promise of ‘the Red Hat of mobile’. In October, private equity firm Garnett & Helfrich Capital announced it had acquired a controlling stake in a privately held U.S. company Celunite, reportedly for $30 million. Celunite is a California-based provider of Linux-based open-source technology, which is still in stealth mode. Microsoft recently expanded its portfolio of software under a Shared Source license, now providing source code access to the full Windows CE 6.0 kernel. More Linux stack vendors are expected to follow Trolltech’s Greenphone example, thus offering developer communities full access to ‘real’ phone hardware, a critical step towards growing community contributions to mobile Linux. This flurry of announcements in the last few months of 2006 can only signal more moves in the forthcoming 3GSM event in February. Beyond the tens of mobile Linux players, the commitment of Sun, Adobe, Microsoft and Nokia to open source is certain to cause disruptions in the predictable future of the mobile industry. Software vendors, mobile operators and handset who haven’t yet taken the time to understand the commercial advantages (and pitfalls) of open source, now need to.

Motorola’s acquisition of TTPCom in June bought the OEM ownership of the AJAR operating system for low-end handsets. In a corporate newsletter published in October, Motorola announced that the AJAR platform would be licensed to other OEMs, following in the footsteps of Nokia’s S60 licensing strategy. I believe Motorola’s AJAR licensing will suffer from the same issues that have caused S60 licensing to fail to date. Quick recap Motorola completed the acquisition of the Cambridge-based company on 28 July 2006. TTPCom is now known as the Motorola TTPCom Product Group and fits within the Technology Office in the OEM’s Mobile Devices Division. As TheRegister points out Motorola paid a huge premium to buy TTPcom. “At first, the price tag of 103m ($192m) looks over-generous for a company that saw a 36 per cent revenue decline in its last fiscal year to 37.2m ($69m) and a slide into the red with a loss of 32.3m ($60m). But this acquisition has nothing to do with revenues and everything to do with gaining valuable technology assets for not one but two of Motorola’s most strategic growth initiatives ultra-low cost handsets and fixed-mobile convergence.” The rationale behind the licensing strategy AJAR is TTPCom’s operating system that includes the applications framework, applications suite and tools for voice phones and low-end feature phones. AJAR (literally means slightly open) was named after the middleground between open OSs and closed, proprietary OSs. As Rob Shaddock, CTO at Motorola Mobile Devices explains in the TTPCom newsletter, Motorola initially licensed AJAR for use by its ODM suppliers. “We decided that it would give us more flexibility and the ability to move a bit faster if we could deliver a software platforms to the ODMs who were all using their own proprietary platforms.”, Shaddock says. The newsletter further explains “most people in the industry thought that we ‘d be swallowed up by Motorola and that they ‘d never hear from us again. That couldn’t be further from the truth”. The newsletter continues saying that “the target is ‘ubiquitous AJAR’ for the mass market and feature phone segments. Targeting the top tier handset manufacturers and their supply chains, we aim to get this tool used right across the industry to reduce the cost of handset production and to enable manufacturers to meet the demands of operators more effectively.” The rationale behind the AJAR licensing strategy is that “operators’ requirements are continuing to increase exponentially” (technically not true – I would say linearly, and are already showing signs of resource fatigue). “To manage the consequences, the industry needs a shared platform for the development of handset user experience – AJAR”. So, Motorola’s plan is to license AJAR to top OEMs and create a community of value-added applications around the platform. Can you trust a competitor as a strategic supplier ? AJAR is targetted to low-end handsets, combining proven modem stacks with a low-memory-footprint OS platform – characteristics which are quite different S60’s target market and design goals. On the other hand, the challenges in Moto’s AJAR licensing strategy are quite similar to Nokia’s S60 challenges. Which OEM will trust a competitor to sell them a platform ? There are four issues with this strategy: 1. Risk of lock-in to the platform and lack of roadmap control – which is why Motorola, Nokia and Sony Ericsson are using internally-developed software platforms. Samsung is also known to be developing its own Linux platform, to replace Mizi. 2. Risk of IP leakage. Who will trust Motorola to build Chinese walls between the AJAR platform group and the OEM accounts groups ? “In sharing a tool like AJAR across the industry’s leading handset manufacturers it is crucial that we recognise the need for: transparency; a declared roadmap; absolute confidentiality of customer information; and a level playing field for pricing” reads the newsletter. Motorola’s words reflect a warm, intimate and trusting welcome, but it will take much more than words to convince customers to walk through the door. 3. The low-end and mid-range segment is very price sensitive and is mostly driven by internal OEM efforts. If a full operating system stack costs $5 for a high-end feature phone, how much can Motorola command for an OS for low-end phones ? The only upside to this is the tens of millions of shipments associated with low-end handsets. 4. The window of opportunity is closing. Most OEMs have already selected their low-cost platforms, although Sony Ericsson and Samsung are still valid customer targets. The answer is no .. and that’s why Moto’s strategy won’t be going far. All in all, acquiring TTPCom was a sane decision for a manufacturer like Motorola with an in-sourcing platform strategy. Most certainly the acquisition will help Motorola strengthen its IP portfolio in 3G+ and convergence products. It comes at the right time, given Motorola’s increase of market share, confidence and R&D spending following the wild success of the lab project that became RAZR – something which reflects on the hiring frenzy at TTPCom’s Cambridge offices. However, putting money into building an ecosystem and selling to competing OEMs seems like money down the drain. #ajar #motorola

