Software is even eating the hardware…

Software is not just eating the world, it will also eat the hardware margins of the leading mobile vendors and level the distribution of mobile industry profits.

Today’s mobile market has clear winners. Samsung makes more profit from Android phones than Google does from all of their operations [Asymco], while Apple earned 57% of global smartphone industry profits in Q1 [Link]. The integrated players, Apple and Samsung, are drowning in the profits from integrated production, efficient supply chains and differentiated, well marketed products.

The software and service players are not monetizing mobile in any comparable way….yet. Google, Amazon (and to a small degree Microsoft) – are playing the role of disruptor. Their strategy resides in subsidizing hardware with services (ads) and content, which will eventually reshape the distribution of wealth in the mobile industry. Two reasons this is working:

  1. Hardware innovation has slowed – The spec war is over. Capacitive touch screens and cheap sensors were the last major improvements. Some are on the horizon (flexible screens), but in general even the less expensive smartphones are capable for most users. Does anybody really know or care how many computing cores their phone has?
  2. Whole product matters – Consumers view the device as a mobile extension of their digital life. So seamless access to the services that support their life (email, maps, search, apps, etc…) are as, if not more, important as any hardware spec.

What’s a mobile goliath like Apple or Samsung to do to keep their monopoly sized profit machine running? For one, continue to invest in R&D to stay in front of the hardware innovation curve and find the next breakthrough. Second, they need to rapidly round out their digital life offerings, getting more users onto their service and content platforms.

They will do everything they can to fill their software, service and content deficiencies to ensure that as hardware margins decrease, they can make it up in service and content margin. Otherwise they will see their products become less attractive and less profitable. How well they do this over the next few years will dictate how much of the industry’s profits they retain from the attack of the disruptors.

[This post also appears as a guest post on the Telefonica blog]

How Cornerstone put Android in a tractor

When Onskreen open sourced Cornerstone early in 2012, we had no idea what was going to happen. At the time, Google was using their powerful stick to beat away customers who wanted to include Cornerstone on their devices (read more about this here); and open sourcing the product was the best way of getting the product out to users.

After being open sourced, the first thing we expected to happen, did happen. That is, the mod community took to it and started to make Cornerstone ROMs for some of the most popular devices out on the market.  In fact, when CyanogenMod (the most popular Android ROM) wanted to include Cornerstone in their releases, Google had to publicly declare they would restrict CyanogenMod from including the Play Store if they did this. You can read the thread here. This was exactly what Google was doing to OEMs behind closed doors already, and was the first time I know of that they had to declare it publicly.

But then a funny thing happened. Other companies, releasing Android based non-tablet/phone devices started to adopt Cornerstone also. We saw a few use cases that were really interesting:

  • Qualcomm/Smart TV and St Microelectronics/Set Top Box – Qualcomm with their Android based smart TV platform built to run on their new SnapDragon chip (read more here) and Orly, ST Micro’s Android based set top box both use Cornerstone to provide a richer experience on large TV displays. Integrating video and Android apps to make use of a > 40″ display and lean back living room experience.
  • All-In-One Computer – A can’t-be-named-yet OEM used Cornerstone as the basis for an upcoming AIO computer. The 27″ device would be ridiculous without multi-tasking so users can engage with and monitor various apps at the same time on the huge screen.
  • Tractors – Yep, tractors. They used Cornerstone to upgrade their in machine control system. The built in display is being upgraded from a relic OS to Android so the company can take advantage of modern s/w development practices. However, federal law requires certain information to be displayed at all times. So they are using Cornerstone to enable a mutli-tasked display and split their app development into smaller, functional units rather a monolithic app that was hard to maintain and upgrade.

There were a few larger trends driving adoption:

  • Android as a technology and not ecosystem -Similar to Amazon with the Kindle Fire, these companies are using Android as a basis for technology, and not looking to it as an ecosystem blessed by Google. For them, Android serves as a modern OS with a supported developer environment. Not being concerned with the Google ecosystem, these companies can adopt and modify the OS without concern of the politics around certification.
  • Google TV’s failure – I’m not sure any real consumer has actually ever bought one before. So for the TV products using Android as the OS, they are very much using the OS purely as a technology platform. Once they do that and see the one app at a time UX on a 50″ TV, it begins to look ridiculous and the need for multi-tasking becomes obvious.

