New Paradigms in the mobile handset market

While recuperating from a viral fever scare, i was quite surprised to read the news that HP had bought out PALM.

A new paradigm seems to be emerging in the wireless handset market...

It used to be the war of brands in the early markets, Nokia Vs. Motorola Vs. Samsung Vs. LG ... People made their choice of a phone on the basis of the brand, need and functionality in that order. This started changing, with innovations in industrial design, i.e. better looking phones, the paradigm shifted to a combination of design and functionality with the brand now sharing priority with these criteria in the decision hierarchy.

With the advent of the software powered smartphone, a new paradigm is emerging - that of the Operating System! With the emphasis more on the software platform and application availability, it looks like every manufacturer worth his/her salt is pushing for a proprietary OS that can be independently controlled, distributed and attract a slew application developers for a sustained competitive advantage in the market.

Of special interest is the story of Apple and Google. Two firms that chose different OS models in line with their strategies to capture a large part of the market share. While Apple went proprietary, they made no mistake on the part of application development. The support shown by Apple to early application developers for the iPhone has paid rich dividends. It did not matter whether the core Operating System was Open-Sourced or not (incidentally these two share the same initials OS ... ;) ... Perhaps this new paradigm can be called the OS2 paradigm, with an Operating System and an Open-Source application development strategy).

Google went one step ahead and Open-Sourced their operating system and application layer completely while making it available for all mobile handset vendors. The Google Android platform had arrived. This seemingly attractive option for vendors came with its own perils. Whilst the code was Open-Sourced, the usage of the code in devices for sale to the customer was controlled by Google. What seemed attractive at first as an Open-Source alternative and possibly the ubiquitous way ahead for smartphone manufacturers may not be the only way ahead.

Smartphone manufacturers are in a certain sense business smart and know that their competitive edge lies in differentiation. If everybody were to offer an Android or a WinMoble phone with nearly the same look and feel of the User Interface and User Experience, where did the differentiation for the manufacturers brand really lie? The risk is the manufacturers brand taking a backseat in the face of the larger brand of the Google touted Android or WinMobile.

What handset manufacturers are probably scared of is to have a single OS (be it Android or be it WinMobile) take precedence over the brand which would mean that the pie (smartphone market) could easily be divided equally.

This is clearly coming out in the strategies that are coming out of all major manufacturers. PALM went ahead and developed WebOS (perhaps the biggest reason why HP bought them out). Samsung has its own smartphone platform dubbed as BADA. RIM has always had its own OS. LG depends on opensource Linux. HTC is talking of setting up its own Operating System.

What is clearly emerging is that handset manufacturers wish to keep the market fragmented from a business perspective. They want to own and control an OS that allows them to differentiate their phones and attract the application developer community. The future business direction of these companies could be driven by the need to maintain competitive advantage in the operating system.

How does this affect hardware vendors for smartphone handset manufacturers?

Handset manufacturers would like to prefer a standardized Operating System on smartphones, since this reduces their costs and also reduces the strain on the development organization to support multiple software platforms on the same hardware. The direction in which the market is moving could prove to be a potential risk if customers start demanding full system support for all available software platforms.

There are three ways to mitigate this risk at the hardware vendors end ...

Option I: The costlier and more complex option of supporting all the available software platforms.

Option II: The more balanced approach of picking and choosing the right software platforms to invest in while totally ignoring the others.
Option III: A mix of internal and external development on the vendors hardware - internally invest in and work on the most promising software platforms and outsource the development of the other software platforms.

There are a number of challenges in coming up with the right decision amongst the available options -

While each of these options have their positives and negatives, is a tabulation of positives and negatives pitted against the corresponding costs the best way ahead for hardware vendors to make their decisions?

What is right from a market strategy point of view? Will the company's view of the market strategy pay off or will the market go completely to the contrary? How can the decision of picking the right Operating System Platform (for options 1 and 2) be made? Are current market pointers sufficient to indicate future trends?

Will a strategic tie-up with the software platform vendor be beneficial in the long run, how painful would the relationship be in case it is unsuccessful, or for that matter even if it is successful!

An interesting thing to note is that while handset manufacturers consider the upstream activity of developing Operating System Software to be a vital part of their competitive advantage, the actual manufacturing of the semiconductor chips required to run these handsets is not seen as a strategic advantage to have in-house. This is most likely due to the higher fixed and operational costs associated with the semiconductor manufacturing business and also the high level of technical expertise that is required to run the business. The real value as perceived by the customer lies in the tangible things that the customer can feel and use as a part of the product which include the user interface and applications exposed to the customer. The underlying hardware is not visible to the customer and is therefore not very high on the list of must haves for handset manufacturers.