Qualcomm has been struggling to sell BREW handsets outside CDMA markets for some time now. Its first breakthrough came with operator O2’s announcement in November 2005 that it will sell BREW-based handsets within its ‘X’ range of branded handsets. Later it emerged that O2 was buying the uiOne on-device portal and idle-screen customisation client-side application, but not DeliveryOne, Qualcomms’ back-end content and application delivery server-side infrastructure. Today, a year later from the O2 press release, Qualcomm announced that operator Telecom Italia Mobile (TIM) has agreed to launch two BREW handsets, the Onda N5050 which will feature uiOne with downloadable themes, and the Samsung Z630. Both handsets support BREW extensions for 3D games, which in association with Gameloft will allow for downloadable 3D games to TIM subscribers. There was no explicit mention of the DeliveryOne infrastructure within the announcement for the deal, which probably means that TIM wouldn’t shell out the license fees for the server infrastructure when it is only agreed to a single ODM handset. [Update: Qualcomm PR contacted me to say that “TIM’s deployment of BREW services does include DeliveryOne. TIM has taken both the client technology and the server technology. DeliveryOne is used to deliver the uiOne ‘Themes’ and the BREW games”]. Note that Onda is an Italian value-added-distributor who also brands ODM handsets. The TIM announcement brings Qualcomm an inch closer to Europe – although this success pattern seems to be not far off a marked improvement compared to last-year’s announcements, i.e. deals on 1-2 handset models with uiOne, but without with the server-side baggage. It once again confirms the following paradox: uiOne is a brilliant software solution for delivering idle-screen personalisation and customisation (see earlier article on this fascinating topic), while Qualcomm is the product’s biggest advantage (given the cash investment to build uiOne, a.k.a Trigenix-on-steroids), and its biggest drawback, given that operators are wary of being locked-in to the Qualcomm chipset-plus-OS-plus-UI-plus-services vertical stack. [Update: Ok, so TIM has also ‘taken’ both the client technology and the server technology from Qualcomm, licensing and financial terms remaining undisclosed. This does mark a success for Qualcomm in selling the full uiOne solution in Europe, although much has yet to be proven, i.e. whether TIM will actually go beyond dipping its toe in the water, into deploying BREW devices and uiOne across a greater share of its handset portfolio. At the same time it should be noted that Qualcomm possesses a strong card, which is an out-of-the-box software platform (BREW + uiOne) customisable to a good extent by mobile operators, and available on tier-2 or tier-3 ODM feature phones that come at competitive price points. This proposition does present an appealing option to European operators who have either not seen enough return-on-investment from their previous handset customisation efforts (e.g. O2, Vodafone?), or who are wondering how to best embark on portfolio-wide handset customisation strategies (e.g. TIM and T-Mobile)] Andreas

In the last five years, tier-1 mobile network operators (MNOs) have looked for strategic inspiration in many places, albeit with limited success: at the killer app, the killer brand, the killer supermarket, the killer segmentation, the killer branded handset, the killer content and the killer service. All have been results of the operator-is-king mentality, which followed from the astonishing revenue growth reaped by networks in the early years of mobile. All have come far short of expectations. My thesis is that operators should re-evaluate their strategies, not in the context of the one-sided market, but in the context of a two-sided market, where value flows both from the left and right of the chain. In other words, rather than continue the one-firm-provides-all strategy, they should adopt a platform strategy, by linking users with content providers and advertisers. They should take lessons from Google, VISA, Microsoft, Shell, Monster and shopping malls. MNOs should focus on extracting value only where they can add value, i.e. through network, handset and retail enablers. Let me explain, starting with a short history of how operators have tried to run the show so far. The killer app The buzzword of the telecoms-bubble era was the killer app. What was it? Email, chat, TV, IMS, mobile broadband (I still find the term amusing!) ? Nobody knew and nobody ever found out – the killer app turned out to be a bubble in itself. The killer supermarket Operators then tried the ‘killer supermarket’ recipe. The idea was that you could get customers to pay just for walking around the supermarket and browsing the shelves. Oh, and when you wanted to go across the street a guard at the door said: “Sorry, you can walk within our beautiful gardens, but you can’t go out. Don’t you remember ? You agreed to these terms when you walked in”. Within these gardens, operators dreamed that they could open up a bank, utility services and all the shops that the consumer would ever need. Tier-1 MNOs had to stop dreaming when the golden era of GSM growth started to dry and so was funding for blue sky projects. Walled gardens, too had to open after journalists did not spare any flattery with the whole garden business. The killer brand One of the most memorable milestones in mobile operator history was around 2002 when most tier-1 MNOs got jealous of Orange’s success and thought they should have national colours and buy lots of paint buckets to dress up their portals, handsets and everything else. Thus came Vodafone’s Red, O2’s Blue, T-mobile’s Magenta and Sprint’s Yellow. The colours did have a memorable effect on the consumer, but they lacked a memorable deliverable. When the brand deliverables are not clear or relevant to the consumer (what does an MNO brand stand for?), there is little tangible differentiation to the eyes of the consumer, other than price. What does Vodafone Live! mean today to the average consumer ? Sergio