jim.shamlin.com

2: The Law of the Ecosystem

When you consider that the Japanese market represents less than 3% of the world's mobile phone subscriber base, it represents a highly disproportionate percentage of the user base of certain technologies. Some examples follow:

(EN: Two counterpoints. First, this is based on revenues, so it may be the result of Japanese consumers paying more for the services they use rather than using more services. Second, it's a bit repetitive: the latter two facts are related consequences of the first, not independent phenomena that support the same conclusion. This does not negate the point, but it does perhaps cast it in a more objective light.)

With this in mind, the authors suggest that the difference in mobile consumption between Japan and other nations may not be a result of cultural differences, but of the mobile "ecosystem," a concept that entails the network infrastructure, application technology, and device capabilities that together are capable of delivering greater value.

A BRIEF HISTORY OF GSM

GSM, which is currently the global standard for cellular telephony, began with a research group in Europe in 1982, which took five years (until 1987) to come to an agreement about even the basic parameters of the standard, which took a further two years (1989) to gain acceptance, and two more years to be used foir the first time (in 1991, by a Finnish network operator).

By 1993, 32 networks were using the standard in 18 different countries, and by 1994 there were about a million subscribers, and this grew to a body of 100 million b7 1998.

Wireless Application Protocol (WAP) was added in 1999. While European firms began trials of the protocol, it was more rapidly adopted and rolled out in Japan by NTT DoCoMo.

A BRIEF HISTORY OF CDMA

CDMA (Code Division Multiplex Access) is generally considered to be the second generation (2G) of cellular networks.

CDMA predates GSM as a technology used for radio transmissions that was first proposed in the 1940's for using a single frequency for multiple communications - similar to the way that two people can converse in a crowded room because they focus on a specific voice and dismiss other speakers as background noise - but it was slower to be developed, applied, and adopted for cellular phones.

The adoption of CDMA was slower than GSM: it was first considered for mobile communications in the early 1980s and did not receive much serious consideration until a 1990 conference (in Japan) to develop it into a standard, but they concluded it was "impossible."

However, the American firm Qualcomm continued working on the standard, and launched it commercially in 1995, and it has since grown to more than 100 million subscribers worldwide.

The advantages of CDMA was significantly higher capacity (roughly ten times as much) as analog networks, and far more than the competing GSM standard, allowing for better signal fidelity, broader coverage, stronger security, and a constant rather than intermittent connection.

A BRIEF HISTORY OF PDC

While GSM and CDMA gained popularity in the European and American markets, Japan bypassed them for a "homegrown" technology developed by NTT DoComo, a subsidiary of Nippon Telephone and Telegraph that was founded in 1991 to work in the mobile channel, which became an independent company a year later (the name is a mash-up of "DO COmmunications over MObile" - and the word "dokomo" also means "everywhere" in Japanese).

NTT DoCoMo developed the Personal Digital Cellular (PDC) network, which was designed specifically to accommodate the weak broadcast strength of small, portable devices with light batteries, meanwhile leveraging the advantages of CDMA. It was later considered "2.5G," an improvement over the 2G network, but weaker than the 3G network that was later adopted.

The standard caught on rapidly, encompassing nearly 50 million subscribers in Japan by the end of 2000, about half of whom were advanced data subscribers who used mobile data services. However, it peaked in 2003 at 62 million before consumers moved on to 3G technologies.

(EN: The author does not step forward to the history of the 3G network - but it was also pioneered by NTT DoCoMo, which launched the first such network in May 2001, nor the 4G standard, which is touted but has not to date been clearly defined: there are a number of competing technologies that show promise, but no formal "standard" has yet been defined.)

However, the author suggests that technology was not a significant factor in Japan's high rate of adoption: in spite of having a better infrastructure, its adoption rate was similar to other countries (Taiwan and India) and not quite as fast as other countries that relied on inferior technology (The UK, Sweden, and Norway).

A WAP PRIMER

Wireless Application Protocol (WAP) was a standard developed by a global consortium of companies. As the name implies, WAP was developed specifically for advanced mobile data use and, given that the consortium that developed it had over 100 members, including virtually every major player in the industry, it emerged rapidly as a standard.

The authors present a couple of media articles to demonstrate that there was a great deal of "hope and hype" for WAP and a corresponding media backlash when it failed to deliver on these wild promises. Notably, the critics of WAP cited its high cost, lack of services, and the difficulty of using mobile applications. As such, WAP was largely proclaimed to be a "horrible failure" in the West

However, Japanese firms continued to explore its potential. The authors assert, "WAP worked in Japan right from the start." This is largely because the major providers in Japan didn't merely support the protocol and expect someone else to figure out how to derive value, but themselves funded the development of applications that would make WAP a must-have service for mobile subscribers.

