More on convergence
Microsoft’s move to release their new MP3 player, the Zune just in time for the busy holiday season is perceived by most analysts as a desperate move from the Redmond based company to regain relevance in the strategic digital entertainment market which they had planned to control with Media Center PCs. However, this strategy failed when Apple outflanked them with the highly successful iPod.
Today, the iPod is at the center of the digital media revolution. The world has realized that music is the mobile killer app, and everyone wants a piece of the pie. Mobile phone and PDA manufacturers believe that they can successfully compete in this market because they have two important competitive advantages. First, they produce literally hundreds of millions of devices each year and this translates in economies of scales that are hard to beat, even by a successful company like Apple. Second, an MP3 enabled phone provides more functionality in a single device. Convenience is important to users. As a result, mobile phone manufacturers expect to steal this lucrative market from Apple, and now Microsoft. It sounds like a great plan, but will it work? What if things went the other way round?
Everyone in the industry, including Apple, understands perfectly this convergence trend. In fact, it is widely expected that the Cupertino based company will release it’s own iPhone in early 2007. This means that the hunted is becoming a hunter, by entering the highly competitive cell phone market. How likely is Apple to succeed? It is clearly an uphill battle. Unless they become an MVNO (Mobile Virtual Network Operator), which is unlikely because this business model does not exit in many countries, they cannot simply start selling the device in their existing stores (although they are an important asset for Apple’s ambitions), they have to partner with Telcos. This is a difficult and relatively slow process. On the positive side, they have some strengths, most notably and unsurprisingly, on the software side.
Cell phone manufacturers do not usually provide good software to integrate their devices with the PC. This is a critical mistake as we do know that currently all digital media resides on computers. Carriers would like us to buy all our digital media from their online stores directly from our cell phone, but this is simply not happening, at least in the U.S. and Europe. One reason that explains this is the sheer volume of digital media that users are growing. Today, it is very
common for most users to store anywhere between 20 and 250GB of digital media. This valuable media needs to be backed up and simply does not fit on a cell phone. This situation is not likely to change anytime soon. Digital media needs to be stored, classified and managed and this can currently only be done on a PC. Besides, users make a heavy personal investment learning to use applications such as iTunes. They are not likely to change quickly to another
application specially if it means that they can lose their DRM protected songs as well as valuable information like tags, lyrics or album covers. So, it is clear that currently those who have a better software solution on the PC to manage digital content have the upper hand. This may change in the future if new online digital media storage solutions appear and devices can synchronize quickly and seamlessly with those services, but even with the rapid improvement in broadband bandwidth and availability we are still years away from such a solution becoming viable. This means that Apple and probably Microsoft are much better positioned than Nokia, Ericsson or BenQ to lead the market. Of course, digital media is not the only killer application for mobile phones. Online mail and chat are also very important for both teenagers and business users. In this category Microsoft has a clear advantage, but Apple is not far behind (at least technologically if not in raw user numbers). Once again, traditional cell phone manufacturers lack the chat application on PCs or mail solutions (excluding RIM, the manufacturer of the popular Blackberry device) to effectively compete in this market.
The fact is that mobile phone manufacturers are in a much more delicate position than most realize. They are not in control of their own destiny because they rely on third party software to synchronize data with the PCs where the master data resides. In some cases they even rely on Microsoft’s OS to drive their digital devices. After what we have seen in the game console and portable music player markets, where Microsoft has decided to enter alone, I think that some of their partners should feel very, very nervous. If rumors prove to be true and Apple launches a cell phone in early 2007, it will have taken them about one year and a half to produce their first product and enter the market, but Microsoft with its mature Windows Mobile OS could achieve the same result much faster, specially if we take into account that consumers are not very loyal to their cell phone manufacturer. After all, most consider these devices disposable and will easily switch to the newest trendiest models. Even worse, they cannot really count on carriers to help them defend their current position because these companies simply do not care.
Today, companies like LG with their new Chocolate phone and Sony-Ericsson with the Walkman phones seem stronger than ever, but it could be an illusion. The market could look dramatically different in just a couple of years. We certainly live interesting times.