Zyman (ex CMO, Coca Cola) wrote an entire book The killer segmentation Since 2004, operators invested in building more and more sophisticated marketing segmentation plans. Most tier-1 MNOs today have about 10 segments (including business users), as shown in the case of T-Mobile below. The killer content It was then that operators realised they needed Disney, MTV and Ferrari to get their users excited. However, content licensing turned out to be expensive (from 20M to license Disney content for a major operator, to nearly $100M to build ESPN Mobile, which as we all know went the way of the dodo). The killer handset What if operators could be making their own handsets ? Surely they would deliver the best handset for their own consumer segments, they thought. Vodafone decided to walk down this path and assembled a fine team to produce the Simply range. Vodafone’s Simply proposition, comprising of handsets, customer service and dedicated calling plan, was designed for a consumer segment the operator calls ‘adult personal users’. However, according to reliable sources, Vodafone country operations are today struggling to sell Simply handsets, because the range is competing unfavourably with other handsets in terms of price. Here’s another lesson: operators don’t know how to sell handset propositions, but manufacturers do. So much for the killer handset notion. The killer service We ‘ve heard it again and again. At 3GSM 04 the killer service was 3G. At 3GSM 05 it was HSDPA. At 3GSM 06 it was Mobile TV. All have come and gone, but still 80-90% of data revenues are driven by SMS in most western markets. In most cases, operators who have licensed DoCoMo’s i-mode solution have been able to convert at best 10% of their subscriber base. A new tariff and marketing plan stands to make much more revenue for the operator than x (insert a large number) billions spent on upgrading the network and handsets for next-generation services. So where to next ? From product to platform strategy I would argue that tier-1 operators need to go back to square one and reconsider their long-term strategies. Starting from first principles, operators should extract value where they can add value. Beyond the voice and data transport network, there are two other things that operators do well: handset customisation and retail shops. However, these should be seen not as products, but as platforms. My thesis is that MNOs should look into the mirror and realise that the market is not one-sided, as in the traditional manufacturing business, where revenue flows from right to left. MNOs should understand that they are part of a two-sided market, where buyers are on both sides of the value-chain equation and value flows from both the left and right. Two-sided markets have been successfully exploited by credit card companies (VISA, who links consumers to merchants), operating systems (Microsoft, who links PC users to application developers), internet search (Google, who links surfers to advertisers), recruitment (Monster, who links job hunters to employers), fuel(Shell, who links gas stations to car owners) and shopping malls (who link shoppers to retailers). Two-sided market concepts and strategies are the subject of the article “Strategies for Two-Sided Markets” by Eisenmann, Parker and Van Alstyne appearing in the October 06 issue of the Harvard Business Review (and well worth a read in my opinion). In this context, operators should realise that they should act as the platform that links consumers with service providers and advertisers. This in essence is a three-sided market, where value flows from, and to, all three sides. Rather than try to be the manufacturing point for all goods, operators should extract value by adopting a platform strategy. I have been thinking about this topic since my early strategy days at Orange. All in all, I believe MNOs should focus their platform strategies three pillars: Pillar 1: Focus on Voice Voice is the quintessential mobile service, revenue and profit-wise. Operators should own and manage voice services, but also provide peripheral data services related to voice. Examples are T-Mobile’s My Faves, Comverse’s visual voicemail, SnapIn’s self-service and SKT’s avatar-based videotelephony service). Pillar 2: Develop Platform, not Product Strategies Operators should realise that consumer service innovation most often comes from 3rd party service developers (and as Bill Joy says, the smartest guys work for someone else). Operators should develop platforms that link service providers with advertisers and consumers (and do it faster than Yahoo, Google and Nokia) – in other words be service pipes, to avoid being bit pipes. MNOs can develop platforms that expose network, device customisation and retail enablers as follows: – Network, location, subscription and device management APIs on the network side – on-device portals and on-device electronic service guides that act as an accessibility/discoverablity portals for 3rd party services across all handsets. – offer service promotion through retail stores – here operators win doubly by reselling services and selling retail space. Operators should offer these platform constituents to all service providers (big and small), all advertisers and all consumers, and let the killer app, brand, supermarket, segmentation, branded handset, content and service be figured out by someone else. Pillar 3: Develop brand deliverables that make sense to the consumer If MNOs want to to be ranked more favourably within the list of handset purchase criteria, they should refocus on developing clear and sustainable brand deliverables that are relevant to the consumer, namely: – offer choice. This can be choice of latest handsets, choice of home-screens or themes, choice of third party brand, service provider, etc – offer peace of mind. Good examples are Orange’s Signature Premium package and Telefonica’s use of FOTA as an assurance of instant handset fix) – offer convenience, i.e. allow users to visually check their balance, or how much a particular service will cost, check their voicemail, request upgrades, manage their subscription,etc. In in all, operators should become platforms or service pipes, before they degrade to being bit pipes. Thoughts and rants are welcome.