It is great to see the product used in ways we never imagined when we built it, and I’m looking forward to seeing these products get to market as well as see how others use Cornerstone in the future.

When open means closed, it gets confusing

Google owns Android, and everybody else is a second class citizen.

This should be obvious, but Google was able to confuse everyone for a number of years by releasing the source code. This offered the veneer of openness while remaining actually closed. At Onskreen, we saw the implications of this the last couple of years and it all played out behind closed doors. However, recently, Google made a very public move by shutting down Acer’s plan to launch a device based on a modified Android stack (read more here.

Certification has some technical requirements, none of which Cornerstone was in violation of. The real problem was that using Cornerstone gave the device manufacturers a differentiated UI. The goal of that was to offer a superior user experience to users, and thus engender loyalty directly to the device manufacturer as opposed to the brand of mobile OS. This may have not been in violation of Google’s technical requirements, however, it did violate Google’s goals. So they essentially banned it.

The act of coercing our common customers (device manufacturers), I don’t actually have an issue with. The problem is the false veneer of opening the code and then basically ensuring that nobody does anything with it that Google does not approve of. It was a great initial marketing tactic by Google that is now running into its limitations and beginning to cause more problems than helping Android.

I should be clear, I think Android is great. I use an Android device and Onskreen does a ton of business around it. It would just be better served with a transparent governance model from Google. The open, but closed approach does nothing but confuse the ecosystem and reinforce that Google’s ‘Don’t be evil’ mantra is outdated in their fight to the death to own mobile.

[Update 1.18.2013] – Samsung has released a version of multi-tasking on their Galaxy devices, and been certified by Google for those devices. Samsung is the major Android distributor (as of mid last year, they sold almost 50% of all Android devices worldwide with no other manufacturer above 10%), so clearly they had the clout to force Google to certify their multi-tasking implementation. It’s unfortunate that the only way that this could happen was with Samsung’s clout, as opposed to being enabled via the Android certification process that is supposed to level the playing field for Android. The implications for this are severe if you are not Samsung:

  • Me-too devices are a guarantee – Differentiating Android in any meaningful way is just not going to happen unless you are Samsung. Some others (LG) have come out with a version of multi-tasking after Samsung, but it is clear that Google had to certify those devices after certifying Samsung’s devices. The problem is that LG and the others are now followers as far as the market is concerned, and have no real means of leading.
  • Stephen Elop looks like a genius – With Nokia surging (at least in stock value), the decision to go with WP and not become another Android clone looks like the right one.

Onskreen Story

There haven’t been any good write ups of the story behind Onskreen – how and why we started it and the twists and turns along the way – so, it seemed like a fitting topic for the start of this blog.

Warning – this is going to be long. So if you can’t stand to be away from your inbox for the time it will take to read the entire post, here is the take-home message -> User Experience matters.

Pre-Onskreen – State of Things
It is hard to believe in today’s world of billions of app downloads, but in 2003, the problem of the day was how to get people to use their phones for more than just phone calls and sms. The magic elixir was supposed to be a killer application for mobile that everybody would have to use so badly they would ignore the small screen, lack of keyboard, etc…The only problem was nobody knew exactly what this app was supposed to be. So, much to the chagrin of the mobile pundits,  people continued buying phones based on how skinny they were (remember the Motorola RAZR?) or the camera. At the time, trying to accomplish any of the following with your super slim, shiny phone would cause you to either pull your hair out, or throw it against a wall:

  • Open the Browser – Yes, even figuring out how to open the browser on some popular models was a miracle
  • Download an app – Navigating the WAP deck was a nightmare (BTW – if you know what a WAP deck is you have been in the mobile industry too long!)
  • Change the Ringtone – I wish that I was exaggerating, but some phones had menus so long and convoluted on some phones this could be a serious challenge

At the same time, I was coming out of a one year stint working at Motorola after they had purchased 4thpass. At 4thpass, we became successful creating the concept of the Mobile App Store and deploying it with Telecom Operators around the world. We provided the back end infrastructure, wired it up to the network and the Operator had an app store for their users.
So, the industry plodded along making great advances in some areas (awesome camera phones, speedier networks, etc…) and failing miserably at crucial issues (UX specifically).

