Fortune's Apple 2.0 blog referenced a post from Tulip Farmer, a blogger at SeekingAlpha, suggesting that the mobile phone business is a winner-takes-all type of business. Tulip Farmer appears to suggest that the mobile phone business will follow the path of the computer industry, where one or two operating systems ended up dominating the market. The computer market ended up with a few dominant OS because customers bought systems due to applications and those applications only existed on certain platforms.
Tulip Farmer goes as far as to suggest that developers can only support one or two OS platforms:
Where developers go, buyers follow. It no longer matters if RIM comes out with a better OS or a new device, because developers only have the bandwidth to support one or two platforms well, and they've already made the investment in iOS and Android. The only chance for survival Nokia and RIM probably have is to adopt Android or retreat into tiny niche markets. Even the king of low cost handsets Nokia has to worry, because in 5 years even low end mobile phones will have iPhone 4 level capabilities. There will be no single function simple phone market because hardware will continue down the path of Moore's Law toward lower cost and higher function.I believe this thinking is flawed.
Personal Computers vs Mobile Phones
The big difference between the PC industry—think about the 80's and not the present—and the mobile phone business is that applications made the PC! In fact, there is a common saying that personal computers became dominant due to spreadsheet applications (this increased worker productivity at businesses). No one bought computers because they were computers. Instead, business, which was the main driver of computer purchases in the 80's, bought computers because they could compute numbers in a spreadsheet, or compose documents in a word processor.
In my opinion, I don't believe anyone buys mobile phones for the applications (the only exception is RIM's Blackberry, which is purchased by businesses mainly due to its e-mail application capabilities). Even Apple's iPhone likely doesn't sell because of its applications (older Windows Mobile phones and recent Android phones arguably had similar or better applications). What matters is the whole package: hardware, software, services, branding, etc.
I believe Tulip Farmer is not necessarily saying that applications drive mobile phone sales right now but they will in the near future. I am not so sure, even about the near future. I doubt software alone will drive mobile phone sales (except in the distant future, say 10 to 30 years from now).
As far as I could tell, there is absolutely nothing that resembles the PC industry of the 80's and 90's, where applications decided the winning OS platform.
Maybe Closer to the Video Game Industry?
A commentator called "Jim, Omaha, NE" at the Fortune blog shared my skepticism of the comparison with the PC industry and suggested a different analogy:
I think using the PC market as a comparison is flawed. The game platform market is a much more apt comparison. You the the Wii, the xBox, and the PS3 all competing for limited gamer dollars. (Yes, some people own multiple platforms, but we're looking at the majority of the market not the niche). The xBox and PS3 fed off of eachother's market, essentially showing that 2 competing platforms going after the same customer base could survive, but leaving no room for a 3rd. The Wii, however, didn't attempt to go after the xBox/PS3 market. They instead tapped into an under-represented market by selling a cheaper platform with a unique interface system.I never thought of it before but maybe Jim is onto something. Perhaps the mobile phone industry is closer to the video game console industry. I'm not a gamer anymore—was a PC gamer in a past life :)—but for those unfamiliar with gaming, I would say that most consumers are heavily influenced by the software—the games in this case. So most people (who cannot afford to buy multiple consoles) decide on the console based on the games. However, we don't just have two gaming platforms; we have three. Each one, especially the Nintendo wii, caters to a different audience.
There is still room in the smart-phone market for the same thing. You're telling me that if Nokia came out with a smart-phone with unique features that cost significantly less than an Android/iPhone, that no one would buy it?
Also, the author's view is almost North-America-centric given how most people who buy phones—these are low-end phones—cannot afford expensive software applications. High-end phones, just like high-end cars, seem to drive the market but really don't.
Projecting the Present Into the Future
One final comment I would like to make is that Tulip Farmer is taking a big risk by projecting the recent results far into the future. By this I am referring to his suggestion that the iOS (iPhone) and Android (Motorola/HTC/Samsung/etc) OS platforms are likely to dominate. On top of applications not driving mobile phone sales (at least in my view), I think mobile phone operating systems are too much in their infancy to matter much right now. After all, some may recall a few years ago when many thought Palm had the best OS and Microsoft was the only other contender. At one point, even Nokia, which may have been the first company to introduce a smartphone, was even thought of as the only serious choice—I know this because I was looking at Motorola shares and wondered if Nokia shares would ever get cheaper (the street was bullish on Nokia and thought it could do no wrong).
Futhermore, the cost of development on mobile phone platforms is likely very low. Most of the software are very simplistic and don't have anywhere near the sophistication one would find in desktop PC software. Sizeable costs such as sales, distribution, and support are also almost-nonexistent for mobile phone applications. Thus, given the low cost of software development for phones, I don't believe developers are as hamstringed (and prone to develop for just one or two platforms) as the author suggests. Maybe the costs will be very high in 5 or 10 years—on gaming consoles, right now, large game development costs are similar to Hollywood movies whereas they were a fraction 10 or 15 years ago—but that is not the case right now. (I will admit that the revenue is also very low but overall I think the cost of development vs revenue is more favourable for mobile phones than for desktop software.)
So to sum up, I think the author's suggestion that only Apple's iOS and Google's Android platforms will survive seem far-fetched. I also do not share the view that Nokia, RIM, Samsung, HTC, and others, should adopt Android or perish. Tags: Nokia (NOK)