The end of each quarter is always an exciting period in the mobile business, the average selling price and market shares of the manufacturers are disclosed. The third quarter, 2006, looked like this in terms of market shares:Nokia33.6%Motorola22%Samsung11.1%Sony Ericsson6.7%LG6.3% (Source: http://www.theregister.co.uk/2006/08/28/moto_gains_market_share/) As can be seen, the top five cell phone manufacturers own around 80% of the market, less than 10% correspond to a handful of Japanese OEMs and the remaining 10% of a collection of smaller brands. Result: The world will more and more be ruled by a few handset vendors, instead of many. (In the CDMA-space, Qualcomm has tried to create the opposite situation with 1-3% companies like Pantech-Curitel and the Japanese vendors, but as any monopolized market everyone involved pays a higher price. Due to a lot of reasons; cost being one of them, dependency from one player another, CDMA has not gained market share over time.) Disclosure: Average Selling Price and Market share are connected What then happens is that people look at the report to find statements like ‘Nokia device ASP of EUR 93, down from EUR 102 in Q2 2006‘ or from SEMC ‘Average Selling Price increases sequentially to 147‘. After this statement they usually make two statements: ‘Why are Nokia losing their margins?!’ or ‘Sony Ericsson is one of the few vendors who really know how to make phones!’. It is not that strange that Nokia and Motorola have largest market shares but not the best ASP. The world market looks roughly like this (divided by type of phone):Low end (Voice phones)41%Mid/High-end (Feature phones)42%OpenOS (Smart phones)17% Source: Nomura 2005 (To avoid unnecessary discussion: the OpenOS-figure is rather high, Gartner for example has a guesstimate of around 10 %.) In the stagnant markets (Western Europe, Korea, Japan) the devices that are sold are to a greater extent feature and OpenOS phones, and people switch phones at least once a year. Here it is a margin business; few phones with good margins are sold. In BRICE (Brazil, Russia, India, China, Emerging) mainly voice phones are sold and these countries has a LOT more people. This is a volume market; a lot of terminals, but with bad margins. (In US, and some other parts of the world, the gaps are as usual bigger and there is a large diversity.) So with greater presence in these the volume markets you get better market share, but also lowered average sales price and margins. Bigger players always have the economy of scale to help them, but it is usually easier to increase price than to lower development costs and bill of material. Vertical vs. Horizontal Sony Ericsson focuses on the feature phone market and not voice phones. At the same time, they are doing something even more important to help their ASP: They focus on clear vertical segments. Sony Ericsson has created two recognizable sub-brands that actually help the user select phones: Walkman for music centric devices and Cybershot for the devices sporting a better camera experience. This is good marketing! The best way of making a consumer pay more is to make her understand why she should. Motorola’s four letter abbreviations (RAZR, ROKR, SLVR, etc) or Nokia’s N-series, E-series or four digit versions don’t bring the same clarity. (The 2xxx, 3xxx, 5xxx, etc series might be clear to Nokia’s marketing gurus, but they are certainly not clear to us consumers.) Samsung and LG haven’t even tried, but spend their time creating pushing the envelope of hardware instead. What Sony Ericsson has done is to create a vertical device: A device which is dedicated to a certain usage (or at least better at this). Nokia with its S60 is moving the other direction: towards a horizontal platform. Most other devices are just fuzzy. There is another group of companies who has followed a similar strategy as Sony Ericsson has: ELLE, Bang & Olufsens Serene, Nokia’s Vertu, Goldvish and others with them. The ‘vertical’ is not a dedicated usage, but an attitude, a clear proposition. The great thing of having a horizontal strategy is that you can become the required middle-man. Who would have built applications for anything but Microsoft Windows a couple of years ago? What we don’t know is whether the horizontals become important. Will people buy a handset so that they can download apps? Or will they choose a pre-packaged target group (and maybe add some links, wallpapers and Java-applications and games)? The risk of going for the platform strategy is that if a certain usage or application becomes dominant you risk become a pipe, or plumbing. Who would have thought that Microsoft’s greatest threat would be Google or Adobe? Hampus Jakobsson, TAT

In the mobile industry, we often talk about customisation and personalisation interchangeably to describe how a service or a handset is adapted to the needs of users. I would argue that these two terms refer to very distinct concepts; in fact customisation is the exact opposite of personalisation. Let me explain why. Customisation In general, we can safely define customisation as the act of modifying the mobile handset or service to suit operator goals. Examples are Orange’s home-screen customisation, and Vodafone’s Live customised WAP portal. The defining characteristic of customisation is that the same content, look & feel, settings, etc of the customisation handset or service are the same for all users. Whether you are Mary, John, Samantha or Bill, you ‘re bound to like seeing your handset painted in the same trademark red, orange, blue or magenta that matches the operator contract that you ‘ve chosen. Right. Personalisation Customisation and personalisation are two extremes along the same spectrum of possibilities. Interestingly, there are two more points along that spectrum, which offer a compromise between customisation and personalisation, as shown below. Targeted customisation Operators are making significant efforts to target niche user segments such as the young or the elderly. Targeted customisation is when the operator or service provider modifies the handset or service to suit the (perceived) needs of a specific customer segment. Another example is the Sony Ericsson Robbie Williams special edition W800i walkman phone launched exclusively by T-Mobile in October 2005 to appeal to fans of the pop artist. Targeted personalisation Mobile service providers have explored yet another approach of a mass-market service that can be personalised to individual users and usage patterns. Targeted personalisation is when the service provider is able to profile each user and tailor the service to the individual characteristics of that user. Personalisation, the end-goal of customisation Mobile operator customisation strategies in 2002-3 evolved around branding the handsets and services with the trademark orange, red, blue or magenta colours, assuming that the one-brand-fits-all approach would win customers, increase ARPU and reduce churn. As the operator strategies have been maturing in 2005-6, operators are realising that a low-key brand approach, coupled with strong elements consumer brands (read Google, Yahoo, Robbie Williams and Ferrari) are more successful at attracting consumers. Both Vodafone and Orange claim to focus on user personalisation, while the implementation of their strategies suggests otherwise. The branded hard key on Live! phones takes you to the central operator portal, and the ‘Your Page’ entry on the home-screen of Orange Signature devices is the very last entry of the menu structure. If operators want to maintain a clear, desirable and sustainable advantage over competitors, they need to offer not only brand, but choice at each and every point.