Launching Onskreen – UX is King
The killer app for mobile is not an app at all – it is an incredible User Experience. This was the key premise for starting Onskreen in 2005, which was a time where that idea was not a very well received world view. Today, it’s obvious of course, just look at Apple’s market cap. Seven years ago it took some convincing that what people wanted to do with their phones was everything, if they could only figure out how to use the damn thing.

The truth was that the Motorola’s and Nokia’s of the world in 2005 were never going to solve the problem of how people interacted with their phones. In addition to being relatively unchallenged to innovate, they were fundamentally not software companies. Their attempts at creating new mobile OS’s or improving their current ones were borderline comical. Their DNA was centered around optimizing radio and hardware and being efficient at global distribution of their products, not making great software.

So, I started Onskreen with the ambition of fixing the mobile UX problem and helping transform mobile phones into the incredibly useful little computers that they are today.

The Journey
Our first product, Fusion, attempted to solve UX problems that would improve user’s experience with their phones while solving business problems for Operators (at that time they were the only real source of distribution so we needed them on board). For users we wanted to help improve:

  • Discovery – No more searching around, information had to be obvious and consistently available.
  • Latency – Info had to be updated in a way that users felt like it was always fresh. No frustrating experience of click and wait.
  • Relevance – Put the power in the hands of the users so that the info they were getting was valuable to them.

Fusion transformed the front screen of the phone from the generic, static wallpaper into a richer experience capable of supporting widgets with info, news…anything the user wanted. I won’t go into detail here, but by doing this we also solved a slew of marketing and service problems for Operators. It was a win for everybody and it worked. We built the product and licensed it to Operators and Device Manufacturers. Things were going well and we were working towards a huge deal with Telefónica. Like much in startups, it was all good, until it wasn’t.

In parallel to Telefónica grinding their enormous gears to make the deployment happen, Nokia was leading the mobile industry with no real competitors. Motorola had faltered and Silicon Valley had not yet risen up to take over the mobile OS to displace them. When the time came for Nokia to include our software on the phones Telefónica purchased from them, they not so politely refused Telefónica’s request, although it was as simple as including an app on the phones. Nokia knew, as we did, that whoever owned the user experience owned the user. They understood that the loyalty of the user would become intertwined with that experience, and they were not about to let Telefónica own a piece of that. The industry as a whole wasn’t challenging Nokia to innovate at any pace but their own, so they felt no pressure to play nicely. [Note: The story of Nokia’s strategy and software failures in the last decade have been written about here and elsewhere. They are a great cautionary tale.]

It was late 2006 and Onskreen was at a crossroads. We had invested a lot to get a product through all the hoops so that a giant customer could deploy it and we could really scale, only to have another industry titan crush it. There was no point investing further on the path we were on. It was time to either cut and run or figure out another approach. Luckily for us and everybody else, Apple was on the verge of announcing the first iPhone. By solving the UX problem from outside the cozy and glacially slow pace of the mobile industry, they forced everybody in the industry to figure out how to improve immediately. What customers currently had to choose from paled in comparison to what Apple was tantalizingly promising. Our current customers and those that were interested but had not yet pulled the trigger started scrambling to figure out how they were going to respond to this threat and who could help them. We had been waving the mobile UX flag for the last 2 years, so our phones started ringing again.

Onskreen was reborn as a professional services organization helping Operators, OEMs and Silicon Vendors to improve the user experience of their products. We were fortunate to be involved with some of the first Android device releases and built a successful portion of our business on the explosion of Android phones and then tablets and TVs. Most recently, our work on transforming Android into a true multi-tasking platform, Cornerstone, was open sourced and is the basis of a number of upcoming Tablet and smart TV implementations.

Current State
Onskreen is a rarity among companies selling to the mobile customers as large as ours. We were bootstrapped and have been profitable for a number of years. It continues as a strong business, profitable and engaged with a number of the interesting shifts in strategy the mobile incumbents make to compete with their new competitors.

This doesn’t mean that all is rosy in the mobile world. There are a number of complex issues that we have had the chance witness first-hand, and that I hope to write more about as this blog goes on.