In effect, the western consumer did not "Fail" to derive value from WAP - the western providers failed to deliver it - and this is why WAP and mobile computing in general has progressed at a very slow pace outside of Japan.

THE ECOSYSTEM

The authors maintain that it is the ecosystem, rather than culture, that drove the adoption of mobile in Japan. That is, firms working together in the value system (as opposed to "value chain" which is internal to a single firm) create a synergy that delivers value to the consumer, and it takes all players working in concert to do so effectively.

In terms of WAP, it was clear that western companies failed to do so: the consumer finds no value in mobile computing because there is no value system, only the separate value chains of various companies that worked in isolation from, and sometimes at odds with, those others with whom collaboration would have produced consumer value.

The authors consider there to be eight basic categories of players in the value system who must work in concert to deliver customer value:

  1. Network Operators - Companies that provide branded mobile services (voice and digital packages) to the consumer: AT&T, Sprint, T-Mobile.
  2. Infrastructure Providers - Firms that provide the basic building blocks of networks, including base stations, servers, and systems: Motorola, Nokia, and Siemens.
  3. Handset Manufacturers - Companies that manufacturer end-user devices: Sony Ericsson, Sharp, and Kyocera.
  4. Middleware Providers - Supply intermediate services that link back-end databases and mobile devices to the network.
  5. Application Developers - Write the system and application software that is run on the devices, sold to service providers or direct to consumer.
  6. Content Providers - Developers of content media, such as text, images, audio, and video programs for consumption on the mobile device.
  7. Service Providers - Companies that provide applications that access content others provide or enable users to provide content for one another.
  8. Consumers - The users of technology who, themselves, add value to the network (no-one would buy a cell phone if there were no-one else to call).

Some firms may play multiple roles, and all of them are essential to the overall health of the mobile industry.

THE COMPETITIVE MODEL

One theory of competition (Porter) between companies is that firms seek to gain competitive advantage by securing scarce resources within its industry and preventing competitors from obtaining them.

In the mobile industry, bandwidth is a scarce resource, and companies seek to acquire spectrum licenses to prevent competition. Other scarce commodities include consumer preferences, quality employees, and external influences. In markets outside Japan, players compete head-to-head within their segments to secure maximum revenue and profits. (EN: It is implied, though not directly stated, that the situation in Japan is different.)

The author considers the extremes of competition: a monopoly in which one firm holds tremendous power over the buyers and other firms are prevented from serving them; and perfect competition in which firms can quickly and easily move into and out of the industry without substantial cost, and consumers have the power to choose among them freely. Most industries fall on a point between these extremes.

Mobile providers tend toward the monopolistic extreme: entering into the industry requires a heavy investment in infrastructure deployment and maintenance, which has helped to ensure that there have been a small number of large firms in the market. By definition, this is an oligopoly (literally, "few who sell").

In such a situation, providers can charge higher prices because customers have few choices, there is little opportunity for customers to switch providers (and term contracts are used to effectively prevent them from doing so), and the firms retain significant control over other firms in the value system.

However, this does not impact all players equally. It requires substantial investment in research and development and manufacturing facilities to set up a handset manufacturing operation, though considerably less than needed to set up a network. Meanwhile, the market for application development, content providers, and service providers is extremely fluid and highly competitive.

Ultimately, however, the access providers have a strangle-hold on the industry: by deciding what equipment they will offer new customers or support for existing ones, what applications and services they will permit to be used on their network, the carriers have significant power to favor or disfavor other players in the competition.

There is also the question of customer preferences: at one time, an individual who preferred a Nokia phone would have to choose a network provider tat supported the model he preferred. However, with standardization of protocols, swappable SIM cards, and legislation that prevents companies from interfering with consumer choice, the power of the carrier is waning.

THE COLLABORATIVE MODEL

Meanwhile in Japan, the players in the mobile industry have a history of working collaboratively. The author mentions the notion of ecosystems, in which various inhabitants of a geographic area must balance and work together to sustain an environment: if even a seemingly insignificant species disappears or becomes too weak, all others in the same environment will suffer, and the ecosystem can (and often will) completely collapse.

While analysts and executives in other industries and markets have acknowledge this notion, they have generally not acted upon it effectively and with genuine motives: aside of industry associations and formal contractual agreements, there has been little collaboration among firms.

There are exceptions, but these are rare. For example, the collaboration between UKL carrier Vodafone and handset manufacturers is shallow: Vodaphone remains firmly in control of the relationship, and is regarded as a "benevolent dictator" by the firms with which it seeks to partner.