Handsets for niche segments are making their presence felt, not only behind the mobile industry scenes, but also in the retail marketplace. Siemens Xelibri was the first bold experiment into handsets designed exclusively for niche segments (back when the German manufacturer had cash to spare). Turns out the experiment was extremely valuable for the industry, but an expensive mistake for Siemens. Xelibri has been followed by tens of handsets every year targeting niche segments: for examples look at Vertu, ESCADA, Firefly, Vodafone Simply, Dmobo’s Disney-themed M900, i-kids, ELLE Glamphone, Bang & Olufsen Serene, Goldvish, Casio G-Zone, Voce, Jitterbug and Nordisk MobilTelefon handsets, which target at a wide range of segments: kids, fashionable females, tweens, teenagers, sports enthusiasts, senior citizens and VIPs. ARCchart’s new report on the ‘The New Age of Handset Customisation: 2006-2011‘ takes a close look at the wonderful and risky crossroads of niche marketing and mobile handsets (I was the lead author of the report). The report documents a wide range of uniquely customised handset to date. The screenshots below tell the complete story (click twice to enlarge): In this context, Xelibri is the earliest and probably the most fascinating case study on handsets for niche segments. And one that has many lessons to teach to the industry. Xelibri: a valuable, but expensive lesson Xelibri is a well-known case of manufacturer device customisation, both for its uniqueness and its ultimate failure to execute. Quoting from the ARCchart report, ‘Siemens gave birth to Xelibri in 2001 with a view to creating a differentiated range of handset models which would support higher handset margins by appealing to consumers’ sense of fashion and style, as opposed to differentiating on technology features. In addition, by releasing two new portfolios a year, in sync with the established fashion seasons, it was intended as a vehicle to shorten the handset replacement cycle. In creating Xelibri, Siemens management opted for developing of a new handset line and an entirely new brand, free of any existing technology associations. Xelibri was announced to the world in February 2003, with a plan to release ‘collections’ of four handsets every six months – a Spring/Summer collection and a Fall/Winter collection. The first Xelibri collection dubbed ‘Space on Earth’ was launched in March 2003 and the handsets were sold in fashion boutiques and through concessions in department stores, positioned alongside the clothes and jewellery and not the electronics. The phones were sold SIM-free, without any operator involvement in the sales process and therefore no subsidy. The first collection did not sell well, and rumours circulated that Siemens had sold less than 100,000 units in total, despite the launch hype and the extensive (albeit not always glowing) press coverage. The second collection launched in October 2003 amid a barrage of publicity and a high profile TV campaign in a number of its key markets. The designs – all produced this time by the design consultancy IDEO – were an improvement on the first range, with each product appealing to a fairly distinct demographic Towards the end of 2003, Siemens management acknowledged that sell-through rate at distribution outlets was very poor – on some occasions as low as 100 handsets for major fashion stores. To shift stock, Xelibri handsets ended up being sold in some incongruous locations, including discount supermarkets and bargain internet sites, at discount rates up to half their original value. Eventually, in May 2004, Xelibri was officially delivered the coup de grace by Siemens. It was the conclusion to a bold experiment, but in the end a reported total of only 720,000 handsets were sold, less than 2% of Siemens’ total handset sales in 2003, according to the Wall Street Journal. Where did Xelibri go wrong? While the conceptualisation and the organisational effort around Xelibri was a valid one, the project failed to execute for a number of reasons. The handsets lacked a recognisable brand. This was intentional, as Siemens wanted to establish a brand entirely separate from its own, which it could buld into an identifiable handset ‘fashion brand’. However, building a brand on this scale requires a budget to match and years of campaigning, something which Siemens was lacking. Furthermore, the Siemens brand was never exposed to the consumer, leaving the handsets with a lack of technology assurance. Typically, a demographic that has disposable income to spend on one or two supplemental handsets as discretionary fashion purchases is going to be a moneyed elite. In general, these consumers are sophisticated and educated men and women who are familiar and comfortable users of technology. However, the Xelibri handsets had appalling feature sets (typically only supporting voice and SMS) in a market where high-quality colour screens and integrated digital cameras were becoming the norm. Xelibri lagged the technology curve and that harmed sales. The handsets looked and felt cheap. While aspects of the fashion market may appear entirely frivolous, great care and pride is taken in the product finish, particularly in the power brand accessories market against which Xelibri was benchmarking itself. Xelibri failed to incorporate this, which corresponded to a low value perception. The distribution channels – fashion boutiques and department stores – did not have enough time to develop: these retailers were not accustomed to selling technology items. At the same time, shelf positioning was not controlled by Siemens, meaning that Xelibri handsets were ‘lost’ amidst unrelated items and imagery, when they should have been framed by promotional material and images. The lack of operator subsidy meant that a Xelibri handset costing around $250 had to compete against a sexy Nokia handset with colour screen and integrated camera sold at low cost under an operator contract. The desirability of the Xelibri range was not high enough to place it in an entirely new product category to that occupied by the standard subsidised handset portfolios. According to a Tier-1 manufacturer who performed a post-mortem on Xelibri, the handsets included a new hardware reference design which was created from scratch for this project. This was an unnecessary risk and a significant surplus to the Xelibri handset BOM. Perhaps Siemens’ most significant failure was that Xelibri simply did not engage with its target market. While most of the marketing around Xelibri positioned the handsets as an accessory for the urban and street demographic, the handsets themselves did not carry design traits, which appealed to this audience. While all of Xelibri’s failures could be corrected by Siemens with hindsight, its inability to garner respect from a fashion conscious consumer base would be difficult to rectify since it goes to the very heart of the company’s nature. Fashion companies such as Chanel, Armani, Quicksilver, Nike and Oakley have spent years and hundreds of millions of dollars understanding and engaging with their target audiences and reinforcing their respective brand values. It is questionable whether a consumer electronics manufacturer will ever be able to engage consumers in a fashion context. This is not a limitation that only BenQ Siemens faces, but indeed is applicable to all Tier-1 OEMs. All in all, Xelibri was a valuable lesson to the handset industry, albeit a very expensive one. Since 2004 a lot has happened. Tens more handsets for niche segments have appeared. Although no one has been as brave in delivering a unique concept as Xelibri to the market, there are plenty of other case studies worth highlighting, two in particular: Bang & Olufsen’s Serene handset and ELLE’s Glamphone. Bang & Olufsen’s Serene: total handset redesign in true B&O style “Bang & Olufsen is a vertically integrated business that sources