With global telecom reform, technology coalitions have proliferated in mobile communications. The industry thrives in novel technologies and systemic complexities. Instead of national or supra-national regulatory regimes, industry firms develop standards through a Darwinian process of growth and harvest.
Simplicity is typical to simple industries. Complexity comes with the territory in mobile communications. Still, appropriate coverage of technology coalitions has been missing. Consequently, simplicity has been superimposed upon complex realities. The result is often lacking - even if it makes a better read.
M-Services, but who noticed?
In the middle of last June, the world's leading mobile phone makers and operators unveiled an industry-wide initiative to create a joint standard (the Mobile Services Initiative, M-Services) - launched by the GSM Association. Based on a software platform by Californian software house Openwave - made available on a no-royalty basis - the standard was endorsed by manufacturers including Nokia and Motorola as well as operators, such as Telecom Italia Mobile and France Telecom. They had hoped that the handsets supporting the new standard would be available by October, in time for the traditional Christmas sales rush.
The new M-Services emerged in an aftermath of criticism of Wireless Application Protocol (WAP), which had been under fire for coming late to market, being slow and cumbersome, and providing only limited service offerings. Because of the broad variety of WAP versions, business has not been able to take off. The circumstances mirror those of Internet advertising during the early 1990s, when dozens of different banner formats constrained advertisers and stunted sales - until the emergence of industry standards, which opened the floodgates.
The genesis of M-services reflects the complexities associated with all technology coalitions. The effort also highlights the shifting bargaining power between the operators and the manufacturers. It certainly was a drama. Unfortunately, it wasn't dramatic enough as the news coincided with the profit warnings - early that summer. Guess which story was touted through the roof?
Mobile shootout: Bill vs Jorma
Take another example: Three years ago, Microsoft Chairman Bill Gates and Nokia CEO Jorma Ollila were having a heated phone conversation. According to a top Microsoft executive who overheard the call, Gates "was yelling so loud you could probably hear him in Finland - without a phone." The problem? Ollila had inked a deal with Microsoft rivals to develop a "smart" mobile phone. The angry e-mail about the encounter was unearthed at Microsoft's antitrust trial, and the Wall Street Journal reported the story in summer 2000.
Last July, a parallel story prompted a Business Week headline: "Clash of the Titans: Microsoft and Nokia The American and Finnish giants are both taking aim at the mobile Net." According to the story, "Now, even as the mobile Net lurches through a crisis of confidence and funding, a mano a mano struggle between the two giants is under way."
According to these assumptions, Nokia, a big company in a small country, is approaching a head-to-head confrontation with Microsoft, a big company in a big country; but only one company can win - a scenario that is a great teaser. But like in the legendary film, My Darling Clementine, it used poetic license to boost drama and simplify the facts at the expense of the complexity of the story.
While dramatic and tempting, these speculations poorly reflect the industry practices. The underlying assumption that the winning company can control the full value chain is invalid. As media stories and technology coalitions are not as sexy as alleged dialogues or market-moving profit warnings, the quest for simple explanations limits a real understanding and depiction of the industry. The so-called not too 'sexy' topics are often a better reflection of the fundamentals of the business.
From cellular concept to vertical disintegration
In 1948, a small group of Bell Lab researchers came up with the basic cellular concept of system architecture (frequency reuse, handoff), cellular geometry, cell splitting, and channel trunking. These intrinsic technologies were built upon broader supportive technologies, such as solid state electronics, digital switching, improved high-capacity batteries, and frequency propagation.
The cellular concept, however, was not actually implemented until early 1980s in the United States, Nordic countries, and Japan. Critical advances in the required technologies took years. And, especially in the United States, regulatory stumbling caused substantial delays. Consequently, the analog cellular era began with the interplay of two central forces, national PTTs and equipment manufacturers, as well as the powerful national regulatory regimes.
Today, mobile competition takes place in dramatically different circumstances. The industry value chain has become far more specialized, not least because of novel technologies and accompanying systemic complexity. In addition to mobile vendors and network operators, this chain comprises new stages - suppliers and contract manufacturers, platform players, software houses, system integrators, content/aggregation providers, value-added service providers, Internet and online service providers, and retailers.