What are the emerging trends in the market for handsets?

One of the smarter things done by the handset manufacturers is the development of unique User Interface software that has a strong association with the brand, eg- Nokia's S60, S40, HTC's Sense UI, LG's S6 UI platform etc. With the uppermost layer of software under their control, the differentiation possibilities are almost maximized. The reason why i use the term almost maximized and not maximized is because the maximization of differentiation comes if the lower levels can be standardized to meet all the functional requirements of the upper levels. If something that differentiates the upper level of software is not available in the lower layer of the software, there there is no real differentiation possible. This is possibly the reason why all handset manufacturers would want to have an underlying Operating System of their own.

The main risk that handset manufacturers might face is the lack of interest that may be shown in porting the proprietary system onto specific hardware platforms by the vendors. What if Qualcomm refuses to port Samsung's Bada Software OS platform onto its Snapdragon hardware platform in the belief that the maximum value for Qualcomm is derived from the porting of Android on Snapdragon. The opportunity associated with this risk lies with the hardware vendors, if there is a segment that is not served by a particular vendor there is always scope for competition to come in and port the custom software platform onto their hardware.

Concluding Thoughts

All in all the fragmentation of the hardware and software platform in the mobile handset market may be inevitable.

Whereas Google is seeing a surge in demand for the Android software platform this surge can be sustained only if handset manufacturers continue to see value in having a unified system like Android and avoid excessive investments in their internal Operating Systems and software platforms. Google's success would also depend on their ability to simultaneously entice semiconductor vendors to port Android onto the platform and sell a good value proposition to the handset manufacturers. The adoption of Android applications in the market and the subsequent popularity and indispensable predisposition to the customers of this platform could also prove to be a critical factor in locking in both handset manufacturers and semiconductor vendors to the Android Software Platform.

Google might run the risk of being a "staging" platform used by the handset manufacturers till they have developed a software platform of their own. However the development of a mature application market will ensure that the demand for Android phones will continue to spur handset manufacturers to have an Android offering as a part of their product portfolio.

10 years of the internet

I got my first computer in May 1999. It was a smart looking Compaq Presario with a 333Mhz Celeron processor, 32 MB RAM, 4 MB VRAM, 128KB L2 Cache, 4GB Hard Disk, a state of the art machine which cost my father a fortune and most importantly came with an inbuilt 56Kbps modem!

The new machine came bundled with a Satyam internet starter pack that gave me a total of 25 hours access to the internet.

It was any 15 year olds dream come true, a gadget for games, music, movies and fun along with a chance to get online and have my own e-mail account!!!

As we entered 2010 i remembered the most crazy thing i did at the fag end of 1999 (or atleast i thought it was quite a crazy thing to do). It was the year of the Y2K bug, doomsday was predicted and i was expecting the worst ... It was the last day of the year, being in between my pre-final exams the only celebration was with the family and at precicely 11:00 p.m. everybody retired to bed to prepare for a long new years day. I remember my first real encounter with the internet was around 11:45 p.m. December 31st, 1999. Inspite of all warnings from my parents to stay away from the computer, i thought "wtf", what could go wrong? After all billions of dollars were spent on fixing the Y2K bug right? A thought struck me, i should be celebrating my entry into 2000 by getting into a chat room and seeing what could go wrong ... would planes really come crashing down all over the US, would Russian ICBMs be triggered off due to a faulty code patch or would the internet fall apart at the precise moment of 00:00:00 hours!

Those were the days when chat rooms were really chat rooms, untouched by bots, real people discussed real issues in a common window. I think i logged in to Rediff Chat and entered one of those general rooms. The mood was quite light and everybody was talking of what was happening ... there were folks from Japan, Singapore, HongKong where dawn had broken in the new year and things were going just fine ... and slowly as the clock inched to 00:00:00 IST there were wild jubilations around and there was nothing that seemed out of the ordinary!

I went to sleep at 12:45 a.m. after getting a confirmation that Pakistan too has survived the entry into Y2K ...

It has been 10 years of using the internet since then, from being a tool to keep in touch with friends, to a source of all those adolecent porn, to being a source of all my music and movies, and culiminating in being my indispensible companion in all my college projects, it has been a faithful comapnion and perhaps the most useful tool i have used in my life ...

Here's a toast to the greatest technological invention of all times that has served me well for the past 10 years!