and manufacturs most products internally, including its DECT handsets, with only a few of its core components, such as its LCD and Plasma screens, supplied by third parties. However, B&O decided not to develop handset technology internally since mobile communications was not a core competence. Instead, B&O decided to partner with Samsung, since the two companies had prior working relationships, but also because B&O felt the Korean manufacturer shared similar processes and a focus on quality. Samsung also had a matching strength of brand and was able to deliver an international footprint. The Serene concept was developed by David Lewis, B&O’s Chief Designer for the past 30 years. B&O retains Lewis on a consultancy basis, as the company recognises that designers have to remain independent and work in different industries to keep track with market trends. Lewis was heavily involved in the entire design process, while the engineering team was a mix of B&O and Samsung staff. Development of the Serene handset took one and a half years from design to completed product. The handset The Serene handset sports typical B&O industrial design and is highly customised. One of its unique features is the motorised hinge – slight pressure on the phone flip activates the motor and the phone automatically opens and closes itself. Beyond voice, the functionality of the handset has been limited to the basics: SMS, phonebook, calendar, VGA camera, calculator, dictaphone, world time, alarm and Bluetooth. B&O justifies the limited functionality and poor camera quality as a result of the decision to optimize the device for voice and emphasise simplicity and ease of use. The wheel-shaped keypad is another distinguishing characteristic, taken from B&O’s range of DECT handsets. The screen is 2.1” QVGA (320×240 pixels) with 262K colours and the user interface has been totally redesigned, with much of the functionality found in today’s mass market phones omitted. B&O Serene: Market reaction and strategy According to Brian Stilling Laursen, Product Manager for Serene, the feedback B&O has received so far has been positive, with the company being thanked for breaking the boring mobile handset mould. The simplicity of operation and limited functionality has also been another source of positive feedback. With a EUR1000 price tag, B&O’s margins for the Serene are comparable to the margins of its other entertainment products. However, small volumes and fast replacement cycles may challenge B&Os business case for Serene, with the company contemplating in early May whether to proceed with a second version of Serene. According to David Lewis, Bang & Olufsen is quite exceptional, because they require a concept to last for at least 10 years, a requirement that is unlikely to remain true in the case of mobile handsets. In turn, ELLE’s Glamphone project has been surprisingly succesful, given that it has produced a distinguishing design for a niche segment that has sold in 6 figure numbers. The Glamphone: a handset for fashion-consious women “The GlamPhone series has been made possible by the collaboration of three parties: ELLE, Tedemis and TCL Alcatel. ELLE, a leading women’s fashion magazine brand is owned by Lagardere Media, the number one special interest magazine publisher worldwide. ELLE stands for femininity, fashion and French culture. ELLE contracted with Tedemis, a French mobile phone licensing agency, to assist in the identification of a handset partner and manage license contracts between the brand and the manufacturer. Tedemis is essentially the matchmaker that brought together TCL Alcatel and ELLE. The GlamPhone No 1 handset has sold more than 100,000 units in 1Q06, with the sales of GlamPhone range expected to reach 250,000 by 3Q06. These volumes rank the GlamPhone particularly high in the league of uniquely customised handsets. The distribution network includes Europe, Russia and Latin America, while the manufacturer is expanding sales to Asia (including Thailand and Malaysia) and the US, where it will be channelled through a San Diego-based distributor. Expansion in global sales is expected to ramp up volumes on GlamPhone handsets to 500,000 by the end of 2006. Clearly, TCL Alcatel is satisfied with the product revenues and profitability, given that the handsets sell at a premium, compared to handsets of similar function. While GlamPhone sales account for a small fraction of the total handsets which TCL Alcatel ships annually, they account for a disproportionately greater level of its profits, and the company expects this trend to continue and grow as it adds new uniquely customised handsets to it production line. We expect ELLE to be making in the order of $2 million to $3 million annually from the sale of GlamPhone handsets, a particularly attractive figure given that this is mostly profit arising from brand licensing”.

A couple of years ago, many in the mobile industry foresaw that mobile operators would control most of the device specification, including the user experience. The manufacturers would turn into unknown hardware manufacturers, considered happy if their name was printed on the battery. There was plenty of evidence; NTT DoCoMo’s undisputed reign in Japan and Vodafone’s increasing specification work. Today, I say the tables have turned. The manufactures are still the big brands and most of the user experience is still controlled by them. The operators are still waiting for data revenues to rise and their specifications of look-and-feel are shrinking. Someone proved that a Vodafone UI increased the usage of Vodafone services, but not to the extent that it gave any meaningful return of investment. It was too arduous and expensive to fight about the user interface. Most operators (maybe not in the US – yet) have lowered their walled gardens, to increase data revenues from uncontrolled Internet usage. So what is it that hinders consumers from switching between operator or manufacturer brands? Brand, price, and service quality are the three motivations that come to mind for operators. And brand, overall quality, and industrial design for the manufacturers. These motivations are not walled gardens at all, but the primary values of these companies. But there is one more thing: the user interface. Intangible and tangible at the same time, both logical and emotional. Anyone who has tried to switch between different device brands knows that this is not easy. Contacts are deleted, downloaded content is lost, and the camera does not take pictures, just to name a few. Look at the PC industry. A lot of consumers are turning to Apple because of one thing: Brand, coherently manifested in industrial design and user interface. But try to change! You will agree that the Mac is beautiful and that all the nice swooshes in the UI makes you feel as if the machine loves you. But the paradigm is not the one you are used to. And in the beginning that will drive you crazy! Essentially the UI raises the comfort level once you are inside, which is also an exit barrier – a soft walled garden. So I don’t think we will have a homogenization of the user interface into a single mobile paradigm. Manufacturers will probably continue to manifest and develop their own unique UI:s because there is an opportunity to continuously ‘lock in’ the consumer. Because switching would mean learning – and boy, aren’t we consumers lazy! There is a great incentive for the big structured mobile manufacturers (Nokia, Motorola and Sony Ericsson) to keep up their good work. There is also a big incitement for the historically more hardware-focused manufacturers (Samsung and BenQ) to invest more in this field. Strong brands like B&O and Apple will also have to keep this in mind when they are moving into our world. Google, Yahoo!, and other of our newly-found friends will have to consider this. And Microsoft will stick to their desktop paradigm, for better or for worse.