Furthermore, the number of these players at each stage has proliferated in most developed markets. At the turn of 1980s, for instance, U.S. telecommunications was synonymous with AT&T. Today, the industry has dramatically expanded and specialized in all markets. Finally, after years of deregulation, privatization, and liberalization, the role of national regulators has shifted irreversibly. With accelerating industry globalization, supra-national competition policy has taken on the past role of national regulator, but with less bargaining power.
Vertical integration is history; vertical disintegration is reality. No single company can any longer control critical industry practices in mobile communications. Still, many observers of the mobile industry continue to take parallel myths seriously - myths that focus on mighty vertical giants at the expense of complex industry value chains. Why?
History and complexity
There are at least two reasons for the simplifications. First, not all industry observers nurture a historical memory. When John Sculley green-lighted Apple's Newton project in the late 1980s, it was a proprietary initiative. At the turn of the 1990s, industry press pushed stories on Microsoft's alleged efforts to develop an appropriate "Newton-killer." Subsequently, public discourse focused on Apple, Microsoft, and the Japanese organizers. Meanwhile, Jeff Hawkins and Donna Dubinsky launched PalmPilot, which captured the early handheld market. Unlike the preceding models, which had failed, PalmPilot did not seek full vertical integration. Instead, its strategy was built on strategic partnerships with the developer community.
In mobile communications (as in most other industries), history matters. Vertical integration has been history since the demise of the mainframe IBM. If industry observers ignore path dependence, they may have discovered a dramatic way to reinvent a wheel - but let's face it - we already have the wheel.
Second, technology coalitions do not make as exciting headlines as an alleged heated exchange between Bill Gates and Jorma Ollila. The former subject is seen as complex, abstract, and impersonal, whereas the latter seems simple, concrete, and highly personal.
In the late 1990s, the leading mobile vendors - Nokia, Ericsson, Motorola, and several others - began to prepare for the impending 3G era. Concurrently, they launched a number of technology coalitions, including the following:
- Bluetooth enabled short range connectivity between devices in a totally digital environment
- EPOC operating system, developed by Symbian, provided an optimal platform for wireless information devices and future media phones
- WAP made Internet content accessible with mobile devices
- SyncML served as the synchronization solution
As the costs of technology development have become prohibitive, no single company can develop all key technologies for the 3G era.
New industry leaders: great competitors and coalition builders
The coalitions are not just about cost control. They can also be about accelerating specialization and the accompanying differentiation. Technology coalitions tend to arise when performing a value activity with a partner is superior to performing the activity internally (organizational mechanism), externally in an arm's -length transactions (market mechanism), or through a merger with another firm. The partners expect the coalitions to unlock benefits that they cannot obtain by the latter methods. These benefits include access to know-how, scale economies and learning, shaping industry competition, risk reduction, and standardization of technology innovation.
Today, the key mobile players must engage in proactive development strategies, which they hope will position themselves favorably in the new and emerging industry value chain. Of course, all central players have their own visions and designs for the coming era - just as Microsoft tends to favor its Microsoft Mobile Explorer and Nokia emphasizing the importance of its Mobile Internet Architecture.
Nokia's strengths are in mobile terminals and networks, but it has recently garnered new territory in mobile systems. Microsoft's strengths are in application software, operating systems, and comprehensive solutions. But neither company can force its view of the future upon the industry value chain. Each company can only try to persuade other industry participants to accommodate its vision.
As technology coalitions dictate the roadmaps of the business, it's not just the bargaining power of a given company that can determine the future of the industry, it has more to do with the ability and willingness of other relevant industry players to support these industry leaders by their participation. Previously, sheer force and crude power could dictate the rules of the game. But now, industry practices are driven more by trust and diplomacy.
In the past, vertical integration ensured control, at the expense of efficiency. Today, vertical integration means efficiency, at the expense of control. In the mobile business, industry leaders must know how - and when - to compete and to cooperate. Great competitors without coalition-building capabilities will be isolated. Great cooperators without competitive capabilities will be crushed.
Dan Steinbock is an Affiliate Researcher at the Columbia Institute for Tele-Information (CITI) and Visiting Professor at the Helsinki School of Economics and Business Administration (HSEBA). He has consulted for international organizations (OECD, EC) and companies (Telecom Italia, Sonera). His most recent book is The Nokia Revolution (Amacom Books: June 2001).