Global Economic Recession - Lessons and Impacts

[This article was originally written as an essay by my friend, teacher and guide on all things related to economics – Devanshi Madan. A quick guide on the financial crisis of 2009 along with a unique view on the principal-agency problem makes this a very interesting article for the average person. I have added a few lines, deleted a few and modified a few more before reproducing it here, all the matter published here has been the original work of the above mentioned author …]

Recessions and business cycles

Recessions are the outcomes of business cycle fluctuations. Business cycle fluctuations are naturally occurring crests (positive growth) and troughs (negative growth) in the revenues and growth of a business. These fluctuations in the business cycle have been well documented. A progression from a crest to a trough leads to a slowdown in economic growth and in extreme cases, as it was in 2008; cause a deep economic recession with global repercussions. Whereas slowdowns and recessions have been around as a naturally occurring economic phenomenon, the global recession of 2008-2009 was exacerbated by the fact that the fundamentals of the financial markets were thrown to the wind in the face of uncontrolled greed.

The global recession of 2009

The origins

It all started with the housing loan crisis, more commonly called the “sub prime mortgage” crisis. American banks and agencies started indiscriminately issuing housing loans to people who did not meet the required eligibility criteria to secure such loans. They slashed interest rates on these housing loans and the demand for these loans shot up. Banks ignored the “credit worthiness” of the applicant and gave loans which were backed by the house bought as the underlying security. These loans were offered at 3% the same rate as the inter bank rate!

The modus operendi of the lending banks and agencies was to lure people by showing much lower variable interest rates on housing loans for a certain period. However hidden behind this promise, as per the fine print, by the time the loan reached its maturity, the total amount repaid would have been the same as the total amount that would have had to been repaid in the case of a high interest fixed rate loan.

This process of ensuring that total cash flows were large and yet it looked to be small in the initial period was done by the process of “negative amortization”. As opposed to normal amortization in negative amortization the principle balance and hence the interest keeps increasing every month. With the lure of lower EMI’s in the initial years, the banks managed to play with peoples psyche and lead them to believe that they were actually getting a very cheap loan. This in turn led to a dramatic increase in the demand for housing.

After a certain amount of time the housing bubble burst, people were unable to pay back these loans and abandoned their houses. As a result, the supply of houses far outstripped the demand for houses, this drove the real restate prices down. The mortgaged houses were redeemed by the banks, albeit as non performing assets. The house prices were much lower than the loan value plus the cost of maintaining the houses would have had to be incurred.

In such a scenario, banks were collapsing due to the large number of non performing assets being added in the form of foreclosure of housing loans. In order to save the banks from collapsing, they were bought out or taken over by other banks and the Federal Reserve. The government intervened later with bail out packages running into billions of dollars to save the banks from bankruptcy.

What are the key lessons to be learnt in analyzing the cause for such a financial catastrophe?

In my opinion it is the misperception and the mismanagement of risk, the low level of interest rates and the indiscriminate de-regulation of financial systems leading to a skew in the market demand that is biased towards a price increase which is artificial and unsustainable.

Today’s world is highly interdependent. Instability in one institution will cause instability in many others. It’s the case of the “ripple effect”. It’s the human psychology around risk perceptions. Individual actions, such as the decision to forward loans to non credit worthy individuals, cannot be viewed in isolation. A global perspective is required in assessing the potential long term impacts over the short term gains that are achieved.

Too greedy in the present - future repercussions

The primary cause for the authorization of risky short term financial decisions would be the greed of the management to show phenomenal revenues and expected future profits. I would call it a managerial greed and callousness. CEOs and other senior managerial personnel rely on compensation received from the companies in the form of salary and other perks. They do not hold any significant stake in their companies. The banking and insurance companies are joint stock companies which have the system of collective ownership.

The “Principal Agency theory”, where the management top teams are just the managers but not the owners, comes into play here. They are the decision makers but they do not bear the burden of the losses incurred by the company. The risk is borne by them and the shareholders, who are collectively the “owners” of the company. The management team earns a percentage of the profits/sales of the Company. Incorrect and greedy decisions made on the part of the management for personal “short term” gain without paying any heed to the long term implications of such decisions, has lead to the financial meltdown in the “developed” countries. There needs to be a principle change in the laws that govern the structure of business institutions at an international level. There is a need to redefine the laws of management and ownership.

Given these observations, it is imperative to have a balance in the principal-agency relationship. Short term profits should not be the sole driver to determine the compensation of the top management team. Shareholders need to be more vigilant and governments need to introduce more stern rules with regard to the regulation of management compensations when linked with the performance of the company.