The Customised Design Manufacturer (CDM) is a new business model in the mobile handset industry that fills a very important market gap: producing uniquely customised handsets on-demand for consumer brands and 3rd parties. CDMs are here to capture a portion of the emerging market for uniquely customised handsets (UCHs) i.e. handsets for niche customer segments. Operators (see Vodafone Simply and the upcoming NMT handset), MVNOs (see Helio and Jitterbug), handset manufacturers (see Alcatel’s ELLE phone and EmporiaLife) and consumer brands (see Versace, Dolce & Gabbana and Bang & Olufsen) want to deliver uniquely customised handsets to firstly differentiate and secondly capture the market for trully unique, branded handsets. The Customised Design Manufacturer is a fabless manufacturer who caters for this very need: producing uniquely customised handsets for niche customer segments, taylor-made and styled to consumer brands, MVNOs and manufacturers. A CDM is an integrated business that combines brand licensing with handset industrial design, outsourced manufacturing, quality control, distribution, reverse logistics retailing and can also include an after sale, on-device service proposition as part of the handset. In essence, a CDM is a specialised, yet vertically integrated service house that is able to act as a one-stop shop for brands wishing to enter the mobile phone business or MVNOs, MNOs and manufacturers wishing to outsource development of unique handset designs. I first wrote about Customised Design Manufacturers after an inspirational talk with i-mate at 3GSM 2005. i-mate is the earliest example of a CDM, for prosumer and corporate customers. i-mate has been buying bulk from HTC and reselling customised handsets to several operators and independent retailers, adding in preloaded applications, internationalisation, warranty, support and marketing. Since 3GSM 2006, i-mate is transforming itself into a system integrator for corporate customers offering uniquely customised handsets with a complete enterprise device management solution. Customised Design Manufacturers are Here In the last year, several CDMs have surfaced; Modelabs, Tedemis, TCL Alcatel (an OEM with an in-house CDM business unit), while Emblaze Mobile plans to follow the same path. Modelabs is the leading CDM today, having produced handsets for Airness and Elite Model Look brands and expected to launch MTV and Tag Heuer handsets. Tedemis was the matchmaker that lead TCL Alcatel to produce the Glamphone for the ELLE publisher brand. ARCchart‘s new report titled ‘The New Age of Handset Customisation: 2006-2011‘ (of which I was the lead author), has analysis and case studies of these customised design manufacturers. The report also profiles tens of uniquely customised handsets to date, including Vertu, Xelibri, ESCADA, Firefly, Vodafone Simply, Dmobo’s Disney-themed M900, i-kids, ELLE Glamphone, Bang & Olufsen Serene, Goldvish, Casio G-Zone, Voce, Jitterbug and Nordisk MobilTelefon handsets, which targeted at a wide range of segments, including kids, fashionable females, tweens, teenagers, sports enthusiasts, senior citizens and VIPs. The report examines the Customised Design Manufacturer business model and provides insightful detail: “Each of the three CDMs ARCchart has identified – modelabs, Tedemis and Emblaze Mobile – take a different approach to integrating all handset commercialisation stages under one roof. Modelabs has grown in-house teams for brand licensing, industrial design, supplier management, marketing, distribution and support. Tedemis grew from a brand manager into a value-adding matchmaker between brands and manufacturers, adding service integration functionality to the handsets. Finally, Emblaze Mobile is moving from a virtual ODM towards a full CDM business model with the acquisition of European Telecom. TCL Alcatel has shown how an OEM can adopt such a business model by forming an in-house CDM business unit. The Chinese-French OEM has created an internal business team under the name ‘Brand Design’, dedicated to designing, manufacturing and marketing branded, customised devices for niche segments. The multi-disciplinary team pulls together functions across the breadth of the handset commercialisation process, including industrial design, engineering and marketing, to form a virtual CDM operation. This structure essentially allows TCL Alcatel to bridge the previously existing communication gaps between handset teams, allowing it to develop uniquely customised handsets, while leveraging the know-how and manufacturing assets of an OEM and reducing time-to-market and cost.” Challenges faced by CDMs However, creating a CDM is not simply a matter of integrating several business units under one roof. The ARCchart report has some interesting analysis on the challenges faced by CDMs today: “Customised design manufacturers have arrived in a challenging market place. As of 2005, about 84% of the global handset market is controlled by the top six OEMs. This leaves limited market share for the remaining hundred or so OEMs, ODMs, ODEs and CDMs. Furthermore, generous operator subsidies have turned mobile phones into consumer electronics items which are perceived as low-value by the consumer. Brands who want to play in the handset space will have to place brand appeal above pricing considerations, in the eyes of the sophisticated consumer. One of the most challenging aspects of a CDM business is merging the distribution and industrial design businesses. These two disciplines, within the traditional context of mobile phones, have different working cultures, processes, business models and margins. Distribution is about a high-volume, low margin business with cold, operational efficiency and large staff count. At the other end, industrial design is about small, closely-knit teams with creativity and flair which develop a few products a year and look to high margins. This challenge is also one that modelabs claims to have overcome, which is one of the reasons for its market lead. Another challenge for customised design manufacturers is linking brand companies to manufacturers. The cultural and communication gap is substantial, but not insurmountable. CDMs therefore have to act as a bridge between brand clients with creative, lifestyle marketing cultures and handset manufacturers who are engineering-led organisations.” Coming into the limelight The report predicts that CDMs such as Modelabs, Tedemis and TCL Alcatel will far outgrow ODMs and ODEs in the production of uniquely customised handsets in 2007. This is due to the appeal of CDMs as a one-stop shop for consumer brands wishing to enter the handset market. The ELLE GlamPhone No 1 handset has sold more than 100,000 units in 1Q06, with the sales of GlamPhone range expected to reach 250,000 by 3Q06, according to the ARCchart report. Modelabs is expected to announce handsets for MTV and Tag Heuer, which will further make an PR impact in the industry and bring CDMs into the limelight. Modelabs’ strong growth in profitability (+59.6% in net income in 1H06) is another validation for the viability and promise of the CDM business model.