While it has been argued that DoCoMo has done the same, the numbers tell a different story. For example, in its partnerships with content providers, DoCoMo demands only 9% of subscription revenues, where mobile carriers aboard generally demand from 50% to 60%.

It's suggested it is because DoCoMo understands that demanding such a high fee increases the price of services to the consumer, and that the firm seeks to make money on the revenues for network usage, which is increased by the proliferation of content. As a result, there are far more developers of content and services in the Japanese market - which creates a wide variety of valuable and compelling content to the subscriber.

Having earlier denied the influence of culture, the authors now turn back to it, offering a few quotes from sociologists about the differing values of Japan and the west, specifically in terms of the premium the West places on independence, competition, and individual achievement.

A quote from a Japanese executive illustrates this: he speaks of companies evolving together and realizing that the role of the strongest firm is merely to "coordinate the pace of forward progress" for the industry - not to drive or control it to the advantage of one's own firm.

The author also speaks to the Japanese notion of "kaizen," the notion of continuous improvement, which differs significantly from the western approach of "command and control" in management. That is, the Japanese culture values progress on a broad scale, above the power and profit of an individual firm. This enables companies to collaborate more fluidly.

TWO-WAY FAILURES

There have been a few disadvantages to the Japanese model of collaboration. Chiefly, Japanese firms have had little success in attempting to partner with overseas firms. To date, every such attempt has been a miserable failure, with the possible exception of France's Boyuges Telecom (which has not failed, but is hardly flourishing).

Second, most Japanese handset manufacturers have not been able to make much progress overseas: Japan's manufacturers hold a scant 5% of the global market. It is reckoned that their collaborative experience leads them to reply upon a mutually-beneficial relationship with network carriers, and are unable to effectively compete in a more contentious competitive environments abroad.

However, this failure is not unilateral: foreign firms have attempted to gain a foothold in the Japanese arket, and have likewise gained little success. Few have been willing to adapt their business practices to the Japanese model, to collaborate openly and share information, or to accept a fair method of profit-sharing.

A specific example is the resounding failure of Vodafone to enter the Japanese market, isolating itself from the collaborate agreements among domestic companies in an attempt to be more aggressive in competiton. When the firm abandoned the market after a dismal failure, the Japanese firm that acquired its assets was able to flourish.

GOOGLE ANDROID'S ECOSYSTEM

Google's Android project was an example of handset development that attempted to leverage the power of collaborative development. The partnership included 80 companies with a goal of creating not only a standard template for hardware, but a common operating system and common content and services.

Google's own interest was clear: they were interested in owning search and advertising services on the mobile platform, and saw control of the mobile device standard as being their key to vie for ownership of the new channel. So from the onset, the notion of "control" and "ownership" encroached upon collaboration.

Setting aside the aspects that Google wanted to control, it sought to facilitate collaboration and discussion between parties interested in some specific element (handset hardware, content providers, network operations, etc.)

In general, this was regarded as good for the market: it was to be an open source system that could be used by multiple firms without having to pay a licensing fee, it would be supported by a sizable company rather than a small open-source ship, and Google was able to play a neutral role, having no profit interest in anything except search and advertising.

Ultimately, Google was paving the way for the development of a wireless ecosystem, like that which existed in Japan, provided that the participating companies were willing to play along and give their continued support to a common platform. The author asserts that Google "may be the only company currently capable of overcoming the barriers" to a collaborative ecosystem.

(EN: It remains to be seen whether this can succeed - but presently, Android is being treated as a operating system standard without any teeth, and developers complain that manufacturers have customized/configured the system such that it does not deliver a "common" platform. This may change, or it may continue to fracture the market and subvert the intent.)

THE TAKEAWAY

Ultimately, the wondrous power of mobile technology is not, and cannot, be delivered by a single company but requires a number of firms to work in concert to provide a collection of services that combine to create a device and services that together have significant appeal to the user base.

This requires collaboration, cooperation, and a common vision among companies whose urge is to compete, control and own. This came quite easily to the Japanese market, but poses a challenge in other markets.

(EN: Apple presents a decided un-Japanese approach to doing the same thing. Apple maintains strict control and ownership over the hardware and software of the iPhone - it dominates content and service providers through its app store and is indifferent to demands of service providers to customize its device in order to use their networks. Ultimately, Apple may be an example of a non-Japanese competitive approach to creating an ecosystem. And going by its dominance of the smart phone market, it seems to be succeeding.)

JIM.SHAMLIN.COM
DISCLAIMERS · CONTACT