ARCchart‘s latest report is titled ‘The New Age of Handset Customisation: 2006-2011‘. The report analyses the new players, business models and market trends that are changing the economics and dynamics of delivering uniquely customised handsets. As the lead author of that report, I will spend some time highlighting key findings of the research in the next few posts. Twelve Stages So much time, money and energy is being devoted across the industry in producing handsets, yet there is scarse analyst coverage and analysis of the handset commercialisation process – understanding this process is key to all vendors wishing to play within the handset customisation business. The ARCchart report spends a chapter analysing this industry process – quite appropriately, the chapter is titled “The Silk Road of Customised Handsets”, and talks about the path of handset commercialisation, from brand licensing and industrial design to distribution and the retail experience” Exactly how complex is the process of designing, producing, marketing and supporting a mobile handset ? The diagram below, taken from the ARCchart report, shows the twelve stages in the process of handset commercialisation: This diagram is particularly interesting, given that it also portrays the stages where the major players in the value chain are active today, and will be active in the future. The report then goes on to analyse each of the twelve stages. Of particular interest is the analysis of ‘brand licensing’ and ‘last mile handset customisation’ stages: Brand licensing “Handset OEMs have also typically been the brand owners. Companies like Nokia, Sony Ericsson and Samsung have both strong manufacturer organisations and healthy brands. However, with the increasing segmentation of OEMs, operator handset customisation and the entry of consumer brands, branded handsets for niche segments are slowly becoming a mainstream activity. Since brand marketing and handset manufacturing are two very different disciplines, a brand licensing agreement or proxy can bridge the gap. Technically speaking, brand licensing involves a brand owner leasing the use of a brand to another company. It represents the exploitation of intellectual property in its purest form. Brand licensing typically involves contractual terms stipulating which products the brand will feature on, co-branding elements, positioning and rendering of the brand logo, product lifetime, distribution, pricing, promotion, retail placement and retail experience of the branded products. The revenue model for brand licensing is a per-device royalty fee, often with a minimum volume commitment. This revenue model presents a low-risk, minimal cost endeavour for the brand owner, albeit at a limited potential for revenue returns. Brand owners may extend this model through strategic revenue share agreements, opting to share both increased potential revenues, with the potential risks. Beyond 1-to-1 brand licensing between owner and licensee, there are a number of proxy companies specialising in multi-brand representation. These players secure long-term licensing deals with brands, which they then represent, sublicensing brands within their portfolio to product manufacturers. An example of a brand license aggregator is Global Wireless Entertainment, Inc. (GWE) which specializes in long-term brand acquisition and representation. GWE’s current brand portfolio includes Pele, Muhammad Ali, Warner Bros., DC Comics, Marvel, Lucas Film, NHL and NBA.” … Last mile Handset Customisation “The final stages of handset customisation aim to furnish the handset with the external branding, applications, settings and increasingly, user interface components, to satisfy the customer’s requirements (typically an operator or OEM). Essentially, this process customises the plastics, settings and software of a basic handset in line with client specifications. Traditionally, client-specific handset customisation includes adding external branding elements to the handset plastics (such as the operator logo), adding local language support in the software and programming network-specific settings onto the handset. In today’s age of operator-led handset customisation, this stage typically involves embedding specific applications to support operator services (e.g. an IM application), or the OEM value portfolio (e.g. a push-to-talk application). It also includes embedding clientspecific software modifications (e.g. for handling special SMS messages, GPRS optimisations, specific codecs and Java APIs). Increasingly, this stage of handset customisation includes modifications to the user interface. The user interface of a handset is essentially made up of the visual elements of the applications that sit on the device, including the homescreen and menu application. Therefore, to customise the handset user interface, the manufacturer needs to adapt these applications one by one for a consistent look & feel. In the last two years, UI customisation frameworks have emerged which enable manufacturers to deliver a completely customised user interface within much shorter development times. UI customisation frameworks and their vendors (e-SIM, Digital Airways, TAT and MSX) are analysed further in Section G.3.” The report also discusses the cost and time-to-market of the typical handset commercialisation process: “The complete handset commercialisation lifecycle typically takes 12-18 months: a considerably long time, given that it is similar to the typical amount of time over which handsets are replaced in saturated mobile markets. The sheer number of stages involved in commercialising a handset also indicates that the total handset development cost is substantially higher than the basic bill of materials (BOM). Over and above the BOM, the total cost includes costs for handset production operations, testing and quality assurance, retail training and customer support training. In total, a low-end handset is likely to cost between $3 – $10 million to develop, while a high-end handset may cost $10 – $50 million.”